University of Warwick institutional repository: http://go.warwick.ac.uk/wrap
This paper is made available online in accordance with
publisher policies. Please scroll down to view the document
itself. Please refer to the repository record for this item and our
policy information available from the repository home page for
further information.
To see the final version of this paper please visit the publisher’s website.
Access to the published version may require a subscription.
Author(s): BEN CLIFT and JIM TOMLINSON
Article Title: Credible Keynesianism? New Labour Macroeconomic
Policy and the Political Economy of Coarse Tuning
Year of publication: 2007
Link to published version: http://dx.doi.org/
10.1017/S0007123407000038
Publisher statement: None
B.J.Pol.S. 37, 47–69 Copyright © 2006 Cambridge University Press
doi:10.1017/S0007123407000038 Printed in the United Kingdom
Credible Keynesianism? New Labour
Macroeconomic Policy and the Political Economy
of Coarse Tuning
BEN CLIFT AND JIM TOMLINSON*
This article questions prevailing interpretations of New Labour’s political economy and challenges the
assumption within the comparative and international political economy literatures of the exhaustion of
the Keynesian political economic paradigm. 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 of British macroeconomic policy framework and
institutions. Our empirical focus on New Labour in government since 1997 offers considerable evidence that
this search for the capacity to ‘coarse tune’ has been successful.
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.
John Maynard Keynes
1
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.
2
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’.
3
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
* Department of Politics and International Studies, University of Warwick; and Department of History,
University of Dundee, respectively. The authors would like to thank three anonymous referees for helpful and
insightful comments upon an earlier draft of this article.
1
John M. Keynes, The General Theory of Employment Interest and Money (London: Macmillan, 1964
[1936]), p. 383.
2
Anthony Giddens, The Third Way (Cambridge: Polity, 1998), pp. 16–17; John Gray, False Dawn (London:
Granta, 1998).
3
Gray, False Dawn, pp. 88–9.
48 CLIFT AND TOMLINSON
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,
4
and of the rise of the New Right and
monetarism ideologically.
5
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.
6
He quotes Callaghan’s famous 1976
conference speech as ‘the obituary for Keynesianism in Britain’,
7
and notes elsewhere of
the 1977–78 public spending cuts ‘for all intents and purposes the Keynesian era was over
in Britain’.
8
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’.
9
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.
10
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. First, Keynesian political
economy has not been wholly de-legitimized 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.
4
Eric Helleiner, States and the Re-Emergence of Global Finance (Ithaca, N.Y.: Cornell University Press,
1994), pp. 144–5.
5
Mark Blyth, Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century
(Cambridge: Cambridge University Press, 2002), pp. 126 and 139–51.
6
Peter Hall, Governing the Economy (Cambridge: Polity, 1986), pp. 92–9, 128–30
7
Hall, Governing the Economy, p. 95.
8
Hall, Governing the Economy, p. 80.
9
Kathleen McNamara, The Currency of Ideas: Monetary Politics in the European Union (Ithaca, N.Y.:
Cornell University Press, 1998), pp. 5–6
10
See for example David Andrews, ‘Capital Mobility and State Autonomy: Towards a Structural Theory of
International Monetary Relations’, International Studies Quarterly, 38 (1994), 193–218. For a critique, see Ben
Clift and Jim Tomlinson, ‘Fiscal Policy and Capital Mobility: The Construction of Economic Policy Rectitude
in Britain and France’, New Political Economy, 9 (2004), 515–37.
Credible Keynesianism? 49
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 they perceive the role and limits of national economic policy.
11
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 characterizing the political
economy of New Labour.
DEFINING KEYNESIANISM
In the wider debates about the scope for social democratic policies within which
discussions of New Labour’s relationship to Keynesianism are often situated, the
specifically Keynesian component of such policies is usually underplayed or conflated with
other issues.
12
Some analysts focus on the possibilities of redistributive policies,
13
while
others see public spending and/or taxation as the crucial issues.
14
While these are central
concerns in the context of debates about social democracy, they are plainly different from
‘Keynesianism’ in any specific sense.
To pursue the argument it is clearly necessary to define Keynesianism, but to do so is
to enter a ‘semantic minefield’.
15
One of the problems of definition is that Keynes
personally was centrally concerned with effecting a revolution in economic theory, so that
policy positions are rarely at the centre of his work, and those that he did advocate were
noticeably pragmatic.
16
Hence his personal legacy for policy is a highly contested one: as
11
Ed Balls, ‘Open Macroeconomics in an Open Economy’, Scottish Journal of Political Economy, 45 (1998),
113–32; Tony Blair, the 1995 Mais Lecture, reprinted in ‘Blair sets out framework to cure economic ills’, Financial
Times, 23 May 1995; Gordon Brown, ‘Chancellor’s speech at the Mansion House, 11 June 1998’,
www.hm-treasury.gov.uk/pub/html/press98; Gordon Brown, ‘The Mais Lecture by the Chancellor Gordon
Brown, 19 October 1999’, www.Treasury.gov.uk/newsroom and speeches/press/1999 168 99.cfm; Gordon
Brown, ‘The Conditions for High and Stable Growth and Employment’, Economic Journal, 111 (2001), 30–44;
Ed Balls and Gus O’Donnell, Reforming Britain’s Economic and Financial Policy: Towards Greater Economic
Stability (London: Palgrave, 2002).
