Maybe Keynes was right after all?

It has to be said that we're not great fans of macroeconomics around here. Not enough good data from enough different places to definitively answer most questions: and that's before we get onto Hayek's point about simply not being able to calculate the economy without using the economy itself to do so. However, this makes us think that Keynes might well have been right on one point: It took far too long but Britain’s traumatic national pay cut is coming to an end. Even on the somewhat crude median earnings measure, pay is finally going up again, even after accounting for the effects of price rises. Wages are rising a little faster and inflation has collapsed, a golden combination for employees across the country.

Ever since the Industrial Revolution and the spread of capitalism, gradually rising wages have been the norm, apart from in wartime and during brief periods of extreme economic dislocation. The fact that this process went into partial reverse over the past few years despite the recovery came as a shock and helped to explain why so many people began to fall out of love with capitalism. It is therefore excellent news that normality is finally re-establishing itself.

One view of unemployment is simply that it happens when labour is more expensive than people are willing to pay for it. That's obvious in that one sense of course. The question becomes then well, how quickly will the repricing happen if we do ever get to that stage? There are those who insist that it happens immediately and thus unemployment and recessions cannot happen. Not an entirely convincing view. There are also those who insist that it can take forever and this justifies all sorts of interventions. And then we've got the evidence of the past few years.

It could be argued that labour in the UK did become too expensive. We had just had the largest and longest peacetime expansion of the economy after all. So, a repricing was necessary. And this is where Keynes could be said to be correct. It takes time because nominal wages are sticky downwards. People really, really, don't like lower numbers on their paycheques. They'll grumble about their real wages falling if it's disguised with a little bit of inflation but they'll riot if the equivalent fall were at a steady price level.

We don't say that the past few years prove it: only that what evidence we have is consistent with this explanation. And, given the paucity of our evidence base, that's probably the best we can do.

Another reason why Keynesian economics doesn't work

Let us imagine that this Keynesian idea that government should spend more money in a recession stands. Not that we'd want to give in to the case in general, but let us assume it for the moment. Why might it still not be a good idea to depend upon this tactic? As Larry Elliot explains:

The second drawback is that the investment – even assuming it happens – will take time to arrive. Every EU country has sent in a list of pet projects and these will have to be assessed by a panel of experts before a final list can be drawn up. This is a recipe for bureaucratic delay and the customary horse-trading as each country demands its share of the action. It is unlikely work will begin on a single project until 2016, when what Europe needs is an immediate boost to demand.

That could come in three ways. It could come from a more meaningful push from the centre, perhaps through the European Investment Bank. It could come from nation states if they were given more budgetary leeway by Brussels to run bigger deficits until growth has returned. And it could come from the European Central Bank through a quantitative easing process. The latter is by far the most likely and will dwarf in size what the commission has just announced.

Government, most especially at the EU level, is simply such a lumbering and inefficient giant that it's not possible for it to get such fiscal stimulus moving in the required timescale. Very much like the American experience of insisting that there were all sorts of "shovel ready" projects out there, then finding that government rules mean that nothing is ever shovel ready. There's always a year or more of paperwork to fill out before anything can be done.

With us still accepting the basic premise, that the deficit should widen, that there should be a greater gap between tax revenues and government expenditure in a recession, perhaps we should be looking for something that acts near immediately instead of increased spending? Like, say, an automatic reduction in national insurance payments in a recession? Like, umm, Keynes himself said would be a good idea?

So where has all of Keynes' leisure gone?

In Economic Possibilities for our Grandchildren Keynes famously proposed that by about now we'd all be working 15 hours a week. As a result we've had endless little reports from the likes of the not economics frankly people suggesting that we should all indeed work only 15 hours a week and spend the rest of our time being poor. But there is another answer, the correct answer, to where all of Keynes' predicted leisure time has gone:

Women devote well over the equivalent of a working day each week to household chores – double the amount undertaken by men.

They spend an average of 11-and-a-half hours doing housework, while men complete just six.

A survey, commissioned by BBC Radio 4's Woman's Hour, found cooking was the most popular job.

Women said their chief responsibilities included changing sheets (86 per cent) and cleaning the toilet (83 per cent).

Whereas men were in charge of bins (80 per cent) and DIY (78 per cent).

The least popular tasks for both sexes were loo cleaning and ironing.

Keynes was proposing that as we got richer then we'd take more of our increased wealth as leisure. Which we have, in terms of our market working hours, to some extent at least. In the 1930s Saturday was still, for many, at least a half-working day. The standard 37.5 hour week of today would have been regarded as being near a part-time rather than full-time work load. But the real reduction in working hours has come as a result of the mechanisation of household production. Those microwaves, vacuum cleaners, gas ovens, central heating and so on, what Ha Joon Chang and Hans Rosling refer to collectively as the "washing machine", have led to a massive drop in the hours spent on running a home.

It would be stretching it a bit to say that a housewife in 1930 was working 11.5 hours a day on housework but not much: it was certainly 8-10 hours a day, very much a full time job. And it's that labour that just isn't being done any more: leading to the explosion of leisure time that we all currently enjoy. Keynes was right in that we've taken more of our increased wealth in the form of leisure. It's just that we've taken it from the non-market, household, part of our labours rather than the market and paid side.