Keynesians, monetarists and unicorns

Keith Joseph

A television interview with Mr Heath has set Political commentators off again scribbling earnestly about the dispute between Keynesians and monetarists in the Conservative Party, rather like lions and unicorns fighting all round the town. No doubt they will go on writing in this vein all the way to the party conference, unless I can succeed in persuading them that there are really no such things as Keynesians or monetarists, any more than there are unicorns.

This is not generally recognised. For the terms have been used so often and with such confidence that people tend to assume that they must mean something. But so, a few generations ago, were words like witches, Warlocks, incubi and succubi; indeed 'selfconfessed witches' could be paraded by the bien pensants of the day. But they were no More real for that.

Similarly, there are people who claim to be Keynesians, just as there are people who are pejoratively dubbed monetarists—pace the political correspondent of the Guardian, it Would be rare for anyone to call himself a monetarist, at least without inverted comInas ; and I for one have always rejected the title. But since the belief in Keynesians and Monetarists has done as much harm in its Own way as belief in witches did in the sixteenth and seventeenth centuries, it is worth taking a closer look into the demonology of our present-day hien pensants.

Let us begin with Keynesians. Keynes's name has been taken in vain a good deal by the polite press in recent years. His working life spanned several decades, but the adjective Keynesian relates specifically to a thesis Presented in the General Theory which challenged a view hitherto accepted as axiomatic by economists, summed up by Say's Law that supply creates its own demand. Keynes argued that because there was no necessary and direct link between saving, investment and consumption, it could not be taken for granted that economies would naturally tend towards the equilibrium Which would maximise use of labour and Other resources. The conclusion followed that the government had a duty to ensure that the best equilibrium of all possible equilibria was achieved.

A few years after the General Theory was PUblished, it was accepted as a basis for biPartisan policy and enshrined in the famous —and hence often misquoted-1944 White paper. In that sense, we are all Keynesians Row. But this is not what political commentators mean when they say Keynesian. They are referring to a doctrine posthumously fathered on to Keynes, part economics, part Politics, part magic and part simply legerdemain, quite out of keeping with his rigorous

approach. It sometimes calls itself neoKeynesian, though respect for fact and the memory of a great Englishman prompts me to prefer 'pseudo-Keynesian'.

This doctrine holds that by the expedient of expanding monetary demand government can and should ensure what it calls 'full employment'—which entails an excess of demand for labour over supply—and high growth rates, irrespective of all other economic data, including the efficiency of the labour market and the structure of the economy.

Keynes did not say this, he argued that monetary policy could deal with that measure of unemployment and under-activity caused by demand deficiency, but not with structural unemployment, frictional unemployment, and many other economic ills.

The pseudo-Keynesian doctrine points to the imperfection of the labour market, excessive wage demands by unions, and the existence of powerful institutional factors— unions among them—which inhibit structural evolution and the optimal movement of resources. It argues that under these circumstances a neutral monetary policy, i.e. one which balanced supply and demand at existing average price-levels, would lead to unacceptable levels of unemployment and stagnation. The corollary—so the argument runs—is that governments have no choice but to expand demand by monetary policy, while using direct methods to suppress the inflationary pressures generated by the monetary expansion. These measures include wage-controls, price-controls, subsidies, and controls of profits and dividends.

Now there are three comments I wish to make on this thesis in the context of the false antithesis between Keynesism and monetarism. First, it is not Keynesian in any recognisable sense of the word. Secondly, it is actually monetarist in the only meaningful sense of the term. Thirdly, it is based on flawed logic.

It is a matter of ascertainable fact that Keynes never proposed any such remedies, or came near to proposing them. I refer readers to a forceful and scholarly article in Encounter (April 1975) by Tim Congdon of the Times for a fully exegetic study of what Keynes actually said compared with what the pseudo-Keynesians now argue. But in any case, Keynes's writings are widely available at first and second hand for those who wish to do it themselves. Moreover, insofar as his writings touch on comparable proposals, he argued the very opposite of what is now said in his name, e.g. in How to Pay for the War: . . . price fixing and legal restrictions against price increases, unaccompanied by any restriction on the volume of purchasing power . . . [have] the effect of positively increasing the pressure of consumption and of facilitating the conversion of money income into the use and depletion of valuable resources'.

Secondly, the pseudo-Keynesian thesis is monetarist insofar as the term could be given any meaning. Keynes was, you will remember, largely a monetary economist. His General Theorycould in one sense even be called monetarist, in that it stressed the role of monetary factors as against real factors— using the term 'real' in its economic sense as the antithesis of monetary. His argument was that if the monetary demand side is allowed to go wrong, the real factors will be thrown out too. But the pseudo-Keynesians exaggerated his 'monetarism' out of context, by arguing that monetary means could be used to overcome 'real' misallocations, structural distortions, etc. This is monetarism with a vengeance.

