It took a very long time following the 1930s’ Great Depression for a consensus to emerge as to what had gone wrong. World leaders are taking a similarly long time, and New Zealand’s leaders have been slower than most, to realise that the Global Financial Crisis and the consequent recession were not just unfortunate, one-off accidents, but were the culmination of three decades or more of mistaken economic policies. But even in those economies that have remained most stubbornly in the economic doldrums, a change of heart is under way. The Euro zone is the most obvious example of a refusal to learn the lessons, but the International Monetary Fund (IMF) has, over recent months, changed its mind and made it painfully clear that austerity for Greece and other Euro zone economies is not the answer and that a more flexible policy, allowing debtor countries to grow their way out of debt, is now required.

And the UK, still mired in recession and committed to austerity, has nevertheless experimented with quantitative easing (or printing money) while the incoming Governor of the Bank of England, Mark Carney, has indicated his interest in adopting a nominal Gross Domestic Product (GDP) target rather than inflation as the preferred goal of monetary policy. Leading monetary economists like Adair Turner and Michael Woodford are publicly debating which precise mechanisms of both fiscal and monetary policy will be most effective in improving liquidity for business; they recognise that the quantitative easing practised so far in the UK has had the effect of merely strengthening the banks’ balance sheets.

Elsewhere, change is even further advanced. President Obama, in the face of determined and obstructive opposition from his Republican opponents, has succeeded in pulling the US economy out of recession and back on the road to recovery - and here, too, the Federal Reserve continues to stimulate the economy by systematically increasing the money supply. Perhaps the most dramatic shift in policy has occurred in Japan, where Shinzo Abe’s government has abandoned the restrictive policies of the last decade or so and has reverted to the kind of expansionary policy, based on credit creation for productive investment that served the Japanese economy so well in its rapid growth phase of the 1960s and 70s.

Then, there are of course the most successful economies - like China or Singapore - that have in their different ways always eschewed the Anglo-American insistence that the market must always prevail and must never be second-guessed by Government. They have demonstrated that business does best when macro-economic policy provides them with an environment that is conducive to economic development. Even in Europe, the most successful economies are those, like Germany and Switzerland, whose Governments have ensured that their industries are not handicapped by factors, like overvalued exchange rates, that make them uncompetitive in world markets.

NZ Oblivious

Here in New Zealand, our leaders seem oblivious to these developments. The best our Prime Minister can do is to describe the policies successfully pursued by other leading countries as “wacky”. We seem to think that we have nothing to learn from other - and generally more successful - economies. We tell ourselves - as we sink back into our old failings of an inflated Auckland housing market, and increased spending on imports made artificially cheap by an overvalued dollar (with the consequent harm to our own producers, and a larger trade deficit that has to be financed by more borrowing and asset sales) - that we must not waver from applying the same old mistaken policies.

We refuse to ask ourselves how it is that - over three decades - other economies have done so much better than we have. We are so far removed from any rational debate on these issues and so preoccupied by deficits and public spending that we scarcely recognise the terms, let alone the policies, that are adopted as a matter of course by the new powerhouses of the world economy.   Those economies focus on issues that are of crucial importance, like competitiveness and liquidity, manufacturing and an industrial strategy, full employment and productive investment - words that scarcely feature in our economic discourse.

While the Swiss and the Singaporeans target competitiveness so that they can sell everything they produce at a profit, we pay the issue no attention. While the Japanese and Americans quite consciously use monetary policy to bring their currencies lower, we do the reverse. While the Chinese ensure that their industry is constantly supplied with credit-created capital so that they can both invest in and buy new capacity (how else do you think they can afford to buy up so much of others’ economies?), we focus on cutbacks and putting people out of work. While the Chinese, Japanese, Germans, Singaporeans, and many others give their primary focus to manufacturing, we are content with a narrowing productive base in primary industry and selling off whatever remains.

But even here, change is afoot. The report on manufacturing, published by the Opposition parties, is a belated recognition that we cannot go on as before. And there is a glimmer of hope even at the Reserve Bank. The new Governor at least seems to understand that the overvalued dollar, the fall in saving and rise in imports, and the Auckland housing bubble are danger signals. The solutions are available, if only we care to look. What would those solutions look like? Their prime feature is that they will address our real problems - our fundamental lack of competitiveness, our failure to understand the importance and value of credit creation for productive purposes, our neglect of manufacturing’s role as the stimulus to greater productivity, our failure to hold Government accountable while bankers are allowed to decide our economic priorities, and our acceptance that unemployment can be tolerated and matters little in any case.

