The Return of the Master


By Robert Skidelsky

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In the debris of the financial crash of 2008, the principles of John Maynard Keynes — that economic storms are a normal part of the market system, that governments need to step in and use fiscal ammunition to prevent these storms from becoming depressions, and that societies that value the pursuit of money should reprioritize — are more pertinent and applicable than ever. In Keynes: The Return of the Master, Robert Skidelsky brilliantly synthesizes Keynes career and life, and offers nervous capitalists a positive answer to the question we now face: When unbridled capitalism falters, is there an alternative?


Praise for Keynes: The Return of the Master
"[A] useful and important introduction to what a modern Keynesianism might look like. . . . Convincing."
New York Times Book Review
"Valuable. . . . A neat synthesis: a first-rate short biography for those who have avoided knowing the man behind the myth until now; a clearly written and accessible timeline of just how and why the current crisis broke upon us; and a clearly stated argument for why Keynes was both right and why his precepts must be followed once again."
Washington Times
"The most satisfying post-crash analysis of the economist."
New York Times
"The book offers clear and cogent critiques of modern macroeconomic thought . . . "
Foreign Affairs
"Explaining the present-day relevance of [Keynes'] theories is executed superbly by Skidelsky. . . . Skidelsky's book excels. It's a passionate polemic that makes a strong case for economists and policymakers to reread their Keynes."
"Skidelsky's summary of what is distinctive in Keynes's theory is excellent."
The New Republic
"As ever, Keynes lights the path to economic enlightenment. Robert Skidelsky's superb short new biography, Keynes: The Return of the Master, shows us how revolutionary was Keynes' thinking in the 1920s and 1930s, and how, until now, it was never properly applied."
Arts & Book Review
"A profound and beautifully written meditation on the dangers of bad ideas, readily accessible to anyone who isn't mystified by the headlines in the Wall Street Journal or the Economist."
"Skidelsky deftly summarizes and explains basic Keynesian economics and how they apply to our current travails."
"Enjoyable and stimulating."
"[H]istorically thorough and thoughtful."
Las Vegas Business Press
"It sparkles with insight, clarity and intellectual brilliance. . . . Skidelsky is at his best in dissecting the failure of economics and his advocacy of a broader economics degree which embraces economic history."
—Bill Jamieson,
"An elegant and forthright book . . . Full of arresting insights, written—despite its complex and heavyweight subject matter—with a captivating lightness of touch."
Sunday Times (UK)
"[T]his book serves as an excellent addendum and update to Skidelsky's three-volume biography of Keynes."
Telegraph (UK)
"The chronological section of Skidelsky's book is easily the best account I have read of the development of the credit crunch, for those interested in the main macroeconomic story as distinct from the micro-financial nitty-gritty."
Financial Times (UK)
"Wonderfully lucid. . . . Ought to be considered required reading for every prospective minister."
—Roy Hattersley, Guardian (UK)
"An important contribution at a time of soul-searching, a must read even if one doesn't fully accept its conclusions. . . . This is a wonderfully stimulating book, one that reflects the author's unparalleled erudition. We're living in the second Age of Keynes—and Robert Skidelsky is still the guide of choice."
Observer (UK)

