Friday, 3 December 2010

Keynes: The Return of the Master - Robert Skidelsky

On to my birthday presents... first up is an impassioned defence of the economist John Maynard Keynes by his leading biographer, Robert Skidelsky. The Return of the Master is a much slimmer affair than his original three-volume opus (which I haven't read) and has no time for any nuance that a longer work might provide. Appropriately for a book with such a Star Wars-ish title, Keynes is here presented as a Jedi master of economics, guardian of great monetary truths which later generations have foolishly cast aside.

The book opens with a potted history of the financial crisis and its aftermath. It's not a bad summary but I'm not sure what sort of reader it is aimed at. Anyone who has been following the story closely will find it short on revelations, while people with less abnormal interests will surely be baffled by all the unexplained jargon.

More substantial is the second chapter, which describes and denounces the three pillars of modern conventional economic wisdom: rational expectations, real business cycles and the efficient market theory. In the wake of the crisis this is like shooting at an open goal, but Skidelsky attacks them with impressive vim. He also introduces a fundamental theme of the book: the Keynesian contrast between risk (which is measurable) and uncertainty (which is not).

Skidelsky then introduces Keynes himself, discussing not only his economic theories but also his Bloomsbury background and his philosophical and political worldview. This is of course an authoritative account, but it suffers from a hero-worshipping tone that by the end makes you wish that he would criticise something, anything about the man (even his support of eugenics gets waved away). In Skidelsky's defence, it's undoubtedly true that Keynes' work has been unfairly maligned since the Keynesian consensus fell apart in the 1970s, but overcompensation is perhaps not the best strategy for correcting that.

Nevertheless the discussion of Keynes' economics is well worth reading. The comparison of global economic performance in the Keynesian golden age of 1950-1973 with 1980-2008 is enlightening and the discussion of the shift from unemployment-targeting to inflation-targeting by governments is very well explained. I'd have liked more on the 1973-1980 period though, seeing as that was the time when Keynesianism lost its momentum. We do however get the take home message that the supply shock problems of that period (which Keynesianism struggled to answer) are qualitatively different to the demand shock problems we face today (which Keynesianism is brilliantly suited to). This is the key to why Keynes is (or at least ought to be) back in fashion.

In the last chapter Skidelsky tries, slightly presumptuously, to imagine what Keynes' response to the current crisis would have been. Like any good Keynesian he is dismayed by how brief the world's commitment was to fiscal stimulus, and fearful of the consequences of the mania for austerity which has now taken hold. The ideas are interesting and radical, such as mechanisms for forcing balance of trade adjustments, the replacement of floating currencies with a standard based on a basket of commodities, and curbs on laissez-faire globalisation.

Skidelsky's proposals for reforming economics are much harder to welcome. Throughout the book he talks of the warring tribes of 'New Classicals' and 'New Keynesians', the 'freshwater' and 'saltwater' economists, who appear to be motivated chiefly by political posturing rather than a search for truth. From my prejudiced hard-science viewpoint it seems obvious that economists are simply not scientific enough, not dispassionate enough, not willing to see things as they are rather than how they would like them to be. 'Dismal' doesn't do them justice.

But Skidelsky takes the opposite view, declaring that there should be a general retreat from a scientific approach and a greater emphasis on politics and philosophy in the average economics degree. Essentially he wants economics degrees to be replaced with PPE (the degree course for wannabe politicians which explains so much about what is wrong with our politicians).

This view is grounded in his belief that the mathematical models in use are too idealised to describe economies as they are really are, and will never be able to take into account the irreducible uncertainty that lies at the heart of Keynes' approach. In this he has a point. But being appropriately sceptical of models is one thing, and throwing out maths altogether is quite another. What's really needed is more open-mindedness about the assumptions the models rest on and more humility about their predictive power.

Overall the book has a muddled and rushed style, and feels like it hasn't been edited properly (there are quite a few typos in the text). But it is still an enjoyable primer on Keynes, and hardcore anti-Keynesians who wish to repent will find it a good place to start.

Keynes: The Return of the Master
by Robert Skidelsky
First published in 2009