Editor's note: This contribution by the late journalist I.F. Stone first appeared in our January 1975 magazine.
A version of this book review will run in the April issue of The Progressive.
Keynes: The Return of the Master
by Robert Skidelsky
PublicAffairs. 240 pages. $25.95.
From the smoking rubble of Wall Street and its market fundamentalism in the 1930s, a genteel English economist clambered, brushed the dust from his suit, and totally remade the way we understand economics. John Maynard Keynes discarded the old myth that the market is pure and rational and operates best when government does least. In its place, he built the intellectual foundations for a very different world—one where democratic governments intervene every day to regulate big business, prevent extreme inequality, ensure full employment, and stimulate the economy when it sags.
In the postwar world, some of Keynes’s economic ideas were finally put into place—even Richard Nixon is said to have pronounced, “We are all Keynesians now.” The result was plain: For three decades there were no global crashes. But then Keynes’s ideas were dismantled by people who said markets didn’t need such fancy management. In slow motion, the Western world fell back to a 1920s economy—deregulated and grossly unequal. Everything Keynes warned would happen came to pass. The growth rate sank. The rich mainly benefited from the growth that remained. Unemployment rose. And it ended like the old Twenties: with a Wall Street Crash and the whispers of a Great Depression.
Once more, the same man has strutted in ghostly from the wreckage, with Time magazine calling him “the Comeback Keynes.” But today’s politicians want to pick only the most immediately convenient Keynesian tools, while discarding his much more comprehensive vision. Sure, they’ll take a fiscal stimulus here and a dab of regulation there, but who needs the General Theory?
We do. Robert Skidelsky is the perfect man to excavate the real Keynes buried under the rubble. Skidelsky has written the definitive biography of him—and now, in Keynes: The Return of the Master, he shows how Keynes’s understanding of the limitations of markets is desperately needed today.
If you read Keynes’s 1930s writings now, it seems as if he is arguing directly against Milton Friedman and Robert Rubin and Alan Greenspan. The ideas that created the Depression returned almost verbatim in the 1980s and became super-charged into the Noughties. They preached the Efficient Market Hypothesis: that the market system left to itself, stripped of regulation, will correctly price all goods and services—including risk. Government should only get out of the way and let it work its magic. Economists built highly sophisticated mathematical models to “prove” this was the case.
But Keynes said economics doesn’t—and can’t—work like Newtonian physics. You can’t establish a series of equations describing a perfectly rational world, and expect it to even vaguely approximate how human beings behave. Newton watched an apple fall and the theory of gravity fell into place. Keynes said no such revelations were possible in economics because people are unpredictable: “It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the center of the Earth.”
He thought markets were a bit like yeast. If you don’t have any yeast, your bread won’t rise: it’ll be flat and doughy. But if you only have yeast, you have nothing but an indigestible fungus. Markets are essential, but they are only one part of the recipe.
Keynes laid out a long stretch of reasons why the “rationality” presumed by the market fundamentalists was deeply irrational. Human beings can’t rationally assess everything we buy for its value. We have a built-in herd mentality: We will stampede towards an exciting prospect if everybody else seems to, making it overpriced, and stampede away in a crisis, making it underpriced.
Even more importantly, we don’t have perfect information about the things we buy. Insiders have a huge advantage over outsiders: Some bankers knew they were packaging lousy debt into a derivative; most investors didn’t. So insiders can—and if allowed, do—rig the market in their favor. As Skidelsky puts it: “The only perfectly informed person is God, and he does not play the stock market.” If there isn’t tight regulation, ripoffs by insiders become routine.
Worst of all, when there is a shock to the economic system, it cannot correct itself. Precisely because people don’t know what will happen next, they will react to a crisis by stopping spending and starting saving. The economy then gets even worse. Fear seeps through the system like water through a sponge.
