It would not be incorrect to say that one of the few economists who came out of the financial crisis with an enhanced reputation is John Maynard Keynes, the English economist who died in 1946.
There was a time not too long ago when Keynes was dismissed as a loose thinker whose theories neither stood the test of time nor met the requirements of modern academic rigour. Nobel Prize winner Robert Lucas had written in 1980, “At research seminars, people don’t take Keynesian theorizing seriously any more; the audience starts to whisper and giggle to one another.”
Modern macroeconomists who were believed to have won a final victory over Keynes after the global stagflation of the 1970s were neither able to predict the terrible economic downturn of the past two years nor able to offer any compelling policy solutions. Governments saved economies from total collapse by increasing their spending budgets and cutting taxes, the classic Keynesian solution.
However, there is more to Keynes than the use of fiscal policy to fight recessions. Robert Skidelsky does well to show in Keynes: The Return of the Master that the man he describes as “the most important economic thinker in the world” had more to offer than an intellectual justification for higher government spending.
Keynes believed that we operate in a world of radical uncertainty where the future is essentially unknowable, which is in stark contrast to the belief in academic seminar rooms and investment bank trading floors that there is little about the economic world that a bit of math cannot reveal. His insistence that people allocate savings according to their liquidity preference or that entrepreneurial investment is driven by animal spirits is an early attempt to examine the deep psychological factors that drive economic cycles, something that economists Robert Shiller and George Akerlof have tried to develop in their recent book, Animal Spirits.
I am not sure that the standard Keynesian explanations tell us everything about what has happened since August 2007. Keynes believed that crises start in the real economy after a collapse of what he described as the marginal efficiency of capital. In contrast, the crisis that the world is now struggling to get out of began in the financial economy because of a huge underpricing of risk.
Later disciples of Keynes, such as the American economist Hyman Minsky— whose work was all but forgotten till about two years ago—built a more coherent explanation about how economic instability has roots in financial instability, even though the calls of these post-Keynesians for the socialization of investment seem impractical.
Skidelsky is better known as the author of the monumental three-volume biography of Keynes, widely regarded as the most authoritative in its class. His new book is elegantly written and persuasively argued, but it has clearly been published in a hurry to meet the requirements of the post-crisis reading market. The first 30 pages on the current crisis read like an overview of what bloggers and newspaper op-ed writers have had to say, and is a bit of a let-down.
But the book gets better. The biographical chapter on the many lives of Keynes is one of the best. It shows that Keynes was a man of the world: Cambridge don, investor, civil servant, member of the avant-garde Bloomsbury Group and journalist. Keynes lived in the real world, which is why his economics was driven by practical considerations rather than theoretical elegance.
Keynes had a mercurial mind and formidable intellect. We still have much to learn from him—and his contemporaries such as Irving Fisher, Joseph Schumpeter and F.A. Hayek. Skidelsky’s new book is a good starting point to understand Keynes.
Niranjan Rajadhyaksha is managing editor of Mint.