BOOKS: 'Keynes: Return of the Master'

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By James Srodes

KEYNES: RETURN OF THE MASTER: WHY SIXTY YEARS AFTER HIS DEATH, JOHN MAYNARD KEYNES IS THE MOST IMPORTANT ECONOMIC THINKER FOR AMERICA
By Robert Skidelsky
Public Affairs, $26.95, [R]256 pages
REVIEWED BY JAMES SRODES

So the question is: W.W.J.M.K.D? "What Would John Maynard Keynes Do?" In this time of economic crisis the reputations of nearly everyone involved — bankers, lawmakers, regulators, consumers, you name it — has crashed along with the global marketplace. Except for that of Keynes, the seminal, some say dominant, economic theorist of this age. Nowadays, the banner of Keynes' broad economic theories, first published nearly 75 years ago, have been raised again by the virtuous left as both a repudiation of the perceived failings of something called "Reaganomics" and as offering the soundest blueprint for the way forward to new prosperity.

That is what makes this book all the more valuable, for it is, among other things, 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.

The author certainly knows his Keynes. Robert Skidelsky is a British political economist who has, between 1983 and 2000, written the authoritative three-volume standard biography of Keynes and his theories, which were credited with showing the way out of the Great Depression of the 1930s. Mr. Skidelsky also has written other well-received historical analyses about the nexus between politics and economic crisis. The flaw in this new telling of Keynes' life can be summed up by the subtitle Mr. Skidelsky chose for this volume: "Why Sixty Years After His Death, John Maynard Keynes Is the Most Important Economic Thinker for America."

Mr. Skidelsky's broad thesis can be summed up: Roughly since Richard Nixon declared in 1971, "We are all Keynesians now," and then imposed his disastrous wage and price controls, most American conservative economic theorists (derided as monetarist dunces and Reaganistas) made the fundamental mistake of believing that the marketplace operated on perfect information and analysis that could be used to forecast risk with mathematical certainty. It was this blind faith in actuarial certainties that made the current crisis such a shock, he argues.

The crisis we are in, he states, started as a storm out of an almost cloudless sky, unexpected, unpredicted, falling on a world thinking and acting on the assumption that such extreme events were things of the past, and that another Great Depression could not occur." And ex-Fed chairman Alan Greenspan, tagged with being a Milton Freidman-style monetary loon, with some justice gets a whack for his fatuous comment that the proximate cause of the 2008 crash "was the failure of banks to 'manage' the new 'risks' posed by 'financial innovation.'" Well, yes, but there was something more that happened before that.

One of the values of this book is that Mr. Skidelsky does provide a candidly instructive timeline of how the crisis began, not in the computer rooms of Wall Street investment banks, but in Washington where, in 1999, Congress repealed the Glass-Steagall Act of 1934 that barred banks and securities firms from dabbling in each other's business. Other Clinton administration social legislation forced lenders to pump out mortgage financing to unqualified home buyers and to force the mortgage support agencies Fannie Mae and Freddie Mac to securitize those mortgages into ostensibly government-backed financial vehicles.

What with the persistent policy of cheapening the U.S. dollar in foreign markets, the global marketplace behaved like any addict given a shot of the drug of choice and banks from Jakarta to Zurich began to soak up these questionable pieces of paper with the assurance that American home prices would rise forever and that the U.S. government would back that paper come what may.

Mr. Skidelsky deftly describes all this but then blames the addict for overdosing on the drug Washington pushed in the first place. Nor is it true that the crisis was neither expected nor forecast; bankers, home builders and even governmental regulators warned throughout most of the Bush years that an unsustainable bubble was building, but neither the White House nor the Congressional opposition wanted to be blamed for deflating the balloon before it burst. What is at work here is the perennial hazard of the biographer, that of becoming so involved with the subject that one loads more significance on the subject's life than it can carry.

Keynes, while not the "most important economic thinker for America" certainly has a lot to tell us about where we are and where we must go. And Mr. Skidelsky is right to chide all economists who try to chop and stretch and squeeze the human complexities of the marketplace into neat mathematical formulas that will fit all occasions.

So what would Keynes say to us today? The author rightly reasons that among Keynes' significant contributions to economic thought was to introduce the principle of uncertainty and the notion that irrationality was one of the forces of the marketplace that must always be recognized.

As Keynes noted, "The investor will be affected, as is obvious, not by the net income which he will actually receive from his investment in the long run, but by his expectations. These will often depend upon fashion, upon advertisement, or upon purely irrational waves of optimism or pessimism. Similarly by risk we mean, not the real risk as measured by the actual average of the class of investment over the period of years to which the expectation refers, but the risk as it is estimated, wisely or foolishly, by the investor." That observation, which he made in 1910, is as true today as it was 100 years ago.

While Keynes advocated active government fine-tuning of economic cycles to moderate the swings, he was no socialist, rather supporting a stable but regulated marketplace as the bulwark of a democratic society. And he probably would have been alarmed at the blind faith of Reaganomics in the unrestrained market, but he most certainly also would be a critic today of the Obamanomics tactic of trying to spark new consumer spending and home buying by pumping up the money supply.

Keynes did argue for lower interest rates during the 1930s slump, but once rates could go no lower he prescribed government stimulus be directed not at reflating the consumer bubble but into public works and infrastructure improvements that not only provided employment but economic growth for the private sector; no bailouts for Wall Street, no cash for clunkers, no cheapening of the national currency in foreign markets.

So it usually is with all prophets be they biblical, Darwinian, Marxist or Keynes himself: It is instructive to read what the man actually said and not what others say he said. This clear statement of what Keynes said is an accessible way to learn why what is going on seems to be going so wrong.

• James Srodes is a veteran financial journalist and author and former Washington bureau chief for Forbes and Financial World magazines. His email address is srodesnews@msn.com.