Keynes | Robert Skidelsky

Summary of: Keynes: The Return of the Master
By: Robert Skidelsky

Introduction

Delve into the world of economist John Maynard Keynes as we explore his theories and ideas in ‘Keynes: The Return of the Master’ by Robert Skidelsky. This book summary provides insights into Keynes’ complex philosophy developed during significant economic events such as World War I, the Great Depression, and World War II. We’ll explore the debates between saltwater and freshwater economists, the critical theories that have shaped economic landscapes, and Keynes’ impact on a post-WWII economic policy. Underlying all these discussions is the quest for a harmonious and stable capitalist system, while tackling the role and necessity of government intervention within markets.

The Complexity of the 2008 Economic Crisis

The 2008 world economic crisis ignited a contentious debate amongst economists as they attempted to unravel its causes and find a remedy. However, the crisis called into question the efficacy of free market thinking and inspired the revival of John Maynard Keynes’ economic philosophy. Keynes’ goal was to bring about the harmonious functioning of capitalism, which includes government intervention to curb the excesses of the system. The breakdown of the global economy in 2007 and 2008 had multiple causes, including the collapse of the housing bubble, financial innovation, the banking crisis, the collapse of commodity prices, the collapse of the stock markets, and the collapse of the real economy. The failure of free market thinking led to two predominant economic schools of thought: the saltwater and freshwater schools. The saltwater (New Keynesians) argue that government fiscal policy has a role in the markets when systems don’t immediately correct themselves, while the freshwater (New Classical) contend that the markets provide the best outcomes and that government interference is unnecessary. Freshwater economists believe that they have access to complete, symmetric data, instant knowledge, and all market participants are rational. This summary explores three theories freshwater economists hold dear that have set the economic landscape for the past 30 years: the rational expectations hypothesis, the real business cycle theory, and the efficient financial markets theory. In conclusion, the 2008 economic crisis demonstrated that the future is unknowable, and Keynes’ philosophy of bringing tempering hands of the state to capitalistic methods gained relevance.

Understanding the Life and Work of John Maynard Keynes

John Maynard Keynes, an economist, and investor brought a strong affinity for psychology, aesthetics, and morality to his work in economics. He saw wealth as a means of living wisely, agreeably, and well and distrusted over-reliance on mathematics in describing monetary events. His practical work-life inspired his scholarly books and papers and his academic writings carried the credibility of his market and political experience.

John Maynard Keynes was an economist who witnessed the waning of the Victorian era and the birth of Edwardian England’s philosophical and political changes. He was a member of the artistic Bloomsbury Group and associated with individuals such as Bertrand Russell and Virginia Woolf. According to his wife, ballerina Lydia Lopokova, Keynes was “more than an economist.” He brought a strong affinity for psychology, aesthetics, and morality to his work in economics.

Keynes believed that wealth was more than money for its sake. Instead, he believed riches could provide a way to live “wisely, agreeably, and well.” He served as a civil servant while concurrently managing money for himself and his investors through two world wars and the Great Depression. His practical experience and career in government, including serving as a Bank of England director, influenced his views on policy issues and informed his scholarly books and papers.

Keynes was conflicted with the idea of over-reliance on mathematics and econometrics in describing monetary events. He thought that any attempt to quantify future prices, wages, or events was flawed due to the uncertain future. The credibility of his market and political experience carried in his academic writings, and he was mistrustful of theories that lacked practicality.

Through his experience in the market, Keynes learned the futility of trying to beat market cycles and became a buy-and-hold investor. He observed that mob reactions to plunging markets were self-defeating as they only fall further. He advised his insurance firm not to sell stocks during the Great Depression. Like Buffett, he believed in buying in a bear market, being contrarian and also having a sense of responsibility to the public good.

In conclusion, Keynes brought a strong affinity for psychology, aesthetics, and morality to his work in economics that inspired his scholarly books and papers. He believed that wealth provided a way to live wisely, agreeably and well and his practical experience and involvement in government informed his views on policy issues. He distrusted the over-reliance on mathematics and econometrics describing monetary events, and he became a buy-and-hold investor. His important contributions and legacy in economics are widely recognized and continue to influence modern economic theory.

Understanding Keynes’ Economic Ideas

John Maynard Keynes’ theories are fundamental to understanding modern economics. His ideas on uncertainty, the limits of econometrics, effective demand, the inducement to invest, the rate of interest, and wise spending are essential in maintaining economic stability. Keynes believed that people hold cash for future value, and investments can be subject to unpredicted volatility and risk. He also argued that economic events change too rapidly for statistics to plot, and abstract notions cannot be quantitatively analyzed.

The Keynesian policy prescription emphasized wise spending through government intervention in the economy. In other words, the government should spend money to keep the economic engine going, maintain stability in private investments, and supply businesses with capital to provide jobs. Keynes’ idea was to use macroeconomic policy to maintain full employment.

His perspective dominated post-WWII economic policy, as nations sought to avoid the mistakes that led to the Great Depression. The Bretton Woods system was based on Keynes’ approach that national stability depends on strong state support. However, the Washington Consensus replaced this in the ’80s, advocating for free markets with little or no government intervention. Comparing the two, under Bretton Woods, national growth rates were higher, unemployment was lower, volatility was less, and the gap between rich and poor was smaller.

Keynes concept of indeterminate uncertainty is perhaps his most enduring contribution to macroeconomic theory. By understanding the limits of knowledge, his work laid the foundation for future debates on the relationship between economic theory, policymaking, and financial markets.

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