Amartya Sen on austerity and the relevance of Keynes today

By Siddharth Singh, 5th June, 2015

Amartya Sen delivered a lecture on austerity at the Charleston Festival in Firle, East Sussex, on the 23 of May. He argued that Keynes is still relevant today, in spite of the perceived sea change of public attitudes towards debt and austerity. Here are relevant excerpts:

If austerity is as counterproductive as Keynes thought, how come it seems to deliver electoral victories, at least in Britain? Indeed, what truth is there in the explanatory statement in the Financial Times, aired shortly after the Conservative victory in the general election, and coming from a leading historian, Niall Ferguson (who, I should explain, is a close friend — our friendship seems to thrive on our persistent disagreement): “Labour should blame Keynes for their election defeat.”

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Keynes ushered in the basic understanding that demand is important as a determinant of economic activity, and that expanding rather than cutting public expenditure may do a much better job of expanding employment and activity in an economy with unused capacity and idle labour. Austerity could do little, since a reduction of public expenditure adds to the inadequacy of private incomes and market demands, thereby tending to put even more people out of work.

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However, the financial leaders of Europe had a different reading — from Keynes and from a great many mainstream economists — of what was needed, and they were not going to budge from their understanding… Further, if the policy of austerity deepened Europe’s economic problems, it did not help in the aimed objective of reducing the ratio of debt to GDP to any significant extent — in fact, sometimes quite the contrary. If things have started changing, over the past few years, even if quite slowly, it is mainly because Europe has now started to pursue a hybrid policy of somewhat weakened fiscal austerity with monetary expansion. If that is a half-hearted gesture towards Keynes, the results are half-hearted, too.

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The bold plan by the new president of the European Central Bank, Mario Draghi, which we have every reason to welcome, to deliver a trillion euros of “quantitative easing” (not unlike expanding the money supply) — with decisive expansionary effect — is a result of that belated recognition which is slowly changing the European Central Bank: that expansion rather than contraction is what the economy needs.

Please click here to read the full lecture.