During the most frightening moments of the credit crisis, the ideas of British economist John Maynard Keynes, written during the depression of the 1930s, emerged as a guide for policy makers struggling to rescue an ailing economy. For over 30 years his theories had been scorned by a new wave of economists, who created mathematical models that attempted to reduce and measure risk. But Keynes' ideas were back and seemingly more influential than ever.
John Maynard Keynes was the world's most famous economist in the late 1930s and 1940s. The Cambridge University professor argued in his 1936 masterwork The General Theory of Employment, Interest, and Money and elsewhere, that there is uncertainty in the world that cannot be foreseen by any economic model. As far back as the 1920s, economists were proposing ways to reduce the risk of calamitous events down to a measurable numerical value. Keynes rejected this approach. He believed that, when faced with uncertainty, consumers and businesses will not spend and this drives the economy into a recession. Governments must step in to provide demand in the economy and stop the slide. Keynes' ideas dominated macroeconomic thinking for much of the last century before falling into disrepute 30 years after his death in 1946.
Skidelsky's sub-title, The Return of the Master, refers to the efforts to discredit Keynes' work, which began in the 1970s. His teachings were largely absent from mainstream economics between the late 1970s and 2007 as taught at universities and utilised by both monetary (central banks) and fiscal (government) policy makers. His return is largely attributed to two factors. First, economists who follow the free-market school of economics believed that markets were self-regulating and that prices could only fall so far before demand would match the prices and clear the market. Their models completely failed to predict the depth of the economic crash in 2008 because they did not believe investors and consumers could be so fearful as to entirely halt their spending. Second, these free-market economists could offer little in the way of instruction to governments and central banks as to how to arrest the freefall in the economy. Keynes's ideas were there to offer an explanation as to why governments must assume the role left by the lack of private sector spending and do the spending themselves. His work provides a roadmap for difficult economic times.
Part of the discrediting of Keynes prior to his "return" stemmed from the conservative movement's distrust of the state's ability to spend effectively. It also followed from a distortion of his ideas. As the author notes, Keynes was by no means a socialist. He advocated government saving during prosperous times so it could be spent when the economy contracted, and he opposed tax rates higher than 25 percent.
Keynes opposed the excessive mathematicisation of economics and tried to keep his language simple. Yet his original texts can often seem dense and difficult. By contrast, Skidelsky's short book is eminently readable and contains a great third chapter about Keynes' social life at Cambridge - which involved more drinking and encounters with elegant women and men than most students could manage.
Skidelsky, clearly a huge fan of his subject, outlines why Keynes is as relevant today as he has ever been. Due in part to a misunderstanding of his ideas, Western governments have struggled to implement Keynesian fiscal policy measures and increase public spending to replace private sector investment. Government bureaucracies, which had been designed over 30 years not to spend a lot of money quickly (for fear of waste or fraud), were so unprepared for the sudden increase in spending. They simply bundled together countless old spending requests under the banner of "stimulus". Over a year since the world entered a recession, announced "stimulus" spending in the United States and Canada is not even half way out the door.
Economics as a field of study must now confront whether its best ideas were developed 70 years ago. If so, much of what has been called "progress" over the last 30 years will be discredited. To highlight the upheaval in field, the most recent Noble prize in economics was shared by a woman who was not trained as an economist. Until a new set of arguments coalesce to guide policy makers, John Maynard Keynes will for now remain the master of his field.