Time to cast Keynes adrift

In a consumer society it is naturally very difficult to tell people they cannot spend wildly, should not get too deeply into debt, and need to look at relative values before deciding they really do live in a gold mine. But someone must find the courage to do so. This is not only a Western problem, but it is in the West - because those economies are the most directly consumer oriented - that the worst and most intractable problems lie. The way out for these countries is to live within their means and save money. That is not the message consumer societies want to hear; nor is it one political leaders are keen to give.

Keynes was not a consumerist. But his essential message - that when you’re losing money you can just print more and throw it around - was tailor-made for the consumer society that emerged in the early 20th century and which came of age in the post-World War II boom. Governments grabbed the idea with glee. Using Keynesian theory, they could be seen to be doing something - the imperative of democratic politics - and, moreover, to be supporting creation of private wealth.

Deregulation - of virtually everything - followed in the days of so-called Reaganomics and Thatcherism. That was no bad thing (if governments cannot even run politics, why should anyone think that they can run things that actually produce saleable goods). But they forgot one essential: that legislation and the law still need to guard against malfeasance and stupidity. Australian bank regulation has proved stronger than in most advanced economies. The mess in America would be unbelievable if it were not true. The mess in Britain, similarly, is a nightmare. The answer when the crunch came essentially ran to renationalising the banks throughout Europe and taking that step - previously anathema - in the heartland of capitalism, the US.

In our region, outside of Australia, New Zealand and (maybe) Singapore, everything depends on China. It used to be Japan that was the linchpin, but no more. Its post-war copy-and-improve economy long ago stalled; it will not recover without radical surgery and probably not even with that outside of a much more closely knit economic partnership with China. There are some very difficult politics in pursuing that course of action.

South-East Asian resource economies - such as Indonesia’s - fare reasonably well when consumer economies are buying in bulk. When these markets recede, things get dicey. There is nothing Indonesia can do about that, beyond fiddling at the margins, taking price cuts, and managing on even less money. Fortunately, outside the big cities most Indonesians are effectively self-sufficient within their communal living arrangements. It’s not comfortable, but no one will starve. The elective-spending elements of Indonesia’s economy (a prime example: Bali with its dependence on international tourism) may yet suffer significant contraction.

It is by no means clear yet what the ultimate depth of the coming recession really is, how long it will take to get out of the trough, or what shape the new world that eventually emerges will take. There is a lot of sensible advice around - consigning the fundamental stupidity of Keynesian fire-and-forget pump priming to history is part of this - but it is profoundly unclear whether anyone with a hand on the priming pump is actually listening, far less that they even understand the question.

Until the world as a whole really gets to grips with the fact that it cannot live on what it does not have, until political leaders everywhere - and the people whose lives they govern - understand this point and are prepared to accept it and swap profligacy for caution, there is no answer.