To Mikhail Gutseriev

Preface to the paperback edition
This is a partly re-written version of the hardback edition of Keynes: The Return of the Master, published in September 2009. Since the book first appeared, recovery has started after the biggest global downturn since the Second World War. In chapter one, I have taken the opportunity to bring the story of the slump and its aftermath up-to-date. The paperback also reflects the way attention has shifted from how to avert a collapse to how to sustain a fragile recovery. In the early days of the slump there was almost unanimous support for government 'stimulus' policies to arrest the slide into another great depression. Today the main question concerns the sustainability of the expanded government deficits and national debts incurred to fight the recession. Should the stimulus packages be quickly withdrawn or do economies need to remain longer on life-support systems? This is as much a matter of theory as of reassuring the markets.
The stampede to austerity, before recovery is secure, is depressing testimony to how skin-deep the revival of Keynes has been. Unless the policy of ending the stimulus is reversed or modified, we in the west will face years of stagnation and under-employment. In combating the financial seizure, early efforts were concentrated on bailing-out insolvent banks. Today the discussion of how to reform the banks has become more sharply defined, with opinion split between greater regulation and breaking-up integrated banking systems into functional components. Discussion of the future aims of macroeconomic policy, and on reforming the world monetary system have not got far, but I have indicated what Keynes might have thought about these matters.
Above all, criticisms of the hardback have stimulated further thoughts of my own about the state of economic theory and its contribution to the crisis. I have tried to sharpen my discussion of Classical theory, Keynes's theory, New Classical theory, and New Keynesian theory. On one matter, I am unrepentant. Some reviewers accused me of vulgarising the orthodox theories which seemed to me, and still seem to me, to be at the root of the crisis. I had not taken sufficient account, it was said, of the qualifications and exceptions to the theory of efficient markets which their own academic advocates recognized, or of the variety of opinion which exists within the economics profession. My defence to the second charge is that the theories of the Chicago School have been dominant, for the last thirty years, with dissenters pushed to the margins of the profession. As for the first charge, theories are always applied in their vulgarized form, and it ought to be the test of a good economic theory that its vulgarization does not lead to bad policy.
In any case, my objection is not primarily to the content of most contemporary economic theory, but to a method of theorising which inevitably produces models of economic life which have little relation to reality.
Robert Skidelsky, June 2010

The economist John Maynard Keynes is back in fashion. That guardian of free-market orthodoxy the Wall Street Journal devoted a full page spread to him on 8 January 2009. The reason is obvious. The global economy is slumping; 'stimulus packages' are all the rage. But Keynes's importance is not just as a progenitor of 'stimulus' policies. Governments have known how to 'stimulate' sickly economies - usually by war - as long as they have known anything. Keynes's importance was to provide a 'general theory' which explains how economies fall into slumps, and to indicate the policies and institutions needed to avoid them. In the current situation no theory is better than bad theory, but good theory is better than no theory. Good theory can help us avoid panic responses, and give us insight into the limitations of both markets and governments. Keynes, in my view, provides the right kind of theory, even though his is clearly not the last word on events happening sixty-three years after his death.
Keynes is relevant for another reason. The crisis has brought to a head wider issues concerning the explanation of human behaviour and the role of moral judgements in economics. These touch on attitudes to economic growth, globalization, justice, the environment and so on. Keynes had important things to say about these matters. To take just one: If growth is a means to an end, what is the end, how much growth is 'enough', and what other valuable human purposes may be pre-empted by a single-minded concentration on economic growth?
The economic hurricane now raging gives us an immense opportunity to reorient economic life towards what is sensible, just and good. Keynes remains an indispensable guide to that future.
My own stimulus for writing this short book was given by my agent, Michael Sissons, to whom I owe an enormous debt of gratitude over forty years of association and friendship. I have also benefited enormously from the encouragement and advice of my publisher, Stuart Proffitt.
Although the historical Keynes is familiar territory to me, my three researchers at the Centre for Global Studies - Pavel Erochkine, Louis Mosley and Christian Westerlind Wigstrom - have given me invaluable help in transforming him into a figure relevant to the contemporary world. Christian Westerlind Wigstrom has helped clarify numerous points of theory, and is responsible for the statistical analysis in Chapter 5.
I would also like to thank Andrew Cox, Bob Davenport, Paul Davidson, Meghnad Desai, V. R. Joshi, Geoff Miller, Landon Rowland and my sons, Edward and William, for reading the manuscript, in whole or part, and making helpful suggestions. Edward in particular has sharpened my understanding of Keynes as a moralist. The House of Lords Library has been a valuable research resource. Any mistakes of fact or interpretation are my responsibility alone.
An important advantage I would claim for this book is that, although its subject matter is mainly economics, it is written from a vantage point outside that of the economics profession. My first academic study - and love - was history, and though I studied economics later, and was indeed a member of the economics department at the University of Warwick, I am not a professional economist. I would describe myself as an economically literate historian. The advantage I would claim is that of not having been brainwashed to see the world as most economists view it: I have always regarded their assumptions about human behaviour as absurdly narrow. For reasons which will become clearer as the book goes on, I have come to see economics as a fundamentally regressive discipline, its regressive nature disguised by increasingly sophisticated mathematics and statistics.
Not having been trained formally as an economist has an important drawback: I find mathematics and statistics 'challenging,' as they say, and it is too late to improve. This has, I believe, saved me from important errors of thinking - like imagining the world to be an urn, or believing in induction as the only source of knowledge. On the other hand, it has no doubt led me to underestimate the contribution of mathematics as an aid to rigorous thinking, and statistics as a check on our fancy. History, politics, sociology, psychology and anthropology are suggestive, not conclusive, disciplines: they cannot prove (or more importantly disprove) any hypothesis. Economics should aim to be more like them and less like physics and maths. That is why I was drawn to Keynes: he was a man of many parts. I have heard economists say he was a brilliant thinker, but a bad theorist. They objected to his 'ad hoc' theorizing - inventing bits of theory to explain unusual events, rather than building up his theory from secure micro-foundations. His wife called him 'more than an economist'. I am less than an economist, but perhaps this makes me better able to appreciate his greatness.
Keynes, of course, is no one's property; and, while economists may disagree with some of my interpretations, this book will have achieved its purpose if it brings Keynes to life for a world struggling once again with the riddles of economies and the perplexities of moral life in an age of actual and potential abundance.
Once I started writing this book, on 1 January 2009, I stopped reading the newspapers on a daily basis to avoid filling up my mind with 'noise'. Any coherence my argument may have stems from this act of self-denial.
Robert Skidelsky
15 July 2009

