Book review - Keynes: The Return of the Master, by Robert Skidelsky

Skidelsky argues that it's time for a paradigm shift in macroeconomics - inspired by Keynes.

by Shamik Dhar

John Maynard Keynes was not only the greatest 20th-century economist, he was also the most quotable. His second most famous aphorism was that 'practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist'. And this book's central argument is that, more than greedy bankers, incompetent policy makers or naive investors, it's the ideas of defunct economists that are to blame for causing the worst global recession since the great depression. Along the way, according to the author, we have been forced to rehabilitate Keynes, the man who first saw that capitalism is prone to periodic collapses and then set about saving it from itself.

The book is at once an introduction to Keynes' ideas and an attack on the prevailing intellectual consensus. Chief villain and defunct economist emeritus is Robert Lucas, high priest of the Chicago School, which undermined Keynesian theory in the 1970s. According to Skidelsky, three ideas associated with Lucas and the Chicago revolution lie at the heart of economic orthodoxy and are not only wrong but highly dangerous. 'By their influence on the way policy makers think about the world, they have helped create a system which is inefficient, unjust and prone to frequent collapses.'

The three premises are the rational expectations hypothesis, real business cycle theory and the efficient markets theory. Skidelsky sketches each of them nicely, and describes the intellectual and political climate under which they flourished. There isn't space to describe them fully here; suffice to say they promoted the efficiency of markets over government intervention and ruled out the possibility of financial collapse and economic slumps.

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