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A thinker for our times

Global leaders are once again reminding themselves of the insights of the Cambridge academic who hel

John Maynard Keynes has been restored to life. Rusty Keynesian tools – larger budget deficits, tax cuts, accelerated spending programmes and other “economic stimuli” – have been brought back into use the world over to cut off the slide into depression. And they will do the job, if not next year, the year after. But the first Keynesian revolution was not about a rescue operation. Its purpose was to explain how shipwreck might occur; in short, to provide a theoretical basis for better navigation and for steering in seas that were bound to be choppy. Yet, even while the rescue operation is going on, we need to look critically at the economic theory that takes his name.

In his great work The General Theory of Employment, In terest and Money, written during the Great Depression of the 1930s, Keynes said of his ideas that they were "extremely simple, and should be obvious". Market economies were in herently volatile, owing to un certainty about future events being inescapable. Booms were liable to lead to catastrophic collapses followed by long periods of stagnation. Governments had a vital role to play in stabilising market economies. If they did not, the undoubted benefit of markets would be lost and political space would open up for extremists who would offer to solve economic problems by abolishing both markets and liberty. This, in a nutshell, was the Keynesian "political economy".

These ideas were a challenge to the dominant economic models of the day which held that, in the absence of noxious government interference, market economies were naturally stable at full employment. Trading in all markets would always take place at the "right" prices – prices that would "clear the market". This being so, booms and slumps, and prolonged unemployment, could not be generated by the market system itself. If they did happen, it was due to "external shocks". There were many attempts to explain the Great Depression of the 1930s along these lines – as a result of the dislocations of the First World War, of the growth of trade union power to prevent wages falling, and so on. But Keynes rightly regarded such explanations as self-serving. The Great Depression started in the United States, not in war-torn Europe, and in the most lightly regulated, most self-contained, and least unionised, market economy of the world. What were the "external shocks" that caused the Dow Jones Index to fall from 1,000 to 40 between 1929 and 1932, American output to drop by 20 per cent and unemployment to rise to 25 million?

He set out to save capitalism, a system he did not much admire, because he thought it the best hope for the future of civilisation

We can ask exactly the same question today as the world economy slides downwards. The present economic crisis has been generated by a banking system that had been extensively deregulated and in a flexible, largely non-unionised, economy. Indeed, the American capitalism of the past 15 years strongly resembles the capitalism of the 1920s in general character. To Keynes, it seemed obvious that large instabilities were inherent in market processes themselves.


John Maynard Keynes was a product of Cambridge civilisation at its most fertile. He was born in 1883 into an academic family, and his circle included not just the most famous philosophers of the day – G E Moore, Bertrand Russell and Ludwig Wittgenstein – but also that exotic offshoot of Cambridge, the Bloomsbury Group, a commune of writers and painters with whom he formed his closest friendships. Keynes was caught up in the intellectual ferment and sexual awakening that marked the passage from Victorian to Edwardian England. At the same time, he had a highly practical bent: he was a supreme example of what Alasdair MacIntyre calls “the aesthete manager”, who partitions his life between the pleasures of the mind and the senses and the management of public affairs. After the First World War, Keynes set out to save a capitalist system he did not particularly admire. He did so because he thought it was the best guarantor of the possibility of civilisation. But he was always quite clear that the pursuit of wealth was a means, not an end. He did not much admire economics, either, hoping that some day economists would become as useful as dentists.

All of this made him, as his wife put it, "more than an economist". In fact, he was the most brilliant non-economist who ever applied himself to the study of economics. In this lay both his greatness and his vulnerability. He imposed himself on his profession by a series of profound insights into human behaviour which fitted the turbulence of his times. But these were never – could never be – properly integrated into the core of his discipline, which spewed them out as soon as it conveniently could. He died of heart failure in 1946, having worked himself to death in the service of his country.

The economic theory of Keynes's day, which precluded boom-bust sequences, seemed patently contrary to experience, yet its foundations were so deep-dug, its defences so secure, its reasoning so compelling, that it took Keynes three big books – including a two-volume Treatise on Money – to see how it might be cracked. His attempt to do so was the most heroic intellectual enterprise of the 20th century. It was nothing less than the attempt to overturn the dominant economic paradigm dating from Adam Smith and David Ricardo.

