22.01.2026

Maynard Keynes, caricatured by David Low in 1934

Confused and confusing

‘Bring back Keynes’ is the motto, but with some extra emphasis on ‘state capacity’. But, whether it be the Washington Consensus or the London Consensus, bourgeois economists remain at a loss, says Michael Roberts

The Washington Consensus was a set of 10 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 and the World Bank.

The Washington Consensus term was first used in 1989 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 eventually called ‘neoliberal’ economics.

The neoliberal 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’;¹ the neoliberals and monetarists said it was because government macro-management distorted the market and just made volatility worse.

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 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 2008-09 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 depression² of low growth in gross domestic product, 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 Joe 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.

Rivals

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,³ which opened up a whole new ballgame - at least for the US. The Trumpist worldview has generated a new economic approach, so-called ‘geonomics’.⁴ 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’.⁵

So how does the London Consensus differ from the neoliberal Washington Consensus? In the introductory chapter to the LSE book, the editors, Tim Besley and Andrés Velasco, spell it out. The very first line of the introduction tells the reader the direction of the new consensus - back to Keynes! The editors quote Keynes’s well-known epigram: “It is ideas, not vested interests, which are dangerous for good or evil.” This implies that getting policies right will get economies right. Actually, Keynes’s idealist view is wrong. It is precisely ‘vested interests’ (or the economic interests of the ruling class) that drives ideas. Keynesian macro-management gave way to neoliberalism and the Washington Consensus in the 1980s because Keynesian policies were no longer working for the interests of capital: ie, profitability was falling. Now neoliberalism has been exposed too and so new ideas for the interests of capital must emerge.

That the authors of the London Consensus fail to see this is revealed by their next comment: “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.

Mainstream

So what changes should mainstream economics make to adjust, change and replace the Washington Consensus with the London Consensus? The authors 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: in particular, globalisation. According to the authors, globalisation created many good things 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.

Another insufficiently appreciated aspect of globalisation, according to the authors, is how ‘rents’ are distributed. 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.⁶

The LSE authors conclude from this that: “Innovation rents” (in reality, profits) are necessary for growth, but they can turn into monopoly rents, which are bad. So we do not 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 is 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 International Monetary Fund chief economist Olivier Blanchard from 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. 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 do not 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, bail 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 the 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.

Classic response

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?’⁷ The LSE experts were nonplussed 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 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.

Michael Roberts blogs at thenextrecession.wordpress.com