The crash of 2008 shattered intellectual assumptions as well as financial institutions. Rational expectations theory and some of its spin-offs - such as the efficient markets hypothesis, which suggests that markets are able to calculate and price all risks - did not fare well. The financial meltdown did not belong to its universe. The crash brought a reminder of the volatility and fragility of capitalist economies, and an end to hopes that booms no longer culminated in busts. For a few days in September 2008, the financial authorities faced the possibility of a complete breakdown of the banking system and the onset of a new Great Depression. This was averted, but only narrowly, and with consequences whose full effects will unfold over the next few years. The economic situation has been stabilised and growth has begun to revive, but the economic outlook remains uncertain, and full recovery is likely to be long and painful.
This sudden eruption of economic and political uncertainty has made Keynes popular once more. We are all Keynesians again, it seems. He may no longer be taught on economics courses, and many economics students may not even know who he is, but in the wider political culture he is still a potent memory. He has been credited with rescuing capitalism once before, so it is not surprising that he should be back on the front page of Time, and spoken of approvingly even in the Wall Street Journal and the Economist. Keynes developed his economic theories in response to the 1930s slump and was not short of ideas about what governments should do. A barbed comment at the time was that if there were five economists in a room, there would be six conflicting opinions, and two of them would be held by Keynes. But at least he had opinions. There has been much unfavourable comment on how little the contemporary economics profession has had to say about this new crisis. The events of the real economy have long since ceased to interest most economists. There are some exceptions, such as Paul Krugman and Joseph Stiglitz, but most of the perceptive writing on the crisis has come from financial journalists and historians.
Keynes is back, but does he really have anything to tell us about the present crisis? Robert Skidelsky and Peter Clarke, authors of important studies of Keynes, think he does. A few years ago, neither could have foreseen that there would be renewed demand for books on Keynes, who was beginning to seem very distant from current concerns. Last September changed all that. Keynes's stock has risen as fast as the markets have fallen. Their two books are rather different. Skidelsky has written a wide-ranging account of Keynes and Keynesianism in the context of development of policy and economics; Clarke focuses more on analysing how Keynes constructed his main arguments in the 1920s and 1930s.
Both books are excellent in bringing out what was distinctive about Keynes's approach to economics and policy. Take, for instance, his insight that deep slumps are always possible in an economy in which the state plays a passive role and leaves the market to regulate itself. Instability is an intrinsic feature of capitalism, and it makes economic agents fearful of the future and disinclined to take risks. The greater the role of finance in the modern economy, the more unstable the economy is likely to be, and a key role of the state is, therefore, to find ways to build trust by creating greater stability. Keynes did not advocate a single policy valid for all times and all circumstances, such as deficit financing. Given the uncertainty inherent in economic affairs, governments had always to be prepared to experiment to find the best ways to stabilise the economy in the circumstances that they faced. They had to avoid the kind of inflexible principles that ruled out sensible experiments. Clarke reproduces a Treasurycopy of the 1929 pamphlet that Keynes co-wrote with Lloyd George, Hubert Henderson and Seebohm Rowntree, We Can Conquer Unemployment. Scrawled over the cover by some unknown Treasury official are the words "Extravagance", "Inflation" and "Bankruptcy".
For Skidelsky, the crash vindicates Keynes. He argues that the root cause of the present crisis is the intellectual failure of economics, and he develops a powerful polemic against it as a discipline. This represents a paradox for those who admire Keynes, as both Skidelsky and Clarke so evidently do. Clarke calls him the greatest economist of the 20th century; for Skidelsky he is simply the "Master". Yet in the end they acknowledge that, despite his brilliance, he did not change economics.
The Keynesian Revolution was not a Copernican moment. After an interval, the orthodoxies reasserted themselves in new form, Keynes was forgotten and his main insights, particularly the emphasis on uncertainty, were discarded. Even the New Keynesians, Skidelsky argues, have accepted the same theoretical assumptions as the new classical economists of the Chicago School. Economics has become barren as a result, obsessed with mathematical modelling and increasingly divorced from any real understanding of the modern world, the conflation of risk and uncertainty imparting to its analyses a spurious precision. Its models were adopted by financial institutions in order to estimate risk, with catastrophic consequences.
Skidelsky comforts himself with the thought that the ideas which survive are those that answer to what is universal in human nature and experience, and not just to the interests of particular groups. However, he is not confident that the crash will shake the confidence of economists in their models. He puts forward ideas for a much broader future economics syllabus in universities, but there is little prospect they will be adopted.Economics is too entrenched as a practical and intellectual discourse for that to happen. Neoliberalism has been partly discredited, but there is no alternative paradigm as yet and no new Keynes to propose one. In both Britain and the United States, there is a strong urge to close ranks after the crash, and to limit change as far as possible. Keynes still has some convincing to do.
There is a deeper point here, one brought out very well by Clarke. He examines how Keynes was able to exert influence over his contemporaries and achieve (like Winston Churchill) an authority during the Second World War and its aftermath that had eluded him up to then. Earlier, Keynes had been regarded as clever but was also widely distrusted. For example, in 1930, at the Macmillan committee, there was a critical exchange between Keynes and one of the senior Treasury civil servants, Richard Hopkins. Hopkins's main objection to Keynes was that he was excessively prone to thinking theoretically, deriving policy from abstract theory, rather than thinking politically and deriving policy from genuine practical reasoning that took account of all the relevant circumstances.
Many of Keynes's fellow economists, particularly Joseph Schumpeter and Friedrich Hayek, considered him the ultimate pragmatist, always ready to sacrifice theory to practical concerns. However, to those actually immersed in practical concerns, like Hopkins, Keynes was still too abstract, and this often made his judgement of practical realities unreliable. For all his devotion to practice, he still hoped to provide a rational set of principles on which policy could be based. He came closer to it than anyone else, perhaps, but ultimately he failed.
After his death, Keynesianism as a policy degenerated into a new orthodoxy that would eventually founder in the stagflation of the 1970s. Economics as a discipline moved away from Keynes's General Theory and his bold concept of uncertainty, renewing its pursuit of abstract theory and mathematical models and purging itself of contact with the real world. The political ascendancy of neoliberalism in the 1980s re-established belief in the capitalist economy as a self-balancing mechanism, which produces best results when a state limited in scale and scope upholds the institutions of the market order. Keynes, on the other hand, had argued that the state must intervene to promote stability and social justice if capitalism was to be at all tolerable. Both of these books are very valuable for reminding us of Keynes's towering contribution as a political economist, the breadth of his interests and the subtlety of his thought. But the political conditions for a real return of Keynes still seem quite distant.
Keynes: the Return of the Master
Allen Lane, 214pp, £20
Keynes: the 20th Century's Most Influential Economist
Bloomsbury, 211pp, £16.99
Andrew Gamble is professor of politics at the University of Cambridge. His latest book is “The Spectre at the Feast: Capitalist Crisis and the Politics of Recession" (Palgrave Macmillan, £14.99 paperback)