«Keynes would have hated the excessive ‘financialization’ of today»

If Keynes was alive today he probably would agree with the critics of financialization who believe finance plays far too great a role in economy and politics nowadays.

Perhaps it seems a paradox. Keynes was a bon vivant, a bridge gambler and champagne aficionado, he traded in currencies, commodities and stocks where he amassed a fortune (but also lost in the stock market in 1929), he was a manager of an investment company and chairman of a life insurance company, but he regarded financial manias as chaff in a casino – he was a heretic intellectual and investor. Keynes even admitted once he would follow the American Thorstein Veblen radicalism and advocate “the euthanasia of the rentier”. Harsh words, indeed. Critics will say he was a dilettante.

John Maynard Keynes died at 63 in 1946, over sixty years ago, after a long carrier as British civil servant (including director of the Bank of England and member of the Treasury Department), international negotiator (Bretton-Woods has his name in the Wall and long before he represented the Treasury at the Versailles Conference), prolix author, modern art collector, cultural venture capitalist, curator, benefactor, investor, compulsive talker – a man of many facets and tricks (his nickname among his close bohemian friends was Pozzo).

Keynes died for the second time in the 1970s when the new anti-Keynesians ridiculed his theories and medicines. For three decades, the British economist was in eclipse. American ‘efficient markets theory’ and monetarism won the academy and the politicians. Milton Friedman, Eugene Fama and Robert Lucas substituted Keynes in the mainstream Economics and Treasury Secretaries and Departments thinking.

“But, Keynes, it turns out, is having the last giggle. We’re living the second Age of Keynes”, as observed by Paul Krugman reviewing Keynes: The Return of The Master, the new book from Lord Robert Skidelsky, just published in September, in the UK (Allen Lane, Penguin Books).

This reemergence of Keynes didn’t come without severe pain. We needed to suffer a Great Panic in 2008 and the menace of a new Great Depression to assist to his glorious return as a savior. Although a dead worldly philosopher, he came back not as ghost but as a master economist, the Master, as in the title of the new book.

Skidelsky, Keynes’s acclaimed biographer, explained, in this interview, why this book now: “The main reason was that I considered that some of Keynes’ neglected insights into the nature and purpose of economic life were ripe for recall in the light of the total failure of the dominant current schools of economics to explain how a crisis of this magnitude could erupt out of supposedly efficient financial markets.”

If we can summarize The Master in short sentences useful for nowadays politicians, economists and amateurs, we would follow Skidelsky four steps about Keynes thinking:

1- The future is uncertain, rather than merely risky; the market system is inherently unstable; this irreducible uncertainty lies behind bubbles and busts of capitalism, explains the intrinsic instability of market economies;

2- Economies hit regularly by ‘shocks’ can, if left to themselves, run down and stay depressed a long time; that’s why we need monetary and fiscal tools from the State in those exceptional times for a “abnormal” (a word used with a chirurgical intention by Keynes) government spending, that will work as a multiplier provoking a snowball effect;

3- The permanent task of government is to maintain an environment in which the ‘shocks’ were less likely to occur;

4- Capitalist financial manias developed a rentier seeking system which is not the same as a means to a civilized word.

Perhaps these four propositions will suffice to define you as a Keynesian, dear reader.

AUTHOR’S PROFILE: Robert Skidelsky

Lord Skidelsky, 70, is emeritus professor of Political Economy at the University of Warwick, in the UK. His three volume biography of Keynes, published in 1983, 1992 and 2000, received numerous prizes. This work “should be given a Nobel Prize for History if there was such a thing”, said the British historian and prominent academic Norman Stone. He was elected Fellow of the British Academy in 1994.

His early life was raised in turbulent times. He was born in Harbin, Manchuria, in 1939 at the time occupied by the Japanese since 1931. His parents were British citizens from Russian and Jewish ancestry. He and his parents were interned in prison camps in Manchuria and in Japan in the 1940s. After, the family was released in exchange for Japanese internees in England. With the triumph of Mao in China, Robert came to Britain as a student in 1950. He published several books since 1967. He began his adventure trough the life of Keynes after appointed professor of International Studies at the University of Warwick in 1978. He retired in 2006. One curious consequence of writing about The Master was that Skidelsky acquired Keynes’s country house in East Sussex in 1986 on a twenty year lease.

