The soothsayer1 min read . Updated: 05 Dec 2009, 01:46 PM IST
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.
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.