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Skidelsky's 'Keynes: The Return of the Master'

by Robert Teitelman | Published August 3, 2010 at 10:30 AM

Keynes: The Return of the Master
by Robert Skidelsky

Robert Skidelsky's "Keynes: The Return of the Master" hit the stores in the last week and seems certain to further turn up the heat in an economics profession engaged in soul-searching and a re-examination of fundamental principles. Skidelsky, of course, is the biographer of John Maynard Keynes and a figure who has been quite forthright in his criticisms of economics, much of which he lays out here. Skidelsky, like Keynes, decries the turn the discipline has taken toward mathematical models built upon what he argues is the confusion of uncertainty with risk, thus turning every economic decision into a "rational" choice built on seemingly solid probabilities -- that is, "risk." He covers a lot of ground in this relatively thin book, but if there's a bottom line, it's that the crisis was caused not by a mispricing of risk, but by a broad belief that risk could be quantified as a probability and that the future can, in that sense, be known. In short, for all the talk that we're all Keynesians now, the great man's emphasis on the future as "irreducible uncertainty" has been lost.

The reviewers are already weighing in. In The Wall Street Journal Monday, Harvard's Gregory Mankiw pointedly observes that Skidelsky is a better historian than economist, and that Keynes "was a creative thinker and keen observer of economic events, but left us with more hard questions than compelling answers." Math, writes Mankiw, is simply the language of logic, suggesting broadly that Skidelsky's aversion to a highly mathematized economics represents a sort of failure of rigor, resisting the notion that there are aspects of a social system like economics that exists beyond quantification -- like knowledge of the future. A layman speaks here from the back of the room, but here goes: Might it be that economics has continued to struggle to answer some of Keynes' hard questions because they can't be fitted into equations? In fact, Mankiw never even mentions uncertainty.

That said, many of these technical questions, particularly on macroeconomics, can only be fruitfully debated by trained economists -- a group Keynes himself referred to as purveyors of a kind of "scholasticism." But Skidelsky's recapitulation of Keynes does raise questions closer to home, which we've commented on before. That's the matter of predictability, specifically the ability to accurately "call" a bubble, a crisis or a turn in the market. This speaks generally to large questions of regulatory policy and to smaller, but still important, questions about the role of analysts and forecasters. And, to get even more parochial, the question of whether the economic or market future can be accurately predicted casts a light on the extent to which financial journalism "failed" in not calling last year's financial crisis.

"Uncertainty pervades Keynes' picture of economic life," writes Skidelsky. He tackled it as a fundamental problem early in his career, when he wrote about probability, and much later, in "The General Theory of Employment, Interest and Money." He did not believe the attempt to cope with the future could ever be statistical; indeed, most people respond to a murky future with varying degrees of confidence, what he later called "animal spirits." Because they could not know, with any certitude, what may happen, they turned to "conventions, stories, rules of thumb, habits, traditions." This, to Keynes, was a rational response -- about as rational as anyone could get. Expectations, which varied by the evidence that they might actually come true, regulated confidence. Keynes, says Skidelsky, believed that most of the disasters that bring down companies and banks are "unforeseeable." That sense of uncertainty, Skidelsky goes on to argue, changed with the notion that we could harness vast amounts of information and computer power to "reduce uncertainty to the status of calculable risk." That is, given our technology, that the past can be mined to predict the future.

Skidelsky doesn't really go here, but that belief in predictability, particularly by specially trained technocrats, has been widely popularized. Brokers, analysts, pundits, politicians, regulators, CEOs, economists, even journalists are all expected to accurately predict the future; they get paid, sometimes well, to try. Failure to do so raises not only questions of competence but of corruption.

As a result, that belief that the future is foreseeable is much broader than economics; it's the heart of the underlying critique that argues that financial journalism should have seen all that was coming and raised the alarm. The fact that that did not occur points to laziness, stupidity, venality, conflict. And yet the problem of tracing causality from the past into the future, from mastering not only a complex, global, and often-opaque financial system, but -- and this is where prediction grows hairiest - anticipating the behavior of millions of human decision makers, is, well, daunting. Given the human component -- and for our purposes, we have to assume people are free agents -- the difficulty of accurately calling the future is off the charts. This explains why so few foresaw the full extent of the crisis. It also suggests why those who did aren't necessarily guaranteed to do it again. And it illuminates why those who predicted some aspect of the problem, and they were far more common in the media than the critics suggest, got very little traction.

As I've written before, this takes no one off the hook. Again channeling Keynes, you don't have to fully see or know the future to recognize developing problems. But you do need the will, the power and the pulpit to act when there's reasonable evidence that markets are overheating. Without the belief in self-regulating markets and economies always seeking equilibrium, regulators might have been more willing to move sooner, although the politics of bubble deflation will always be formidable. And the financial media is hardly innocent. There were scandals out there -- subprime was one of them -- that were undercovered. (Though subprime, in isolation, did not necessary reveal the full-blown credit crisis that developed.) And the financial media shares with much of its audience a resistance to tangled and complex matters that range from global trade imbalances to derivatives regulation. Indeed, the continuing coverage of financial regulatory reform in the consumer media, including the blogosphere, doesn't exactly provide persuasive evidence that we've progressed very far.

All that said, reading Skidelsky on Keynes does point up a strange parallelism in the debate over who should have seen the future. The very folks who argue that journalists can investigate and trace certain abuses in the past and reveal the shape of the economic future are tapping the same underlying beliefs held by those who posit that the future can be probabilistically described and that irreducible uncertainty can be packaged and managed as risk. Strange bedfellows, indeed.

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