What has happened to Europe?

In order to understand the inadequacy of Keynes as a guide to solving the European economic crisis, we have to ask: what kind of an economist was Keynes in terms of his vision of a good society? Keynes did say - famously and again accurately enough - that paying labourers to dig holes and then to fill those up can be a very good thing, because of its impact on increasing effective demand to combat a recession or a depression. This is fair enough, but Keynes had extremely little to say on what social commitments a state should have - what should the public expenditure be for, other than just for strengthening market demand through state intervention.

Keynes said very little on economic inequality, was extraordinarily reticent on the horrors of poverty and deprivation, had little interest in externalities and the environment, and neglected altogether the subject that his rival and adversary A.C. Pigou concentrated on, to wit, "The Economics of Welfare," the title of Pigou's most famous - and certainly most profound - book. It was the allegedly rightwing Pigou who had initiated the measurement of economic inequality, spent time on analyzing the nature and causes of poverty, wrote extensively on externalities and on environmental degradation, and the need for public economics to aim at remedying what the allocational errors of the market economy.

So the need to question the on-going financial policies in Europe arise for economic reasons that go beyond Keynes (while incorporating some ideas of Keynes), in addition to political and social reasons to which I have also tried to point. This scepticism does not in any way question the need to recognise the importance of reducing, in an appropriate time table, the burden of public debt. But good economics is not only about what to aim at, but also about what can be effective, and how and when.

If we add to this economic argument the long-term concern in Europe about some form of social justice and the more immediate political worry about the undermining of the sense of European sense of solidarity, we can see what a disaster the recent European financial policies have been. This is not to say that commitments to social justice are always paramount, but it is surely is a serious concern that cannot be brushed aside by unilateral decisions of financial leaders – no matter how high or low their standing might be in their limited world. There is always a need for rational scrutiny and examination of what a country can afford and what it cannot (taking into account all relevant factors, including the changing age distribution of the population), but this is not the same question as checking what a country can afford with inefficient economic and financial management – of the kind that Europe has plentifully experienced recently - with fuzzy thinking on exchange rates and market demands and economic competitiveness.

The guiding principle has to be, rather, what Adam Smith specified with much clarity in The Wealth of Nations: how to strive for good functioning of the economy to be able to provide the public services that people agree are needed, along with enhancing the private means that people enjoy from employment and income. Good political economy, Smith argued, has to have "two distinct objects": "first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the publick services."

Finally – and importantly - serious consideration of the kinds of reform that are needed in Europe has, in fact, been hampered, rather than aided, by the loss of clarity on the distinction between (1) reform of bad administrative arrangements, and (2) austerity in the form of ruthless cuts in public services and basic social security. Europe does need many economic reforms of different types, such as the stopping of the evasion of taxes, preventing government servants from using favouritism in the exercise of the power that the society gives them, regulating banks that are tempted to work irresponsibly – or worse – in unrestrained pursuit of their own gains (sometimes biased heavily towards short-run profits), and changing unviable conventions about early retiring age that are economically hard to sustain. The requirements for alleged financial discipline have tended, in unclear analysis, to amalgamate the two, even though any scrutiny of the demands of social justice would view policies for necessary reform in an altogether different way from indiscriminate cuts in important public services. Even if that distinction may have been lost in rather crude financial thinking, opportunities for adequate public discussion, in "governance by discussion" could have brought out its relevance clearly enough.

Europe has been extraordinarily important for the world, which has learned so much from Europe. Europe can remain globally important by setting its own house in order - economically, politically and socially. This is important not just for Europe but for the world.

©RIPRODUZIONE RISERVATA