12
Giddens, The Third Way,p.16
13
Geoffrey Garrett, Partisan Politics in the Global Economy (Cambridge: Cambridge University Press, 1998);
Mark Wickham-Jones, ‘New Labour in the Global Economy: Partisan Politics and the Social Democratic Model’,
British Journal of Politics and International Relations, 2 (2000), 1–25; Chris Pierson Pierson, Hard Choices:
Social Democracy in the 21
st
Century (Cambridge: Polity, 2001); Ben Clift, ‘Social Democracy and Globalization:
France and the UK’, Government and Opposition, 37 (2002), 466–500.
14
Dani Rodrik ‘Why Do More Open Economies Have Bigger Governments?’ Journal of Political Economy,
106 (1998), 997–1032.
15
Colin Hay, ‘Credibility, Competitiveness and the Business Cycle in “Third Way” Political Economy: A
Critical Evaluation of Economic Policy in Britain Since 1997’, New Political Economy, 9 (2004), 39–56, p. 40.
16
Peter Clarke, ‘Keynes and Keynesianism’, Political Quarterly, 69 (1998), 297–305.
50 CLIFT AND TOMLINSON
Corry and Holtham note, ‘were Keynes alive he would undoubtedly have some lucrative
actions for libel associated with careless use of the word “Keynesian” ’.
17
In the early post-war period many economists and policy makers happily described
themselves as Keynesians but the meaning attached to this term varied. Probably the
majority aligned themselves explicitly or implicitly with the ‘neo-classical synthesis’,
which incorporated Keynes into a broader framework of orthodox economics, providing
the underpinnings for a ‘consensual’ view that regarded Keynes as adding to rather than
overthrowing much existing economic theory. By contrast, radicals such as Joan Robinson
saw this synthesis as creating a ‘bastard Keynesianism’, which drained Keynes’s ideas of
their revolutionary potential.
18
Since the 1970s, Keynesianism has become both less
‘hegemonic’ in economic discussion and even more diverse in interpretation. A variety of
‘New Keynesianisms’ has emerged, with widely divergent views of what needs to be
retained and what deleted from the Keynesian canon. On the one side, the work of left
Keynesians like Joan Robinson has inspired a New Keynesianism that asserts the
continuing and fundamental instability of capitalism and the need for major policy
reconstruction to deal with this problem.
19
At the other end of the spectrum is a New
Keynesianism which accepts many of the central tenets of the new classical counter-
revolution in economic thought, and continues the trend of the ‘neo-classical synthesis’
towards integrating Keynesianism into the mainstream of economics, a mainstream that
has arguably become more conservative in the last decades.
20
In the early twenty-first
century, Keynesianism, with qualifying adjective, has become a church so broad that its
doctrinal limits are difficult to determine.
Nevertheless, some parts of the Keynesian position seem clear to us. At the core is a
perception of the inherent instability of a capitalist economy, and especially its inability
unaided to deliver a full use of resources. As Arestis and Sawyer summarize the position:
‘our approach can be considered Keynesian in the sense that its policy implications arise
from the perception of the role of aggregate demand in setting the level of economic activity
and the lack of automatic forces leading a market economy to full employment’.
21
Our definition follows the spirit of Arestis and Sawyer, by seeing the key features of
Keynesianism as the pursuit of low unemployment, which in an unstable world requires,
in principle, the use of all possible policy instruments, but a pursuit which must make a
realistic assessment of the context of policy making, especially the international environ-
ment.
22
Here it is perhaps useful to counterpose our interpretation of Keynesianism
17
Dan Corry and Gerald Holtham, Growth with Stability: Progressive Macroeconomic Policy (London:
Institute for Public Policy Research, 1995), p. 3.
18
Joan Robinson, ‘What Has Become of the Keynesian Revolution?’ in Joan Robinson, Collected Economic
Papers, Vol. V (Oxford: Basil Blackwell, 1979), pp. 168–77.
19
Jan A. Kregel, ‘The Microfoundations of the “Generalisation of the General Theory” and “Bastard
Keynesianism”: Keynes’ Theory of Employment in the Long and Short Period’, Cambridge Journal of Economics,
7 (1983), 343–61.
20
For example, Greg Mankiw and David Romer, eds, New Keynesian Economics, Vol. 2, Co-ordination
Failures and Real Rigidities (Cambridge, Mass.: MIT Press, 1991).
21
Philip Arestis and Malcolm Sawyer, ‘Keynesian Economic Policies for the New Millenium’, Economic
Journal, 108 (1998), 181–95, p. 181.
22
In relation to the international context, the key issue is the achievement of room to manœuvre – the ability
to direct national economic policy towards a goal of full employment in a manner not unduly constrained by the
international economic context. Keynes’s clearing union was one means to that end – and arguably the balance
of payments constraints experienced by post-war governments indicated Keynes was right to highlight the potential
problem. In today’s radically changed contemporary context, with the prevalence of capital mobility, the issue