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Keynes: The Return of the Master Hardcover – September 14, 2009
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“An important contribution at a time of soul-searching, a must read even if one doesn’t fully accept its conclusions…. This is a wonderfully stimulating book, one that reflects the author’s unparalleled erudition. We’re living in the second Age of Keynes—and Robert Skidelsky is still the guide of choice.”
Richard A. Posner, The New Republic
“Skidelsky’s summary of what is distinctive in Keynes’s theory is excellent.”
Roy Hattersley, Guardian (UK)
“Wonderfully lucid…. Ought to be considered required reading for every prospective minister.”
“Explaining the present-day relevance of [Keynes’] theories is executed superbly by Skidelsky…. Skidelsky’s book excels. It’s a passionate polemic that makes a strong case for economists and policymakers to reread their Keynes.”
Charles R. Morris, Commonweal
“A profound and beautifully written meditation on the dangers of bad ideas, readily accessible to anyone who isn’t mystified by the headlines in the Wall Street Journal or the Economist .”
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Skidelsky provides a brief analysis of the current crisis in the first two chapters of the book. Skidelsky argues that the current crisis should be understood not as the result of individual greed or immorality but as a failure of ideas (I certainly agree with him there). The problem was not simply that we had immoral people doing immoral things; rather, the problem was in the basic theories we were using to model the economy. Skidelsky singles out three theories in particular for criticism: real business cycle theory, rational expectations, and the efficient financial market hypothesis.
In the next three chapters of the book Skidelsky provides a brief overview of Keynes's career as a speculator as well as an overview of the fundamentals of Keynesian economics and the movement away from Keynesian economics in favor of New Classical economics. Skidelsky concludes that, "Mainstream economics today, by improving on the math, and abandoning common sense, is further away from Keynes's economics than ever before" (pg. 111) and he goes on to highlight some of the differences between contemporary mainstream economics and Keynesian economics (I have only listed four out of the eight differences Skidelsky discusses): 1) the distinction between uncertainty and risk has been abolished so that uncertainty about the future can be reduced to a probability calculus (the Gaussian bell-curve) 2) macroeconomics is thoroughly grounded in microeconomic optimizing behavior (while for Keynes individual behavior is based on what Skidelsky calls aggregate psychological data, meaning: individual behavior cannot be understood without taking into consideration the state of the macroeconomy) 3) Say's Law has been reasserted 4) the quantity theory of money has also been reasserted contra Keynes who believed that the standard theory was only true when the economy was at full employment (pg. 111-113).
Skidelsky especially highlights the importance of uncertainty in Keynesian economics. The efficient financial markets hypothesis assumes that the financial market is an efficient way of pricing risk and financial assets and that the best way of insuring stability in the financial markets is, therefore, to leave these markets alone. These markets should be allowed to develop their own means for managing risk which would be more efficient than government interference. The problem (or one of them anyways) seems to have been that the risk-management models being used assumed that we could establish a certain range of probabilities in regard to future events that could be captured by a Gaussian bell-curve. In other words, the models were treating uncertainty as if it were risk (a natural human tendency). Introducing uncertainty into the model means that there is no guarantee that future events will fall within a few standard deviations of the average or that financial markets will be optimally self-regulating. It may be simply impossible for financial markets to correctly price risk and the innovations invented to reduce risk may actually wind up increasing it. It may be necessary to introduce government regulation into the financial markets in order to ensure stability.
Uncertainty is also important in regard to the problem of unemployment and aggregate demand failure. The problem is: if we take uncertainty seriously it becomes impossible for human beings to "possess the information required to validate the theory that markets are self-equilibrating at full employment" (pg. 112). This is not simply a matter of the information being too costly to acquire but of it being simply non-existent because the relevant information is about an uncertain future. In order for the market to reach a full employment equilibrium it would be necessary for agents to possess information (information relating to future price movements, or demand trends for example) which it is simply impossible for any human being to possess. Given uncertainty, therefore, the economy will not self-equilibrate at full employment.
Ultimately the conclusion to be drawn from all of this is that "an unmanaged capitalist economy is inherently unstable. Neither profit expectations nor the rate of interest are solidly anchored in the underlying forces of productivity and thrift. They are driven by uncertain and fluctuating expectations about the future" (pg. 97). In order to ensure macroeconomic stability government intervention and regulation become necessary.
Skidelsky also provides three final chapters on Keynes's ethics, his politics, and his relevance to the present.
