The Current Crisis Has a Silver Lining

Capitalism has had many crises and often they have led to improvements in the way it has operated. Two related improvements are predicted as a result of the current crisis. One is the hastening of the decisive defeat of market liberalism. The other is the rehabilitation of fiscal policy as part of the tool kit used to minimise the inherent instability of capitalist economies. After a brief exposition of the core aspects of market liberalism, this article considers the use of fiscal policy in each of the short run and the long run. Policies around the OECD in the last 16 months have already embodied both these improvements, but a similar achievement in the long run will be more difficult. The crowding-out thesis has more appeal when applied to the longer run. However, the empirical evidence does not support crowding out. More generally, economic orthodoxy relies on neo-classical growth theory to support a belief that longer run trends in real economic variables such as output and employment are determined solely by supply side factors. The article uses the authority of Solow and Swan to emphasise that this is an assumption, not the result of any analysis, and that neoclassical growth theory itself assumes that fluctuations in investment over the business cycle will necessarily affect the path of potential output. Moreover, not only is the NAIRU (Non-Accelerating Inflation Rate of Unemployment) determined by the path of investment in physical and human capital, but at a much lower level of unemployment than the conventional wisdom believes.