Credible Keynesianism?: New Labour Macroeconomic Policy and the Political Economy of Coarse Tuning



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Ben Clift & Jim Tomlinson ‘Credible Keynesianism’, British Jourrnal of Political Science

Credible Keynesianism?: New Labour Macroeconomic Policy and the Political Economy of Coarse Tuning
Ben Clift & Jim Tomlinson

The article has been accepted for publication in the British Journal of Political Science © Cambridge University Press, 2006. Forthcoming, Volume 36 (2006).

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Ben Clift, University of Warwick b.m.clift@warwick.ac.uk

http://www2.warwick.ac.uk/fac/soc/pais/staff/clift

Jim Tomlinson, University of Dundee j.d.Tomlinson@dundee.ac.uk



Abstract

This article questions prevailing interpretations of New Labour’s political economy. New Labour’s doctrinal statements are analysed to establish to what extent these doctrinal positions involve a repudiation of Keynesianism. Although New Labour has explicitly renounced the ‘fine tuning’ often (somewhat problematically) associated with post-war Keynesian political economy, we argue that they have carved out policy space in which to engage in macroeconomic ‘coarse tuning’ inspired by Keynesian thinking. This capacity to ‘coarse tune’ is precisely what is being sought in New Labour’s quest for credibility through the redesign on the UK macro policy framework and institutions. Our empirical focus on New Labour’s in government since 1997 offers considerable evidence that this search for the capacity to ‘coarse tune’ has been successful.



Credible Keynesianism?: New Labour Macroeconomic Policy and the Political Economy of Coarse Tuning1

Abstract

This article questions prevailing interpretations of New Labour’s political economy. New Labour’s doctrinal statements are analysed to establish to what extent these doctrinal positions involve a repudiation of Keynesianism. Although New Labour has explicitly renounced the ‘fine tuning’ often (somewhat problematically) associated with post-war Keynesian political economy, we argue that they have carved out policy space in which to engage in macroeconomic ‘coarse tuning’ inspired by Keynesian thinking. This capacity to ‘coarse tune’ is precisely what is being sought in New Labour’s quest for credibility through the redesign on the UK macro policy framework and institutions. Our empirical focus on New Labour’s in government since 1997 offers considerable evidence that this search for the capacity to ‘coarse tune’ has been successful.


Introduction

‘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 the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler from a few years back.’2


It has become something of an orthodoxy amongst analysts of New Labour’s political economy that, whichever ‘defunct economist’ the Labour Governments in Britain since 1997 have been ‘distilling their frenzy’ from, it is not the author of those words, John Maynard Keynes. This article seeks to interrogate and challenge the assertion that New Labour has decisively renounced Keynesianism.
The mooted repudiation of Keynesianism is often explained at least in part by a changing international political economic context with which Keynesian economic policies are decreasingly compatible.3 Gray’s pessimistic account infers from the assumed centrality of neo-liberal orthodoxy to ‘credibility’, and the changing cost/benefit analysis of national economic policies, that ‘global mobility of capital and production in a world of open economies have made the central policies of European social democracy unworkable’.4 A second aim of the article is to challenge this view, exploring how far Keynesian policies are sustainable in principle in a ‘globalizing’ world. We illustrate how New Labour’s political economy has been developed to reconcile both the securing of credibility with international financial market actors and substantial fiscal policy space to pursue domestic economic policies of a broadly Keynesian character.
In a wider context, the argument presented here challenges a prevailing orthodoxy within the comparative and international political economy literatures. References to the exhaustion of the Keynesian political economic paradigm, and to the decisive renunciation of Keynesianism (and indeed the commitment to full employment) are a familiar refrain of many authoritative works in the field. These are usually placed in the context of the breakdown of ‘embedded liberalism’ internationally,5 and of the rise of the New Right and monetarism ideologically.6 Hall, for example, charts the ‘collapse of the Keynesian consensus’ (on the Left as well as the Right) in Britain, and the monetarist ‘triumph’, in particular within the Conservative Party and the City.7 He quotes Callaghan’s famous 1976 conference speech as ‘the obituary for Keynesianism in Britain’,8 and notes elsewhere of the 1977-8 public spending cuts ‘for all intents and purposes the Keynesian era was over in Britain’.9
Similarly, McNamara describes the ‘search for alternatives to traditional Keynesian policies’, and a ‘sense of crisis’ that created ‘space for an new conception of the role of government in the macroeconomy’. Monetarism, she argues, provided ‘a template and a legitimizing framework for a new economic strategy that made neo-liberal, anti-inflationary policies a priority rather than employment and growth objectives’.10 The capital mobility hypothesis of the international political economy literature makes similar claims about the powerful constraining effect of financial capital mobility upon macroeconomic policy autonomy and activism. Allegedly, this leads governments to eschew expansionary fiscal and monetary policies in favour of tight money and balanced budgets.11

Each of these accounts doubtless contains an element of truth, but - to different degrees - they all require significant qualification. As this article demonstrates, the widely held view that Keynesianism has been exhausted is inaccurate. Firstly, Keynesian political economy has not been wholly de-legitimised by the crisis of the 1970s. The victory of monetarism over Keynesianism was not total, as the rise of various strands of New Keynesian economic thinking demonstrates. Furthermore, macroeconomic policy activism, and in particular fiscal policy activism, remains a viable strategy and a prevalent feature of government economic policy. In this article we demonstrate that an economic strategy of a broadly Keynesian character has been pursued in Britain since 1997. At the level of economic doctrine, as well as at the level of policy practice, the enduring relevance of Keynesian macroeconomic thinking to policy is evident. This indicates that the mooted incompatibility of economic strategies inspired by Keynesian thinking with the new international political economic context of global financial markets has been exaggerated.


Here, for reasons set out in the first section, Keynesianism is understood as centrally concerned with pursuing full employment, especially by means of fiscal policy. Within this framework our empirical concern is with New Labour’s period of office in Britain since 1997. Having defined Keynesianism, the next section examines the debates on New Labour’s relationship to Keynesianism in the light of the doctrinal statements of the architects of New Labour economic policies where they have articulated in detail how they see the world and how the perceive the role and limits of national economic policy.12 The key issue here is in what sense and to what extent these doctrinal positions involve a repudiation of Keynesianism. The third section analyses the policies actually pursued by New Labour to see both how far they conform to these doctrinal statements, and how far they can be described as Keynesian. The concluding section briefly examines how far the policies of New Labour differ from those of past Labour governments in terms of their Keynesian content, and explores the significance of all this for characterising the political economy of New Labour.



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