Keynes Was No Socialist

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A review of Keynes: The Return of the Master, by Robert Skidelsky, Public Affairs, 2009.

In a "Letter from America" in a recent issue of the Newsletter of the Royal Economic Society, British economist Angus Deaton complained how politicized the U.S. economic debate had become and how it was almost mandatory for Republicans to oppose a "fiscal stimulus." This was combined with the anathema often poured on the doctrines of the British economist John Maynard Keynes (1883-1946), who espoused stimulating spending as a cure for deep recessions. While in the United States he is often denounced as a "socialist," in the United Kingdom even Thatcherite Conservatives prefer to condemn the misapplication of his views.

Lord Keynes (as he later 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. Robert Skidelsky, author of a magisterial three-volume biography of the great man, is well qualified for this task. In his new book, Keynes: The Return of the Master, he attempts more than this. There is a chronology of the crisis up to May 2009; a critique of U.S. mainstream macroeconomics; a summarized easy-to-read version of his biography; a comparison of economic performance in the supposedly Keynesian Bretton Woods period of 1951-73 with the era of the so-called Washington Consensus from about 1980; some notes on Keynes's ethics and politics (which it would be a mistake for the most hardened Wall Street type to omit), and finally his own proposals for the future. And this is all given in 210 pages reasonably accessible to the interested non-specialist.

The chronological section 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 U.S. academy is bound to attract hostility. Skidelsky quotes a University of Rome professor of economics, Robert Waldmann, on the vogue for doctrines such as rational expectations and efficient financial markets characteristic of the New Classical school. Graduate students have to learn a huge amount of mathematics very fast, which is hardly possible unless doubts about the validity of the approach are set aside. This applies I suspect most of all to some of the business schools, where most students probably regard the MBA as a meal ticket 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, stylized assumptions are not to be criticized on their descriptive validity but on the fruitfulness of their analysis. 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 woe fully taken by surprise by everything to do with the credit crunch. And while on the subject of Friedman, it is worth remarking that he never attempted to deny the logic of Keynes's General Theory, which Friedman often praised to the consternation of some of his followers. His point was that the Federal Reserve could have stopped a normal recession from developing into the calamity that it did through monetary policy, but through human error did not do so. …