He finally said what he wanted to say in the preface to The General Theory: "A monetary economy, we shall find, is one in which changing views about the future are capable of in fluencing the quantity of employment and not merely its direction." In that pregnant sentence is the whole of the Keynesian revolution.

Keynes's understanding about how economies work was rooted in his theory of knowledge. The future was unknowable: so disaster was always possible. Keynes did not believe that the future was wholly unknowable. Not only can we calculate the probability of winning the Lottery, but we can forecast with tolerable accuracy the price movements of consumer goods over a short period. Yet we "simply do not know" what the price of oil will be in ten, or even five, years' time. Investments which promised returns "at a comparatively distant, and sometimes an indefinitely distant, date" were acts of faith, gambles on the unknown. And in that fact lay the possibility of huge mistakes.

Classical economists could not deny the possibility of unpredictable events. Inventions are by their nature unpredictable, especially as to timing, and many business cycle theorists saw them as generating boom-bust cycles. But mainstream economics, nevertheless, "abstracted" from such disturbances. The technique by which it did so is fascinatingly brought out in an argument about economic method between two 19th-century economists, which Keynes cited as a fork in the road. In 1817, Ricardo wrote to his friend Thomas Malthus: "It appears to me that one great cause of our differences . . . is that you have always in your mind the immediate and temporary effects of particular changes, whereas I put these immediate and temporary effects quite aside, and fix my whole attention on the permanent state of things which will result from them."

To this, Malthus replied: "I certainly am disposed to refer frequently to things as they are, as the only way of making one's writing practically useful to society . . . Besides I really do think that the progress of society consists of irregular movements, and that to omit the consideration of causes which for eight or ten years will give a great stimulus to production and population or a great check to them is to omit the causes of the wealth and poverty of nations . . ."

Keynes sided with Malthus. He regarded the timeless equilibrium method pioneered by Ricardo as the great wrong turning in economics. It was surely the Ricardo-Malthus exchange he had in mind when writing his best-known aphorism: "But this long run is a misleading guide to affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

Ricardo may have thought of the "long run" as the length of time it took storms to disperse. But under the influence of mathematics, economists abandoned the notion of time itself, and therefore of the distinction between the long run and the short run. By Keynes's time, "risks", as he put it, "were supposed to be capable of an exact actuarial computation". If all risks could be measured they could be known in advance. So the future could be reduced to the same epistemological status as the present. Prices would always reflect objective probabilities. This amounted to saying that unregulated market economies would generally be extremely stable. Only very clever people, equipped with adequate mathematics, could believe in anything quite so absurd. Under the influence of this theory, governments withdrew from active management and regulation of economic life: it was the age of laissez-faire.

Keynes commented: "The extraordinary achievement of the classical theory was to overcome the beliefs of the 'natural man' and, at the same time, to be wrong." It was wrong because it "attempts to apply highly precise and mathematical methods to material which is itself much too vague to support such treatment".

Keynes did not believe that "natural man" was irrational. The question he asked was: how do we, as rational investors, behave when we – unlike economists – know that the future is uncertain, or, in economist-speak, know that we are "informationally deprived"? His answer was that we adopt certain "conventions": we assume that the future will be more like the past than experience would justify, that existing opinion as expressed in current prices correctly sums up future prospects, and we copy what everyone else is doing. (As he once put it: "Bankers prefer to be ruined in a conventional way.") But any view of the future based on "so flimsy a foundation" is liable to "sudden and violent changes" when the news changes. "The practice of calmness and immobility, of certainty and security suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct . . . the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning yet in a sense legitimate where no solid basis exists for a reasonable calculation."