Competitiveness

The competitiveness of the New Zealand economy, or lack of it, has been the great taboo of our economic policy for decades. It is almost totally ignored and never discussed. Though various indices of competitiveness are maintained, they are never referred to and are apparently regarded as irrelevant to any consideration of the course that our economic decision-making should take. Yet a moment’s thought should tell us that, in a post-war world that has seen the rapid industrialisation of new economic powers, including the rise of the world’s second largest economy (China) in a remarkably short time, it would be extraordinary if we could simply assume that our place in the competitiveness stakes could remain unchanged without any care or attention being paid to it by our policymakers. 

Ignoring the issue has not of course saved us from the malign consequences of a loss of competitiveness. Our perennial trade deficit, our comparatively slow growth and productivity gains, our diminished share of world trade, our inability to grow without provoking fears of inflation, the decline of manufacturing, the increasing need for overseas borrowing and selling our national assets into foreign ownership are all evidence of a profoundly uncompetitive economy. Even our response to recession is dictated by that lack of competitiveness. Austerity is regarded as the only possible response to recession because it is tacitly accepted, though never publicly acknowledged, that to try to grow our way out of recession would inevitably create insuperable problems of rising inflation and worsening trade deficits. The problem, in other words, is not the failure of Keynesian* economics, but a deep-seated, though unacknowledged, loss of competitiveness. *John Maynard Keynes (1863-1946), the highly influential 20th Century British economist, whose followers in governments throughout the West practised a mixed economy of the State and private sector. He was the most influential Western economist for several decades after World War 2, until he was supplanted by the monetarists. Ed.

Even if we were to address the issue of competitiveness, we have convinced ourselves that it is beyond the reach of policy and that the exchange rate, the most important determinant of our ability to sell into international markets at a profit, will find its own level whatever we do. Yet we constantly intervene, through using high interest rates as our only counter-inflationary tool, to push the dollar upwards, handicapping our productive sector yet further. Even when volatile foreign exchange markets may mean that the dollar falls briefly in value from time to time, that is far from a considered attempt to achieve a desired level of competitiveness in the long term of the kind that our successful competitors take for granted as the sine qua non for export success.

We deliberately do the very opposite, in other words, of what more successful economies choose to do. The new economic giants of Asia, for example, have focused on trying to hold down their exchange rates so as to maintain the competitive advantage that rapid industrialisation - with its consequent economies of scale, quick returns on investment, and high profits to be re-invested - is able to produce. China, in particular, has clearly recognised the importance of holding down the value of its currency, the renminbi, over the whole period of its rapid growth, while Japan, intent on kick-starting a sluggish economy, is taking decisive action to bring down the value of the yen.

An economy like Singapore, with an economic performance to its credit that puts us to shame, has quite specifically focused on competitiveness as the central indicator of the efficacy of its policies.  Switzerland has done likewise and Germany, Europe’s most successful economy and exporter, pays constant attention to competitiveness indices, such as unit costs in manufacturing, export prices and measures of productivity growth. Despite this persuasive evidence that others may know something we don’t, we continue to believe that manipulating the currency (other than upwards) is somehow morally shameful and - as all good morality tales insist - will in the end do us no good. It is therefore an article of faith - never examined in the light of actual evidence - that the advantage of a lower currency will quickly be eroded by inflation and will make little difference to economic performance. 

My co-author on an earlier occasion, John Mills, has, however, recently examined the statistical evidence in respect of 20 devaluations in different countries and at different times (“Exchange Rate Alignments”, Palgrave Macmillan, 2012). He is able to disprove conclusively the contentions that devaluation is always negated by inflation and that it does not help living standards to rise. It should come as no surprise, and especially to those who constantly proclaim the market’s immediacy and wisdom in responding to stimuli, that reducing prices in the international marketplace will stimulate sales, and that increased sales and profitability will produce greater investment and employment to the advantage of the economy as a whole.

It is of course true that, while a competitive exchange rate is a necessary condition for export-led growth, it is not by itself sufficient. Without it, nothing else will be effective to bring recession to an end and to make up the ground we have lost; but with it, there is good reason to look to other measures that would at least then have a good chance of working. Once we have overcome our reluctance to accept that improved competitiveness is the starting point of a recovery strategy, we can begin to identify what those other measures might be.

