A man for modern times? Economist John Maynard Keynes. © David Killen

Why Keynes is making a comeback

The theories of John Maynard Keynes might be unfashionable but his ideas remain potent
March 26, 2015

A man for modern times? Economist John Maynard Keynes. © David Killen

I imagine that somewhere in Cambridge, perhaps in a hostelry frequented by economics PhD students, or in the King’s College junior common room, there will one day be a pub quiz devoted to trivia about John Maynard Keynes. If you wanted to train for such a quiz, Richard Davenport-Hines’s Universal Man is the biography for you. Who said, in 1919, after reading The Economic Consequences of the Peace, “I guess this Keynes to be a crank”? Neville Chamberlain. Who argued that the same book “enabled Hitler—only 20 years later—to trample the continent of Europe underfoot”? Conservative politician Robert Boothby. What age was Keynes when his father sewed up his overcoat pockets to stop him playing with himself? Eleven.

Davenport-Hines, who in 2013 wrote a well-received book about the John Profumo scandal, An English Affair, has done a capable scissors-and-paste job in Universal Man, assembling a collection of entertaining facts—larded with salacious gossip—about one of the 20th century’s most famous economists. It is broadly divided into the “seven ages of man,” with chapters on Keynes the Official, Keynes the Lover and Keynes the Connoisseur. There is nothing forced about this taxonomy: Keynes did live a series of remarkable lives. Unfortunately, it is also topped off with purple prose and portentous received wisdom. Lydia Lopokova, Keynes’s ballerina wife, is described as “fathom deep in exoticism and furlongs distant from any bluestocking.” In a description of his art collection we learn that “connoisseurs are fastidious, privileged and more ornamented than careful. Their opinions are trenchant, not insipid; but never hectoring… They adopt foreign fashions; they have their own decorum.” This is “fine writing” at its most pointless.

The narrative of Keynes’s public life is competently rehearsed—from the India Office through Versailles to Bretton Woods—and there will be readers who prefer this racy account to the more thorough, intellectual and discreet approach taken by Robert Skidelsky in his three-volume biography published a quarter of a century ago. What they will not find is any re-assessment of Keynes’s influence on the profession of economics and on economic policymakers.

In Davenport-Hines’s defence, generalisations about the economics profession are hazardous. Still, we can discern a shift of opinion about Keynes. In 1980, Robert Lucas, the godfather of rational expectations—the theory which argues that economic agents take account of all available information in developing their views of asset prices, which are themselves rational—and a leader of the so-called freshwater school centred on Chicago, said “one cannot find good under-40 economists who identify themselves or their work as ‘Keynesian.’ At research seminars, people don’t take Keynesian theorising seriously anymore; the audience starts to whisper and giggle to one another.”

But any blanket denial of Keynes’s influence is overdone. Even in the days when rational expectations and the efficient market theory had captured the imaginations of most economists, there were always old believers, men like Paul Krugman and Joseph Stiglitz, or even Alan Blinder, who sang counterpoint in Alan Greenspan’s Federal Reserve. Olivier Blanchard, the Chief Economist of the International Monetary Fund, appointed in 2008, kept the flame alive in Washington. And in most of the “saltwater” schools, at Harvard and Columbia for example, where counter-cyclical fiscal policy can be discussed in polite company, mentioning Keynes was never a trigger for laughter.

By 2008, Lucas’s sarcastic observation looked more than a little foolish. Two strands of re-evaluation were under way. The first concerns the role of fiscal policy in the stabilisation of an economy in the aftermath of a financial shock. Even most of those who had previously argued that monetary policy was the only appropriate counter-cyclical weapon in the policymakers’ toolkit accepted in 2008-9 that a fiscal stimulus was necessary to prevent the economies of the United States and United Kingdom spiralling from recession to depression. There remain lively arguments about the size and duration of the stimulus, and about its precise impact, but there is no giggling at the back of the class when the issues are debated.

