Robert Skidelsky wrote the prize-winning three-volume biography of the economist John Maynard Keynes. As he is also Emeritus Professor of Political Economy at Warwick University, he is well placed to review the financial crisis in the context of Keynes’ economic theories and to show how it would have significantly mitigated the causes and impact of the financial crisis. In Keynes, the Return of the Master Skidelsky goes on to show how applying Keynesian policies would be the best way out of the resulting problems. Lord Skidelsky was made a life peer in 1991.
Part I: The Crisis
With unconcealed, but controlled, anger Lord Skidelsky examines what went wrong and how it led to the Credit Crunch, the financial crisis 2007-8 and beyond. He then goes on to consider the state of economic thinking and is especially critical of theories that assume all risk and uncertainty can be quantified. The author is at pains to point out that risk, which has a known probability, is not the same as uncertainty, which is unquantifiable. Therefore, the impact of uncertainty cannot be accounted for in economic theory even though many economists, in thrall to mathematics even at the expense of common sense, do not appear to recognise that.
Perhaps most telling is Skidelsky’s comparison of the Keynesian Bretton-Woods era (1951-73) band the subsequent Washington Consensus period. During the Bretton-Woods period GDP growth was higher; unemployment and global exchange rate volatility was lower. Furthermore, during the Washington Consensus period inequality between earnings at the top and bottom widened.
Ultimately the Bretton-Wood era came to an end due, as Skidelsky puts it, “…fiscal restraint was overwhelmed in the 1960s by a wave of Keynesian hubris. This was not the moment when Keynesianism ‘came of age’ in the United States; it was the prelude to its downfall”. Perhaps now the same is happening with the Washington Consensus.
Part II: The Rise and Fall of Keynesian Economics
Part II of Keynes, the Return of the Master provides a short biography of John Maynard Keynes and explores how Keynes theories developed in the light of his experience as an investor. He was active in the financial markets; it provided real life experimental testing of his theories. Nearly wiped out on more than one occasion, he learned from the experience and revised his theory accordingly. In the end, he left a considerable fortune when he died.
Skidelsky goes on to examine the success and failure of Keynes’ theories. He explains how political and economic reinterpretation of Keynesian economic theory has led to a false perception of what it involves. Skidelsky seeks to correct that and show that Keynes brought more than economic thinking to his theories.
Part III: The Return of Keynes
Keynes was more than just an economist; he was also a philosopher and moralist, but not religious or socialist. His view that “love of money” was only justified when it led to “a good life” may be thinking whose time has returned. Happiness as an indicator of national wellbeing has become part of the mainstream political discussion; at least it has in the UK. Keynes, the Return of the Master therefore explores the ethics of capitalism in the context of Keynes approach and his moderate approach to politics.
Finally, Keynes, the Return of the Master considers “Keynes for Today” and looks at what that would mean. Skidelsky is blunt in his identification of three failures that led to the financial; crisis. He identifies them as:
Institutional failure with banks becoming casinos and being allowed to do so as a result of
Intellectual failure as policymakers and regulators did not challenge the efficient market theory and ithe “intellectual failure of mainstream economics”
Moral failure and the “worship of economic growth for its own sake”.
Uncertainty leads to speculation so Keynesian approach seeks to recognise and moderate the impact of irreducible uncertainty. Keynes would also have identified the global savings glut as a major issue for the stability of the financial systems.
Keynes as a moral philosopher as well as an economist had the vision of a “harmonious society” both national and international. His ideas were aimed at easing tension from globalization and creating a more plural world. Difficult, and in some ways open to political abuse, Skidelsky argues that time to return to Keynes’ ideas. As Robert Skidelsky says, “Keynes is not just for the foxhole, but for the emerging world order”.
Overall, this book is a useful and passionate challenge to the received economic wisdom. Keynes, the Return of the Master is a valuable counterpoint to the many other books on the Credit Crunch that look at the crisis through the lens of current economic theory. Perhaps, as Keynes would have argued, the time for a more common sense approach to economic police is overdue.
Keynes, the Return of the Master (2010, ISBN: 978-0-141-04360-9) by Robert Skidelsky is published in paperback by Penguin at £9.99 (Can$20).
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