John Maynard Keynes

Keynes: The Return of the Master By Robert Skidelsky, Penguin, Rs 550

Robert Skidelsky is a renowned Keynesian scholar, having received a number of awards for his biography of John Maynard Keynes. However, he considers himself an “economically literate historian” rather than a “professional economist”, which allows him to avoid the narrow assumptions under which economists develop their “fundamentally regressive discipline”.

The book is not concerned with viewing Keynes as a pure economist. It is divided into three parts, called “The Crisis”, “The Rise and Fall of Keynesian Economics” and, finally, the “Return of Keynes”. Though well-written, it is not an easy book to read on account of Skidelsky’s erudition. He covers a vast panorama comprising history, religion, philosophy, economics and statistics, and judges Keynes’s contributions from all these different angles. But the book being relatively small in size, it is far too compact a presentation of Keynes’s multifaceted intellect. Skidelsky, it appears, addresses the book to accomplished “generalists”, a somewhat rare species, rather than hardened “specialists”, of whom endless numbers are around. As a result, this fascinating study will probably attract fewer readers than it ought to.

Part I is a clear presentation of the recession — following the subprime crisis in the United States of America — that engulfed most of the world we know today. A great deal has been written on the issue, and Skidelsky provides a succinct summary of the causes underlying the crisis as well as the semi-Keynesian remedies that governments across the world have engaged in. The treatment here will be of great use for readers wishing to acquaint themselves with the events over the last two years or so. It is best to point out, however, that it requires a minimal training in economics and finance theory to assimilate the section. It is followed by a lucid presentation of the path that economic theory followed once the world had come out of the Great Depression. One is introduced here to the monetarist lead given by Milton Friedman of Chicago University, and is then taken to its logical culmination in the rational expectations revolution ushered in by Robert Lucas and the real business cycle theory. As Skidelsky explains, and this reviewer agrees with him, the Lucas critique of Keynes — which, amongst other things, does not even recognize the reality of “unemployment” (Chapter 2, page 37) — is simply a mathematically sophisticated version of pre- Keynesian classical thinking carried to its logical, though unrealistic, extreme. And the real business cycle theory fares no better.

What post-Keynesians have often viewed as a weakness of Keynes’s theoretical framework is probably its strongest point. The weakness in question was the absence of a standard supply-demand equilibrium representation of an economy in recession, or even full-employment for that matter. The problem here arises from the obsession of economic theory with concepts of equilibrium borrowed from Newtonian physics — concepts that are not too relevant for a social science. Put simply, a system devised to study equilibrium constellations need not explain the state of the world in the absence of equilibrium.

In Part II of the book, Skidelsky moves into territories where pure economists begin to feel like strangers. It represents Keynes, whose theories depended on the profit maximization hypothesis, as a person who “set out to save a capitalist system that he did not particularly admire.... He was... clear that the pursuit of wealth was a means, not an end — the end being to live ‘wisely... and well’.” The theme is further elaborated in Part III, where Skidelsky states: “He was not a socialist, but nor was he an uncritical admirer of capitalism.... This brings him close to Karl Marx... But... he did not look forward to capitalism’s overthrow....” It was the Cambridge philosopher, G.E. Moore, in whom the underpinnings of Keynes’s ethics lay. The ethical question was, “What is good?” and the moral question, “How ought I to behave?” The justification of business enterprises or markets lay in their being means to attain ethical goodness: “It is easier for people to be good... if they have a certain level of material comfort.”

Despite the scope of his short treatise, Skidelsky goes deep into these questions. For a pure economist, however, the most important point that he makes repeatedly in the book relates to the concept of “uncertainty”. Latter-day general equilibrium theorists, such as Kenneth Arrow, Gerard Debreu and Lionel W. McKenzie (with whom Skidelsky does not deal), did a great deal of work on the efficiency of a competitive market system in the presence of uncertainty protected by insurance contracts. Keynes, on the other hand, made a clear distinction between measurable (qualitative or quantitative) uncertainty and non-measurable uncertainty. It is the latter kind of uncertainty that weakens the basis of capitalism. One cannot insure against uncertainties that are totally unknown animals, and it is for this reason that money plays an all-important role in the real world. It is the only insurance against the uninsurable. As Keynes made clear, when afflicted by depression, it is money that people hold as opposed to commodities, thereby reducing market demand and destroying the capitalist incentive to produce.

The only criticism this reviewer has against the book is that it ignores Michael Kalecki’s contributions and their links to Keynes.

Finally, there is a serious typo that needs to be attended to: “It is harder for a camel to go through the eye of a needle...” on page 134.