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Keynes: The Return of the Master
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on 4 December 2017
How governments should regulate the markets is fundamental to stabilize economics.
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on 16 November 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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TOP 500 REVIEWERon 4 October 2011
Think of the current recession as the mother of all hangovers. The World economy has been partying insanely for the best part of a decade - busily borrowing, spending, investing and speculating without real regard to what economists like to call 'the fundamentals'. In other words by failing to address the risk attached to a given activity in relation to a possible return; institutions and individuals have spent money to no good purpose whilst at the same time racking up huge debts. Hence the big headache the morning after the debauchery the night before.

So, governments, businesses and me if not you, have been binging on cheap credit. Eventually, the party has to stop when the money runs out. The waiter of doom presents his bill. Governments who have run big budget deficits have racked up massive interest charges on loans face huge problems as do the citizens in their care. Governments like Greece are faced with debt default, firing civil servants, begging from the European Central Bank or World Bank, cutting back on services and raising taxes. Their citizens are faced with higher unemployment, wage cuts, inflation and failing public services. Businesses find profit margins squeezed reduced sales revenues and rising input costs. It's a big mess and possibly it's going to get messier before much longer. But what to do about it?

After a period of heavy indulgence its fairly normal for the patient to go on a diet - lose a bit of weight and generally reform previous bad behaviour, at least for a while, until normal vigour is restored. 'Keynes -Return of the Master' is a detailed analysis of why the market cannot be left to itself to clear the debris up the morning after the economics party is over.

Markets according to 'libertarian' economists function well, providing they are left alone by government. Unemployment high? -wage rates fall, employers take on more staff-end of problem. Over supply of goods and services? -prices fall, demand picks up-no problem. In other words markets will adjust and eventually confidence, investment and spending power will return to the market and all will be well. Keynes saw things differently. The market can and will fail. In fact the natural state of the market is not full employment and full use of resources. In fact markets have pronounced weaknesses. Prices and wages are 'sticky downwards'. The herd mentality of investors, consumers and businesses mean that they will not act 'rationally' - that's why 'asset bubbles' form. Worse still, no one can be certain of the future. This is fundamental. If you can't predict the future then you can't put a price on risk. If you could, interest rates would have been a lot higher in the USA and Europe a lot sooner and the easy credit to the Sub- Prime market would never have happened. Keynes was arguing for governments to provide the missing spending power that occurs during recessions in order restore markets, create employment and prosperity. Keynes was not a socialist- he was however a moralist. For him, one of the purposes of economic management was to create wealth, opportunity and well being but not just for the elite but for all citizens.

This is highly readable account of the age old Monetarist v Keynesian debate. There is some technical matter to attend to but not enough to cause indigestion to the non- specialist. It's also a biography. Keynes was definably what used to be called a 'man of parts'. For he was a brilliant author and debater, a key government adviser from the end of the First World War onwards, a hugely successful (on occasion) investor as well an original thinker of almost unparalleled depth and breadth. He may not be currently fashionable, but his influence is every where and given the depth of problems that Western economies are facing right now, it may not be long before his name is again centre stage for policy makers.

The aspiring economist will gain from this book is the chance to enter the debate: Is changes in money supply more important than changes in savings and investment stimulating growth, Should governments spend and tax to adjust for cyclical changes in the economy- if so does this imply that economists should accept a moral responsibility to 'price in' the effects on society of policy changes? Does the emphasis on mathematical analysis in Economics ignore the stumbling block that is 'uncertainty' in assessing risk? Economics invites discussion, opinion and dispute. Read this book and get stuck into some fascinating issues

Question: If Keynesian economics was so 'useful' why did people like Margaret Thatcher and Ronald Regan drop it for the 'Free Market' approach?

Topics covered: Great Depression, current economic situation: causes, effects and policy strategy. Looks in detail at the strengths flaws in the Monetarist /Free Market models in comparison to Keynesian analysis and policy prescriptions. Also an in-depth examination of Keynes view of markets suggesting that governments need to regulate 'Animal Spirits' and be ready to step in when the economy starts to get out of kilter. Also interesting there is an interesting study of Keynes views on Ethics and Economics with reference to G.E Moore which may be useful many Philosophy students.

Type of Read: Appropriate adjectives: Enjoyable, challenging and rigorous. The author has the happy knack of presenting complex arguments in a clear and absorbing fashion, no attempt at 'dumbing down' here. Students of Politics, Economics and History would find 'The Return of the Master' a compelling read. Even if you think you `know' Keynes', be prepared to have your understanding enriched. Recommended? You bet
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TOP 500 REVIEWERon 14 April 2010
This provides some thought-provoking perspectives on, for instance, the collapsed credibility of the discipline of economics which failed to foresee the recent financial crisis- Skidelsky attributes this to a narrow focus on mathematics rather than the broader ethical, philosophical, historical context within which Keynes operated. This led Keynes to change his mind on the benefits of free trade after experiencing the trauma of the Great Depression. Perhaps wishing to have it all ways, he favoured an international approach to the world of arts which he loved, but came to advocate a measure of protection to encourage countries to manufacture their own goods, even if others could do it more efficiently.

