Keynes: The Return of the Master
By Robert Skidelsky
Allen Lane £20, 240 pages
FT Bookshop price: £16

Keynes: The Twentieth Century’s Most Influential Economist
By Peter Clarke
Bloomsbury £16.99, 224 pages
FT Bookshop price: £13.59

Harold Wincott, a well-known Financial Times columnist of the 1950s and 1960s, once wrote that because the doctrines of the British economist John Maynard Keynes (1883-1946) were misapplied in his own lifetime, they would be discredited when they might really be needed. So it has proved.

In fact, economic policies in the UK and some other European countries were very cautious in the 1950s and 1960s, but only because of a mistaken adhesion to a fixed exchange rate. So it took a long time for governments to learn the more basic flaws in their policy framework.

For instance Harold Macmillan, British prime minister from 1957-1963, believed that inflation mattered only because of the balance of payments. And many political and business leaders are still at a loss what to do when faced with the genuine threat of depression brought on by reluctance to lend and spend.

It was therefore inevitable that those who can see the futility of trying to fight this threat by “cuts” all round should wish to disinter an economist well known for advocating government spending stimuli in deep recessions. One healthy result has been a desire to re-examine what Keynes really did say.

Lord Keynes, as he became, was famous for adjusting his theoretical framework to the facts of the situation. To ask what he would be saying now is a pretty futile exercise. It is not futile, however, to ask if there is anything in his doctrines that can offer hints on how to tackle the greatest threat to the international capitalist system since the Great Depression of the 1930s.

It is fortunate that two new books provided to meet this need are written by historians of ideas who really know about the life and times of the great man. Robert Skidelsky is already the author of a magisterial three-volume biography of Keynes, and Peter Clarke has also published widely on the subject.

Inevitably the books overlap a great deal. Although I much prefer Skidelsky, I have to admit that Clarke is a smoother read. I would certainly recommend novices to start with Clarke, even though he provides just that left-of-centre picture of events and ideas with which many of the chattering classes will feel at home – and makes a few of what I would regard as theoretical mistakes.

Skidelsky is a harder read partly because he attempts more than Clarke’s narrative of Keynes’s work. Indeed one has a sense of his grappling with the issues as he goes along. There is a chronology of the credit crunch up to May 2009; a critique of US mainstream macroeconomics; a summarised biography; a consideration of economic performance in the supposedly Keynesian Bretton Woods period of 1951-73 compared with the era of the so-called Washington Consensus from about 1980; some notes on Keynes’s ethics and politics; and finally his own proposals for the future.

The chronological section of Skidelsky’s book is easily the best account I have read of the development of the credit crunch, for those interested in the main macroeconomic story as distinct from the micro-financial nitty-gritty. I hope the next edition will contain a few blank pages for the reader to continue the narrative on his or her own.

The section on the modern US academy is bound to attract hostility. He cites a professor of economics at Rome University, Robert Waldman, on the vogue for doctrines such as rational expectations and efficient financial markets, characteristic of the New Classical school, which superseded Keynes in respect of American-based economics.

Graduate students under this influence have to learn a huge amount of mathematics very fast – which leaves little time to reflect on the validity of the approach. This applies most of all I suspect, to some business schools, where many students probably regard the MBA as a meal ticket to a lucrative job and believe that they are merely learning a few technical tricks.

Skidelsky regards the assumptions behind the New Classical school as “mad”. At this point I can hear the cautionary voice of Milton Friedman, who predates this school, saying “Go slowly”. In Friedman’s view, we should not criticise assumptions for not being realistic if the resulting analysis is fruitful. After all, Isaac Newton’s frictionless universe is also “mad” but retains its utility in defined situations.

The charge against the New Classical theory is that its adherents were woefully taken by surprise by everything to do with the credit crunch. It is worth remarking that Friedman never attempted to deny the logic of Keynes’s General Theory. Friedman’s point was that the US Fed could have stopped a normal recession from developing into the Great Depression by the appropriate use of monetary policy but through human error did not do so. This is too narrow a basis on which to erect a monetarist orthodoxy.

To the more practically minded the key Skidelsky chapter will be the one that compares the post-Second World War settlement with the post-1980 period, when markets were given freer reign. The author has little difficulty in showing that the first period is at least as strong as the second not only on growth and employment but also on sound money tests such as price and exchange rate stability. He does not, however, fully explain why the first period gave way to the second.

The reasons were not ideological, but because the post-war compromise contained the seeds of its own destruction. For instance “fixed but adjustable exchange rates” had to freeze into rigid rates or break down into generalised floating, as some critics pointed out at the time. Attempts to use trade unions to hold down money wages ran up against the raison d’être of union existence. Friedman was surely right to deride the idea of a long-term unemployment/inflation trade-off depending on temporary illusions about the value of money.

Both Clarke and Skidelsky make too much of Keynes’s belief in balanced current national budgets. This was based partly on a quirk of UK procedure under which parliament had given permission for certain capital items to be considered off-budget or “below the line”. This does not detract from Skidelsky’s central point that Keynes distinguished between the all pervasiveness of uncertainty, as distinct from insurable risk.

What I confess I found most thought-provoking in these two books were some critical remarks by Skidelsky on Keynes’s ethics. Keynes valued economic advance as an indirect way to promote the amount of “goodness” in the world, along lines developed by his philosophical mentor, G.E. Moore.

But rational people disagree about what is good. For Moore it was self-evident that goodness consisted solely of the pleasures of human intercourse and the enjoyment of beautiful objects. But this was not self-evident even in Keynes’s time when “neither warrior nor priest had left the scene” as a source of ideals that go beyond mere money-making. We are left alone to form our own ideas of good and bad.

Samuel Brittan is an FT columnist
www.samuelbrittan.co.uk

Get alerts on Non-Fiction when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article