Labour suffers from economic “Stockholm Syndrome”

One of the reasons that economies are being crucified on the cross of ‘austerity’ is the discrediting of so-called Keynesian policies of the 1970s, writes Ann Pettifor.

Ann Pettifor is the co-founder of the think tank PRIME

One of the reasons that economies (including our own) are being crucified on the cross of ‘austerity’ is the discrediting of so-called Keynesian policies of the 1970s.


‘Keynesianism’ (‘bastard Keynesianism’ as Joan Robinson called it) is blamed for the inflation of the 1970s; not just by Keynes’s intellectually dishonest enemies in the economics profession and the finance sector; but also by the Labour movement. By this behaviour Labour exhibits clear symptoms of “Stockholm syndrome” – the psychological state in which victims identify and empathise with their persecutors.

Andy Newman of Socialist Unity is but the latest to do so.

For the sake of today’s millions of unemployed and under-employed; for the elderly losing care and homes; for single mothers losing benefit, for the homeless, Labour must get the economic history – and theory – right. In 1971, under Anthony Barber, the UK chancellor, and the US’s President Nixon, Keynes’s monetary framework for the international financial system (Bretton Woods) and for the regulation of the banking system was abandoned. Unilaterally (in the case of Nixon), and without public debate.

This ditching of Keynes’s monetary policies proved calamitous for the Labour movement, for society and for the Anglo-American economies. This is because Keynes’s monetary policies subordinated the finance sector to the interests of the broader economy and society – through regulation. Which is why they were, and are, loathed by the City of London and their friends in the economics profession.

In 1971 chancellor Anthony Barber and Heath’s Conservative government introduced ‘Competition and Credit Control’ (CCC) – widely dubbed “all competition and no control” – into the private banking sector. With the stroke of a pen, and with very little public or parliamentary engagement, what was left of Keynes’s monetary policies were swept away. As William Keegan has noted, this “ended in a serious lack of control, the secondary banking crisis and the near collapse of NatWest”. (For more on CCC read this, particularly page 24.)

Barber effectively unleashed the power of the banks to create credit – without effective regulation. As this effortless activity is so profitable, and as CCC also released effective caps on the rate of interest banks could charge, the banks duly obliged. They issued too much credit/money. This ‘easy money’ began chasing too few goods. Not surprisingly – this led to inflation.

The Bank of England stood aloof. Having franchised out the credit creation process to the private sector, governors and officials did nothing to contain the cause of inflation.

Trade unions naturally responded to rises in the prices of goods and services, as the living standards of their members were eroded. The wage increases they fought for no doubt added to the inflation spiral. But they were a reaction to and a consequence of an effect whose cause was ‘easy money’; not ‘trade union militancy’ and ‘Keynesian’ policies.

Indeed it is intellectually fraudulent to blame the inflation of the 70s on an economist, Keynes, whose policies were directly opposed to the inflationary policies of Anthony Barber, Friedrich Hayek and Milton Friedman.

The victims then embarked on a process of political self-flagellation – which delighted the bankers, not to mention the Conservatives. It certainly pleased Milton Friedman, as David Smith, the historian of monetarism has documented.

As a result of this failure to get a grip on the nature of monetary policy, and its impact on the economy, Labour, automatically on the defensive, never put up a fight against policies for financial liberalisation. By so doing it hurt its own political base. We live to this day with the catastrophic economic and social consequences of those monetary policies, and with that political and economic mis-diagnosis.

Central bankers reacted to the Labour movement’s defence of living standards by imposing policies (high interest rates, trade liberalisation/globalisation etc.) that increased unemployment and lowered wages. Real incomes fell – both here and in the US. Prices of goods and services were brought under control.

By contrast asset prices were allowed to rise. Central bankers resolutely declined to impose policies that would clamp down on the inflation of assets owned by the rich: property; race horses; brands; works of art; stocks and shares etc. On the contrary: central bankers like Alan Greenspan positively encouraged this asset-price inflation.

Thanks to the ‘easy money’ that was lent to the already-wealthy, and poured into property etc., asset prices let rip. Central bankers sat back as asset prices inflated a vast bubble that burst on several occasions (including the dot-com bubble burst of 2000-1) but in the most spectacular way in 2007-9. However, this collapse did not come before the owners had been massively enriched by the easy credit that had inflated the value of their assets.

These policies – diametrically opposed to Keynes’s monetary policies – lie at the heart of Britain’s and the world’s economic inequality: and at the heart of the economic injustice of ‘austerity’. They explain how and why the rich got richer, and the poor got poorer.

And still Labour doesn’t get it. Until the Labour movement is cured of Stockholm Syndrome, and fights for a restoration of Keynes’s monetary policies, it will continue to be held hostage by its “persecutors” – and the 30-year long series of financial crises unleashed by Anthony Barber et al will intensify.

Will the victims awake from this irrational, psychological capitulation? For the sake of the poor and vulnerable, we must hope so.