Credit Creation For Productive Investment

The most important of the measures needed to build on a base of improved competitiveness is a second major policy initiative - the provision of sufficient credit for investment purposes. We have grown so accustomed, after three decades of monetarism, to regarding control of the money supply as relevant only to the battle against inflation that we have lost sight of how essential is an accommodating monetary policy if growth is to be secured. The monetarist approach takes a narrowly focused, backward looking and static view of the economy; it treats monetary policy as though it were a minefield, and any growth in the money supply as a dangerous beast that must be kept strictly muzzled and leashed.

The consequence is that monetarism has become a recipe for slow growth and high unemployment.  As soon as there is any sign of growth, an almost superstitious fear of inflation (which is almost always code for a potential rise in wage levels) dictates that demand must be choked off and job growth restrained. Monetarism looks at only one side of the supply and demand equation; it totally overlooks the potential of a market economy to grow and the importance of liquidity and the availability of investment capital in allowing it to do so - even more surprising when one considers that the proponents of monetarism claim to be the most committed supporters of the “free” market. 

In addition to its intrinsically anti-growth stance, monetarist policy requires, through its reliance on higher interest rates as a counter-inflation tool, that the cost of borrowing for investment is forced up and becomes a further barrier to improved competitiveness. Higher interest rates, and the consequently high exchange rate, are a poorly focused and slow acting counter-inflationary instrument that produces a good deal of collateral damage while addressing a problem that in recessionary times is hardly the top priority. The limitations of interest rates as a tool of macro-economic policy can be clearly seen in the unsuccessful current attempt to use lower interest rates as a stimulus to an economy mired in recession; without help from other elements of policy, bringing down interest rates is, as Keynes observed, like pushing on a piece of string.

But while monetarist theory inhibits us from realising the possibilities of growth, it does not tell us what is really happening in respect of inflation and monetary policy. In the real world, there is virtually no control over the money supply. While the wider economy, and manufacturing in particular, are continually denied the liquidity and investment capital they need in the supposed interests of controlling inflation, there is virtually a private sector free-for-all in terms of credit creation for non-productive purposes.

In the real world, the size of and growth in the supply of money is almost entirely within the control of the commercial banks, which are able to create vast volumes of credit at the stroke of a computer key. The interest of the banks is of course to lend as much as possible, and they do so, constrained only by their own need for security if irresponsible lending goes wrong. As a result, bank lending (or, as we should say, bank credit creation) is mainly devoted to lending secured by property, which means in most cases, residential properties which are the most reliable and easily realised form of security. This is not only damaging in itself, not least in the stimulus it provides to inflation, but it also diverts investment capital away from productive purposes.

Monetarism Shackles Real Economy

Monetarism, in other words, operates so as to shackle the real economy while being scarcely relevant to the real causes of inflation. This is in marked contrast to the approach taken at other times and in other countries. We have focused for so long on restraint and protecting the value of existing assets rather than creating new wealth that we are simply unfamiliar with the thinking that has enabled other economies to use monetary policy and credit creation for productive purposes as essential elements in boosting economic performance.

History provides compelling evidence to support Keynes’ pre-war contention that “there are no intrinsic reasons for the scarcity of capital”. Two of the most striking instances of how credit creation was used, not to inflate the property market for private profit, but to stimulate rapid industrial growth, were the United States at the outbreak of the Second World War, when President Franklin Roosevelt used the two years before the Japanese attack on Pearl Harbor in 1941 to provide virtually unlimited capital to American industry so that the country could rapidly multiply its military capability; and Japan in the 1960s and 1970s, when Japanese industry was enabled by similar means to grow at a rapid rate so as to dominate the world market for mass-produced manufactured goods. Western economists have typically shown no interest in how this was done and are almost totally ignorant of the work of leading Japanese economists such as Shimomura and Kurihara.

More recently, China has used similar techniques to finance the rapid expansion of Chinese manufacturing. The Chinese central bank, under instructions from the Government, makes credit available to Chinese enterprises that can demonstrate their ability to comply with the Government’s economic priorities in the course of building or buying new capacity. This is admittedly, in principle at least, easier to bring about in a totalitarian regime than in New Zealand, but in practice there is nothing to stop our Government from requiring the central bank, as the Chinese have done, to create cost-free credit for specific (and productive) purposes.