We have been living through one of the most violent collapses in economic life seen in the last hundred years. Yet economics - the scientific study of economic life - has done an exceptionally poor job in explaining it. For, according to mainstream economic theories, a downturn on this scale should not have happened. And we also have precious little idea about how to stop a succession of such crises bearing down on us in future. To get a handle on both sets of issues we need John Maynard Keynes.
In a way, this is to be expected. For twenty years or so, mainstream economics has been dominated by the idea that markets maintain continuous, or almost continuous, full employment. Shocks of the kind we are now experiencing, and which John Maynard Keynes understood and explained so well, are outside its theoretical range. So it has nothing to say about them - nor about how to prevent them in future. We also had many years of sustained growth which seemed to vindicate the contention that free market capitalism had finally 'cracked' the economic problem. So it is hardly surprising that the Great Recession which followed the Great Moderation has caught economists and policy makers by surprise. The strange situation has arisen that there is no shortage of prescriptions on offer, but very little in the way of fundamental diagnosis. It's like doctors furiously prescribing for a disease which some deny exists, and others acknowledge exists, but cannot explain.
This book is partly an attempt to understand how economics has got into this position. Its argument is that the missing bit of theory - which links diagnosis to prescription - was supplied by John Maynard Keynes. For thirty years or so after the Second World War, Keynesian economics ruled the roost, at least in the sense that Keynesian policy - trying to keep economies fully employed and growing on an even keel - was part of the normal tool kit of governments. Then it was thrown out, as economics reverted to its older doctrine that market economies were internally self-correcting and that it was government intervention which made them behave badly. The free-market era of Reagan and Thatcher dawned.
The story of the decline and fall of the Keynesian revolution, and what has happened to economics generally, is a fascinating intellectual detective story in its own right, which charts the trajectory from President Nixon's 'We are all Keynesians now' in 1971 to Robert Lucas's 2009 remark 'I guess everyone is a Keynesian in the foxhole.'1
The decline of Keynesianism is a key theme of this book, because I believe with Keynes that ideas matter profoundly, 'indeed the world is ruled by little else'.2 I therefore believe that the root cause of the present crisis lies in the intellectual failure of economics. It was the wrong ideas of economists which legitimized the deregulation of finance, and it was the deregulation of finance which led to the credit explosion which collapsed into the credit crunch. It is hard to convey the harm done by the recently dominant school of New Classical economics. Rarely in history can such powerful minds have devoted themselves to such strange ideas. The strangest of these is the proposition that market participants have correct beliefs on average about what will happen to prices over an infinite future. I am naturally much less critical of the New Keynesian school, which disputes the terrain of macroeconomics with the New Classicals, but I am still quite critical, because I believe that in accepting the theory of rational expectations, which revives in mathematical form the classical theory which Keynes rejected, they have sold the pass to the New Classicals. Having swallowed the elephant of rational expectations, they strained at the gnat of the continuous full employment implied by it, and developed theories of information failures to allow a role for government.
The centrepiece of Keynes's theory is the existence of inescapable uncertainty about the future, and this is the main subject of Chapter 4, with Chapter 3 being an account of the influence in developing it of his experience as an investor during the turbulent period of the Great Depression. Taking uncertainty seriously - which few economists today do - has profound implications not just for how one does economics and how one applies it, but for one's understanding of practically all aspects of human activity. It helps explain the rules and conventions by which people live. I lay particular emphasis on its implications for how the social sciences should use language. Keynes always tried to present his essential thoughts - which he called 'simple and . . . obvious' - in what may loosely be called high-class ordinary language. This was not just to amplify his persuasive appeal, but because he thought that