Labour returns to Keynesian roots

An article in the Sunday Telegraph accuses Prime Minister Gordon Brown and Chancellor Darling of reverting to a default Keynesian option.

One of the commentators says that he does not recall an economist who forecast the bust. Regular visitors to this site will know, of course, that as long ago as 2005, Fred Harrison, wrote a book called “Boom Bust: House Prices, Banking and the Depression of 2010”. He also accurately forecast the 1991 recession long before it happened. Harrison has identified 18 year cycles going back to about 1800, and their cause and frequency is due to the interaction of the banking system with the land market.

The problem is that the behaviour of the land market is not factored in to modern economic theory, though classical economics was clear about its importance. David Ricardo, for instance, formulated the Law of Rent (and died a rich man). This aspect of economics is all but dropped, which is why the average street busker knows something important about economics that is played down or ignored by all the experts – that assuming you are a half-decent musician, what determines your takings is where you choose to play. But if you study economics, Ricardo’s Law of Rent is regarded as an interesting historical curiosity as, the experts say, “land is not of economic importance any more”.

Now that a housing boom (really a land boom), is crashing – we are nowhere near the worst of it, it is obvious that, with a handful of exceptions, the experts are wrong. But don’t blame Brown and Darling. They are just doing what they were taught. It is the accepted theory that is wrong. The trouble is that the same theories inform, or rather misinform, the policy makers in all the political parties. So this boom-bust would have happened whoever had been in power, no doubt in a slightly different way. It’s the people who write the economics text books who are really responsible for the inability of politicians to manage the economy effectively.

Anyone interested in an in-depth critique of modern economics theory can find one on this site other sites linked from it.