The British and American central banks have already undertaken quantitative easing on a significant scale, and - interestingly - this has had no discernible influence on inflation; but an effective creation of credit for investment purposes would have to be applied directly to the strengthening of the productive base. Significantly, the incoming Governor of the Bank of England, Mark Carney, has already pointed to this aspect of the policy that enabled Canada (under his watch) to escape most of the adverse consequences of the global financial crisis.  His interest in adopting a nominal GDP target rather than inflation as the preferred goal of monetary policy also indicates a non-standard form of monetary policy. Thinking of this kind from leading monetary economists like Adair Turner and Michael Woodford is rapidly gaining ground; they recognise that the quantitative easing practised so far has failed to focus on this desirable outcome. The rationale underpinning such a strategy is a simple one.  Whereas a sudden expansion in the money supply would, according to monetarist theory, feed directly into increased inflation - that would be true only when the economy is already fully utilising its productive capacity; as Keynes argued, credit creation will not be inflationary if it results in increased output. As we have seen, orthodox monetarism makes it is all too easy to assume that there are strict limits to that capacity - unfortunately all too true of an economy that is fundamentally uncompetitive.

Where an economy is manifestly operating at less than full capacity, there is no point in restricting the money supply - especially in the matter of capital for investment. What is needed in a recession is a lift in demand so that markets at home expand, coupled with an improvement in competitiveness so that exports are encouraged. In these circumstances, a deliberate policy of investment credit creation would bring a double benefit. It would provide readily available finance to support productive investment and to rebuild a sadly weakened manufacturing base, and at the same time it would encourage a welcome fall in the value of the dollar as the foreign exchange markets recognised that this was a deliberate and long-term goal of policy. These are both key features of the strategy now being pursued by Shinzo Abe’s government in Japan (a welcome return to the policies that served Japan so well in earlier decades and that are justified) and largely accepted by Japan’s trading partners - on the basis that everyone will benefit from a more buoyant Japanese economy. 

More Helpful Banking

Policies of this kind would be equally welcome and effective in Western countries if we are to escape from what Paul Krugman calls the “liquidity trap”, but it is important to understand that enlarging the monetary base by itself will do little. What matters is what is done with it. If it simply goes into the banks’ reserves, or is made available so as to boost demand and consumption in an undirected way, it will miss the point. The successful example of other countries is that - to be effective in building a stronger productive base - it must be directed into productive investment.

Sadly, this has been the missing element in the billions of pounds of quantitative easing made available by the Bank of England to the commercial banks in the UK through the funding for lending scheme. It has failed to show up in increased lending to the small and medium-sized businesses which desperately need a boost to their available funding. The excuses trotted out for this failure include the age-old claim that the comparatively low level of bank lending to business does not evidence any reluctance to do so, but merely a shortage of demand - or, to put it another way, a shortage of suitable projects on which to lend. But no sense of this can be made unless we know not only how much is available to lend but also - and more importantly - the terms on which the banks are offering to lend. And that is precisely, of course, what we are not allowed to know. 

The banks, in New Zealand as elsewhere, are always very coy about the terms they offer, but we are entitled to make some assumptions on the basis of what is known of their long-term attitude to lending to industry. The information that is available shows that, by comparison with other and more successful economies, our banks lend over a short term - repayment, in other words, has to be made faster. This means that the annual repayment costs of bank loans for our firms over the life of the loan are much higher, the adverse impact on cash-flow is therefore more severe, and the need to make an immediate return on investment (and a quick boost to profitability) is much greater. Annual repayment costs that are several multiples lower than the equivalents here are a large part of the reason for the greater amount and ease of bank borrowing enjoyed by businesses in, for example, Germany and Japan, and in the new powerhouses of China, Korea and Taiwan - and that is, of course, why they are able to buy up and make a profit from our failing assets.

This is the fons et origo (Latin for “source and origin”) of the much lamented disease of short-termism. Short-term cash-flow or liquidity is at least as important to our firms as longer-term profitability; indeed, it is literally a matter of life and death. It is a factor that both inhibits the willingness to borrow (and therefore the access to essential investment capital) in the first place, and - if the loan is made - greatly increases the chances that it cannot be repaid in accordance with the loan period and terms insisted upon by the banks. If, as is all too likely, a business borrowing on these terms runs into difficulties before the return on the investment funded by the borrowing becomes available, the news gets worse. Our banks, unlike their overseas counterparts, show little interest in the survival of their customers. Their sole concern is to recover the loan and interest payments due to them over the short period specified in the loan arrangement. If that means receivership or liquidation - even if the business had a good chance of survival were the investment plans funded by the loan allowed to proceed - so be it. The banks can congratulate themselves not only on the return of the loan and other payments due to them sooner than if the business had been allowed to survive but also on the money to be made from the disposal of the assets (sometimes to foreign buyers) and the receivership process. Many people are vaguely aware of these factors but our lack of interest in what makes competitor economies more successful than ours - indeed, our conviction that we have nothing to learn from them - blinds us to these truths. It is time we opened our minds and demanded better from our banking system. And shouldn’t these decisions in any case be taken in the public interest and not those of self-interested bankers?

