Robert Skidelsky, the biographer of Keynes, has just written an excellent overview of Keynes and his economic principles, Keynes, The Return of the Master. This book has been reviewed at two extremes by Prof Krugman (The Guardian) and Prof Mankiw ( the WSJ). In addition Judge Posner (The Nation) refers to the book as worthy of attention in a recent article. It is clear that there is still a great deal of heat generated by Keynes depending which side of the street you are on, and people seem to be switching sides almost real time.
Skidelsky in the three volume biography of Keynes presented a professional and detailed work of the man. The three volume biography is readable body of work but from an academic perspective. It is worth the effort if you are seeking for the details on Keynes' life. If however you are a more general reader, it may come up wanting, this is not a criticism, but an observation. The new shorter book we review here is more approachable and despite Mankiw's criticism that Skidelsky eschews mathematics, the work is quite approachable. It can be read and can be enlightening, even to those who may know something of economics, a claim that is not readily made in today's world.
For in many ways economics today is akin to Christology in the fifth and sixth centuries, with all sorts of claimed heresies floating about, monophysites, Arians, Pelagians, and the like, with general disagreement as to the Greek words for person, mind, soul.In today's world of macroeconomics we see the same for each side of the debate. Now, however, the economists apply the purported rigor of equations to make the analysis appear as it it were accepted doctrine. Thus despite the outcry of Mankiw that the author eschews mathematical rigor, the book by Skidelsky is of great use and insight. Words do count, equations can often be the hiding places for weak thinkers.
Now to the book. It is short, some 190 pages, it is relatively easy going, the author writes well, and it addresses the key issues.
Part 1 is an overview of where the economy is at and how it got there. To anyone following the current economic disaster this is somewhat redundant but for a book which I believe will have lasting value it places the immediacy of the topic in a good light. On page 23 he recalls the well known fact that bankers profited at an extraordinary level from their success but did not suffer for the losses. The quote from the British Liberal Treasury spokesperson of "Bring back the guillotine!" may have merit. For consider a financial regulatory regime where there is no regulation on the top side but only one regulatory rule on the bottom side. Namely you can make as much as you want but if you lose anyone's money then you get executed. I wonder how bankers would function in such a regulatory environment? The Brit may have a point, if reinterpreted.
In Chapter 2 he goes over the current state of economics reviewing the various schools and the various underlying premises. The three premises are the rational expectations hypothesis (REH), the real business cycle theory (RBC) and the efficient financial markets theory (EFMT). The REH assumes everyone has perfect knowledge. The RBC theory he explains rests upon the strong version of the REH which is that markets always clear, a statement I have used from time to time, to my dismay, since they don't, and they don't in real time. The EFMT is the final leg of the three legged stool and it states that prices of all financial instruments or securities reflect all the risks that may affect them at any time. Well we have seen that this is not the case. He mentions one of the classic issues, herd mentality, and refers to a second, the stickiness of markets.
There is a third effect. That is that financial market makers, the bankers, will always find ways to work around things, like markets and regulations, and create new instruments and new techniques, to make more money. The bankers have, by nature, the instinct to look at any road block, any danger sign, as an opportunity to overcome it for the purpose of making more profit. Thus, I would argue that it is this "counter gaming" phenomenon that provides a significant alternation to the markets and is an effect that Keynes had not considered. In many ways it is akin to the spy-versus-spy mentality of the cold war. the regulator moves and the banker counter moves.
The author then goes onto to explain the problems inherent in Gaussian statistics. I have discussed elsewhere my experience almost forty years ago with the Black-Scholes model, where one knows that "stuff happens" whereas the Gaussian model is a graceful degradation model. The unknowns of random hits must be anticipated and managed. It is akin to the use of what are called "bang-bang" control systems, which in a manner of speaking, are regulators who prevent movement beyond a certain level. Namely regulators have a purpose in a non-Gaussian world.
Part II deals with Keynes and his life and ideas. Keynes was an idea man who actually did something other than academics. He ran his own investments and he had a first hand understanding of what went into making and losing money. The latter is often a critical element of insight. Keynes also understood ideas. Yes his classic is difficult, as are most writings from the Brits at that time. But is was a work of ideas and secondarily of equations.