Skidelsky never took a degree in Economics. He got some tutorials or supervisions from eminent economist friends, as he explained. He considers himself an economic literate historian – not a professional economist at all. His passion from his ninth birthday in Tientsin (China) is history, world history. In 1995 he wrote World after Communism and in 2008 he completed a short history book: Britain in the 20th Century. He is co-authoring a book about the sense and non-sense of Globalisation, forthcoming next year. He passed through politics, as a founder member of the British Social Democratic Party and joined the Conservatives. He was against the current several times and left politics in 2001.

Since 2001 he accepted positions in financial companies in the US. He is ironic about this last twist in his life: “I believe this could only happen in the USA. In the UK nothing I have written or done has suggested to anyone that I might be suited for money-making!”

TWO TIPS from the interview below

Most relevant aspect nowadays

«I think the aspect of Keynes’s work most relevant to what has happened in the last two years is his emphasis on uncertainty, and the distinction he made between uncertainty and risk. Too often we talk of risk management when we should be talking of uncertainty management.»

Animal Spirits, rationality and irrationality

«Keynes did not believe that human beings acted irrationally. He thought of rational as ‘reasonable’. In general human beings acted as reasonably as their circumstances allowed. These circumstances included the existence of irreducible uncertainty. Acting according to ‘animal spirits’ was rational in the face of the unknown, as indeed was herd behaviour.»

A short interview with Lord Robert Skidelsky

QUESTION: This financial crisis, the risk and fear of a new Great Depression, the G20 dynamics bring back Lord Keynes after 30-40 years of exile in the academic world. Do you think – for economics and for politicians – this is a “Keynesian moment”?

ANSWER: Yes definitely. The ‘stimulus’ is a Keynesian policy tool based on Keynesian reasoning. As Robert Lucas of Chicago University said ‘We are all Keynesians in the foxhole’.

QUESTION: Where the Keynesian heritage is most appropriate: in the anti-cyclical government policies, particularly the fiscal ones, or in the international agenda dealing with the turmoil in the international monetary system and the crisis of the dollar hegemony?

ANSWER: The stimulus is an emergency policy. Once the global economy is out of the foxhole, we have to set up a system which stops us falling into foxholes. This must include a more equal distribution of international reserves, which in turn involves an agreement on exchange rate rules. It also means an end to the political imbalances which have justified the hegemonic position of the dollar.

QUESTION: You have been a biographer of Lord Keynes for so much time. From his memories, which aspect, event or ditto, you think is the most appropriate for the economic and political landscape of today?

ANSWER: I think the aspect of his work most relevant to what has happened in the last two years is his emphasis on uncertainty, and the distinction he made between uncertainty and risk. Too often we talk of risk management when we should be talking of uncertainty management.

QUESTION: Lord Keynes “resurrected” Thorstein Veblen, the iconoclast of the theory of the leisure class, and he once said that he would recommend the “euthanasia of the rentier”. Facing the huge financialization of the OECD economies since the 1970s, in what sense Keynes thoughts can be useful today?

ANSWER: Keynes would have hated the excessive ‘financialization’ of the economy for the reason that it exalted abstract love of money above the enjoyment of concrete goods. While the former might be a means to the latter, it was too often a substitute. He wanted the economy to be as concrete as possible, so that people would not lose sight of this primary question: what is wealth for?

QUESTION: Professor Krugman recently opened a new American Keynesian revival, but the academia is very fragmented, and new economics’ approaches since the 1980s emerged, like the complexity economics, the evolutionist economics, the econophisics, the behavioral economics (although based on the animal spirits of Keynes), etc. Do you think it’s time for a Keynesian renaissance, or it would be better that different schools of thought blossom?

ANSWER: I believe the debate between those who believe market participants are rational and those who believe they are irrational is a red herring. The problem lies in the neoclassical definition of rational behaviour as behaviour which conforms with a mathematical model of individual decision-making. Any behaviour which deviates from this model is by definition dubbed irrational. Keynes did not believe that human beings acted irrationally. He thought of rational as ‘reasonable’. In general human beings acted as reasonably as their circumstances allowed. These circumstances included the existence of irreducible uncertainty. Acting according to ‘animal spirits’ was rational in the face of the unknown, as indeed was herd behaviour.

2 Responses to “«Keynes would have hated the excessive ‘financialization’ of today»”

  1. […] This post was mentioned on Twitter by Di Wilson. Di Wilson said: «Keynes would have hated the excessive 'financialization' of today» http://bit.ly/3w0n7S […]

  2. […] aspectos levantados por Keynes (e, recentemente, recordados pelo biógrafo inglês de Keynes, Robert Skidelsky, na sua obra The Return of the Master, e por George Akerlof e Robert Shiller no livro justamente […]

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