Labour's mess: A brief tour of economic perspectives

11 Feb 2014

The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.
John Maynard Keynes


It is not to easy being a Labour Party member at the moment. Coalition fever hasn’t exactly gripped the population, but their narrative of the economic crisis is now so well spread that one can regard it with equal familiarity to a common cold. The story goes that in its last 13 years of government Labour spent more money than the country could afford, let in more immigrants than the country could accommodate and now the coalition has had to step in to resolve the situation. Perhaps broadly speaking there is some true in this, but before going into that, what firstly must be established is that the economic crisis was caused primarily by a failure of the financial sector.

In 2008 the world was hit by the worst crisis since the Great Depression. While you don’t really need to be told this, your still feeling it, it is important to note that the financial crisis, the key reason for the world recession, had nothing to do with public spending. Banks didn’t crash because central government built too many parks, roads or hospitals. Banks crashed, in a sentence, because they lent money that they didn’t have, to people and companies who couldn’t afford to pay it back. This happened through: the invention of various shifty financial mechanisms, the sale sup-prime mortgages to people likely to default on repayments, and the widespread use of credit cards: who doesn’t have a horror story about them? The crash meant that banks even after the bailout couldn’t, or were reluctant to, lend money to businesses. If business can’t get loans, they can’t employ people or make a profit, hence why everyone loses. 

Understanding why banks took such risks and made such faulty loans is the key to understanding why the world entered a recession, and several groups of people have tried to explain this. The first group are the Keynesians. Keynesian economists such as JK Galbraith and more recently Ha-Joon Chang believe that the capitalist system is inherently unstable and needs government intervention to make Capitalism serve the interests of its citizens better. The most well-known Keynesian idea is the idea that the government should borrow money and spend it on things during a recession, to reverse the economic downturn and create economic growth, which in theory you can then tax to pay off the loan. However, in regard to the financial crisis, what is most important is the idea that the state should regulate the financial sector to stop it taking unnecessary risks for short-term gain. Keynesians argue that the financial crisis was a direct result of various governments dismantling financial regulations which have not been in place since the Great Depression of the 1930’s.  They argue that had Thatcher not dismantled financial regulations in the 1980’s and had Blair not continued this process, the banking crash could have been avoided we would be in a much better situation now.

Of course, if this was the only way of looking at the crises, the Tory’s would be dead in the water. The second group trying to get to grips with the crisis are the Free Marketers. Inspired by thinkers like Freidman and Hayek, Free Marketers argue that Capitalism works best when government has nothing to do with it. Taking away people’s money through taxes makes them unwilling to work hard and lazy. Capitalism is a self-regulating system. While Keynesian’s say that it is this kind of thinking that drove governments to deregulate banks and give them the power to take dangerous risks (after all if Capitalism self regulates why get government involved?) Free Marketers assert that Thatcher didn’t go far enough. The Free Marketers argue that if banks were not fully aware that government would bail them out when they crashed, then they wouldn’t have taken the big risks that crashed Capitalism, in the first place. 

The third, albeit by no means the last way of understanding the crisis, is through the ideas of Karl Marx. Marxist argue that Capitalism always eventually produces more things than it can sell, and employs more people than it can afford to pay. Companies employ more people, paying them as little as possible, and produce more goods so they can sell them at a cheaper price than their competitors. Soon capitalists are paying their staff so little that no-one can afford the massive number of things that they are trying to sell, and Capitalism goes into crisis. Marxists argue that banks lending money out to people that couldn’t pay it back was a short term solution to this inherent problem. If you can’t shift the goods by paying people wages, give out credit. The solution to this in Marxist eyes is for a planning authority to plan economic activity and stop all this overproduction nonsense from going on… after a bloody revolution of course.

So there you have it- 300 years of economic history in three paragraphs. But what does this mean for Labour? Basically, the crisis is either Labour’s fault because it accepted the ideas of Keynes and tried to make the economy work for the people, or the crisis is Labour’s fault because Labour accepted the ideas of the Free Marketers and didn’t regulate the financial sector effectively, or lastly, the crisis is perhaps Labour’s fault because the Labour Party didn’t instigate a bloody revolution and replace Capitalism with planned economics. So, to conclude, the financial crisis wasn’t caused by Labour building too many hospitals; although it could have been caused by a number of things that Labour either did or didn’t do. At least the Conservatives are equally to blame, because no matter whom you listen to; these problems also can be traced back to when Major and Thatcher were in power! Isn’t the two party system a blast?

By Nicholas Byard

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