Chapter 4 is the best of the chapters in that it reviews and summarizes Keynes economics and his ideas. Keynes had written on probability as a younger man and had struggled with the definition of probability especially as how it applied to economics. Keynes struggled with the issue of the meaning of a probability, namely could one look at an economy as having random events buffet it about or were there just things we did not understand that resulted in the perceived uncertainty. The current macro-economists and finance professors often accept the Wiener process as gospel and they apply the theory of this model as if it were Gospel. They use averages, and we all know that averages rarely reflect reality, and they attempt to bound the spreads with a standard deviation, which may quite small if the reality has what are called "long tails". The author does an excellent job at describing this despite the inherent complexities involved.
On p 80 he discusses the issues regarding the business cycle. The question is what causes a business cycle; something predictable and thus controllable or is the cycle an inherent instability which we must just live through. The author's comment that "...Keynes came to reject the Newtonian schema..." is a telling statement. For he continues with Keynes own words, "...economics is ...a moral science...it deals with introspection and with values...". Perhaps that and even more. Economics is akin to the dynamics of an organic system, like the growth of cells, like what we see in developmental biology and epigentics. The system keeps growing and changing, it is not some inherently stable system which we can control, it is a system where new factors and epi factors keep arising and get activated and result in spurts of change. Imagine if macro-economists thought the way systems biologists think.
On p 83 is the most telling statement of all, he says, "Uncertainty pervades Keynes's picture of economic life". That to me is the most powerful statement in the book. It is not the uncertainty of the Gaussian process it is the inherent uncertainty of not really knowing enough. The discussion on p 88 regarding econometrics is also quite telling. Keynes did not like econometrics. For one can often correlate anything with anything. Yet there must be some underlying reality in this set of relationships, there must be a "law of nature", repeatable and verifiable, which one can rely upon, otherwise econometrics is worthless.
Chapter 5 is an excellent review of the application of the principles. The discussion on p 111 on the differences with Keynes and the current theorists is worth a long and detailed read.
Chapters 6 thru 8 are worth the read in that they details some of Keynes thoughts regarding Capitalism and other issues. They are in many ways a summary of Keynes as the man and less as the thinker.
This is a superb book, worth the read, and worth returning to from time to time. Yes it lacks a single equation, but at times ideas count.
Skidelsky in the three volume biography of Keynes presented a professional and detailed work of the man. The three volume biography is readable body of work but from an academic perspective. It is worth the effort if you are seeking for the details on Keynes' life. If however you are a more general reader, it may come up wanting, this is not a criticism, but an observation. The new shorter book we review here is more approachable and despite Mankiw's criticism that Skidelsky eschews mathematics, the work is quite approachable. It can be read and can be enlightening, even to those who may know something of economics, a claim that is not readily made in today's world.
For in many ways economics today is akin to Christology in the fifth and sixth centuries, with all sorts of claimed heresies floating about, monophysites, Arians, Pelagians, and the like, with general disagreement as to the Greek words for person, mind, soul.In today's world of macroeconomics we see the same for each side of the debate. Now, however, the economists apply the purported rigor of equations to make the analysis appear as it it were accepted doctrine. Thus despite the outcry of Mankiw that the author eschews mathematical rigor, the book by Skidelsky is of great use and insight. Words do count, equations can often be the hiding places for weak thinkers.
Now to the book. It is short, some 190 pages, it is relatively easy going, the author writes well, and it addresses the key issues.
Part 1 is an overview of where the economy is at and how it got there. To anyone following the current economic disaster this is somewhat redundant but for a book which I believe will have lasting value it places the immediacy of the topic in a good light. On page 23 he recalls the well known fact that bankers profited at an extraordinary level from their success but did not suffer for the losses. The quote from the British Liberal Treasury spokesperson of "Bring back the guillotine!" may have merit. For consider a financial regulatory regime where there is no regulation on the top side but only one regulatory rule on the bottom side. Namely you can make as much as you want but if you lose anyone's money then you get executed. I wonder how bankers would function in such a regulatory environment? The Brit may have a point, if reinterpreted.