An Agreed Industrial Strategy

As we have seen, an effective economic policy is dependent for its effectiveness on a further element - the development of an agreed industrial strategy. This does not raise problems for a centrally directed economy such as China, nor is it a difficult issue in wartime when the needs are pretty obvious; a country like democratic Japan, too, with its more structured society, might find that the common good might be more readily accepted as the basis for action than it would be in the West, but none of this means that it is any more difficult in principle for a country like New Zealand. 

An effective industrial strategy would require agreement and support from each of Government, industry and the banking sector. The task is not an impossible one; the urgency of what is required should surely concentrate minds. The strategy need not “pick winners” in detail or operate in too prescriptive a manner but would establish criteria and measures of performance that would provide a context within which the normal processes for identifying worthwhile investment opportunities could operate so that a great deal of the decision-making could be left to the usual agencies. Proponents of the current orthodoxy will of course argue that to attempt such an exercise would be to usurp what is the proper role of the market. But that is to ignore two obvious factors - the current failure of the market to produce satisfactory outcomes and the successful experience at other times and of other economies with just such a strategy. 

A successful industrial strategy would, of course, focus on manufacturing. It is a competitive manufacturing sector that has underpinned the growth of other economies by providing access to mass markets and the benefits of economies of scale. It is manufacturing that uniquely provides the stimulus to innovation, the quick return on investment, the development of new skills and the creation of new jobs - all elements in a successful economy that have sadly eluded us over a very long time. It is manufacturing that makes possible the strategy of investment credit creation by offering a sufficient return on that investment in terms of increased output so as to provide the virtuous circle of increased investment leading to increased output and back again to yet greater investment that has served other economies so well.

Credit creation by the central bank, directed to productive purposes, would be hugely more effective than undirected quantitative easing in rebuilding our industrial strength. Firms with access to investment capital on terms that impose less of a burden on cash-flow and that give them the chance to build output, sales and profits so as to repay their borrowings would stand a much better chance of not only surviving but prospering; there would then be a sound base on which other well-tried elements of an industrial strategy, such as tax breaks for research and development, would have a better chance of making a difference, and that in turn would improve employment, investment and productivity levels.

Restoring Macro-Economic Policy To Democratic Control

The commitment of Government, industry leaders and the banks to the development of such a strategy (encouraging its development, in other words, as the outcome of a wide-ranging consultation so that it thereby gains considerable popular support and understanding) would point the way to a further essential reform which constitutes a further element in a successful economic policy - the restoration of macro-economic policy to its proper place as the responsibility of Government. The elevation of a supposedly “independent” central bank to the role of unchallengeable arbiter of macro-economic policy was widely applauded when it was introduced and is still virtually never questioned. It can hardly be argued, however, that it has produced successful results; and there is now at least a greater disposition to ask whether bankers are as objective and free from self-interest as was thought.

The evidence is that handing monetary policy over to the tender care of a central bank is simply a reinforcement of the current and increasingly discredited orthodoxy that inflation is the only concern and proper focus of monetary policy and that its treatment is simply a technical matter that is properly the preserve of unaccountable bankers, and is not to be trusted to unreliable politicians. Quite apart from the undemocratic nature of this approach, whereby the most important decisions in economic policymaking are removed from the democratic arena, we have paid a heavy economic price for allowing the bankers’ interest to prevail over the interests of the economy as a whole.

It is easy to see why the bankers - and the economists who increasingly work for them - should support this. It is less easy to see why the politicians should so readily have accepted it. Yet the answer is fairly clear. It has suited the politicians well to be able to argue that the travails of the economy arise, not by virtue of their mistakes or deficiencies, but as a consequence of inexorable economic forces which must kept in check and marshalled by expert technicians. In this way, our Governments have been able to disclaim any responsibility for policies (and their consequences) for which they are ultimately responsible. What is clear is that an economic policy that breaks the shackles of current orthodoxy would necessarily have to be removed from the exclusive and self-interested control of bankers. It would need to be driven by politicians who saw the need to ensure that the wider interest is carried into policy and is an essential element in setting its direction and gaining for it the necessary support. 