But what is rational for individuals is catastrophic for the economy. Subnormal activity is possible because, in times of crisis, money carries a liquidity premium. This increased "propensity to hoard" is decisive in preventing a quick enough fall in interest rates. The mainstream economics of Keynes's day viewed the interest rate (more accurately, the structure of interest rates) as the price that balances the overall supply of saving with the demand for investment. If the desire to save more went up, interest rates would automatically fall; if the desire to save fell, they would rise. This continual balancing act was what made the market economy self-adjusting. Keynes, on the other hand, saw the interest rate as the "premium" for parting with money. Pessimistic views of the future would raise the price for parting with money, even though the supply of saving was increasing and the demand for investment was falling. Keynes's "liquidity preference theory of the rate of interest" was the main reason he gave for his claim that market economies were not automatically self-correcting. Uncertainty was what ruined the classical scheme.

The same uncertainty made monetary policy a dubious agent of recovery. Even a "cheap money" policy by the central bank might not be enough to halt the slide into depression if the public's desire to hoard money was going up at the same time. Even if you provide the water, you can't force a horse to drink. This was Keynes's main argument for the use of fiscal policy to fight a depression. There is only one sure way to get an increase in spending in the face of falling confidence and that is for the government to spend the money itself.

This, in essence, was the Keynesian revolution. Keynesian economics dominated policymaking in the 25 years or so after the Second World War. The free-market ideologists gave this period such a bad press, that we forget how successful it was. Even slow-growing Britain chugged along at between 2 and 3 per cent per capita income growth from 1950-73 without serious interruptions, and the rest of the world, developed and developing, grew quite a bit faster. But an intellectual/ideological rebellion against Keynesian economics was gathering force. It finally got its chance to restore economics to its old tramlines with the rise of inflation from the late 1960s onwards – something which had less to do with Keynesian policy than with the Vietnam War. The truth was that "scientific" economics could not live with the idea of an unpredictable world. So, rather than admit that it could not be a "hard" science like physics, it set out to abolish uncertainty.

The "new" classical economists hit on a weak spot in Keynesian theory. The view that a large part of the future was unknowable seemed to leave out learning from experience or making efficient use of available information. Rational agents went on making the same mistakes. It seemed more reasonable to assume that recurrent events would initiate a learning process, causing agents to be less often surprised by events. This would make economies more stable.

The attack on Keynes's "uncertain" expectations developed from the 1960s onwards, from the "adaptive" expectations of Milton Friedman to the "rational" expectations of Robert Lucas and others. The development of Bayesian statistics and Bayesian decision-theory suggested that agents can always be modelled as having prior probability distributions over events – distributions that are updated by evidence.


Today, the idea of radical uncertainty, though ardently championed by “post-Keynesians” such as Paul Davidson, has little currency in mainstream economics; however, it is supported by financiers of an intellectual bent such as George Soros. As a result, uncertainty once more became “risk”, and risk can always be managed, measured, hedged and spread. This underlies the “efficient market hypothesis” – the idea that all share options can be correctly priced. Its acceptance explains the explosion of leveraged finance since the 1980s. The efficient market hypothesis has a further implication. If the market always prices financial assets correctly, the “real” economy – the one involved in the production of goods and non-financial services – will be as stable as the financial sector. Keynes’s idea that “changing views about the future are capable of influencing the quantity of employment” became a discarded heresy.

And yet the questions remain. Is the present crisis a once-in-a-lifetime event, against which it would be as absurd to guard as an earthquake, or is it an ever-present possibility? Do large "surprises" get instantly diffused through the price system or do their effects linger on like toxic waste, preventing full recovery? There are also questions about the present system that Keynes hardly considered. For instance: are some structures of the economy more conducive to macroeconomic stability than others?

This is the terrain of Karl Marx and the underconsump tionist theorists. There is a long tradition, recently revived, which argues that the more unequal the distribution of income, the more unstable an economy will be. Certainly globalisation has shifted GDP shares from wages to profits. In the underconsumptionist tradition, this leads to overinvestment. The explosion of debt finance can be interpreted as a way of postponing the "crisis of realisation".

Keynes did not have a complete answer to the problems we are facing once again. But, like all great thinkers, he leaves us with ideas which compel us to rethink our situation. In the long run, he deserves to ride again.