Although this book inspired me to resolve to read a longer and more detailed work on Keynes, it left me feeling a little disappointed. The structure seemed disjointed, as the text switched back and forth in time, with sections written under subheadings in the manner of a text book, but without the systematic approach this normally entails. I was uncertain as to the intended audience. Surely a lay reader with no prior knowledge of Keynes would be confused by the half-explained theory, such as the role of interest rates in equating savings and investment, but not necessarily at the full employment level?

I would have preferred the key points of this book to be presented in a meaty essay, rather than have to tease them out of a somewhat unfocused book.
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on 25 November 2009
If anyone ever 'got' economics it was certainly Keynes, and if anyone 'gets' Keynes it is Skidelsky. Description of The Global Economic Crisis is a bit old-hat by now, so the start of the book drags very, very slightly, but as the critique develops and moves into proper exploration of 'The Master's' ideas in the post-crisis arena - with a good bit of banker-bashing too boot - the book comes into its own.

Not too technical, as has been suggested elsewhere. Indeed, Skidelsky is no mathematician, which is to the great benefit of the readability of his latest work.
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TOP 1000 REVIEWERon 19 March 2013
At the time Robert Skidelsky penned this paean to Keynesian economics and its potential for resolving the prevailing financial crisis, 2010, Labour were still in power and he believed he could see signs of recovery on the horizon. If that's what they were, that's where they remain. On the horizon.

Three years of monetarist policy later, the deficit is growing, the UK has lost its Aaa rating from Moody's, employment is high but wages and productivity are scraping the undersides of the barrel, investment is anaemic, the banks aren't lending and RBS is still a basket case. But Skidelsky cautions against the scapegoating of bankers, the government, and various others, comparing it to pogroms, witch hunts and human sacrifice in the face of harvest failures in years gone by. For starters, he points out, the problem with slamming bankers for lending irresponsibly is that they stop lending altogether.

Skidelsky's verdict on the crash that led to all this is that the powers that be were guilty of a terminal case of groupthink, believing in the sustainability of the boom, trusting in only half-understood systems and market theories of self-correction. The failure, he says, quoting Keynes, was in the "ideas" of economists, some of which he then singles out as particularly misleading if not fully understood, such as rational expectations theory and real business cycle theory which between them led some to believe that "the future was certain, that unemployment was voluntary and that numbers could substitute common sense". But some of the risk models upon which the boom was built had very short memories, factoring in the good times and factoring out the bad.

The problem is, the austerity-based policies now being pursued are based upon the premise of self-correction, whilst what is needed, Skidelsky says, is a stimulus in demand: Paul Krugman has argued for fiscal stimulus based on government spending; monetary policy is riven with uncertainty and in the face of a drought in spending there is insufficient confidence in the market for business investment. Skidelsky takes this argument back to the early 19th century debates between Ricardo and Malthus, in which Ricardo stresses his focus on the long term, with short-term fluctuations effectively noise - things turn out for the good in the end - a position Malthus rejected in practical terms - people live in the here and now, not in the future. Most of us know Keynes's view of the long term.

Overall, Skidelsky's positions are well-argued, and he summarises well some of the main Keynesian principles upon which he bases his arguments, and does the same for some of the neoclassical models with which he takes issue, though sometimes he is quite ruthless in his put-downs, as he does for example with Friedman's theory that workers will voluntarily make themselves unemployed if they think they are being underpaid and wait for a better offer to come along. They don't. Sometimes they sit it out and suffer, sometimes they join a union and go on strike (though not so much nowadays), and sometimes they get a better offer and then they quit. Some of course take a second job, or even a third, and maybe a tiny minority turn to crime. Very few will opt for unemployment as an alternative.

On a few points I would take issue (though very respectfully, of course). The author describes the crash of 2007-8 as a black swan, that is, totally unexpected and unpredictable. As Nouriel Roubini has pointed out, there were plenty of signs things would go and were going wrong. Several years before its error came to fruition, for example, The Economist flagged the perils of HSBC's purchase of a US bank founded on lending to sub-prime customers, based on its low opinion of such businesses. He also makes rather too much, in my opinion, of Keynes's aversion to global trade, a genie which is way too far out of the bottle now. Paul Samuelson, a Keynesian, is on record as describing the principle of comparative advantage (developed by Ricardo, it has to be said) as one of economics' true contributions to social science in helping us understand the benefits of globalisation.

Additionally, he advocates a shift from economics as a glorified branch of maths - like Keynes, apparently, he isn't a fan of econometrics - prompting in me the old joke about there being three kinds of economist, those who can count and those who can't. Instead he suggests combining economics with philosophy and various other subjects. Isn't that called PPE? And isn't that what George Osborne did? I'm currently studying for a Social Sciences with Economics degree, and the economics is very shallow.

