BBC economics editor Stephanie Flanders examines how three
extraordinary thinkers, Keynes, Hayek and Marx, helped shape the 20th century.
John Maynard Keynes, 1st Baron Keynes, was a British
economist whose ideas have profoundly affected the theory and practice of
modern macroeconomics, and informed the economic policies of governments. He
built on and greatly refined earlier work on the causes of business cycles, and
is widely considered to be one of the founders of modern macroeconomics and the
most influential economist of the 20th century. His ideas are the basis for the
school of thought known as Keynesian economics, as well as its various
offshoots.
In the 1930s, Keynes spearheaded a revolution in economic
thinking, overturning the older ideas of neoclassical economics that held that
free markets would, in the short to medium term, automatically provide full
employment, as long as workers were flexible in their wage demands. Keynes
instead argued that aggregate demand determined the overall level of economic
activity, and that inadequate aggregate demand could lead to prolonged periods
of high unemployment. He advocated the use of fiscal and monetary measures to
mitigate the adverse effects of economic recessions and depressions. Following
the outbreak of the Second World War, Keynes's ideas concerning economic policy
were adopted by leading Western economies. In 1942, Keynes was awarded a
hereditary peerage as Baron Keynes of Tilton in the County of Sussex. During
the 1950s and 1960s, the success of Keynesian economics resulted in almost all
capitalist governments adopting its policy recommendations.
Keynes's influence waned in the 1970s, partly as a result of
problems that began to afflict the Anglo-American economies from the start of
the decade, and partly because of critiques from Milton Friedman and other
economists who were pessimistic about the ability of governments to regulate
the business cycle with fiscal policy. However, the advent of the global
financial crisis in 2007 caused a resurgence in Keynesian thought. Keynesian
economics provided the theoretical underpinning for economic policies
undertaken in response to the crisis by Presidents George W. Bush and Barack
Obama of the United States, Prime Minister Gordon Brown of the United Kingdom,
and other heads of governments.
In 1999, Time magazine included Keynes in their list of the
100 most important and influential people of the 20th century, commenting that:
"His radical idea that governments should spend money they don't have may
have saved capitalism." In addition to being an economist, Keynes was also
a civil servant, a director of the British Eugenics Society, a director of the
Bank of England, a patron of the arts and an art collector, a part of the
Bloomsbury Group of intellectuals, an advisor to several charitable trusts, a
writer, a philosopher,a private investor and a farmer.
Keynes: the return of the master, By Robert Skidelsky
Keynes, By Peter Clarke
REVIEWED BY SEAN O'GRADY
FRIDAY 04 SEPTEMBER 2009 / http://www.independent.co.uk/arts-entertainment/books/reviews/keynes-the-return-of-the-master-by-robert-skidelskybr-keynes-by-peter-clarke-1781177.html
Economics is in a sorry state. The joke used to run that
economists have predicted five of the last two recessions. They lamentably
failed to warn us about this one, the worst slump in three-quarters of a
century. The Queen was hardly alone when she wondered aloud a few months ago,
"Why did no one see it coming?"
In all the instant books, articles, conferences and reports
generated by the crisis there is little answer to that regal query, and no new
framework for thinking about how to rebuild prosperity. The intellectual
colossus who might furnish us with such a gift has not yet emerged. So we turn
again to what he himself would have termed "some defunct economist" -
John Maynard Keynes, who died 63 years ago, at the age of 63.
Events have thrust Keynes back into fashion: "We are
all Keynesians again", you might say. Peter Clarke, former professor of
modern history at Cambridge, where Keynes spent much of his life, and Robert
Skidelsky, author of the definitive life of Keynes, have both come up with
timely accounts of the rise, fall, and rise again of Keynesianism, each
part-profile, part-polemic, and part-exercise in what Clarke calls
""anachronistic ventriloquism" – trying to guess "What
would Keynes do?"
Skidelsky's account of the "return of the master"
is the more technical, Clarke's the more personal, more rooted in Bloomsbury
and Keynes's role "on the extreme left of celestial space". Clarke it
is, for example, who offers up the names Keynes gave to the trade he picked up
round London, all recorded in the great economist's diaries from 1901 to 1915:
"Stable Boy of Park Lane, "Auburn Haired of Marble Arch",
"Lift Boy of Vauxhall" and so on. He later married a ballerina.
Keynes's sexuality remains more difficult to fathom than his economics.
Would Keynes have sensed this financial storm approaching?
Yes, Clarke and Skidelsky agree, because he would have detected the same
weakness in the financial system he saw in the 1920s – an inability to
distinguish between risk and uncertainty. David Viniar, chief financial officer
of Goldman Sachs, said when the money markets froze in autumn 2007, for
example, that his team were witnessing events that, according to their model,
"could occur only every 10-to-the-power-140 years". Goldman Sachs had
thus suffered a once-in-every-fourteen-universes loss, and on several
consecutive days.
The use of ever more incomprehensible investment vehicles
and mathematical models to manage, price and diffuse risk that was in reality
unmanageable brought the financial system to the brink of collapse. The
"mispricing of risk", former US Federal Reserve chair Alan Greenspan
called it - but it wasn't getting the price wrong that was the error, but
trying to set any price on it at all.
Way back in 1937, Keynes explained with typical clarity the
difference between risk and uncertainty. "By 'uncertain' knowledge I do
not mean merely to distinguish what is known for certain from what is merely
probable...the sense in which I am using the term is that in which the prospect
of a European war is uncertain, or the price of copper and the rate of interest
twenty years hence, or the obsolescence of invention, or the position of
private wealth owners in the social system in 1970. About these matters there
is no scientific basis on which to form any calculable probability whatsoever.
We simply do not know".
"We simply do not know" was something seldom heard
from economists and investment bankers in the long boom. They were, and
surprisingly still are, paid handsomely to pretend that they do know, despite
much evidence to the contrary. That conflict of interest remains unchecked.
Just as he did when he witnessed the insanity of trying to
make Germany pay for the Great War in 1919, Britain returning to the Gold
Standard in 1925, or the disastrous attempts by governments to balance their
budgets in the crises of 1929 -1930, Keynes would have done everything to warn
of the dangers of the credit bubble. He would be writing prolifically, but also
blogging, twittering and getting on the telly, like Vince Cable, but with more
global clout. Keynes would also have recognised, as others have recently, that
America's vast trade deficit with China – and the debts it has created -
represents a looming threat to global prosperity, even peace, just as
international debts created so many tensions in the 1930s.
But what Keynes might be able to tell us, as no one can now,
is how we get ourselves out of this bind, even as the West's governments adopt
his prescriptions to spend their way out of recession, piling their debts even
higher. As Skidelsky says: "The stimulus packages now being implemented
may restore the world economy to its previous rickety condition, but they will
do nothing to address the structural imbalance... Indeed they will aggravate
it, since the stimulus will replace private debt by public debt, without
creating new resources to finance it".
One contemporary wrote this about Keynes at the Bretton
Woods conference in 1944: "Keynes must be one of the most remarkable men
that ever lived – the quick logic, the birdlike swoop of intuition, the vivid
fancy, the wide vision, all combine to make something more several degrees
beyond the limit of ordinary human achievement... The Americans sat entranced
as the god-like visitor sang and the golden light played round".
Despite their best efforts, neither of Keynes's vicars on
earth is quite able to recreate that golden light. We will remain in the
economic darkness for a while longer.
Sean O'Grady is economics editor of 'The Independent'
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