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Tuesday, 16 October, 2001, 11:05 GMT 12:05 UK
The return of Keynes
The attraction of share markets may have waned
Rodney Smith

The events of September 11 brought swift responses by governments in the United States and Europe.

Money was thrown at struggling businesses like airlines and insurance companies.

Until just over a month ago, the United States was probably the most market related, non-interventionist economy in the world.

Now it is rediscovering that government can have a role in directing capital.

State intervention has never really been abandoned in many parts of the world, in spite of the last quarter century of monetarism and free trade.

Keynes: advocated government spending to fight recession
Keynes: advocated government spending to fight recession
What is emerging may be a world where, while there is no return to the practical socialism of 1970's Western Europe, there is a modest return of demand management economics as originally preached by John Maynard Keynes, and greater scepticism about the private sector.

This has achieved special prominence with the award of this year's Nobel Prize for economics to three New Keynesians.

Railtrack turnaround

The British government too has been testing its mettle in this way.

The speed with which it whipped Railtrack out of the private sector may have stunned shareholders, and it may not turn out to be the best plan for a government wishing to be popular with business, but it does show the way the climate has changed.

Meanwhile, in Britain there is great and justified anxiety about the poor state of state education and the state-funded health service. The continuous complaint is that public sector workers, teachers, doctors and nurses are ill-paid.

However these are safe jobs, not subject to the threat of redundancy that destroys many other careers in banking, finance and other parts of the service economy, and of course manufacturing industry.

In a slower growing economy, with low inflation and persistent unemployment, these safe public sector jobs could become more attractive.

Global slowdown

Many of the biggest investment banks are advising their clients that share ownership may become a less attractive way of saving in Britain for systemic rather than cyclical reasons.

Credit Suisse says it will be the worst slowdown for 50 years, with private demand dwindling in favour of state spending, private indebtedness giving way to public borrowing.

Economists are now comparing what is happening today with what happened 50 or 70 years ago.

This is leading to a revival of the theory of economist N D Kondratiev, who suggested that there was an extended 50 or 60 year cycle in prices, interest rates and other economic variables.

Deflationary spiral

He predicted that in the 1920s that the world was entering a deflationary depression.

He was proved correct, but all subsequent efforts to prove his case have been weakened by a missing ingredient - deflation - after 1932.

Many modern economists, including the often controversial Roger Nightingale, believe the global economy may be heading for a deflationary period rather like the one in which Japan currently seems trapped.

So maybe it's time to bid farewell or at least adieu to rampant capitalism. Maybe there is a change that is bringing the leading countries full circle to a closer relationship between government, investment and the economy.

That would not come too soon for a European Union not fully convinced yet of the freedoms afforded by a thoroughly unfettered free market.

And one country above all would be able to say, "I told you so." France never really believed all that free market, Anglo-Saxon stuff anyway

See also:

15 Oct 01 | Business
White House mulls insurance aid
10 Oct 01 | Business
Economic fallout
16 Oct 01 | Europe
EU seeks to stop terror funding
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