Both Keynes & the IMF can’t be right

Keynes pooh-poohed the notion that savers save capitalist system and therefore deserve high interest rates as a reward


Dr Pervez Tahir March 19, 2015
pervez.tahir@tribune.com.pk

At the Bretton Woods Conference in July 1944 where the IMF and the World Bank were created to establish the post-war financial architecture, there were two plans on the table: the Keynes Plan and the White Plan. The former, presented by the British negotiator Lord Keynes, the greatest economist of the 21st century, reflected the efforts of a declining imperial power to safeguard whatever was left of its economic and political interests. It was, however, the White Plan, presented by a lesser-known economist representing the rising global power of the United States, that prevailed. The White Plan aimed to discipline borrowers more than the lenders in the shift from colonial to a neo-colonial world. At that time Britain itself was a net borrower. Keynes wanted the IMF to be the international lender of the last resort, an extension of his ideas on inflation and full employment in the domestic economy.



So both can’t be right, as suggested by M Ziauddin in his article of March 18 in these pages. He was commenting on Dr Asad Zaman’s article titled “Keynes versus the IMF” (March 16). Dr Zaman’s essential point is whether the state has the capacity to spend the borrowed money wisely. Now Keynes could have spent money on anything, including digging holes to fill them up again, so long as it boosted aggregate demand and created jobs. Dr Zaman asks: “Can we rise to the challenge of spending efficiently on social services and productive investments, leading to the Keynesian outcomes of full employment without inflation?” The main text of Keynes General Theory is about increasing employment with some inflation. It is, however, the last chapter on social philosophy underlying Keynes’ theory that Dr Zaman’s query leads us to, perhaps to suggest that both are wrong.

In this last chapter, Keynes pooh-poohed the notion that savers save the capitalist system and therefore deserve high interest rates as a reward. In his scheme of things, a zero interest rate was not out of the question.  He saw the rentier aspect of capitalism as a transitional phase. Lower rates of interest not only lead to higher investment and employment but also an equitable distribution of wealth and incomes. It required “the euthanasia of the rentier, of the functionless investor”. The state “will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment.” Lest he be accused of socialism, Keynes was quick to add: “But beyond this no obvious case is made out for a system of state socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the state to assume. If the state is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.”

Doesn’t that sound familiar? Neither capitalism, nor socialism. The rule of saleheen eliminating riba will bring full employment without inflation. Zia sahib, Zahid sabut lai jo mai ke jawaz mein, Iqbal ko ye zid he ke peena bhi chore de. After all, it was Keynes who said that the power of ideas was far greater than the power of vested interests.

Published in The Express Tribune, March  20th,  2015.

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COMMENTS (5)

Toba Alu | 8 years ago | Reply @inquisitive: What is so interesting? Maybe Mr. Blake is torn apart between the Keynesian and Friedman school but modern economists are much less so torn apart. Both schools have introduced useful concepts. To say that under both schools' assumptions inflation got out of control is factual incorrect. Friedman based policies have clearly contributed to bringing down the high inflation rates of the 1970s when Paul Volcker started tightening monetary policies in October 1979. Like every thing in life nothing is black and white (only for religious people). Furthermore, world inflation has a world component (like commodity prices) and a local component and is strongly affected by central bank's (monetary) policies (and many other variables). A complex issue indeed, not for the faint hearted. Certainly demanding an open mind. Finding the right balance of policies and the timing remains a serious challenge for central bankers (Friedman) and governments (Keynes). Secondly to say that worldwide 80% has seen their standard of living drastically dropping and 20% has seen it rising enormously is to say the least unclear and might be factual incorrect if it means since the 1970's or 1980's. Not only have world poverty rates come down but also the gini coefficient has improved. Sure some countries did a better job than others. (http://www.voxeu.org/article/parametric-estimations-world-distribution-income). I agree though that the rich and the very rich take more than what I consider fair (subjective). Good policies, honest and transparant governments, and government policies are required to deal with these challenges, even more so in poor countries. What we don't need is conflating facts and fiction.
prashanth | 9 years ago | Reply Author: The main text of Keynes General Theory is about increasing employment with some inflation. Nope, as per original Keynesian theory, there would be no inflation with unemployment. It is Phillp's curve that propounds tradeoff between rate of unemployment and inflation in about 1958.
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