economics should be intuitive, not counterintuitive: it should present the world in a language which most people understand. This is one reason why he opposed the excessive mathematicization of economics, which separated it from ordinary understanding. He would have been very hostile to the linguistic imperialism of economics, which appropriates important words in the common lexicon, like 'rational', and gives them technical meanings which over time change their ordinary meanings and the understandings which they express. The economists' definition of rational behaviour as behaviour consistent with their own models, with all other behaviour dubbed irrational, amounts to a huge project to reshape humanity into people who behave in ways economists say they should behave. It was consistent with Keynes's attitude to language to prefer simple to complex financial systems. He would have been utterly opposed to financial innovation beyond the bounds of ordinary understanding, and therefore control. Complexity for its own sake had no appeal for him.
My hope is that the current slump will cause the New Keynesians and others to take uncertainty seriously. But that probably requires a major institutional change in the way in which economics is taught and transmitted. This book ends with a proposal to reform the teaching of economics to encourage economists to think of it as a moral, not natural, science.
Keynes, of course, did not have the last word to say about the causes of economic malfunctions. But my contention is that he provided the right kind of theory to explain what is now happening; and since, in my view, financial crises which lead to failures in the 'real' economy are a normal part of the operation of unmanaged markets, he can claim to have produced a 'general theory' which directs us to how to make markets safe for the world, as well as making the world safe for markets.
But let's get Keynes - and Keynesianism - right. In the US, more than in Britain, he is considered a kind of socialist. This is wrong. Keynes was not a nationalizer, nor even much of a regulator. He came not exactly to praise capitalism, but certainly not to bury it. He thought that, for all its defects, it was the best economic system on offer, a necessary stage in the passage from scarcity to abundance, from toil to the good life.
Keynes is also considered to be the apostle of permanent budget deficits. 'Deficits don't matter.' This was not Keynes: it was Glen Hubbard, chairman of George W. Bush's Council of Economic Advisers in 2003. It may surprise readers to learn that Keynes thought that government budgets should normally be in surplus. The greatest splurgers in US history have been Republican presidents preaching free-market, anti-Keynesian, doctrines: the one fiscal conservative in the last thirty years has been Democratic president Bill Clinton.
Nor was Keynes a tax-and-spend fanatic. At the end of his life he wondered whether a government take of more than 25% of the national income was a good thing.
Nor did Keynes believe that all unemployment was caused by failure of aggregate demand. He was close to Milton Friedman in viewing a lot of it as due to inflexible wages and prices. But he did not believe that that was the problem in the 1930s. And he believed that, except in moments of excitement, there would always be 'demand-deficient' unemployment, which would yield to government policies of demand expansion.
Keynes was not an inflationist. He believed in stable prices, and for much of his career he thought that central governments could achieve price stability - another link with Friedman. But he thought it was idiotic to worry about inflation when prices and output were in free fall.
It makes some sense to think of Keynes as an economist for depressions - that is, for one kind of situation. He has been criticized for offering not a 'general theory', as he claimed, but a depression theory. I think this is wrong, for two reasons.
First, Keynes believed that deep slumps were always possible in a market system left to itself, and that there was therefore a continuous role for government in ensuring that they did not happen. His demonstration that they were not 'one in a century event', but an everpresent possibility, is at the heart of his economic theory.
Second, Keynes was a moralist. There was always, at the back of his mind, the question: What is economics for? How does economic activity relate to the 'good life'? How much prosperity do we need to live 'wisely, agreeably, and well'? This concern was grounded in the ethics of G. E. Moore, and the shared life of the Bloombsbury Group. Broadly, Keynes saw economic progress as freeing people from physical toil, so they could learn to live like the 'lilies of the field', valuing today over tomorrow, taking pleasure in the fleeting moment. I give an account of his ethical ideas in Chapter 6.