Lord Skidelsky is the author of "John Maynard Keynes" (three volumes), published in hardback by Macmillan

This article first appeared in the 22 December 2008 issue of the New Statesman, Christmas and New Year special

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Why Tehran hates Isis: how religious rifts are fueling conflict

Above all, the Islamic republic wants stability – and to fight back against a group that despises Shia Muslims.

The alliance between Iran and Syria might seem an unlikely one. As Iran is an Islamic republic, one might not expect its closest ally to be a dictatorship that grew out of the political doctrine of Baathism, a secular Arab nationalist movement that originated in the 1930s and 1940s. But politics – and perhaps especially the politics of relations between states – develops its own logic, which often has little to do with ideology. Baathism advocated Arab unity but two of its founding fathers, Michel Aflaq and Zaki al-Arsuzi, both Syrians, disliked each other and would not be members of
the same party.

Projects to fuse Syria and Egypt and, later, Syria and Iraq foundered, creating in the latter case a personal bitterness between Bashar al-Assad’s father, Hafez, and Saddam Hussein, though both were Baathists, at least nominally. That led to the two states breaking off diplomatic relations with each other at the end of 1979. When Iraq invaded Iran the following year, Syria and Iran became allies against Iraq. Syria cut off an oil pipeline that had allowed Iraq to export its oil from a Mediterranean port and Iran supplied Syria with cheap oil.

Iran and Syria had other things in common, including resistance to the US in the region, opposition to Israel and a supportive relationship with the Shia Muslims of Lebanon, which led to the creation, with Iranian help, of Hezbollah after the Israeli invasion of Lebanon in 1982. Since then, Syria has been of value to Iran as a reliable ally but also as a bridge to Hezbollah.

How does all that affect the present desperate situation in Syria and in the Middle East more widely? The first point to deal with is Iran’s position towards Islamic State, or Isis. Some commentators would have you believe that Iran and Isis, as so-called Muslim fundamentalists or Islamists, have something in common, or that Iran’s Islamic Revolution had something to do with the origins of Islamic State.

That is wholly misleading. The extreme Wahhabi/Salafi form of Sunni Islam that underpins Islamic State regards Shia Iranians – and, indeed, all Shia Muslims – as heretics and apostates. This hostility is not somehow theoretical or theologically abstract: it is visceral, bitter and deep. It inspires frequent suicide bombings of Shia mosques and other targets in Iraq, Pakistan, Afghanistan and (more recently) Saudi Arabia. It is a major threat to Iran and to all Shia Muslims – a greater threat to them than the Isis threat to us, because they are geographically closer. The Iranians are supporting the fight against Isis in Syria and Iraq in self-defence and supporting the self-defence of those they are sympathetic to in those countries (the Iranians back the Alawite Assads in Syria because of their long-standing alliance but also for sectarian reasons). They are not acting, as the Saudis and some other Gulf Arabs would have us believe, because they have hegemonic ambitions in the region. That view arises from the insecurity and paranoia of the ruling elites in those states and their dislike of Shia Muslims.

The Iranian regime has many faults. We may deplore the repressive policies of the regime internally, its treatment of women and the unacceptably high level of executions there. But on most of those points, there are others in the region that are worse; and in our thinking about what to do in Syria, Iraq and the region more widely, we have to consider Iran’s record as a force for stability or instability. In both Iraq and Afghanistan, the Iranians helped to establish the proto-democratic governments we backed and, like us, have consistently supported them since, despite their weaknesses and failings. With the exception of its policy towards Israel, Iran has acted to favour stability elsewhere in the region, too. (Recent reports suggest that the Iranians have stopped funding Hamas.) Considering the actions of the Saudis towards Shias in Bahrain and Yemen, the Iranians have responded with restraint.

Iran’s acceptance of greater Russian involvement in Syria has to be seen in the context of the wider instability in the Middle East. Again, we should not misjudge it. It seems that the latest, more intensive Russian intervention came at a point when the Assad regime was coming close to collapse. The Iranians were therefore bound to welcome the intervention; but the history of relations between Iran and Russia is not a happy one and a greater Russian military presence in the Iranians’ near abroad must be making some of them uneasy. When Russian ships launched cruise missiles from the Caspian Sea that tracked across Iranian territory on their way to targets in Syria (announcing at the time that this territory was “unoccupied”), “uneasy” was probably an inadequate word.