This book is one that speaks directly to the burning economic question of the moment, and the next few years: is it the size of the federal deficit and debt which are the problem, or the inadequate government spending and the shortfall in private demand/investment that has taken the nation, and Europe, to the brink of a double-dip recession - or worse, as Paul Krugman has indicated in his column from June 28th, "The Third Depression?" Once again, it is a citizen of Great Britain, Robert Skidelsky, Keynes' biographer, and a member of the House of Lords, who has supplied the public with a bold assertion, "Why, Sixty Years After His Death, John Maynard Keynes is the Most Important Economic Thinker for America," the statement on the front cover of his book Keynes, Return of the Master, published in 2009. This is the "popular," if not populist version of Skidelsky's acclaimed three volume biography of Keynes, an ultra brief version which nonetheless, reads like a long essay, not Cliff notes.
Yet, despite its brevity, this is a book not just about Keynes the economist, but also Keynes the philosopher, and the place of Keynesianism in the history of economic thought, relevant now to the "intellectual failure of economics," which Skidelsky believes is "the root cause of the present crisis." The organization of the book tells the story, with Part I covering the crisis and what the author believes went wrong, and the present dismal state of economics. Part Two is a brief history of "The Rise and Fall of Keynesian Economics," which is perhaps most interesting for its discussion of the distortions which Keynes underwent at the hands of both liberals and conservatives in the U.S. in the period 1945-1975 and even later. That's because the American Right, although it would deny it, has developed its own form of ersatz "Keynesianism": tax cuts and increased defense spending. And Part III, "The Return of Keynes," gives us, in keeping with what has become Skidelsky's own take on economics, Keynes' view of the "ethics of capitalism," and a chapter on his politics, and finally, what he believes is most relevant for our situation today.
Keynes: Hijacked by the Left and the Right
Readers will be surprised to learn that Keynes was not an advocate for running continual budget deficits, and took seriously the given preoccupation of conservatives with the state of "business confidence." Keynes was a remarkable thinker, defying neat categories, despite the deep varnish laid upon him as a man of the left and of massive government intervention - a view which most of the Right has far too simplistically promoted. Yet if conservative Bruce Bartlett tried to correct some of that in his August 14, 2009 piece in [...], "Keynes Was Really a Conservative," at [...], Skidelsky paints the far more nuanced picture of him: neither socialist nor uncritical capitalist, an atheist with deep ethical convictions and a "religious" sense about means and ends in life; an early free trader who became, in the 1930's, a critic of the free trade world of 1914; a withering critic of the gold standard of the 1920's and early 1930's whose functionally equivalent idea was defeated by the U.S. at Bretton Woods in 1944 i.e., his attempt create a mechanism to deal with exactly the problem facing the international trading system today, the great imbalances generated by a glut of savings by trade surplus nations; a some-time speculator like George Soros, who none-the-less wrote to explain the difference between risk taking, a proper activity for capitalists, and uncertainty, the appreciation of what is unknowable and beyond the risk models of even the most advanced mathematical formulators: "Uncertainty pervades Keynes' picture of economic life. It explains why people hold savings in liquid forms, why investment is volatile, and why the rate of interest doesn't adjust saving and investment."(Page 83.)
In his chapter on Keynes' politics, Skidelsky portrays him steering a course through the ideological minefields of his - and our day - and, surprisingly, please witness the appearance of conservative economist Friedrich von Hayek, with whom Keynes corresponded and "shared epistemological positions" - but with whom he disagreed on the dangers of "planning:"
Keynes certainly did not believe that government knew, or could know, more than `society.' But he did believe that it was in a position to take precautions against the consequences of uncertainty which private individuals or even informal social arrangements could not do. The `conventions' which society erects to guard against uncertainty break down in moments of great stress. Hence a full-employment policy was not the thin end of the wedge to serfdom, but a prudent precaution against a situation developing which would destroy the values which he and Hayek jointly shared....We know enough to have a rational belief that `moderate planning' will be an improvement on laissez-faire; we have no basis for saying that it will inevitably lead to serfdom or slavery further down the line. (Page 162.)