Thanks to these flaws and many more, the notion that deregulated markets will reach an “equilibrium”—which provides the best of all outcomes—turns out to be a quasi-religious fantasy. The economic models “proving” it is so are lies and act, as Professor Paul Davidson puts it, as Weapons of Math Destruction, shoving us towards the abyss. Unregulated markets will seesaw wildly between booms and busts. Only tough regulation can stop the market from devouring its own internal organs, and only big government spending can prevent a bad recession souring into a depression.
This was all willfully forgotten by the Chicago School economists and Ayn Rand devotees who conquered America. They didn’t prevail because they had the best arguments; their predictions were about as accurate as Sybil the Soothsayer’s. No, they prevailed because their arguments served the interests of the super-rich, who lavishly funded the campaigns of politicians who picked them up.
When the crash came, these economists were genuinely bemused; it contradicted the Holy Tablets of their mathematical models. Greenspan stammered he was “in a state of shocked disbelief. … The whole intellectual edifice … collapsed.”
Since then, most governments have turned to fiscal stimulus bills. The largest by far has been China’s, and—not coincidentally—it has been the most successful in restoring growth. The more puny offerings by Barack Obama and European leaders have been less successful because they have not gone far enough. (Even this stimulus has been resisted by the Republican right. They are Herbert Hoovering-up the tired old market fundamentalist dogma that the state is the problem, and if it only withdrew, the market would put everything right again.)
Yet even the politicians preaching stimulus seem to think they can give the economy a Keynesian kick-start, and then merrily go back to market fundamentalist business-as-usual. The too-big-to-fail banking system is still too big and too prone to fail, with only minor tinkering from a heavily bribed Congress. It is still pumping out unearned bonuses. The wider warnings of Keynes—that markets are a limited tool and they need to be always counterbalanced by democratic states, in good times and bad—are being scraped off, as if they were merely icing on his economic theories.
But Keynes’s analysis ran deeper still. He didn’t only see the problems unfettered markets caused in his own time; he peered way ahead, to glimpse the problems they would cause at our stage of economic development too. He understood how to ensure economic growth better than anyone, but he thought there would come a time—around about now—when the ceaseless pursuit of economic growth had done its work, and we should abandon it.
Today, the only shared structural goal of our society is to grow, grow, grow—so Keynes’s questions seem, at first, puncturing and bewildering. What is economic growth for? Why do we do it? Keynes said it should have only one goal: to enable human beings to live “wisely, agreeably, and well.” For a time, growth will—provided it is matched by a redistributive state—achieve this. It will make people less hungry, less cold, less ill, and therefore more happy. But he saw that there would come a time when a society had achieved “abundance”—and growth would stop adding to the sum of human happiness.
It was an uncannily accurate prediction. Professor Richard Layard of the London School of Economics has conducted pioneering research that proves once a society has a certain basic level of comfort, chasing more money doesn’t make us any happier. Over the past fifty years, Western societies have become massively wealthier—yet we are no happier. We are all running ever more frantically on the growth treadmill, but we are getting nothing out of it. Sure, we can—if we are lucky—keep a few inches ahead of our fellow citizens, and we can buy more flashy consumer durables we have been convinced by advertising to “need.” But it doesn’t give us joy.
Keynes also foresaw the other, even more crucial, point at which economic growth would hit the end of the runway. There are ecological limits to growth. We can burn and package and consume only so much before the planet becomes a depleted husk. Yet our economic models, again, cannot see environmental costs: Those are mere “externalities” that are always trumped by short-term profit. Carbon emissions might cost us the ecosystem, but they don’t cost corporations cash—so they continue. Keynes saw it coming, albeit in the shadows. In 1933, he wrote: “We destroy the beauty of the countryside because the unappropriated splendors of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend.”
You can’t casually exhume John Maynard Keynes and whirl him around Capitol Hill once every depression. We need his ideas—in full, and in our faces—before we sag back into market fundamentalist fantasies.
Johann Hari is a columnist for The Independent newspaper in London, and a contributing writer for Slate. He was named Journalist of the Year by Amnesty International for his reporting on the war in Congo.