The Keynes comeback

Their perspectives differ. Peter Clarke,an historian,makes the case for Keyness continued relevance by combining an absorbing narrative of his life with perceptive comments on how that life shaped his views. The book progresses chronologically through the important biographical landmarks: Keyness membership of the Bloomsbury group; his rollercoaster record as an investor; his interest in economic policy,from a minor technical role at the 1919 Paris Peace Conference to centre-stage at the 1944 Bretton Woods conference. Along the way it charts Keyness intellectual progress,showing how events,such as Britains persistently high joblessness in the 1920s,fed the evolution of his view that classical economic theory was inadequate and that a capitalist economy called for government intervention.

Mr Clarke deftly describes the twisting contours of Keyness impact on both economic policy and economic theory. He convincingly demolishes the naive deficit-loving,market-hating caricature that Keynesianism is often reduced to. But,despite the occasionally proselytising tone,this book is more a celebration of Keyness revival than a call to action.

In The Return of the Master Robert Skidelsky takes a different tack. As the author of a magisterial three-part biography of Keynes,Mr Skidelsky knows more about him than any other scholar. He now tries to refocus Keynesianism in the public mindand in doing so claims that most modern economics is bunk.

Keyness insights,he argues,can be broken down into two broad categories: why economies go into a downturn; and why they stay in onethe main topic of Keyness most important work,The General Theory of Employment,Interest and Money,written at the bottom of the Depression in 1936. Keynes showed that,contrary to the beliefs of classical economists,supply did not always create its own demand,and that governments needed to step in to prevent persistent underemployment. This is the idea that lies behind most post-war demand management as well as todays fiscal stimulus packages.

It is also the area where Keyness influence within economics is most felt. Much of modern macroeconomics has been about how,and whether,his ideas fit into the formal microeconomic building blocks of rational behaviour and complete markets. New classical economists say no; New Keynesian ones say yes. Thanks to imperfections,whether sticky wages or asymmetries of information,markets do not always clear,and overall demand can fall short of an economys potential.

Unfortunately,says Mr Skidelsky,this intellectual evolution has paid far too little attention to Keyness other big insight,which regards radical or irreducible uncertainty as the root cause of economic instability. This immeasurable uncertainty,he argued,explains why people hoard cash,why investment is volatile and why financial markets are inherently unstable.

The idea of uncertainty and its connection with confidence rings truer after the happenings of the past year. But it is a concept that sits ill with the theoretical underpinnings of modern macroeconomics. And that,Mr Skidelsky says,is the real problem. By ignoring irreducible uncertainty,modern economics had gone fundamentally off course. Those intellectual errors,in turn,prompted huge policy errors,such as relying on deregulated financial markets. This present crisis,he thunders,is a crisis of systemic ignorance not asymmetric information.

Mr Skidelskys desire to refocus Keyness legacy is legitimate. And his criticism of modern macroeconomics is withering. But poking intellectual holes is easier than offering an alternative. The authors ideas for revamping both economics and economic policy are disappointingly undeveloped. Within economics he wants to separate macroeconomics from micro. He wants more holistic teaching that plays down maths. In the policy world,he wants to restrict the role of finance and set up a more managed global economy. But little of this is fleshed out.

Those looking for a more detailed policy agenda should turn to The Keynes Solution by Paul Davidson. Mr Davidson,an economist who edits the Journal of Post-Keynesian Economics,is Keyness most faithful academic disciple. He has spent his career explaining why Keyness insights demand a fundamental revamping of economics. On the basis of the masters ideas of radical uncertainty,for instance,he has long argued that securitisation-the slicing and dicing of illiquid assets such as mortgagesis inherently flawed. His book advocates banning much of it outright.

But his solution goes much further. He wants a centralised incomes policy to control inflation. And he wants to re-create Keyness 1944 plans for an International Monetary Clearing Union. Countries would receive credits for payments surpluses,which would be subject to confiscatory taxes if they got too big. The world economy may have changed beyond recognition since 1944,but to a true disciple the same policies make sense. To most others,however,Mr Davidsons solutions are outmoded and unworkable.

And that,in the end,is the problem that plagues all these books. Keyness disciples are right that their prophets visions go far beyond the stimulus packages with which his name is now associated. But it is much less clear how these ideas should be applied to the realities of contemporary economic policy. Beyond a broader faith in governments role,the question of What would Keynes have done? is surprisingly difficult to answer.

The Economist Newspaper Limited 2009