Yet paradoxically, the term 'monetarist* has been brandished against those of us who question this panacea and argue that monetary policy can be used only to remedy monetary ills, whereas 'real' ills need 'real' remedies. I use the term `real' in the economic sense as the antithesis to monetary. 'Real' in this context means economic structure, capitalisation, union behaviour, geographical distribution of population and industry, housing availability, behaviour patterns. Insofar as 'monetarist' means anything, We are the anti-monetarists, the 'realists'.

We are not only accused of 'monetarism', as though it were one of the deadly sins, but also of wanting unemployment and stagnation. This accusation would only make sense if we believed the pseudo-Keynesian thesis, namely that by expanding monetary demand one could prevent the unemployment and stagnation which would otherwise be generated by anti-economic behaviour on the part of the unions.

The measure of union responsibility for unemployment and economic stagnation is common ground between pseudo-Keynesians and imputed-monetarists. But we do not agree that it is possible to cure the results of trade union unreasonableness by using monetary means, i.e. expanding demand. We argue that there is no surrogate for tackling the 'real' underlying causes of unemployment and low growth, which include union obstruction and the widespread belief that unions and others may be as unreasonable as they wish because the government can and will immunise them from the consequences of their own actions. Monetary measures, in the sense of expanding real demand, will give short-term relief by suppressing the symptoms for a short period at the cost of making them worse and more intractable in the longer term. This is what has happened. Far from there being a real trade-off between inflation and unemployment, inflation makes unemployment worse in all but the short run. There is now a large measure of common ground between the parties on this, though a few diehards on both sides remain prisoners of their own past, or as Keynes wrote: . . . we have become so accustomed to the problem of unemployment and of excess resources that it requires some elasticity of mind to adapt our behaviour to the problem of full employment and of resources which are no longer adequate to supply our needs.'

The pseudo-Keynesian approach as it emerged in the hands of politicians, economic advisers and civil servants has become essentially mechanistic. If government pulls the right levers in demand management, regional policy and a few other 4symptomsuppressing devices, the economy cannot but work well.

The opposing viewpoint, dubbed as monetarist, rejects this. The economy—which means society viewed in its economic aspects, for society is a seamless web—is organic, an ecology rather than a mechanism. By understanding its laws of motion, which depend on what men think no less than what they do, governments can help remove obstacles to optimalisation. As I have repeated in so many speeches, to get the money supply right does not absolve you from getting everything else right. But to get the money supply wrong—too high or too low—ensures that you will get nothing else right. But new problems emerge which need new solutions. To hark back to what Keynes said in 1936 or what Marx said in 1870 is what dogmatism really means. Keynes was not a Keynesian: he would have dealt with today's problems on their merits, not on the basis of what he had said one stage previously.

'Monetarist' views on the role and cost of wage restraint follow from this. I shall deal with them in a subsequent article. It remains to point out in this context that the false antithesis between Keynesians and monetarists has exerted a number of other distorting effects on the picture of our political economy presented by the quality press. One is to impute homogeneity to the 'monetarists', i.e. a statement or formulation of any one of them is automatically ascribed to all. This is wholly specious, since all that we 'monetarists' hold in common is a belief in cause and effect in economics. It would be as fallacious to ascribe common theological views to all who oppose the flat-earthists.

In addition we are saddled with views which are incompatible with a monetary approach to inflation. We are accused of wanting to use unemployment to bring down wages—'wage-inflation', a term we cannot accept as valid. Our argument is not that full employment is inflationary, but that the pseudo-Keynesian means used to achieve it are—full employment and free collective bargaining are not eo ipso inflationary for 'monetarists', only excessive monetary demand is. Disagree with us if you can, but please do not put words into our mouths.

You may wonder why, in view of what I write here, the false antithesis gained so much currency and exerted so much influence. The question relates to the microhistory of ideas; how words, fashions, trends, fallacies rise, dominate, then shrivel in the light of experience. Presumably, they suit some kinds of psychological conjuncture. I think that pseudo-Keynesian millenarianism reflected the high hopes at the end of the Second World War following the depressed nineteen-thirties. We felt, and rightly, that having done so well in the war we should make more of the peace this time. Government had run the war effort ; why not the peace effort ? War had brought full employment ; why should we not achieve it in peace-time? And had not the good Lords Keynes and Beveridge shown how it could be done?

The answer—as those who have actually acquainted ourselves with what the two good lords had actually said can verify—was that they had sketched out some objectives, some strategies, some conditiones sine qua non. The mood of the day turned them into wonder cures, short cuts to utopia. Those who warned us to read the small print in the two good lords' prescriptions were booed off the stage as spoilsports, as not wanting the masses to share in the good things. They suffered the reception which Jerome K. Jerome retails for those who warn daytrippers that it will rain later on in the day. Not only is their warning rejected, but when it does rain they are blamed.

But the rain is not going to be stopped by cursing prophets. So it behoves us all to learn how cause and effect operate, rather than ascribe economic phenomena to malevolence. Political commentators have a special responsibility here. Fascinating as the small change of political life is, they have a duty to look through words to the meaning behind. If they are to discuss the politics of economics, they really must learn the rudiments of economics, rather than throw words about like brickbats. When they stop talking about the confrontation between monetarists and Keynesians, I shall know that they have made a start.