Regrettably, whilst the substance of this book is excellent, it has been highly ill-served by the proof-readers. There is throughout a tendency for words to go missing, for letters to go missing from words, and for punctuation to go awry, such as quotations being closed without being opened. Some sentences are so badly mangled that a minor textual analysis is necessary to make sense of them, which detracts from the logical flow of the arguments, and at one point Edmund Burke is made to look only semi-articulate. And the typos are appalling: macroeconomic policy becomes macropolicy policy; on the same line on one page we have a "surfiet" and a "surfeit" (difficult to type as my autochecker corrects the bad one), and two lines down we have "reducation"; elsewhere there is "abudance"; Olivier Blanchard of the IMF becomes Oliver and, in the coup de grâce, the master himself becomes "Keynese"!

When I was at school a Penguin book was the ultimate trust object. This one doesn't deserve to be allowed within three miles of an educational establishment, unfortunately, for fear of the damage it could do to literacy, until it is reissued in recognisable English. Once it is, it will make a very good primer, though from a Keynesian perspective, on the present state of economics.
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on 21 December 2012
Robert Skidelsky has, at a stroke, reminded us just how powerful and insightful was Keynes' intellect. When compared to today's barren landscape dominated by Chicago school economics, Keynes' voice, here articulated through Skidelsky, makes today's analysis seem not only flawed, but arid and even reckless in its disregard for the potential of its downside outcomes. Before reading this I took some time to refresh myself with some of Keynes' earlier writings (Essays in Persuasion)and that provided a useful check against any hyperbole which Skidelsky might have been tempted to introduce into his analysis. Believe me, this is both a lucid account of the present crisis and Keynes' intellectual legacy as a tool for pathfinding a way though it.
There is a rich and multifaceted quality flowing through these pages both in Skidelsky's articulation of the master, but most notably, from the intellectual and historical heritage which incubated Keynes' ideas and spurned him to synthesise some of the most profound insights into political economy of any economist, either before or after. That Keynes is little known outside of economic circles remains a blight on our national self identify, as he was so much more that just an economist. Read this and feel the power of real intellect soaking through the pages, you wont regret it.
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on 18 August 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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TOP 1000 REVIEWERon 3 January 2010
With Keynes back in vogue after a lull in his reputation in the seventies it's good to have an overview of what he was about. An economist himself and having written probably the definitive biography of the man, Robert Skidelsky is ideally placed to do this task.

He begins looking into the current economic situation and highlights areas of economic thinking since that are, in part, responsible. This he relates to Keynes because some of the errors in thinking are the very same that Keynes was warning about in the nineteen thirties. Especially singled out are ideas that economic events can be predicted, and that markets are always self-correcting.

Skidelsky, however, goes deeper than most economic text books. He points out that Keynes was a thinker about uncertainty and risk. He also looks at Keynes as a moralist an political thinker and how he regarded economics as a means to ensure a better life for people. He also looks at the success, or otherwise, of post-war Keynesian economic policies and how relevant Keynes is to today, though stops short of asking what the master would have said about the current situation.

All in all this book does the reader a service in showing what Keynes was about. This is especially valuable as his works are generally not easily available to the general public in and accessible and affordable form. Many of them deserve a wider readership, including some of his thinking about risk, and philosophical and moral matters. Skidelsky has now edited The Essential Keynes (Penguin Classics) which corrects this and allows the general reader more access to the Master himself. This makes an excellent follow up to the volume being reviewed here.
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on 6 January 2011
Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick and biographer of John Maynard Keynes, has written a brilliant little book. He shows how Keynes' ideas can help us to get out of the slump.

He compares the effects of the Keynesian paradigm with the effects of Thatcherism: "the former had less unemployment, higher growth, lower exchange-rate volatility and lower inequality." Between 1951 and 1973 global GDP grew by 4.8 per cent a year; between 1980 and 2009, by 3.2 per cent. In Britain, GDP fell from 2.5 per cent to 2.1 per cent, while unemployment soared from 1.6 per cent to 7.4 per cent.

Skidelsky writes, "Keynes (like Anthony Crosland in the 1950s) thought that managerial control of large corporations would expand their `public motives'. He did not foresee the explosion of the bonus culture, which would give managers incentives to rip off both shareholders and the wider public." Capitalism grows less, not more, public-spirited, as bankers grow more rent-seeking and free-riding.

Printing more money will not bring recovery; we need `government action to increase aggregate spending', not cuts. As the author notes, "Experience of Japan's great recession of the 1990s confirms that if the private sector is de-leveraging - reducing spending to reduce its debts - then public sector de-leveraging - cutting its deficit - will deepen, not lighten, recession."

Britain's investment is now 25 per cent down from pre-slump levels. Keynes wrote aptly, "a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment." But he did not ask how we could do this when Britain's `politically dominant financial sector' used `state power to promote financial interests'.

Skidelsky sums up that we need to tame finance (as the Glass-Steagall act of 1933 did) by splitting commercial from investment banking; we need high public spending for full employment; we need `a government-backed infrastructure bank', `more equitable distribution of wealth and incomes', `control of hot money flows' and protection of our industries. (As Keynes observed, it is better to produce cars inefficiently than to produce nothing at all.)
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