50 economists from LSE seem to be unable to think outside of the box of failure
Michael Roberts is an Economist in the City of London and a prolific blogger
Cross-posted from Michael Roberts’ blog
The Washington Consensus was a set of ten economic policy prescriptions considered in the 1980s and 1990s to constitute the “standard” reform package promoted for crisis-wracked developing countries by Washington DC multilateral institutions, the International Monetary Fund (IMF) and the World Bank. The Washington Consensus term was first used in 1989 by British economist John Williamson and was the foundation for global policies designed to promote ‘free markets’, both domestically and globally, as well as reducing the role of the state through privatisation and ‘deregulation’ of labour and financial markets. Keep government spending and deficits down and let the market do its thing. In effect, the Washington Consensus was a set of economic guidelines for what was eventualy called ‘neo-liberal’ economics.
The neo-liberal consensus came to dominate economic policy because of the apparent failure of post-war Keynesian macro management in the 1970s, as economic growth foundered and inflation and unemployment rose. The cause of this failure is disputed within mainstream economics. The Keynesians say it was because the economic policy makers changed ‘the rules of the game’; the neoliberals and monetarists said it was because government macro-management distorted the market and just made volatility worse.
In my view, the Marxist explanation is more to the point. The post-war economic boom of relatively high economic growth rates and relatively full employment (at least in the advanced captailst economies) was possible only because the profitability of capital was high, enabling productive investment, while a plentiful supply of labour could be exploited across Europe and Asia. But Marx’s law of declining profitability eventually operated and profitability fell sharply from the mid-1960s through the 1970s. The first international slump took place in 1974-5, followed by stagflation (stagnant output alongside rising inflation). Something had to be done to revive capitalist economies and a change of economic policy was necessary. Away with expensive government spending and interference with markets, crush trade unions, privatise state assets and shift investment globally to the cheap labour areas of the Global South. The successful implementation of these policies during the 1980s allowed profitability to recover somewhat; and so mainstream economics became convinced of the Washington Consensus.
But Marx’s law of profitability again began to exert its pressure on capital. By the end of the 20th century, profitability began to fall again and in 2008-9 there was a global financial crash and the Great Recession. This exposed the failure of neoliberal policies and the Washington Consensus. Globalisation came shuddering to a halt and the major economies entered a Long Depression of low growth in GDP, investment, inflation and employment. It was time for the mainstream to reconsider its economic zeitgeist.
First, there was an attempt to revise the Washington Consensus by the US state department under President Biden. Free trade and capital flows and no government intervention were to be replaced with an ‘industrial strategy’ where governments intervened to subsidise and tax capitalist companies so that national objectives were met. There would be more trade and capital controls, more public investment and more taxation of the rich. It would be every nation for itself – no global pacts, but regional and bilateral agreements; no free movement, but nationally controlled capital and labour. And around that, new military alliances to impose this new consensus.
This revised Washington Consensus was put on hold with Biden’s replacement by Trump in 2025. The Trumpist approach was instead enshrined in the recent National Security Strategy document, which opened up a whole new ballgame – at least for the US. The Trumpist worldview has generated a new economic approach, so-called ‘geoenomics’, As economics is to be ruled by political moves and the wider class interests of capital have been replaced by the separate political interests of cliques, mainstream economics need a new approach ie geonomics.
But now along comes a rival London Consensus, as it is portentously called by a group of economists at the heart of the mainstream, the London School of Economics. From 2023, this Consensus was developed by over 50 of the world’s leading economists and policy experts at the LSE. In 2025 they published: The London Consensus: Economic Principles for the 21st Century.
That the authors of the London Consensus fail to see this is revealed by their next comment that “there is no ‘grand designer’ charting the evolutionary course of the world, where trial and error shape change. So does luck: societies have yet to prevent happenstance from determining their destiny.” So what happens in economies is just random chance; there are no general laws that can provide guidelines to changes and trends in economies; all we can do is react to changing circumstances. And what are these changing circumstances in the 21st century that have driven gaping holes into the ideas of the Washington Consensus? The LSE authors tell us “new challenges are easy to list: climate change, loss of biodiversity, pandemics, assorted inequalities, the unwanted effects of tech, a fragmenting world economy, populism and polarisation, war on the European continent, waning support for liberal democracy in many countries.” Yes, quite a lot – indeed, what has been called a polycrisis for capitalism.
So what changes should mainstream economics make to adjust, change and replace the Washington Consensus with the London Consensus? The authors of the London Consensus aim to maintain a market-based economy, but alongside more egalitarianism. The Washington Consensus concentrated on the former, the London Consensus wants to add the latter.