Keynes, Labor and the Crises of Capitalism
It is hard not to think about the similarities between the complex, nuanced Keynes and the political biography of his biographer, Lord Skidelsky, and to put them both in the context of the 1930's, measured against our own times. Skidelsky has moved from the Labor Party to the now evaporated Social Democrats, and then to the Conservative Party in the early 1990's, from whence he has departed to become a "cross bencher." His essay, The Crisis of Capitalism: Keynes vs. Marx, from February of 2010, offers a strong clue to providing a compass heading for this migration, and the difference between the two eras, 60 years apart. It sounds like the 1970's fiasco of Labor in Britain left a lasting impression, and found resonance in the life of Keynes: "Trade Unions, in Great Britain at least, threatened to become the prevailing power. Labor Government programmes in the early 1970's envisaged an economy run by the government and the trade unions, with only a minor role for private business. Thatcherism was the political reaction to this."
Impression indeed; there is no mention of Trade Unions, or Labor, in the Index of Keynes, Return of the Master. And Keynes, according Bartlett's piece in Forbes, was very tough on the Trade Unions' brand of Fabian Marxism. Yet if Keynes was not fond of the trade unions and Skidelsky himself thinks that they overstepped the limits of a mixed, yet still quite capitalist British society in the 1970's, it is clear that he feels that in turn, "Globalization" has now carried the war against labor too far, just as John Grey does:
Globalization was the business response to the declining rate of profits which Marx predicted. It was seen as the master key to overall improvement in the position of the business class. It increased corporate profits, reduced prices of consumer goods, and made possible a huge influx of outside money into the western banking system. But, most important, it was used as a bludgeon to frighten workers and to emasculate their economic and political powers. (The Crisis of Capitalism: Keynes vs. Marx, at [...])
In Search of the `Harmonious Society'
It's a glimpse into an economic world whose operating principles have eroded, if not consumed, the broader civic society in which it rests. That is what John Grey meant when he wrote that "Markets are made to serve man, not man the market." Keynes saw that the capitalism of the 1930's was going to destroy middle class society, and the working class as well, if more stabilizing and equitable arrangements were not made, and Skidelsky writes in a similar vein of capitalism's troubles today, with adjustments for a less extreme situation - for now, at least. Yet the economics profession of our day, as in the 1920's and 1930's, has no broader vision of where it is going or what constitutes the good life, other than to urge that society continue to give the business world all the particulars it has been asking for since the mid-1970's, once the emergency repairs and regulations of 2009-2010 have finished their stabilization task. On the next to the last page of Keynes, The Return of the Master, we are given a glimpse of the world that the great economist-philosopher was hoping for, "that of the `harmonious society.'" Social harmony will be built upon "full employment at home by means of investment and income redistribution..." which would "take the pressure off foreign trade, slow down the pace of globalization, and ease the social tensions arising from it. A Clearing Union for international payments would bring to an end global macroeconomic imbalances, automatically creating a more plural world." (Pages 190-191."
From the perspective of the summer of 2010, the "harmonious society," has a cruel, sardonic edge to it, thanks to the state of American politics, which is not the way Keynes intended it. Instead, a "Society without solidarity," might be closer to the reality of our situation. Far from having too much power, as British labor did in the 1970's, American labor has seen its legislative priorities put in the freezer, if not deep-sixed. There is no "balance of forces" in society that can enact a comprehensive reform program to cure the economic troubles of our day, and despite increased conversation and agenda sharing at the international level, we are no where close to achieving Keynes' "Clearing Union," and a new Bretton Woods arrangement for the world's dangerous and unstable international economy. Nations can't agree on the shape of banking reform or even the propriety of a Financial Transactions Tax - which ought to be the lowest common denominators, given the catastrophe of the private financial casino and its creation of a good share of the public deficits here and in Europe. Today "Keynesianism" is waved about by the Right as if it were the equivalent of the bloody flag of full blown governmental socialism and "interventionism", intervention of a scope that is only allowable for nation building far, far from home, like that undertaken by Paul Bremer in Iraq, in the fall of 2003 (speaking of social engineering).
Public Choice theory, another school of thought which leans to the Right, is covered by Skidelsky in Chapter Five, which asks whether the Keynesian Revolution was a success or failure. He gets to Public Choice Theory right after a heading for the New Classical Synthesis, which he earlier covered with brief, illuminating little portraits of the rational expectations hypothesis (REH), real business cycle theory (RBC) and the efficient financial market theory (EFMT), which "together...lie at the heart of contemporary economics." We might also observe that together they add up to a world view that says markets can pretty much take care of themselves once up and running, so that government can put the idea of major interventions back on the shelf labeled the 1920's, along with public jobs programs. Skidelsky says that public choice theory is actually a "theory of `government failure." It shares with rational expectations a "methodology of modeling public policies as the solution to individual maximization problems." That takes us back, way back, to the 18th century "inspiration of economics, which juxtaposed the efficiency of markets with the failures of government." (Pages 110-111.)