In Chapter 2 he goes over the current state of economics reviewing the various schools and the various underlying premises. The three premises are the rational expectations hypothesis (REH), the real business cycle theory (RBC) and the efficient financial markets theory (EFMT). The REH assumes everyone has perfect knowledge. The RBC theory he explains rests upon the strong version of the REH which is that markets always clear, a statement I have used from time to time, to my dismay, since they don't, and they don't in real time. The EFMT is the final leg of the three legged stool and it states that prices of all financial instruments or securities reflect all the risks that may affect them at any time. Well we have seen that this is not the case. He mentions one of the classic issues, herd mentality, and refers to a second, the stickiness of markets.
There is a third effect. That is that financial market makers, the bankers, will always find ways to work around things, like markets and regulations, and create new instruments and new techniques, to make more money. The bankers have, by nature, the instinct to look at any road block, any danger sign, as an opportunity to overcome it for the purpose of making more profit. Thus, I would argue that it is this "counter gaming" phenomenon that provides a significant alternation to the markets and is an effect that Keynes had not considered. In many ways it is akin to the spy-versus-spy mentality of the cold war. the regulator moves and the banker counter moves.
The author then goes onto to explain the problems inherent in Gaussian statistics. I have discussed elsewhere my experience almost forty years ago with the Black-Scholes model, where one knows that "stuff happens" whereas the Gaussian model is a graceful degradation model. The unknowns of random hits must be anticipated and managed. It is akin to the use of what are called "bang-bang" control systems, which in a manner of speaking, are regulators who prevent movement beyond a certain level. Namely regulators have a purpose in a non-Gaussian world.
Part II deals with Keynes and his life and ideas. Keynes was an idea man who actually did something other than academics. He ran his own investments and he had a first hand understanding of what went into making and losing money. The latter is often a critical element of insight. Keynes also understood ideas. Yes his classic is difficult, as are most writings from the Brits at that time. But is was a work of ideas and secondarily of equations.
Chapter 4 is the best of the chapters in that it reviews and summarizes Keynes economics and his ideas. Keynes had written on probability as a younger man and had struggled with the definition of probability especially as how it applied to economics. Keynes struggled with the issue of the meaning of a probability, namely could one look at an economy as having random events buffet it about or were there just things we did not understand that resulted in the perceived uncertainty. The current macro-economists and finance professors often accept the Wiener process as gospel and they apply the theory of this model as if it were Gospel. They use averages, and we all know that averages rarely reflect reality, and they attempt to bound the spreads with a standard deviation, which may quite small if the reality has what are called "long tails". The author does an excellent job at describing this despite the inherent complexities involved.
On p 80 he discusses the issues regarding the business cycle. The question is what causes a business cycle; something predictable and thus controllable or is the cycle an inherent instability which we must just live through. The author's comment that "...Keynes came to reject the Newtonian schema..." is a telling statement. For he continues with Keynes own words, "...economics is ...a moral science...it deals with introspection and with values...". Perhaps that and even more. Economics is akin to the dynamics of an organic system, like the growth of cells, like what we see in developmental biology and epigentics. The system keeps growing and changing, it is not some inherently stable system which we can control, it is a system where new factors and epi factors keep arising and get activated and result in spurts of change. Imagine if macro-economists thought the way systems biologists think.
On p 83 is the most telling statement of all, he says, "Uncertainty pervades Keynes's picture of economic life". That to me is the most powerful statement in the book. It is not the uncertainty of the Gaussian process it is the inherent uncertainty of not really knowing enough. The discussion on p 88 regarding econometrics is also quite telling. Keynes did not like econometrics. For one can often correlate anything with anything. Yet there must be some underlying reality in this set of relationships, there must be a "law of nature", repeatable and verifiable, which one can rely upon, otherwise econometrics is worthless.
Chapter 5 is an excellent review of the application of the principles. The discussion on p 111 on the differences with Keynes and the current theorists is worth a long and detailed read.
Chapters 6 thru 8 are worth the read in that they details some of Keynes thoughts regarding Capitalism and other issues. They are in many ways a summary of Keynes as the man and less as the thinker.
This is a superb book, worth the read, and worth returning to from time to time. Yes it lacks a single equation, but at times ideas count.
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