Kevin O'Rourke blogs today about the coming economic ice age where each nation tries to grow itself out of its current economic downturn by export-led growth. The only problem is, if everyone is selling, then by definition, everyone is not buying. So where does the demand come from?

This discussion reminds me of a piece JM Keynes wrote in 1933 entitled National Self Sufficiency. This article is often read as a defense of protectionism. It is not. Keynes' hope was that domestic demand would be the mainstay of a country's fortunes, the extent to which they produced high quality things for their home market would determine their wage rates, and hence their prosperity. Comparative advantage would carve out niche markets through which the country could compete for exports internationally. Exports, in this schema, are only the icing on the cake. It is domestic demand which drives prosperity.

Now, Keynes was writing about the UK in 1933, then one of the biggest economies in the world, so his points don't map one for one onto Ireland in 2009. Keynes' core assertion, it seems fairly clear to me, applies: as a nation, first make things yourselves, and for yourselves.

One can see how the essay has been caricatured as a defense of protectionism, but a careful reading of the text puts the lie to that assertion. Keynes means to defend national productivity as a first pass at prosperity. He is not against export led growth, only against the notion that export led growth is the only game in town.

What has this got to do with Ireland? We have a small economy on the periphery of Europe. We are, in some senses, an interconnector between the US and Europe, without being a true 'hub' of trade as, say, the Netherlands is.

We have few, if any domestic powerhouses in producing anything, apart from construction. We need to grow ourselves some indigenous companies which produce things both for the private market, and the export market. Straddling these two divides is hard, and in the past it has been easier to set up agencies to chase FDI rather than channel resources into the creation of solid, competitive domestic enterprise. The more robust a country's domestic demand, the less exposed it is to external shocks of unprecedented magnitude.

All of which brings me back to Keynes. He could have been writing yesterday:

The decadent international but individualistic capitalism, in the hands of which we found ourselves[...], is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous - and it doesn't deliver the goods. In short, we dislike it and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed.

He goes on to write:

[T]he point for my present discussion is this. We each have our own fancy. Not believing that we are saved already, we each would like to have a try at working out our own salvation. We do not wish, therefore, to be at the mercy of world forces working out, or trying to work out, some uniform equilibrium according to the ideal principles, if they can be called such, of laissez-faire capitalism. There are still those who cling to the old ideas, but in no country of the world today can they be reckoned as a serious force. We wish - for the time at least and so long as the present transitional, experimental phase endures - to be our own masters, and to be as free as we can make ourselves from the interferences of the outside world. Thus, regarded from this point of view, the policy of an increased national self-sufficiency is to be considered not as an ideal in itself but as directed to the creation of an environment in which other ideals can be safely and conveniently pursued.