10 of 10 people found the following review helpful:
5.0 out of 5 stars
The Return of Keynesian Economics, 21 Feb 2011
Given that macroeconomists have been thinking about the world's economy since the late eighteenth century, an impartial observer could be forgiven for assuming that the field had reached some kind of a consensus in over 200 years.
They couldn't be more wrong.
The twentieth century saw a great tug-of-war between two separate schools of thought. In the blue corner, stand the economists who see the economy as a well oiled machine, instantly responding to exogenous shocks by reaching a new satisfactory equilibrium -- the classical economists and their latter day equivalent, the rational expectations crowd and real business cycle theorists.
In the red corner, stand Keynes and his myriad followers. When puzzling over the Great Depression, Keynes created a new model of macroeconomics: which stressed the imperfections and frictions in the economic machine that could keep the economy in an unsatisfactory rut for years. These frictions allowed for a role for government: to expand the money supply, cut taxes, and increase spending in the face of recession. Much of this has become modern-day common sense policy, but he was opposed by President Hoover in the U.S., and the British Treasury who insisted that a balanced government budget laid the best foundations for growth.
Sounds familiar?
Robert Skidelsky traces out this theoretical tug-of-war, and explains how the current crisis calls for, "Keynes: The Return of the Master". He also explains how this war was an overtly political one. The modern day economists who wanted to overturn Keynes were mostly conservatives with an innate distrust of government. The modern day neo-Keynesians, such as Nobel prize winners George Akerlof and Joseph Stiglitz, are largely liberals, who emphasise that markets have imperfections and failures as well as governments.
This short book is all about Keynes's ideas, and their enduring relevance in the 21st century. For a biography of Keynes the man, try Peter Clarke - Keynes.
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23 of 25 people found the following review helpful:
4.0 out of 5 stars
Restore Keynes but apply his toolkit more specifically, 16 Nov 2010
Robert Skidelsky is right : we need to restore Keynesian economics to the current debate. Lord Skidelsky has contributed immensely with his monumental three volume biography of Keynes (`Hopes Betrayed', `The Economist as Saviour', and `Fighting for Freedom'). In this shorter book he summarises aspects of Keynes' economic theory. He attacks neo-classical economic theory's assumptions of rational expectations, real business cycle theory, and efficient market theory. He highlights inescapable, irreducible uncertainty as the key Keynesian diagnostic of economic behaviour, leading to Keynes' theory of `Liquidity Preference' whereby actors hold money to allay uncertainty, and thus reduce effective demand, leading to macroeconomic recession. He correctly points out that philosophically this diagnostic of irreducible uncertainty challenges the established Newtonian paradigm.
But more importantly he argues the practical superiority of Keynes over monetarist economics. As an economic historian, Skidelsky does this in his core chapter 5 by seeking to demonstrate that the global economy performed better under the Keynesian Bretton Woods period of 1951 to 1973, than under the monetarist free market `Washington Consensus' which replaced it. At this point Skidelsky's admitted lack of economic training and of the mathematical skills he too easily derides weakens his point. He interprets the graph on page 117 of world real GDP growth as two points of high average growth under Bretton Woods and low average growth under the Washington Consensus. A visual and econometric best line fit of this data would show a growth line declining from 1960 to 1985 and then rising, which would undermine this particular aspect of Skidelsky's argument.
He emphasises liquidity preference theory which may have addressed the 1930s depression, but does not figure in explaining the current recession, where, on the contrary, households are high in debt rather than in savings. He misses Hicks' `false trading' interpretation of Keynes, whereby actors seeking a market clearing price trade experimentally at other prices, leaving some actors short of market clearing income. He relies to some degree of Leijonhufvud's information failure exposition of Keynes but does not expound this fully.
The main conclusion should be that it is Keynes' tool kit, rather than any specific Keynesian policy which needs restoring. Keynesian methodology would be to apply the tool kit differentially to specific situations. Three core Keynesian ideas of relevance today are i) the need for effective demand in the economy to purchase full employment output ii) the realisation that wages are not just a cost of production but also a major component of this demand iii) the definition of money as a virtual artefact, which can be created and destroyed and does not need to be balanced.
Skidelsky traces the current recession in standard terms. US banks made excessive house purchase loans to households unable to repay. This drove an asset bubble which burst when the mortgage backed derivatives were traded in a nervous unregulated market. But the best interpretation of the current recession, using the Keynesian toolkit, is that advanced by Thomas Palley in an article Skidelsky quotes briefly on page 178. Palley's argument in his `America's Exhausted Paradigm : Macroeconomic Causes of the Financial Crisis and Great Recession' is that real wages have failed to keep pace with productivity, leading to deficient consumer demand, a gap which has been made up by consumer credit which then becomes un-repayable. Palley's policy solution is to raise real wages. I agree with Palley's analysis, but suggest that advancing technology makes a reduced wage component of GDP inevitable, so that a citizen's income is the only workable solution.
Skidelsky ends by calling for a wider university macroeconomics programme to include history and philosophy. Agreed, but the Oxford PPE degree supposedly already offers this, and half the UK cabinet, including the Prime Minister, have taken this degree, without apparently realising the Keynesian diagnostic?
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4 of 4 people found the following review helpful:
4.0 out of 5 stars
Great book, shame about the proofreading!, 18 Aug 2011
This is a fabulous and incredibly concise introduction to Keynes, a great primer for several schools of economics, and a pithy analysis of the economic troubles we find ourselves in. It would easily be a 5-star review if it weren't for the fact that my paperback edition is littered with typos, mis-spellings and some sentences which don't even make any sense. Sort it out Penguin!
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