The aim should be to re-establish the full range and purpose of macro-economic policy. It would no longer be a simple matter of tasking the central bank with restraining inflation and then allowing market forces to get on with it. Other important outcomes - full employment, a reasonable and sustainable rate of growth, properly funded public services, and so on - would come back into the reckoning as the legitimate goals of policy. Governments would expect then to be judged on their success or otherwise in achieving those goals of a more broadly based economic policy. The outcome of reviving the public debate about macro-economic policy - a debate that has been in limbo for decades - would be not only a better performing economy and a more integrated society, but also a more vibrant democracy, as voters realised that their views might count after all.

For the time being, however, even those - like Adair Turner and Michael Woodhouse - who are prepared to consider significant departures from standard monetary policy are still in thrall to an almost religious faith in central bank independence. This leads them (and of course most others) to shy at ghosts; they find it necessary to grapple with the totally unnecessary and invented problem of whether a sensible combination of monetary and fiscal policy might threaten the supposedly necessary separation of function between the Treasury (with responsibility for fiscal policy) and the central bank (responsible for monetary policy). The danger is that this misplaced concern will inhibit us from doing what is necessary. As Kurihara made clear, no such problem bothered the Japanese, and it is hard to see why it should bother us.  If we have to choose between the supposed need to maintain central bank independence and the advantages of a more accommodating monetary policy, it is surely a no-brainer; the fact that we even have to consider it is merely a further illustration of the price we have paid for allowing bankers to run our economy.

Full Employment

As we have seen, an important benefit from a renewed debate about economic policy would be the possibility of replacing ideologically driven preoccupations, such as preserving the value of assets, reducing the size of Government, and relying on austerity to escape recession, with goals that more accurately reflect the wider interest and represent a more comprehensive measure of economic success. Prime amongst such goals would be full employment - a further element in a more effective economic policy.

Full employment as the central goal of policy would not only be the most important step that could be taken to relieve poverty and to reverse the destructive growth in inequality; it would also be a huge step towards a more inclusive and therefore more successful economy. There is, after all, nothing economically efficient about keeping large numbers out of work and unwillingly dependent on benefits. Full employment is the hallmark of a properly functioning economy. An economy that is competitive in the sense that it could find profitable markets for what it produces, and for which investment capital is available to finance increased production, would be able to use the productive capacity of its total workforce. Conversely, a high or persistent rate of unemployment shows that those conditions do not apply.

To restore full employment as the central goal of policy and as the measure of that policy’s success would revolutionise the way in which management of the economy is regarded. Once it was accepted that full employment is achievable, the success or otherwise of economic policy would be judged according to a criterion that was easily understood by the public. The value, in both economic and social terms, of the contribution that labour makes to society’s wellbeing would be newly acknowledged. Full employment would be seen as determining the direction of economic policy but requiring that other aspects of policy should also help towards this desirable outcome. It would be seen as important that the workforce was properly supported through measures like comprehensive rights at work and appropriate skill training, and that the underlying services that guarantee the health and educational levels of the workforce were raised to a high level. The wellbeing and effectiveness of that workforce is, after all, our greatest asset.

This would represent, of course, a significant move away from the current orthodoxy which regards labour as just another production cost, to be kept as low as possible. That approach may or more likely may not make sense from the viewpoint of the individual business, but it is certainly and literally counter-productive from the viewpoint of the economy as a whole. A change in approach would also run counter to the current, but usually unstated, belief that wage costs are too high and that the key to improving competitiveness is to drive them down - not least by allowing unemployment to remain high.

Conclusion

These elements of an economic strategy to replace neo-liberalism would certainly represent a clear break from the orthodoxy that has dominated the world economy for so long. It has the merit of offering a real choice to the voters and by enthusing those who are keen for change, without departing in any way from mainstream economics. The overall strategy is recognisably Keynesian and would be supported by that growing group of economists that is now confident that neo-liberalism as an economic doctrine has had its day.

It allows a coherent critique to be made of an orthodoxy that is manifestly failing - an orthodoxy that uses austerity to reinforce recession and is increasingly defended not on its own merits but by the schoolboy tactic of demanding sight of an alternative. Each of the elements in my proposed strategy supports the others and helps to create a coherent whole; objections to the relevance or practicality of one element can be met by pointing to the supporting role of the others. Most importantly, it means that those who increasingly understand the failures of neo-liberalism are not discouraged by a reluctance to tackle the doctrine on the centrally important territory where its deficiencies are most apparent and damaging. An economic strategy built on these elements would not only produce a better economic performance but would - properly understood - commend itself to the electorate as well. And for those who suffer withdrawal symptoms when denied their usual diet of an emphasis on deficit reduction, it would be the best way of dealing with that too!