Keynes had a profound insight into the nature of social existence, which did not fit into economics then, any more than it does now. He believed that it was fear of the unknown which played the predominant part in shaping the religions, rituals, rules, networks, and conventions of society. The function of belief systems and institutions was to give humans courage to act in face of the unknown and unknowable. This is largely removed from the economist's picture of the isolated individual maximising his utilities in the clairvoyant light of perfect foresight.
This book shifts the accepted interpretation of what was important in Keynes's theory. The early interpretations of Keynes centred not on his view of why things went wrong, but on why they stayed wrong. He established, as economists say, the possibility of 'underemployment equilibrium'. This was the important message for policymakers at the time: it suggested that policy intervention could achieve a superior equilibrium. Today - and understandably at this stage in the economic meltdown - we are more interested in the causes of the instability of the financial system. This was not the main topic of the General Theory of Employment, Interest and Money (1936), which was written at or near the bottom of the Great Depression. Nevertheless, Keynes did write a crucial chapter - Chapter 12 - which explained why financial markets are unstable, and a year later, in summing up the main ideas of the General Theory, he put financial instability at the centre of his theory. In this Keynes it is 'radical uncertainty' which both makes economies unstable and prevents rapid recovery from 'shocks'. The shift in focus from the Keynes of 'underemployment equilibrium' to the Keynes of 'uncertain expectations' allows for a direct confrontation between contemporary theories of risk and risk management and Keynes's theory of uncertainty and uncertainty reduction.
Keynes had a political objective. Unless governments took steps to stabilize market economies at full employment, much of the undoubted benefit of markets would be lost and political space would be opened up for extremists who would offer to solve the economic problem by abolishing markets, peace and liberty. This in a nutshell was the Keynesian 'political economy'. Keynes offers an immensely fruitful way of making sense of the slump now in progress, for suggesting policies to get us out of the slump, for ensuring, as far as is humanly possible, that we don't continue to fall into pits like the present one, and for understanding the human condition. These are the things which make Keynes fresh today.
This book would not have been written had the slump not happened. We will not escape permanently from slump territory unless we make the effort to understand what went wrong at the level of grand theory. There is no shortage of explanations of what went wrong at the micro-level - the level of particular institutions, in this case banks. But if we push the level of explanation upwards to the macro-level we can see these particular failures as the result of failures of the way the economy as a whole was working. There are two main macro-economic theories of what went wrong, pointing to very different conclusions for policy, and we must decide between them.
The first is derived from the quantity theory of money, the second from the Keynesian theory of aggregate spending. The first, or monetarist, theory attributes the collapse to instability in the supply of money. Broadly speaking, the central banks of the western world, led by the Federal Reserve Board, made money and credit too easy in the years leading up to the crash. The result was an asset-price inflation, built on debt, which spilled over into a consumer boom. This was bound to collapse as soon as credit was tightened. The collapse of the real estate boom (residential and commercial) hit the banks which had over-lent to this market and, via securitization, spread to the whole financial system. The pile up of bank losses led to a credit freeze-acollapse in the money supply - which spread recession to the whole economy.


On Sale
Oct 26, 2010
Page Count
256 pages

Robert Skidelsky

About the Author

Robert Skidelsky is the Emeritus Professor of Political Economy at the University of Warwick. His three volume biography of the economist John Maynard Keynes (1983, 1992, 2000) received numerous prizes, including the Lionel Gelber Prize for International Relations and the Council on Foreign Relations Arthur Ross Book Award. He is the author of The World After Communism. He was made a life peer in 1991, and was elected Fellow of the British Academy in 1994.

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