First, some things need to be restored: namely, globalisation. According to the authors, globalisation created many good thngs for the world’s population: “it is hard to argue against the proposition that the huge drops in global poverty that followed were due, at least in part, to greater economic openness.” Really? All empirical studies show that global poverty levels (however you measure them) fell after the 1990s almost exclusively because of the leap forward in per capita income in the most populous country in the world, China. Take China (and to some extent, India) out of the poverty equation and there was little or no reduction in global poverty. Indeed, the LSE authors have to admit that “the uneven effects of globalisation cannot be ignored. Changes in the size and composition of trade flows have markedly unequal effects on earnings across individuals.”
Another insufficiently appreciated aspect of globalisation, according to the authors, is how ‘rents’ are distributed. Those with intellectual property rights are able to increase their rents by outsourcing manufacturing. “Even though tech giants such as Apple produce little in the US, rents from their products accrue to the Apple Corporation where it chooses to declare them. This has enriched the (successful) entrepreneurial classes whose returns are larger when they can drive down production costs. It also has created new sources of inequality within countries.”
But what are these ‘rents’? This is clearly the Keynesian view of ‘imperfect markets’ and monopolies. You see ‘profits’ are ok (the word profit is used only once throughout the introductory chapter), but ‘rents’ are not. Rents are assumed to be ‘pure profits’ ie income extracted through monopoly. This is the cause of inequality and efficiency, our LSE experts think. Profit as value appropriated by capital through the exploitation of labour and redistributed through competition among capitals is accepted. And yet profit is by far the largest proportion of surplus value gained by capital.
Even concentrating just on ‘rents’, as the LSE authors do, raises a problem. Rents cannot easily be taxed, it seems.“There are technical issues around identifying and measuring rents rather than normal returns (‘normal returns’ are what the authors mean by ‘profits’). The task is especially difficult in a world of creative destruction, where profits motivate innovation” (indeed!). Here the authors refer to the ‘creative destruction’ growth ‘paradigm’ for which Philippe Aghion and John Van Reenen have just received the so-called Nobel economics prize. These Nobel winners revive Joseph Schumpeter’s theory (who developed it from Marx) and argue that growth takes place in capitalist economies through ‘creative destruction’; if you like booms and slumps. The LSE authors conclude from this that “innovation rents motivate investments in innovation, so doing away with all rents via liberalisation and competition can, in fact, be bad for growth. But those innovative rents cannot be allowed to get too big, because yesterday’s innovators are tempted to use their rents to prevent subsequent innovations, since they do not want to be the victims of creative destruction themselves.” ‘Innovation rents’ (really profits) are necessary for growth, but they can turn into monopoly rents and they are bad. So we don’t want to tax profits ie ‘innovative rents’, only ‘pure profits’ ie rents. But we may have to tax attempts to monopolise innovation and create rents. So this is complicated. “If the system limits competition and fails to tax rents, that is sure to undermine faith in the market system.” But taxing wealth is not a way out of this conundrum. That’s because “wealth is hard to measure and often portable across borders. Without a level of global cooperation that is unrealistic today, wealth taxes are unlikely to raise much larger revenues.”
Maybe the answer is not trying to redistribute ‘rents’ to productive uses through taxation, but intervening directly into the productive process. The authors go on: “relying on the market for most allocation decisions is often right when considering private production.” But “not all economic and social ills can or should be corrected by post-production redistribution. Some need to be corrected before or during production, in what some are now calling ‘pre-distribution’ And they quote former IMF chief economist, Olivier Blanchard from in his contribution to the LSE volume that ‘it may be that more direct intervention in the market process, rather than the redistribution process, is needed’.
This tentative hint towards common ownership of private capital and state investment is quickly dismissed, however. First, state-owned enterprises have “proven extremely hard to manage and avoid inefficiency.” And there “is close-to-a-consensus on ownership in sectors such as consumer goods and services, which are best located in private hands”. However, we could debate (just debate) “the case for public ownership of natural monopolies and some kinds of core infrastructure.”
So public ownership of key sectors to direct economies is not part of the London Consensus – no surprise there, after all, our authors are followers of Keynes, not Marx. But being followers of Keynes, they argue for increased ‘state capacity’. What does that mean? It means using the state to support the market economy, it seems. “Contrary to the mythical libertarian ideal of the small state, creating a functional market economy requires an array of market-supporting institutions, both legal and regulatory. A market does not develop in many countries because the state is too incompetent and weak.”
