Wednesday, 28 March 2012

Keynes and cognitive dissonance

The financial crisis of 2008 did not lead to wholesale change. The banks have not been reformed in any substantive way; the rebalancing of the UK economy from financial services to manufacturing is a vague intent rather than a plan; and organised stimulus to maintain aggregate demand has lost out to punishing austerity. The last of these is seen as the failure of the Keynesian insurgency in 2009.

A recent paper on "The Rise and Fall of Keynesianism During the Economic Crisis" attributes a key role in this failure, and the ensuing commitment to austerity, to Germany. The authors note that Keynesianism has rarely been in favour there as it advocated a more interventionist state than the post-war orthodoxy of "ordoliberalism" (i.e. the social market economy) would allow. Much of what we think of as distinct about the German economy reflects a diffusion of power, such as the independence of the central bank, employer and union cooperation, strong regional policy, and the fostering of the broad mittelstand of companies.

What is particularly notable is the deliberately circumscribed role of government. This was a direct reaction to Nazi (and arguably Willhelmine) Germany, where centralised government got out of hand. In the UK, the success of planning during WW2 did much to normalise Keynesianism as a feature of policy until the 1970s. The success of stimulus under FDR also set the tone for US economic policy into the same decade, though in their case state management of demand was largely smuggled in through defence spending (and Obama's limited stimulus has involved a fair bit of smuggling too).

A second feature of Germany's response over the last 4 years has been their intolerance of large deficits by EU members, culminating in the Greek sovereign debt crisis. This has been seen variously as Germany flexing its muscles (and putting the French in their place), an act of hypocrisy (as all that debt in the South fuelled a German export boom), and as a Lutheran obsession with fiscal rectitude. Whatever the cause, the effect was to rule Keynesian stimulus out of bounds as far as concerted EU action was concerned and herald in the new age of austerity.

What seems to have been ignored here is that modern Germany is temperamentally averse to an interventionist state and has merely translated that attitude to its dealings at an EU level. It's insistence on a strong and independent ECB is part of this. It's opposition to Eurobonds is less a cultural fear of hyper-inflation and more a belief that the central bank should stick to monetary policy and not be used by government for fiscal engineering. In the UK, this jars with our stereotype of a pro-EU, bureaucratic and technocratic Germany, with strong unions and extensive welfare. With that form, we assume they must be Keynesians at heart.

Angela Merkel's December 2008 address to the CDU annual convention, quoted in the above paper, is revealing. She claimed that any Swabian housewife could provide a common-sense explanation of the financial crisis: "we cannot live beyond our means ... we have too often put our trust in experts that were not really experts ... we are answerable to the taxpayer of today and the taxpayer of the future". The echo of Thatcher (you can almost hear the swish of the handbag), and the pre-echo of Cameron with his "maxed-out credit card" nonsense, are what will immediately strike British ears, but the real substance is the suspicion of self-appointed experts, the appeal to common sense, and the belief in a debt to the future. These have a particular resonance when you consider Germany's 20th century history and Merkel's own upbringing in the GDR.

I was struck by this difference of interpretation in Gavin Esler's interview with Merkel on Monday night's Newsnight. The short chat was prefaced by parallels being heavily drawn between Luther's defiance of Rome and Germany's current ambivalent attitude towards the profligate Catholic South, with much talk of how fiscal rectitude is a Lutheran virtue. This makes a nice parallel, but looks a bit silly when you consider the Greeks aren't Catholic while most of Bavaria and much of the Rhineland is.

This reminded me of the second part of How God Made The English, in which Diarmaid McCulloch claimed that Protestantism, of the Anglican variety, is what led the English to become so tolerant. Given the bloodletting of the 16th and 17th centuries, this might appear a hard one to pull off, so his case rested on the claim that the Catholics were a lot worse: cue modern Spaniards wearing scary KKK-style capirotes (the pointy dunce caps with masks).

Apparently, Catholics hated Jews because the ban on usury led the latter to become bankers (a modern flourish). This ignored the fact that usury was banned by Christianity, Judaism and Islam, but only among coreligionists - i.e. a Christian could lend money to a Jew and vice versa. It also ignored the fact that modern banking was invented by Catholics in Northern Italy (the Medicis et al), and that Jewish involvement in banking was driven by involvement in trade, which was the result of being banned from owning land in many countries and the side-effects of the diaspora and subsequent expulsions.

The English Civil War apparently happened because Charles I failed to put down a Catholic rebellion in Ireland, rather than anything to do with the competing interests of the gentry and the Court in England, but the Restoration led to an outbreak of peace and understanding (Quakers and Ranters get a mention, Diggers and Levellers don't). Why the Pilgrim Fathers didn't sail back home I don't know. In the 18th century the English became even more tolerant because of the need to rule Catholics in Ireland and Canada. No, seriously. Catholic and Jewish emancipation in the 19th century was the triumph of this growth in tolerance, though why it took 300 years is unclear.

There was a bit of this self-serving lunacy on show in Jeremy Paxman's recent series, Empire. Paxo doesn't really find economics congenial (despite Paul Mason's best endeavours) and is far more interested in the human or moral dimension, hence most of the programmes oscillated between nostalgia and an admission that beastly things had been done. The commercial basis of empire was touched on, but his heart wasn't really in it. What he wanted was to find someone who thought the empire might have produced something good, preferably cricket.

The last episode banged on about the Victorian evangelical movement and how this provided a sense that the British were doing God's work among the benighted heathen. It failed to note the multi-headed movement's roots in the bloody sectarianism of the 17th century and its initial focus on proselytising among the emerging industrial proletariat back home, most notably the Methodist revival.

What has been striking by its absence in both series, with the exception of a few throwaway remarks, is the vexed issue of Ireland. A subject people of the British Empire, but white. Paxo was suitably angry when highlighting Victorian racist pseudo-science (though for balance he reminded us of the abolition of slavery), but he didn't point out that a 19th century issue of Punch would contain more cartoons portraying the Irish as ape-like brutes than images of savage Africans or intrepid missionaries, or that the tactics of the Mau Mau owed much to Irish templates, from the swearing of oaths to boycotts and attacks on isolated settlers. Shaking hands with a Kenyan freedom fighter, who happily confesses to killing, is clearly easier than doing the same with a Provo.

What these coincidental treatments have in common is the inability to understand "the other" because we insist on preserving self-serving myths about ourselves. We fail to see how Germans can be simultaneously suspicious of the central state and yet in favour of a comprehensive state. We insist that "the Empire wasn't all bad" and are baffled when our former subjects smile politely and insist they'd slit out throats again if they had to. We claim moral exclusivity ("the Church of England") and a genius for toleration, without seeing any conflict between the two.

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