The Crash Through Keynes’ Eyes

The author of “Keynes: The Return of the Master” says we can attribute the 2008 stimulus package to the great economist.
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TRANSCRIPT

Question: What were the factors in his life that contributed to Keynes’ philosophy?

Robert Skidelsky:  Well, that's a big, tall order.  I think first name to mention is Cambridge, that is Cambridge, England.  He was born there, his parents were Dons, his father taught at Cambridge University, he then started teaching at Cambridge University at King's College.  So Cambridge was the intellectual center of his life.

The next big center was treasury, British government.  He worked at the treasury during the first World War, worked at the treasury during the second World War.  So British government was his third, sort of third center.

And then the Bloomsbury Group, which was the group of his friends, he met them at Cambridge, they were artists, writers, and famous names that everyone's heard of, like Virginia Wolfe.  And this was his group of personal friends and of course when he married the ballerina, Lydia Lopokova, then ballet entered into his life.  So there was economics, there was government service, and there were the arts.  I think those three things contributed to his formation as an economist and as a thinker.

Question: What are the key tenets of Keynesian economics?

Robert Skidelsky:  Well, I would single out two.  First of all, markets are not very stable, they're liable to crash, especially that's true of investment markets.  And secondly, when they do, and as a result of their crashing, economies run down, governments have a duty to provide a stimulus in order to break the fall and promote recovery because the markets won't do that themselves.  So I think those are two basic features of Keynesian economics.

Question: In what ways did the neglect of these principles contribute to the economic crises of 2008?

Robert Skidelsky:  Well, I think that the regulators and governments thought the financial markets were much stabler than they turned out to be, and therefore, they could be allowed to regulate themselves.  So I think monetary policy, or macro policy was not attempted to the possibility of these big bubbles building up and then crashing.  But on the second part, I think the fact that governments came in with a stimulus, once the economy had started to run down, was attribute to Keynes.  I think the difference is with the Great Depression itself of the early '30's, when governments did the exact opposite, they tightened their budget, they cut their spending, they raised taxes, and as a result, made things worse.  This time I think they did the opposite and the reason they did the opposite was Keynes had already written his theories, his great book and governments instinctively did what he had advised them to.

Question: Does the Keynesian understanding of consumer choice illuminate the dramatic downfall in the stock market?

Robert Skidelsky:  Well, I don't know that it was consumer choice that is the illuminating thing.  What I think his theory does enable us to understand is that investment is quite uncertain because people don't know what the future is going to bring, they bet, they bet on the future.  And a lot of those bets can go wrong.  I think it was also due to the fact that the banking system, or a lot of it, had been deregulated and therefore, there was very little control over financial innovation.  And financial innovation, a lot of it was very, very destructive.  So I think that Keynes' economics illuminates how that sort of thing can happen.

And also on the other side, I think he did insist that when there was a big disturbance like in the investment markets, so it could be in any sort of market, economies don't bounce back quickly on their own.  They do aggregate demand, as he called it, or aggregate spending, does start falling.  And when it falls, unemployment starts rising.  So I think that's where his, that's where his economics is particularly illuminating, in those two areas.

Question: What role did morality play in his economic philosophy?

Robert Skidelsky: I think he always asked the question, what is wealth for?  What is money for?  It's not something that economists ask on the whole, they assume that people have come to market with wants of their own and that the sole occupation of economics is to show how those wants are most sufficiently satisfied and they will thought they were doing a good thing if they set up systems which allowed one's satisfaction its fullest play.  Keynes always said, "No, let's look at the nature of these wants and we need to always have a moral critique of wants.  Economic progress is to enable people to lead a good life."  And he didn't think that that was what every, you know, that that was just an individual choice, what a good life is, he was based on certain traditions and moral philosophy, which said a good life consists of these things.

Now, you can say, of course, well, that didn't enter into his economics and many other economists also might have an idea of a good life, which is detached from what, their technical economic work, but I think he tried to keep them connected in his own mind and I think very few economists followed him in that direction.

Recorded on December 16, 2009