Sean O'Grady: Once again, the lessons of Keynes are being ignored

After a brief but spirited revival, John Maynard Keynes has been put back in his box. A panicked world re-discovered the merit of the master's teachings when a re-run of the Great Depression loomed in the autumn of 2008. Budget deficits were allowed to soar, fiscal stimulus was all the rage and borrowings ballooned. The rule book was thrown away. It worked.

And now? Retrenchment. Austerity. Cuts. The Keynesian orthodoxy is being binned again, just as it was in the 1980s. Unlike the dawn of Thatcherism and Reaganomics, this is a pragmatic, almost involuntary revolution rather than an ideological one. This is because governments, not for the first time, misused Keynes's teachings.

In the case of both the UK and the US in the decade between 1997 and 2007, the previous regimes in both counties ran their economies according to what might be termed Anti-Keynesian principles. Keynes taught that you borrow and spend your way out of recession; but you also control spending and borrowing during an upswing, to avoid inflation, trade deficits and housing bubbles. America and Britain did the opposite.

In the case of the Bush administration this was, at least, intellectually consistent because the president was following an ideology whereby low taxes always and everywhere spur growth and yield more bountiful revenues than "punitive" ones as they unleash enterprise and effort (the phenomenon known, after its most effective advocate, as the "Laffer Curve").

Thus did America end up turning the Clinton administration's balanced budget way into the red – long before the financial crisis struck.

In Britain's case, Gordon Brown operated a supposedly sacrosanct set of fiscal rules that ran on impeccably Keynesian lines. And yet he too borrowed lavishly during our boom – the opposite of proper Keynesian demand management.

Bush and Brown, lest we forget, allowed credit and the banks to run out of control, greatly compounding their other errors.

So George Osborne and Barack Obama are in fact paying for the mistakes of their predecessors. They might wish us all to be Keynesians now, but they have precious little room for manoeuvre to practice the faith. We are where we are, for sure, but one wonders whether even Keynes would have been able to think his way out of this mess.

Mr Osborne has indicated that he has some flexibility on borrowing – he won't return us to a pre-Keynesian world of constant cuts, and that is good news.

Keynes might now recommend that the British and American governments "borrow to invest", which the markets might not be too spooked by if the funds were used not only to support the economy now, but to raise the long-term prospects for growth – well thought-out schemes to improve rail and air links, roads and other vital infrastructure would still allow the underlying deficits to be attacked.

Who knows? It is tricky to second-guess a dead genius. We can be more sure that, were he around today, he would spare little scorn for those politicians – and economists – who got us to where we are now.