After the settlement of the Iranian nuclear question in July (when Iran agreed to limit its nuclear programme in return for the lifting of economic sanctions), hopes for further immediate co-operation between Iran and the West have been disappointed – in particular by the apparent ban of the supreme leader, Ali Khamenei, on bilateral discussions with the US. Nonetheless, there have been discussions, notably in the margins of the recent multilateral talks on Syria.

Just as there was opposition to the nuclear deal within the US, there was strong opposition in Iran. Khamenei’s ban is best understood as reassurance to those hardliners that, apart from the nuclear deal, it will be business as usual.

The nuclear deal is a major event in Iran’s foreign policy but if the Iranians are cautious in developing their relationship with the West, that may be no bad thing. The multi­lateral talks on Syria could be a good place for that to begin – those talks are, in any case, the best hope available for a solution to the carnage in that country. There are models for that in what was done recently in Somalia; one fruitful avenue to explore for the Middle East as a whole could be a multi­lateral negotiation culminating in a treaty guaranteed by outside powers, along the lines of the Westphalia Treaty that brought the Thirty Years War to an end in Germany in the mid-17th century.

Lurking in the background to all this, however, and behind the shocking massacres in Paris on 13 November, is our queasy position towards Isis and the troubles of the Middle East. Some Iranians believe that western countries secretly support Isis. That is wrong, of course – it is a view based on conspiracy theories and misleading propaganda – but not as wrong as we might like to think.

Since 1979, when the Saudi royal family got a scare from religious radicals briefly occupying the sacred precincts in Mecca, it has appeased extreme Wahhabi clergy within Saudi Arabia and has supported the application of their doctrines within and without the country. Outside Saudi Arabia, it has funded mosques preaching Wahhabism throughout the Islamic world, to the point that their brand of Sunni Islam is now becoming dominant in many communities where previously it was quite alien, symbolised by the practice of those British Pakistanis who have begun to adopt dress codes from the Arabian Peninsula, such as the wearing of the niqab.

Al-Qaeda, Isis and their sympathisers are the result of those 30 years of preaching hatred (along with other contributory factors such as the collapse into civil war in countries such as Iraq and Syria and the alienation of young men of immigrant origin in western countries). Isis does no more than put into practice the doctrines of puritanical intolerance advocated by Saudi Wahhabism. Our too-uncritical support for Saudi Arabia puts us in a shameful position.

The debate over whether or not to send RAF warplanes to bomb Isis positions in Syria is secondary to the need for the bombing to be done in close, effective support of ground forces. We may have to swallow our misgivings and accept that we bomb in support of Iran’s troops, or Assad’s, in addition to those of the Kurds or others.

We also urgently need to re-examine our relations with the Saudis and the other Gulf Arab States that have supported and encouraged the spread of extreme Wahhabism. The Saudis have belatedly realised that Isis is as much a threat to them as to everyone else (it may actually be more of a threat to Saudi Arabia because the jihadis’ dearest wish is to establish their caliphate in Mecca and Medina).

Yet that is not enough. We need to make clear that our continued friendship towards the Saudis cannot simply be bought with the weapons we sell them but has to be conditional upon taking a more responsible attitude in their religious policies – not so much for human rights reasons, as Jeremy Corbyn and others have suggested (although those reasons have their place) but for our security and for the stability of the Middle East region.

If that preaching of hatred is not stopped – as the preaching of the Catholic Counter-Reformation eventually came to an end – then even if we, the Iranians, Russians and others succeed in defeating Isis, we will only find ourselves confronted in a few years by yet another generation of murderous jihadis, recruiting from another bunch of foolish, ignorant and disaffected young men, just as Isis followed on from al-Qaeda

Michael Axworthy is senior lecturer at the Institute of Arab and Islamic Studies at the University of Exeter and the author of “Revolutionary Iran”

This article first appeared in the 26 November 2015 issue of the New Statesman, Terror vs the State