Books

The Redemption of Keynes


Keynes: The Return of the Master
By Robert Skidelsky
PublicAffairs; 221 pp; $25.95

Keynes: The Rise, Fall, and Return of
the 20th Century's Most Influential Economist
By Peter Clarke
Bloomsbury Press; 211 pp; $20 Thanks to extraordinary actions by the Federal Reserve, a record-breaking stimulus package, and massive bank bailouts, the downward momentum of the Great Recession has been halted. A year after the collapse of Lehman Brothers, there's no hyperbole in saying a depression was barely averted. And as the economy tentatively moves from contraction toward recovery, John Maynard Keynes ought to be named Man of the Year. Governments around the world have successfully, if messily, resurrected many of his insights from the 1930s to thwart economic collapse. Foremost is his idea that easy money and government spending can rescue an economy in free fall—with credit frozen, businesses panicked, and consumers paralyzed.

The return of Depression-era economic realities lies behind a resurgence of interest in the man. Modern macroeconomics is widely considered to be the house that Keynes built. He was a dominating transatlantic intellectual and policymaking force from World War I through World War II. (He died in 1946.) Yet by the 1990s, Keynes was largely ignored by economists, who became increasingly enamored with market efficiency and obsessed with the deadweight costs of government. Whenever action was called for to offset a slump, most economists recommended a dose of monetary policy. Politicians rarely invoked his name, and when they did it was often with disdain.

But attitudes change during a siege. As N. Gregory Mankiw, a Harvard economics professor and adviser to President George W. Bush, put it: "If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes."

Two new books attempt to bring him back into focus. Keynes: The Rise, Fall, and Return of the 20th Century's Most Influential Economist is by Peter Clarke, a former history professor at Cambridge University, where Keynes also taught. The other is Robert Skidelsky's Keynes: The Return of the Master. Emeritus professor of political economy at the University of Warwick, Skidelsky earlier penned a three-volume Keynes biography (published in 1983, 1992, and 2000) that runs to more than 1,500 pages.

Both authors combat the caricature of Keynes as a market-hating, deficit-embracing, tax-and-spend socialist. And both argue that Keynes deserves better than to be trotted out only in times of crisis and that his ideas are relevant in the current debate over reforms. In this, Skidelsky's book excels. It's a passionate polemic that makes a strong case for economists and policymakers to reread their Keynes. He puts great stock in one of Keynes' most famous quotes: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly supposed. Indeed the world is ruled by little else."

Keynes' is a rich story, and Clarke's book emphasizes the details of his life. A product of Eton and Cambridge, he was a multitalented genius living at the center of Britain's academic, journalistic, government, financial, and artistic communities. Keynes worked in the India Office and the British Treasury and ran an insurance company. He had homosexual relationships as a young man and was later happily married to ballerina Lydia Lopokova. His literary career was deeply influenced by his membership in the Bloomsbury group, which included Virginia Woolf and E.M. Forster. In 1923 he put the income from his writing to work in the markets, making and losing several fortunes. He lived, as Clarke writes, off "the fluctuating performance of his investments."

The orthodoxy of the time held that government should do little to stop downturns. Many of the best economists of the era, such as Joseph Schumpeter and Friedrich Hayek, valued depressions as necessary purgatives. Keynes would have none of it: He saw millions of unemployed workers, their livelihoods and hopes dashed on an adherence to balanced budgets, the gold standard, and unfettered trade. This is the Keynes most of us know.

But Skidelsky brings another Keynes alive. Keynesian economics, he argues, has at its core a deep appreciation of market psychology and—unlike the efficient-market camp—uncertainty. If you can't predict the future, Keynes reasoned, then you need a system that can handle breakdowns. Writes Skidelsky: "Underlying the escalating succession of financial crises we have recently experienced is the failure of economics to take uncertainty seriously."

Skidelsky also makes a plea for economics to again become a humanist discipline. People have started asking: What is economics for? To Keynes, it wasn't about efficiency or wealth-building. He thought hard about how economics relates to an ethical life, to art and beauty, to what is truly good and valuable. And his return may create room in the post-recession debate for questions along those lines.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkWhat Went WrongIn a Sept. 2 article in The New York Times Magazine, Nobel laureate Paul Krugman gives his take on why economists failed to see the current crisis coming. He chronicles the decline of Keynesianism, from Milton Friedman's monetarism through the missteps of Alan Greenspan: "As memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations."To read Krugman's piece, go to http://bx.businessweek.com/economic-analysis/reference/
Chris_farrell
Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace.

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