Economic ideas always have the potential to influence politics, but the relationship is hardly straightforward. Indeed, it was John Maynard Keynes, one of the most celebrated progressive economists of the twentieth century, who once wrote: ‘Practical men who believe themselves to be quite exempt from any intellectual influence, 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 of a few years back’.

Economics can reshape politics, but often the time-lag involved is very considerable, as Keynes’ writings illustrate. Keynes’ most important treatise, The General Theory of Employment, Interest and Money, was published in 1936 in response to the great depression that had begun in 1929. However, it took at least a decade for his theories to be translated into recognisably ‘Keynesian’ models of macro-economic management in the mid-1940s, which cast aside the laissez-faire free market orthodoxies of the early twentieth century. The Second World War played a crucial role: across Western Europe there was a strong desire not to return to the social misery and mass unemployment of the inter-war years, so Keynes’ ideas found a receptive audience among politicians and policy-makers.

Another reason why progressive economics struggles to influence politics is that the analysis of what is wrong has to be matched by a compelling prospectus of what might be done to put it right. The celebrated French economist, Thomas Piketty, has produced a landmark book, Capital in the Twenty-First Century, assessing the scale of global wealth inequality and its origins in contemporary models of western capitalism. Piketty draws on historical data to argue that wealth tends to expand more quickly than economic output, ensuring that over time capital is concentrated in fewer hands: as a result, Western societies are returning to a form of ‘patrimonial capitalism’. The real success of Piketty’s volume is to put the question of inequality firmly on the mainstream political agenda. Today, all politicians across Left and Right profess to be opposed to extreme inequality. Business leaders and financiers fall over themselves to express concern about the scale of inequalities in income and wealth in the aftermath of the 2008 financial crisis. What is missing, however, is any substantive agreement about what could or should be done by democratic governments. Piketty advocates a global wealth tax – not a bad policy at all, but very tough to implement in a world increasingly divided into regional blocs (such as the European Union) where citizens still identify strongly with the nation-state.

 

In Europe today, there is general agreement among progressive economists about what needs to happen at the policy level to address the long-running economic crisis: the difficulty, as ever, is political implementation. The financial crash has triggered the worst recession in Europe since the 1930s, plunging many EU member-states into deep fiscal crisis and straining the Euro-zone almost to breaking point. Initially, it was hoped that the turbulence would quickly pass, but Europe’s economies have been afflicted by a series of damaging ‘aftershocks’ which ensures that the crisis in the EU, and in particular the Euro-zone, is far from over. There is frustration that European governments and the EU itself have been slow to act.

Nevertheless, economic ideas and prescriptions have often struggled to influence politics because of the inherent tension between capitalism and democracy. Nowhere is this truer than in today’s Europe. The German political scientist, Wolfgang Streek, points towards: ‘an endemic conflict between capitalist markets and democratic politics’. The post-1945 social settlement temporarily resolved the conflict by subjecting markets to democratic control through Keynesian macro-economic management, public ownership, welfare provision, and an ethos of social partnership between employers, governments and labour. The social contract fell apart in the 1970s, however, as markets forces were allowed to prevail over the ‘welfare needs’ of society in order to restore international competitiveness – nowhere more so than in the United Kingdom under the governments of Margaret Thatcher.

Today, there is an attempt at EU level to restore the equilibrium between capitalist markets and democratic politics, explicitly accepting that nation-states are no longer sovereign actors and that they cannot hope to regulate the forces of global capitalism by acting alone. The European Commission is attempting to strengthen the EU’s economic governance arrangements by refining policy co-ordination instruments such as budgetary surveillance and improving crisis management mechanisms to prevent destructive contagion effects. The policy regime of inflation targeting and rules for fiscal stability that has prevailed since the 1990s proved to be inadequate. The Euro was originally a bold progressive idea: to control the power of financial markets in destabilising national currencies and national governments. But because fiscal sovereignty has not been pooled, the Euro has transferred risk from the currency markets to the sovereign debt markets. This has left countries caught in a sovereign debt trap, with little alternative to austerity as they struggle to rebuild bond market confidence. Some economists argue that fiscal federalism, which requires the creation of democratically accountable institutions at Euro level, is the only answer. If the politics of attachment to national sovereignty makes this impossible the Euro can still survive, but as a ‘sub- optimal’ currency area with all the attendant social stresses and political instability.

More fundamental questions therefore remain about how Europe can deal with major structural imbalances both within and between member-states, and whether further financial liberalisation is actually conducive to sustainable economic growth. It is striking that mainstream ‘rational expectations’ economists made mistakes prior to the crisis encouraging complacency about the benevolence and self-correcting properties of markets – in contrast to more intuitive thinkers earlier in the twentieth century such as Keynes and Polanyi. The danger now is that aggressive enforcement of austerity to ensure economic stability will lead to a ‘lost decade’ of secular stagnation and relative economic decline, as the broader agenda of ‘Europe 2020’ focusing on climate change, widening access to post-compulsory education, and reducing relative poverty is increasingly marginalised. The obsession with budget balance will further undermine Europe’s long-term growth potential.

This serves to underline that more innovative ideas as well as concrete action on economic and social policy is urgently required in Europe, including programmes to expand the long-term productive base of our economies through ‘social’ and ‘physical’ investment. Growing disenchantment with the European project arises because of the lack of bold and decisive action despite the severity of the crisis and its impact in rising unemployment and social deprivation. European integration will only be politically acceptable if policy can restore economic growth, ensure socially inclusive welfare systems and labour markets, and develop an alternative to the discredited market liberal model of western capitalism. Progressive economics will, no doubt, have a vital role to play.