But the authors don’t advocate a leading investment role for the state in capitalist economies. For them, state capacity means “revenue-raising capacity to pay, without excessive recourse to debt, for the things government does; legal-administrative capacity, to provide a stable framework in which private agents can take decisions – especially investment decisions, which involve parting with resources today in exchange for an uncertain return in the future; and delivery-capacity – not just to design policies, but to implement them effectively.”
So this is really little different from Keynesian macro management of the post-war period: “government plays the role of insurer of last resort, given that private markets cannot provide insurance. The second policy is for government to become a market-maker of last resort, helping to prop up financial markets that freeze at times of macroeconomic stress.” So bailing out any mess caused by the capitalist sector. And“fiscal policy must be prudent (and reduce net debt) in good times. So, the new activism is far from a call for ‘anything goes’ when it comes to fiscal policy. On the contrary, it requires substantial fiscal prudence, and the institutions that make that prudence possible.” Thus macro-management of budgets.
What about the finance sector? How do we avoid another global financial crash as in 2008? Apparently, “market-determined credit allocation remains a goal in the London Consensus. But we place a great deal more emphasis on regulation to prevent lending booms and busts. Creating an institutional environment for micro and macroprudential regulation is now the name of the game, for central bankers and banking supervisors across the world.” Here we have the classic mainstream response to the 2008 crash: more regulation, but not too much in case it blocks credit for capitalist enterprises.
The irony here is that, at the apex of the 2008 crash, the then Queen of the UK visited the LSE and greeted the assembled experts with the question: ‘why did you not see this happening?’ The LSE experts were non-plussed and only issued a response in a letter a few days later. What was the cause of the financial collapse, according to the authors of the London Consensus? They reckon that “the benign economic circumstances that preceded it allowed for the build-up of imbalances in the financial sector – a phenomenon that illustrates how the financial sector can itself be an important source of shocks, and how proper financial regulation is an essential component of policies to keep the economy stable.” Apparently, too much deregulation of speculative finance was the cause of the 2008 crash and “the lesson from all of this is a renewed emphasis on both macroprudential and competition policy in finance, both to reduce volatility and to create fairer economic structures.” The banks, the hedge funds, the big companies are not to be touched, but just regulated better. But ‘regulation’ has miserably failed to stop recurrent crises in capitalist economies.
The authors are keen to show the successful role of central banks in controlling inflation. “Inflation rates declined world-wide after the adoption of inflation targeting and remained there for more than two decades. And when inflation spiked after the pandemic, in part because of unforeseen supply shocks, central banks managed to bring down headline inflation rates without provoking a recession.” Really? All the latest evidence shows that central bank monetary policy failed to achieve their preset inflation targets throughout the neo-liberal period, during the Long Depression of the 2010s, and in post-pandemic inflation spike.
The London Consensus authors return to the maxim of their hero Keynes, namely that ideas drive economic interests, not vice versa. To this theme, the authors argue that the biggest difference between the Washington Consensus and their London Consensus is that now it is ‘politics stupid!’ that matters, not economics. You see, liberal democracy is under threat. “From the end of the democratic dream in Russia to hardening autocracy in China, from democratic backsliding in Hungary and Turkey to the return of dictatorship in Venezuela and Nicaragua, to the recent succession of coups in Sub-Saharan Africa, from chaotic political gyrations in the United States to growing disenchantment with democracy in many long-established democracies in the West, the catalogue of political ills is long and worrying.” No mention here of the lack of democracy in Saudi Arabia, other Arab sheikdoms, Israel’s destruction of Palestine etc. The only worry is the loss of liberal democracy elsewhere.
The authors note that ‘liberal democracy’ is under threat from ‘authoritarian populism’ because “wage stagnation and growing inequality in the US and the UK, the left-behind regions caused by the decline in industrial employment, and the massive human suffering triggered by job losses and family bankruptcies during the Great Financial Crisis of 2007–09.” What’s the answer to this? To “emphasise the importance of a liberal political consensus built around a cohesive society as a basis for political and economic development.” ….Without ‘good jobs, at good wages’ it is hard to imagine how politics will remain peaceful and stable in many countries.” Indeed, but is not the failure to deliver the key reason for the increasing loss of political power by the mainstream ‘centre-right’ and ‘centre-left’ parties of ‘liberal democracy’? Can capitalism in the 21st century deliver good jobs at good wages, better public services etc
The London Consensus is confused and confusing. Bring back Keynes is the motto, but with some extra emphasis on ‘state capacity’. However, the authors say that “pragmatism is required. We agree with Paul Johnson, who writes in this volume that good economics ‘do not support simply minimising state involvement, nor ruling out the private sector. It is much more complicated than that’.” Indeed, too complicated for the Consensus. Meanwhile, Trumpism and geonomics are on the rise globally.
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