Keynes might have had time for the George Osborne plan

It has become increasingly common for a new generation of self-styled economic conservatives to pretend that Keynes was some sort of welfare socialist. He was not. He favoured free markets; he wanted to end the scourge of mass unemployment – but not at the cost of national bankruptcy or runaway inflation; he was in fact a liberal, with a small and a capital ‘l’. He was mostly concerned with saving capitalism from itself and the facile appeals of communists and fascists.

He did, to be sure, reject the notion that all it takes for capitalism to right itself is a fire sale of assets (shares, property, bonds) and for wages to adjust ever downwards.

He had three problems with this theory. First, such an equilibrium can be – and was 80 years ago – at levels of high joblessness. Second, that pushing prices down raises the real level of debt in an economy. Third, that low wages mean low demand.

Keynes was putting it mildly when he said we could not wait for the world economy to just fix itself because it would simply come too late for those unemployed today; they might indeed be dead by the time recovery arrives, and the “classical” solution might mean recovery could never come.

As it happens, Keynes might have more time for George Osborne’s plan than either Keynes’ friends or foes today are willing to admit. Keynes would probably judge that the Chancellor is right to allow the “automatic stabilisers” to work, tolerating lower tax revenues and higher welfare costs as the structural deficit is dealt with.