Keynes fell from favour because he didn't believe in iron laws that predicted human behaviour. Now he looks prescientby Robert Skidelsky / November 23, 2008 / Leave a comment
I have always said that Keynes would live as long as the world needed him. What the world decided, 30 years ago, was that it no longer needed him. The Keynesian revolution had been reduced to a mechanical system for stabilising economies by means of budget surpluses and deficits—more deficits than surpluses, as it turned out, leading to the “stagflationary” crises of the 1970s. Keynes, the theoreticians said, was redundant, having failed to prove that the world needed “Keynesian” policies. The market system was automatically self-correcting; Keynesianism led only to inflation.
And from their point of view, the theoreticians were right. The only acceptable basis of economic theorising is the assumption that human beings are rational maximisers. Grant this, and it follows that the many disturbances to which market economies are prone are the result of outside interferences. For Hayek and Friedman, the culprit was government manipulating the money supply for populist ends. No one who is not an economist believes human nature to be as economics depicts it, yet without its rationality axiom economics could not exist as the science it claims to be.
Keynes’s greatness, indeed his uniqueness as an economist, was that he was more than an economist. As well as being an outstanding theoretician and a great administrator, he was economics’s only poet of human nature. He tried to press his poetry into the service of science and policy. But it did not really fit, as he himself half-recognised. The poetic and scientific parts of his theory were discordant. So the poetry was struck out, and with that, his science also fell. He had never succeeded in showing, the theoreticians said, why rational agents should neglect trades which were to their advantage. Involuntary unemployment is impossible. And once Keynes’s science was gone, there was little, if nothing, left of Keynesian policy. All economies needed was independent central banking, whose principles long preceded Keynes’s economics.
Keynes’s understanding of human psychology in markets had two features, neither of which fits into the paradigm of mainstream economics. The first was inescapable uncertainty. “The outstanding fact,” he wrote in his magnum opus, The General Theory of Employment, Interest, and Money (1936), “is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” We disguise this uncertainty from ourselves by assuming that the future will be like the past, that existing…