BOOK REVIEW: News Weekly
KEYNES: The Return of the Master, by Robert Skidelsky
, May 15, 2010
The Return of the Master
by Robert Skidelsky
(London: Allen Lane)
Hardcover: 224 pages
Rec. price: AUD$45.00
Reviewed by Colin Teese
Professor Robert Skidelsky's fine book emerged as a consequence of the global financial crisis. In one sense, it can be said to have taken us all by surprise. In another sense, it is no more than we might expect from the author of the definitive three-volume biography of the greatest of all 20th-century economists. Indeed, 64 years after his death, the book's jacket proclaims John Maynard Keynes as still the most important economic thinker in the world.
As I read Professor Skidelsky's preface to the book, my heart initially sank as the author revealed that it was his agent who first suggested the idea of this book in the context of the current financial crisis. Was it to be just another publisher's attempt to exploit an opportunity?
Of course, it wasn't. How could Robert Skidelsky be part of any such shabby conspiracy?
He begins by giving us a short thumbnail sketch of how financial misdemeanour has all but brought down Western capitalism. He makes the distinction between the post-1929 Great Depression and the current global financial crisis. This time, it is financial mismanagement that has brought about the collapse of the real economy (i.e., output and jobs). In the 1930s Depression, it was the other way around: it was the slump in the real economy which brought about the collapse of financial institutions.
With that in mind it is worth emphasising that the world's response to the current financial breakdown, which got underway in 2008, had nothing in common with Keynes's prescriptions in the 1930s.
The initial US reaction adhered strictly to economic orthodoxy, which was to let the bankrupt Lehman Brothers go to the wall. Many bankers have since argued that this act, of itself, caused the subsequent financial meltdown. This assertion overlooks the fact that banks throughout most of the West had recklessly committed themselves, far beyond their capacity, to issue loans of dubious value.
The conservative Republican Party, then in power, genuinely believed, as did economists of sympathetic persuasion, that if banks had a right to make a profit, they also had to be prepared to suffer the consequences when they failed. Indeed, free market supporters could hardly believe in anything else.
But after the Lehman collapse, they got the message. Commonsense pushed aside ideology when a prominent member of the financial establishment, none other than Federal Reserve chairman Ben Bernanke, became an overnight convert to government intervention to save banks. Indeed, as he announced gloomily one Friday morning as the crisis set in, "We save the banks or we have no economy by Monday morning."
Even at this stage, orthodox free-market economists were far from feeling the need to resurrect Keynes. That came later, when it became obvious that the fallout from the financial crisis threatened to demolish the real economy.
After a number of international crisis meetings, the idea of "stimulus packages" took hold. These were, effectively, government injections of spending with the intention of restarting stalled economies. Old-fashioned Keynesian pump-priming was respectable once again.
Skidelsky makes it clear, however, that this approach wasn't Keynesianism. Keynes did not believe that market capitalism never worked. Nor did he have much time for socialism. While not perhaps a devotee of capitalism for its own sake, he was convinced that no other form of economic organisation was capable of materially improving the lives of ordinary people.
What Keynes contested was the free market dogma that a market economy left to its own devices would always find equilibrium at full employment. In the real world, he insisted, prices and wages were sticky. That is to say they would not always respond immediately to changed circumstances in the ways predicted by free market economists.
And, in that event, equilibrium might occur far short of the level of economic activity needed to ensure full employment. The result would be large-scale and long-term unemployment. To reverse that trend, Keynes said, government intervention was necessary to restart the economy.
Contrary to popular belief, Keynes did not advocate government deficit-budgeting in all circumstances. He was prepared to support government deficits for short periods to restart stalled economies. However, he believed that, in normal circumstances, budgets should be kept in general balance over the course of the business cycle.
Neither was Keynes an advocate of inflationary policies; but again, in times when market forces cannot of themselves sustain full employment, Keynes believed that policies to stimulate purchasing power should take precedence over managing inflation.
All of this Skidelsky outlines for us. He does not enter into the discussion of whether or not Keynesian policies failed us in the 1970s and led to the stagflation (i.e., the phenomenon of simultaneous economic stagnation, unemployment and inflation) of that time. He does not believe that to be relevant, because it was not Keynesian theory (or the absence of it), which delivered stagflation to the world.
In fact, it is not relevant to talk about Keynes "theories". Keynes was really concerned to suggest policies to deal with specific problems - what in today's language might be called (inaccurately) examples of market failure.
Keynes did not accept that markets operated in the way classical or neo-classical economic theory postulated. He rejected the idea of economies as permanently self-correcting and self-regulating mechanisms delivering the most perfect outcomes if left to operate without interference.
He advanced theoretical arguments in support of his views, and also to explain why prices and wages were sticky and why this alone - though it was by no means the only imperfection in orthodox theory - was enough to deny the possibility of equilibrium at full employment for long periods of time.
Although Skidelsky's Keynes: The Return of the Master is a short book, there is much more in it than any review can do justice to.
In particular, the author discusses Keynes the philosopher and how this aspect of his life shaped his character and beliefs.
In the process of doing this, Skidelsky makes clearer why it was possible for Keynes to paint his economics on a broader canvas than did most of his contemporaries, and why also he insisted that economics could be not be practised without regard for the political context in which it was embedded.
One final point. Skidelsky firmly believes that Keynes would have been puzzled by the recent crisis, which seems, on the face of it, to have invalidated some of his forecasts.
This was not because Keynes expected better of financial institutions - quite the reverse. He thought poorly of them and believed them only useful to service the needs of the real economy, not unproductive financial speculation.
His surprise would have been that governments should ever have given financial institutions the freedom to so undermine the real economy.