Mr Murphy and economic history

Never the twain shall meet.

I wonder if the BCC realise just how crass that comment is? They’re asking the government to carry on with its cuts that are sucking money out of the economy at a record rate. And at the same time they’re saying the government must deliver growth in demand and new jobs.

The BCC can have cuts or growth, but not both.

Surely they realise that by now?

And if not, shouldn’t they take a course in economics? Not neoliberal economics – but the economics of Keynes that got us out of recession in the 30s and are the only thing that could do so again now.

The economics of Keynes that Ritchie is referring to is of course the idea that there should be fiscal stimulus, government borrowing to spend in the economy so as to pump prime growth.

It\’s a lovely idea of course and it is exactly what the theory itself says we should do and should happen.

It\’s just that, with reference to the UK and the 1930s, there\’s no actual evidence of it working. The reason being that in the 1930s that isn\’t what the UK actually did.

You see, 1930s Britain did not run large deficits. They ran virtually no deficits at all (that\’s what did for Ramsey MacDonald you see?), did not increase public spending and even the national debt only rose 5% (5% of the national debt that is) and that was more of an effect of screamingly high interest rates to protect the gold standard than anything else.

What the UK actually did at this time was to come off the gold standard and allow the declining exchange rate to boost exports.

So, the lesson of the 1930s for us here in the UK is that the effects of a recession can be ameliorated not by splurging with borrowing and spending but by cutting the exchange rate.

No, I don\’t insist that this is the only way that things can be done: only that that is what we did in the 1930s and that it is true that the UK rebounded much more quickly than did the US which went the other way. We were back to peak GDP per capita by 1934, two years after the currency decline.

Might I therefore suggest a little economics course for Ritchie?

A tad of economic history perhaps? For if you\’re going to use the UK\’s 1930s experiences as your guide to what we should do now it would help if you actually knew what the UK\’s 1930\’s experience actually was.

16 thoughts on “Mr Murphy and economic history”

  1. It must be added that when Richie Rich bangs on about Keynesian economics, he conveniently forgets 50% of the theory, which states that governments must spend little in boom years, and build up a budget surplus. Prior to the 08′ crash, did Britain and America have budget surpluses? No, so proper Keynesian theory does not support the running of deficits from a dreadful fiscal position with heavy levels of public spending.

    Just a thought

  2. Ritchie might also like to bear in mind that The General Theory wasn’t even published until 1936, and it took some time after that for the new Keynesian economists to even figure out what it meant in practical policy implementation terms, it is so badly written.

  3. Philip Scott Thomas

    I bet that Richie thinks that FDR’s New Deal was what saved the US economy.

    I thought that too, about Ritchie, that is.

    A couple of economists at UCLA have figured out that the New Deal policies actually extended the Great Depression by seven years.

  4. Look everyone KNOWS its all the Evil Tories ™ fault, despite the financial crisis hitting after 10 years of Labour rule. If it wasn’t for the Evil Tories ™ everything would be sweetness and light, there would be no problem financing ever increasing deficits, if fact we could just print all the money we needed until everyone had a Rolls Royce and a country estate. Damn those Evil Tories ™!!!

  5. Tim, I admire your tenacity in dealing with every one of Murphy’s idiotic utterances. These days I occasionally check on his website, just to marvel at his stupidity – much in the same way that I occasionally enjoy watching one of those programs like Big Brother. Something quite satisfying and ego-boosting to see an idiot at work like that. I’m glad that someone else has the energy to deal with his daily misinformation.

  6. In Britain the state spending was cut to keep the deficit under control, and the economy bounced back in a couple of years. In the USA Herbert Hoover followed what would become the Keynesian orthodoxy (according to J K Galbraith he did everything right) and the economy just got worse, then FDR came in with his New Deal which delayed the recovery for a further 6 years.

  7. How do cuts suck money out of the economy?
    If e.g. my council cuts £10 per person in council tax surely we the tax payers get it?
    I personally don’t burn this £10 and I guess most people don’t.

  8. Many people, including Ritchie, believe the State is the economy. Tim pointed out some time ago somewhere on this bog an article by Ritchie about how the State does everyhing useful and the private sector is just “fripperies”, which is a refrain from statists echoing back a very long way.

    So from their perspective, that £10 “cut” is £10 which cannot be spent by the State on things which are noble and moral and so on, which you will waste on your private fripperies.

    It’s worth remembering that these people philosophically descend from the Calvinists/Puritans. That’s why they’re so dominant in the Protestant world, particularly the anglosphere, and particularly undeveloped parts of it like Scotchland. Their entire worldview is based on the idea of moral virtue. The State (so long as they control it) is an engine of virtue, managed by the Elect (themselves, natch), to fight the inherent, incurable, corrupt nature of (the rest of) mankind.

    So if you are left alone with your own money you will inevitably do corrupt things with it, wasting it on pleasures and fripperies. Only they, via the State, can ensure it is spent on virtue. Money left in your own hands is like handing a child petrol and matches, from their point of view.

    It’s also worth noting that the Calvinist understanding of work is that it is a “calling” predestined by God, and the purpose of it is the work itself rather than what it may or may not produce as a consequence. Which is why they bang on endlessly about “jobs” and “employment” without giving a damn whether the employed are doing anything productive with their work, and why these people inevitably are driven to a labour theory of value, like miserablist little moths unto a candle flame.

    Ritchie’s the type species pretty much, a pious little Quaker, secure in the knowledge that he is one of the Elect with a duty to impose virtue on the Hellbound rabble.

  9. Tim, you are missing the obvious part: leakage. The UK is too internationalized an economy for Keynesianism to work, while in the US Keynesianism work much better.

    Tim adds: Err, that’s exactly the point I made at the ASI site this weekend….

  10. So, the lesson of the 1930s for us here in the UK is that the effects of a recession can be ameliorated not by splurging with borrowing and spending but by cutting the exchange rate.

    Lucky you didn’t join the Eurozone then? You still have options.

  11. and remember that when Keynes was incoked as the designer of economic policy in the UK, it was against the backdrop of fixed exchange-rates (Bretton Woods)

  12. and the Murph-meister has closed his nonsense to comments already! (in my previous post, I thought I had corrected it to invoked)

  13. Cutting the exchange rate in the 30’s: resulted from the cut to interest rates from 5% to 2% Feb-April 1932.The exchange rate followed ;did not lead Obviously.Lower interest rates worked in a classic Keynesian manner ,leading amongst other things to a a massive building boom: all those 1930’s semis ( 3 million between 1933 and 39).Part of this building boom was due to low land prices because agriculture had been ruined by the Depression. Exports were helped by the Ottawa Accords which set up a kind of Imperial Common Market.So I’m afraid you’ve got iit all wrong .

  14. Every £10 cut from public spending is potentially £10 less spent on papers from Tax Research dot org.

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