Wednesday, April 7, 2010

Robert Skidelsky's "Keynes: The Return of the Master"

This was a very good book. It covers many topics and raises many thoughtful questions.
  • The first part reviews the current crisis.

  • The second part identifies how the two main schools of economics -- the freshwater and saltwater schools -- helped create the situation. Skidelsky adds comments to show how Keynes viewed things differently.

  • Finally, in the third part he tries to resurrect Keynes and interpret how he would have viewed the current situation.
One of my favourite sections is where he compares the years 1950-73 to 1980-2008. The earlier period was strongly influenced by Keynes and showed higher economic growth, lower unemployment, less volatility in growth and exchange rates, but slightly higher inflation. Anybody alive today would prefer the earlier period over the latter period of the "Washington Consensus". The point is, modern economics has mislead politicians and regulators into believing that a "hands off" approach to the economy is best. But that puts us right back into the periodic panics and depressions of the late 19th century. Keynes developed his theory to save us from this, but as economists moved away from Keynes and back into their love affair with math and model building, the "unification" of micro and macro economics on the foundation of the mythical homo economicus they have led us back to the economic instabilities, the inequities, and slower growth of the pre-Keynesian times.

This book does an excellent job of distinguishing risk from uncertainty. Skidelsky points out that modern economics conflates the two and consequently builds theories that invite the kind of crises we've seen over the last 20 years. Crises that were missing in the Keynes-influenced 1950-73 era. Risk is a pobabilitistic event that can be estimated and measured and therefore hedged against. But uncertainty is by definition something that can't be clearly perceived so there is no technique to handle it. As Skidelsky points out, this is the famous distinction that Donald Rumsfeld made between "known unknowns" and "unknown unknowns". Keynes insisted that economics couldn't be a science in the sense that modern economics wants to shape it. There is no math or mathematical model that can tame unknown unknowns.

One aspect of Keynes that I was his interest in ethics. Here's a bit from the book to give you a taste of it:
'The key thing that went wrong was that a culture was allowed to develop over the last fifteen years or so where the relationship between what people did and what they got went way out of alignment, especially at the top end.' There is a typical politician's ambiguity in this observation by Alastair Darling. It could mean that people spent more than they earned, which is true. ... But reference to 'at the top end' suggests that Darling had something else in mind: that people especially 'at the top end' were being paid too much for what they did. Whichever way his remark is taken, he seemed to be saying that the fault lay in a money-obsessed culture -- one in which money had become the measure of all things. And this is right. But this is a moral judgement. And, being an intellectual, Keynes had no such inhibition. He was a philosopher and moralist as well as an economist. And he never ceased to question the purposes of economic activity. Briefly stated, his conclusion was that the pursuit of money -- what he called 'love of money' -- was justified only to the extent that it led to a 'good life'. And a good life was not what made people better off: it was what made them good. To make the world ethically better was the only justifiable purpose of economic striving.
This is an excellent book to get a new perspective on the current crisis and to re-establish an appreciation for John Maynard Keynes.

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