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29 Responses to “Labour suffers from economic “Stockholm Syndrome””

  1. Bloomsbury Fightback

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  2. Emma Bean

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  3. J P

    RT @BloomsburyFight: RT @leftfootfwd: Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  4. Tim Easton

    “@leftfootfwd: Labour suffers from economic “Stockholm Syndrome”: http://t.co/ckgn0F9 writes @AnnPettifor” interesting

  5. Knut Cayce

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  6. MustBeRead

    Ann Pettifor at @leftfootfwd: Labour suffers from economic “Stockholm Syndrome” – http://j.mp/lfwLoh

  7. Tim Saunders

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  8. Paul Sceeny

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  9. immunity

    Labour suffers from economic “Stockholm Syndrome”: By this behaviour Labour exhibits clear symptoms of “Stockhol… http://bit.ly/kSGB95

  10. Priti Honrao

    Labour suffers from economic “Stockholm Syndrome”: By this behaviour Labour exhibits clear symptoms of “Stockhol… http://bit.ly/kSGB95

  11. Oxford Kevin

    Thanks Ann, this background is so needed. What we also need is more background to the period of stagflation in late 70s, how that stagflation is different to today, and the history of how that stagflation has been used to discredit Keynes. You’ve provided some critical pieces here, but the smearing of Keynes goes beyond this.

    Kevin

  12. Lorcan Mullen

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  13. modernity blog

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  14. Jackie Fleming

    Left foot forward putting togther a good read. Labour suffers from economic “Stockholm Syndrome” http://bit.ly/mMNkJn

  15. William

    Nixon went off the gold standard, due to the cost of the Vietnam war.Barber panicked when Rolls Royce and Alfred Herbert went bust, and inflated the money supply.2002, the then chancellor began his orgy of government borrowing, whilst turning a blind eye to the non supervision of the banks’uncontrolled property lending, under a system he had initiated.No more boom and bust?Stockholm syndrome?Put an idiot in charge of a nation state and the outcome is inevitable.

  16. Dominic Eagleton

    Blairites + ultra lefties unite and slag Keynes – and do Hayek’s work in the process. Shame on me for liking Anne P http://bit.ly/indmVo

  17. Andrew prince

    Great article,and time for a Keynesian renaissance.

  18. Turn Trafford red

    http://bit.ly/mqd2hq interesting feature on Left Foot forward. Labour suffers from economic “Stockholm Syndrome”…

  19. Labour Broadheath

    http://bit.ly/mqd2hq interesting feature on Left Foot forward. Labour suffers from economic “Stockholm Syndrome”…

  20. Annie Libya

    MT @AnnPettifor 'This ditching of Keynes’s monetary policies proved calamitous for the Labour movement' http://j.mp/mqd2hq

  21. Tony Thomas

    Labour suffers from economic “Stockholm Syndrome” http://bit.ly/mqd2hq

  22. Robert

    For the sake of today’s millions of unemployed and under-employed; for the elderly losing care and homes; for single mothers losing benefit, for the homeless, Labour must get the economic history – and theory – right. In 1971, under Anthony Barber, the UK chancellor, and the US’s President Nixon, Keynes’s monetary framework for the international financial system (Bretton Woods) and for the regulation of the banking system was abandoned. Unilaterally (in the case of Nixon), and without public debate

    What the sick and disabled left out again, some of us actually worked for a life time.

    Never mind.
    Real New Labour….

  23. Jim

    Thanks for writing this. I’m intrigued by Keynes-

    a- that he would write such a prescient “whistleblower” critique of the Treaty of Versaille in 1919 [the Economic Consequences of the Peace]

    b- for this theories of money in the 30’s which I havne’t read and don’t [yet, & might never] understand

    c- for the notion that he helped conceive the Bretton Woods institutions, but that his idea was taken from him and mis-implemented.

    A bibliography would be nice. The 70s were uber-confusing to live through, and are still much less written about than the 60s. I enjoyed Frances Wheen’s “Strange Days Indeed”– I’d forgotten just how deeply hungry we were for stability by 1978.

  24. Jim

    Another thing. Ann didn’t mention how Nixon in 1971 said “We are all Keynesians now”.
    http://en.wikipedia.org/wiki/We_are_all_Keynesians_now

  25. Charles Wheeler

    Yes, it seems the disabled have become the cannon fodder for the war against debt.

    Have a partner working more than 24 hours a week and you’ll get nothing – no matter how long you’ve worked, how disabled you are or how much you want to work. It doesn’t make the news though – too much interest in benefit scroungers and Ryan Giggs.

    Back on message though: The hostage is an imposter.

  26. Broken OfBritain

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  27. peter fainton

    Labour suffers from economic “Stockholm Syndrome”: http://bit.ly/indmVo writes @AnnPettifor

  28. peter fainton

    “@BrokenOfBritain: Labour suffers from economic “Stockholm Syndrome”: http://t.co/sYGqhWb writes @AnnPettifor” < @dmiliband

  29. Ann Pettifor

    Jim….thanks for your comment. As to bibliography. I would recommend David Smith’s “Rise and fall of Monetarism” http://www.amazon.co.uk/Rise-Fall-Monetarism-Penguin-economics/dp/0140135278; but also Geoff Tily’s “Keynes Betrayed” (Palgrave 2007). Especially the latter. But there is a sad lack of writing on Competition and Credit Control, and the 70s…and what exists is interpreted from the point of view of the beneficiaries…And may I immodestly refer you to my own: “the coming first world debt crisis” Palgrave, 2006. The latter, because it is aimed at activists, is the easiest read!

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