Chris Harman

Thinking it through

Brown and the bank

(June 1997)

From Socialist Review, No.209, June 1997.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Archive at
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

I don’t know what amazed me most – Gordon Brown’s decision six days after the election to hand the power to fix interest rates to the Bank of England or the enthusiastic reception his decision met from the likes of Will Hutton in the Guardian.

Hutton greeted the change as ‘part of the process of modernising the British state and bringing the conduct of monetary policy into line with its conduct elsewhere ...’

According to another Guardian enthusiast for Brown, Alex Brummer, this means that Brown

‘is neither a monetarist nor Keynesian, a supply side nor neo-Keynesian ... His goals fit into the utilitarian model of ending the hopeless cycle of instability and plugging the UK into a virtuous circle of higher investment and long term thinking.’

In fact, however, the change represents one more shift of Labour away from the belief that you can reform capitalism through Keynesian methods – a belief to which Hutton still holds – to complete acceptance of the sort of laissez faire economic policy preached for decades by Frederick von Hayek.

To see how far the shift has gone, you only have to look at some of what Brown himself has been saying. He told the Mirror that his strategy will ‘set in place a new approach’ different to ‘the big feature of the last 18 years ... stop-go, boom-bust’. In other words, he is saying that provided governments hand over control of interest rates to independent banks whose remit is to keep inflation low, then the whole boom slump cycle of capitalism can be overcome.

Brown claimed his was ‘the modern way’ to pursue ‘high and stable levels of employment and growth’. Yet, this ‘modern way’ is essentially the very old way preached by orthodox economists before the great slump of the 1930s led to the so called ‘Keynesian revolution’.

That theory preached that the free movement of prices and wages would ensure that the supply and demand for goods and labour would always move to meet each other. There could therefore be no overproduction of goods and no slump, providing monopolies were prevented and governments held back from intervening in the economy.

The slump of the 1930s was a huge challenge to this theory, and caused many of its adherents to switch over to the Keynesian view that the free market could give rise to a deficiency of ‘effective demand’, with the market too small to buy all the goods produced. The government, it was then argued, had to intervene in the economy in one way or another (by direct investment itself, by raising welfare payments, or by lowering interest rates), to stimulate demand.

Such a ‘tax and spend’ approach was at the centre of all the theories claiming in the 1950s and 1960s that capitalism could be reformed so as to avoid booms and slumps. But it failed absolutely to provide an answer to the recessions which hit the system in the 1970s.

Tax and spend did not replace slump by boom, but merely added inflation to recession. The response of many mainstream economists was to turn back to one or other version of the pre-Keynesian theory.

There were two main versions of this theory. One, the so called monetarist version associated with Milton Friedman, held that governments – or at least central banks – had one important role to play. They had to adjust the supply of money – and with it the level of interest rates – to the needs of the ‘real economy’. But the experience of the 1980s under Thatcher proved that governments could not measure, still less control money supply in the way the Friedmanites wanted.

This led to the growth of rival free market schools, particularly that of Hayek. Yet there is an ambiguity in Hayek’s writings as to whether the free market economy would experience slumps and booms if ‘monopolies’ and ‘restraints on labour’ were magically banished – an ambiguity between a more apologetic and a less apologetic, an unrealistic and a more realistic, version of his ideas.

Those of his writings that are popular with Thatcherite politicians imply that equilibrium and full employment would prevail if only the market were genuinely free and governments stopped playing with the money supply.

Thus, he speaks of ‘the self correcting forces of the price mechanism’ and claims that if only ‘conditions in general are conducive to easy and rapid movements of labour’ there will be ‘stable conditions of high employment’.

Yet in other writings he was forced to admit that there was something about the very organisation of capitalist production that led to slumps and booms, so that the term ‘equilibrium’ which ‘economists usually use to the describe the competition process’ was ‘unfortunate’, and even admits that Marx was responsible for introducing, in Germany at least, ideas that could explain the trade cycle.

In these writings his argument for capitalism is not that it leads to the meeting of people’s needs as supply automatically adjusts to demand, but that it is dynamic as entrepreneurs continually revolutionise production. And so he accepts that it does ‘not ensure that what general opinion regards as more important needs are always met before the less important ones’.

Gordon Brown is accepting the first, completely apologetic, version of Hayekism when he claims that surrendering the government’s ability to intervene in financial markets to the Bank of England will result in ‘macro-economic stability’ and an end of the boom slump cycle.

Such a move by the Labour leadership suggests we are in for a very bumpy time as the logic of unfettered capitalism works itself out. And if people like Hutton have gone along with him, it shows how hollow is their claim to offer some way of dealing with the bumps along Keynesian lines.

Last updated on 21 December 2009