The second, rather broader, reassessment relates to the role of the state in financial markets. Here Robert J Shiller and George Akerlof led the way with their 2009 book Animal Spirits—a phrase borrowed from Keynes’s General Theory of Employment, Interest and Money. They reach back into this 1936 work for an explanation of why markets, left to their own devices, are essentially unstable. They highlight flaws in the efficient markets hypothesis (un-hypothesised in Keynes’s day) and argue there are times when people are too trusting, and that capitalism sometimes produces what people think they want, rather than what they want. Crucially, they write, an excessive reverence for markets “fails to take account of the roles of confidence, stories and snake oil in economic fluctuation.” Their conclusion, which owes much to Keynes, is that markets need the counterbalancing role of governments, and that public authorities need not be shy about intervening when they see signs of irrational exuberance.

Keynes’s thought began to inspire revisionist papers, some of which even found their way into high-grade refereed journals. Volumes of essays with titles like “The Return to Keynes” began to appear. To say that the Chicago school experienced a “come to Maynard” moment of conversion overstates the case, but even the freshest lakewater began to take on a slightly brackish character. As one might expect, Lucas and his supporters are fighting back. In 2013, the Nobel Prize committee co-awarded its economics prize to Chicago’s Eugene Fama, a celebrated efficient markets guru.

How has this academic dispute affected public policy? Shiller and Akerlof’s conclusions are now shared by many policymakers in central banks and regulatory authorities. This amounts to a significant change from the era when the non-interventionist philosophy of Alan Greenspan reigned supreme. The Keynesian revival has taken a few twists and turns: it is fair to say that it is more firmly entrenched in the English-speaking world than in Europe’s more bracing Ordoliberal climate. (Ordoliberalism is social market economics, but with a heavy emphasis on markets and fiscal continence.) Germany’s Chancellor, Angela Merkel, in language reminiscent of Margaret Thatcher, has praised the common sense of the Swabian housewife—a German cliché of financial frugality, who lives within her means, come what may. Merkel’s former Finance Minister, Peer Steinbrück, described Gordon Brown’s government’s fiscal policy as “crass Keynesianism”—and he did not mean to imply that there was another, more intellectually respectable, kind. The Bundesbank has tried to resist both fiscal and monetary loosening even at a time when the eurozone economy is operating at well below capacity.

Today, German reluctance to envisage a new deal for Greece is often buttressed with similar arguments about living within one’s means, without considering that for an economy running a very high rate of un- and under-employment, it may make sense for the government to adopt a looser fiscal stance (in the short term). Of course, in the Greek case, German views are highly coloured by the sense that successive Greek governments have “cheated” and that affluent Greek citizens have not taken their necessary share of pain. But policymakers must look forward rather than back.

Just before he left the European Central Bank in 2011, Jean-Claude Trichet talked of the need for European governments to prepare “credible fiscal exit strategies,” by which he meant cutting deficits. But the tone at the top of the bank has changed. His successor Mario Draghi has, by contrast, talked of the need for a more expansive fiscal policy, at least in Germany. His speech at last year’s Jackson Hole conference in Wyoming could hardly have been clearer. The response in Germany was to close ranks, so in the absence of any fiscal movement in Germany, he has launched the euro-version of quantitative easing. Too late perhaps, but it was a brave decision nonetheless.

We must be careful not to see all this change through the prism of a Keynesian revival. I doubt that either Trichet or Draghi, as they pondered their dilemmas at the top of the Eurotower in Frankfurt, asked themselves what Keynes would have done in their place. Davenport-Hines may be guilty of hyperbole, and of an Anglocentric mindset, when he says that “Keynes was the chief intellectual influence on English public life in the 20th century.” At the same time, however, Keynes’s ideas remain potent—and it is a tribute of sorts to their continued resonance that Robert Lucas thought it necessary to ridicule him.

The principal virtue of Universal Man is in reminding us of Keynes’s life away from economics: his role in the creation of the Arts Council, his remarkable modern art collection which now sits in the Fitzwilliam Museum in Cambridge, his work on the original design of the World Bank. Few people, and no economists, have left such a heritage. Often his work as an economist took second place to his many other interests. Indeed, he may privately have shared Robert Boothby’s scepticism about the status and impact of his profession. At a mock trial of economists held in 1933 at the London School of Economics, Boothby accused them of “conspiring to spread mental fog” among the population. He claimed to have more sympathy for a criminal at the Old Bailey than for the people he was prosecuting. After all, he said, “no one ever became an economist through an uncontrollable impulse.”