“WWKD – What Would Keynes Do”

By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives

Keynes: The Return of the Master By Robert Skidelsky (2009)

John Maynard Keynes is having an excellent crisis. Dead for over a half a century, the British economist is enjoying a comeback as desperate governments and even more desperate economists adopt massive and dramatic fiscal stimulus to prevent the current crisis developing into a depression.

Renewed interest in Keynes is evident in the rash of new books re-examining his work and legacy. There can be, of course, no suggestion that authors and publishers are merely cashing in on the opportunity.

Mr. Robert Skidelsky is recognised as an authority on Keynes, based on his peerless three-volume biography of the man. The Return of the Master tries to reposition the economist’s work and insights in the light of recent events. It is an interesting and eminently readable overview of some themes that can be found in Keynes’ work.

Drawing, at times heavily, on the biography (authors must be allowed the license to ‘self refer’), Mr. Skidelsky’s central theme appears to be that most post Keynesian economics is problematic and the great man’s insights are ‘misunderstood’. Specifically, Keynes’ thought on “radical” or “irreducible uncertainty” as a primary cause of economic instability is not given enough recognition or prominence. Mr Skidelsky argues that in ignoring uncertainty, modern economics makes a serious intellectual error. Some of the criticisms are entertaining and also valid.

The book probably overstates its case. It is a bit like Nostradamus’ prophecies – followers see in the elliptical words what they wish to see.

The modern world is fundamentally different to that which Keynes inhabited and analysed. The insights gleaned from Keynes are ambiguous when viewed from the viewpoint of the economies and markets of 2009. There is selective resort to specific dictum to justify any specific course of desired action. There is sometimes insufficient acknowledgement of the complexity and ambiguity of Keynes’s own views on economic theory and its practice.

In the run-up to the 1929 election, Keynes discovered a seminal political truth about deficit spending. Lloyd George, an economically challenged politician, was delighted when Keynes provided the rationale for spending taxpayers’ money on social programs to bribe voters. Keynes absorbed this lesson well and maintained a constructive ambiguity throughout his life allowing him to appeal to politicians who favoured government spending and those who favoured middle-class tax cuts.

Economics is, at best, an inexact, inadequate and evolving set of theories seeking to explain complex relationships in a constantly changing world. The major insight that Keynes offered was regarding the inability of theories to explain actual events and how any attempt to apply the theory had unintended consequences. In an essay titled “The Great Slump of 1930,” published in December of that year, Keynes acknowledged: “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”

Writing in the Financial Times (5 February 2009) Benn Steil, Director of International Economics at the Council on Foreign Relations, succinctly set out the background to the return of Keynes: “when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes.” The Return of the Master and the many other titles appearing about Keynes are testament to this tendency rather than the validity or otherwise of his nostrums.

When an author or thinker’s own published total output is exceeded in a single year by that of writers writing about his ideas, it is a fair assumption that there is a ‘bubble’ in his or her stock.