Keynes, Capitalism and the Good Life
This strategy on the Right to deprive the American people of even the possibility of a neutral government serving the public interest is very important. It seems as if it is designed to take away, if not destroy, hope itself - a hope that it denies exists beyond that generated by the all powerful private marketplace. And that is why we are going to close with a couple of thoughts about a passage from Lord Skidelsky's book, from Chapter 6, "Keynes and the Ethics of Capitalism." It is an answer to the contemporary Right's confusion of capitalism as an end, not a means, and its related problem of mistaking one 19th and 20th century interpretation of Christianity with a much older tradition - and understanding.
What if any ethical value, Keynes often asked, was to be attached to a life of `moneymaking and bridge'? Business life was at best only good as a means, but even as a means Keynes ranked it below public service, which at least was concerned with the public good. This was because business life overturned the correct hierarchy of values, teaching society to value `love of money' above love of goodness. Keynes's characterization - and condemnation - of capitalism as based on `love of money' echoes the biblical statement `the love of money is the root of all evils' (I Timothy 6:10). (Pages 141-142).
Now if Keynes were writing during the formal Social Gospel era in the United States, at the turn of the century, he might have let matters rest right there. But he wasn't; he was writing, in 1930, what Skidelsky calls a "futuristic" essay, Economic Possibilities for Our Grandchildren, just at the time when the psychological insights of modern life were beginning to penetrate scholarship of all sorts. So that "love of money" from the Bible becomes "the engine of capitalism...driven by a neurosis which he called `love of money.'" Keynes was looking forward to the day when the compulsions of capitalism and its Protestant Ethic, would ease off, resting on the great abundance they had helped create: "With the economic problem solved, mankind would face its permanent problem, how to live `wisely, agreeably, and well,' by which Keynes meant that people would be able to shed their pathological `purposefulness' and `love of money' and trade even higher incomes for more leisure and enjoyment of life." (Page 144.)
Well... it's 2010 now, and with the dominance of neoliberalism, we're still living with the neuroses and the pathological purposefulness of capitalism - and how. The mechanisms of abundance are even more impressive today than they were in the 1920's and 1930's, yet the "wisely, agreeably and well" hopes sound entirely utopian, as pensions and savings evaporate and the concept of a career, and even that of a job, are now formally obsolete. But the need for incomes from the employment from those careers is looming larger than ever, in one of the greatest contradictions ever to face capitalism.
Meanwhile, over at Goldman Sachs, we can tell you how Lloyd Blankfein and his firm face the contradictions. Subjecting most of their employees to daunting work schedules and relentless personal evaluations, the idea is to make their millions by an early age, and then to pursue Keynes' triad, mixing in charitable and governmental work amidst all that leisure. Although Blankfein called it doing God's work, in some ways, one could also call it a parody of what Keynes meant, because in fact the Wall Street syndrome has contributed the added irony, and cruelty, of demolishing Keynes' dreams for much of the rest of society.
The choices facing American society are becoming clearer and clearer. We are either going to work out our own good, modern version of social democracy leaning towards Keynes' fondest hopes, or we are going to plunge into an new era of ugly Social Darwinism, one that will make the first one look enchanting.
William R. Neil
Skidelsky starts with a short explanation of the Financial Crisis. If you have been following the news you won't learn anything new here, but it helps to put the book in context. The rest is devoted to the life (very little) and thought (a lot) of Keynes. The book excels in packing Keynes' economic, political, moral, and philosophical thought in a very short volume. The main thesis is that modern economists don't acknowledge the existence of uncertainty. Risk can be measured but uncertainty can't, and Keynes' political systems is constructed to have Government reduces uncertainty through policy. In this, Skidelsky is very critic of the present state of the economic discipline (he calls it "regressive").
The utopian thinking in Keynes is also covered, and although it sounds like a post-history type of thesis, it is interesting not in the utopian part but in how it shapes Keynes's ethical philosophy. Skidelsky points out that Keynes never lost touch with the goal of economics, and some of its "evils" are justified as a way to achieve the post-economic stage in history. You probably won't buy this Utopia but the moral ramifications are interesting nevertheless.
For the least economic literate among us, a glossary or an appendix would have been useful to explain some concepts that are not straightforward.