Philobiblon

It’s an academic tradition so often observed that it’s practically a rule: if you’ve been a star in your field, a creator of new paradigms, new fields, new genres, soon after your death (or possibly before) your reputation will fall into a precipitous decline. The nature of the Western academic method, that new intellectual stars arise by entirely revising, if not reversing, the direction of their teachers, guarantees it.

Yet few can have suffered quite such a precipitous fall from grace as Keynes, the man who after the Second World War most of the governments of the world with their economic prescriptions (maintain full employment and growth on a steady keel), and the medicine to do so (government intervention to stabilise markets).

So it was that in 1971, America’s President Nixon famously said: “We are all Keynesians now.” Yet, less than a decade later, Keynes was deposed by a coterie of neo-liberal economists, who restored a much older doctrine, that markets were naturally self-correcting and only the intervention of governments made them behave badly.

It was a doctrine that was to have two decades or more basking in the sunshine of political, regulatory and (to some degree at least) public approval – until the crash that has felled economies around the globe struck. Now, suddenly, Keynes, or perhaps it had be better said neo-Keynesianism, is back in fashion.

The speed of that reversal is illustrated by the frank declaration of Robert Skideslsky, author of Keynes: The Return of the Master, who explains that he sat down to write the book on January 1 this year, at the suggestion of his agent and finished it on July 15. It hit the shops on September 3, the publisher no doubt desperate to pre-empt what will surely be a flood of books on the now back in fashion economist.

Skideslsky explains in the introduction precisely where he’s coming from intellectually:

…the root cause of the present crisis lies in the intellectual failure of economics. It was the wrong ideas of economists which legitimized the deregulation of finance, and it was the deregulation of finance which led to the credit explosion which collapsed into the credit crunch. It is hard to convey the harm done by the recently dominant school of New Classical economics. Rarely in history can such powerful minds have devoted themselves to such strange ideas. The maddest of these is the proposition that market participants have correct beliefs on average about what will happen to prices over an infinite future. I am naturally much less critical of the New Keynesian school, which disputes the terrain of macroeconomics with the New Classicals, but I am still quite critical, because I believe that in accepting th theory of rational expectations, they sold the pass to the New Classicals.”

He’s no doubt clear in his mind about his own views, but there’s somewhat less clarity about what this book is for: is it for a general readership, to reacquaint them with Keynes and explain how they’re likely to find his ideas attractive, or is it meant to persuade the professionals in the field and direct the neo-Keynesians down the particular paths Skidelsky considers most likely to be fruitful?

Being very much in the former group of readers (I did a very bad university course in what amounted to, although wasn’t called, neoclassical economics 20 years ago, which thoroughly
discouraged me from pursuing a subject so clearly unrelated to the reality), there were large sections of this rather small monograph that I find not so much perplexing as utterly impenetrable.

Yet I also got a lot from it – well worth the reading hours. First, it confirmed my own conclusions: Skideslsky draws from Keynes the conclusion that in the long term the world needs “an expanded public sector, and a more modest role for economics as tutor of governments”.

And it also confirms what I (and a great many other people) have sensed was wrong with the Neoclassical model – that it requires assumptions about human behaviour that bear no relationship to reality, and furthermore, these beliefs leave them utterly unable to explain the current crisis. This is how Skideslsky puts the Neo-Classicals dilemma: “If markets are perfect they cannot fail Therefore the crisis must be the result of policy mistakes…the favourite mistake for conservative economists is excessive money creation by the monetary authority, leading to bubble and bust. But this admission is damaging to them theoretically, because it destroys the policy ineffectiveness proposition. It assumes that people are fooled by ‘money illusion’. But if they had rational expectations, they would not have been.”

There’s a further, positive prescription to be obtained from Keynes and Skideslsky: the place for an argument for limits to economic growth. Skideslsky makes much of Keynes’ width as a theorist, and his assumption that an economist had to ask what his or her aims should be. And Keynes’ conclusion was that the pursuit of money was only justified to the extent to which it led to a good life – the state of abundance where increasing amounts of effort could be directed towards culture, societal development and simply, pleasure. “The empire of greed should be progressively retracted as its job neared completion.”

Skideslsky makes it clear that Keynes, an often speculative, highly abstract, thinker, can be put to many purposes, yet as he points out, the Green agenda is certainly there. He quotes Keynes from a speech in Dublin in 1933: “We destroy the beauty of the countryside because the unappropriated splendours of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend.”

But the section of the book I found most fascinating was, perhaps counterintuitively, a section with lots of graphs. In the chapter “The Keynesian Revolution: success or failure”, Sidelsky compares the state of the world economy pre-1975, and post-1980. Now of course there are many factors at play, but what these graphs fascinatingly show is that even in their own terms, the Neoclassical prescription has proved to be worse for the patient than Keynes’s. The rate of GDP growth during the “Bretton Wood years” – pre 1975, was 4.8%, during the “Washington Consensus period” 3.2%. There was no significant difference in inflation between the two periods, despite the common perception that Keynesian approaches led to higher inflation. Inequality, as might have been expected, rose sharply during the later period.

So this isn’t just a book about Keynes – it is also a book about Neo-Liberal economics and its failures. And as Skideslsky notes, that’s an important message to drive home, for after the immediate shock of the crisis there’s been increasing number of voices trying to suggest that nothing much was wrong with the economics or the economic prescriptions, and all that is needed is some tinkering around the edges. This books helps explains how profoundly, dangerous wrong it would be to take this approach.

If you want a view of the book from the other intended audience, Paul Krugman, winner of the 2008 Nobel prize for economics, has reviewed it for the Guardian.