For the past few days I’ve been driving, busing and walking in to my office listening to a podcast of an interview of Robert Skidelsky by Bloomberg radio’s Tom Keene. It’s a fabulous discussion of how John Maynard Keynes’ thoughts apply to the present world economic and financial situation, what Keynes’ relation to the Austrian School was, and how he saw the fundamental nature of economics and how economists should be trained.
Lord Skidelsky (he’s an independent in the British House of Lords – go check him out at www.skidelskyr.com) spent 30 years writing a biography of Keynes, and three months writing his latest book: Keynes: the Return of the Master. Keene is a great interviewer because he understands economic theory, and Skidelsky was a great guest because he’s able to talk in the language humans speak. From the podcast I was interested in hearing that Keynes was anti-socialist, pro-capitalist and pro-markets, that his differences with folks like Friedrich Hayek were much smaller than he and Hayek thought and smaller than subsequent generations have believed, and that Keynes was already concerned about the over-reliance on mathematics by economists that was already evident in the 1930s.
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I’m interested in both the Austrian School of economics and in the dangers of the excessive mathiness of economics, so today I ran out to the local bookseller to buy this mini-tome by Skidelsky. CURSES!!!!! The book’s on the shelf in the U.K. and the U.S., but not in Canada yet, I was told. I’ll have to wait until October 27. What am I to do? Perhaps I will just listen to the podcast another half a dozen times. So I asked if they had a copy of The Myth of the Rational Market, a book by Justin Fox, who was also recently interviewed by Keene. Nope. That one’s sold out at the downtown location. Clearly there’s a conspiracy unfolding in which my reading interests will be frustrated until I atone for some sin or other.
I was quite surprised in the interview to hear how much Keynes thought economics was getting too mathy in the 1930s – a trend that has gone into a parabolic advance in recent decades (perhaps a blow-off before a return to a more principled approach?). He thought, according to Skidelsky, that schools of economics were producing computing machines who had no knowledge of and never used the wisdom of history, ethics and politics. So they’d produce numbers from formulae and think these represented big picture truths, rather than background details. Keynes would clearly have been bewildered by the profusion of Ph.D.s of mathematics that became common on Wall Street in the past decade. Most have been Black Swanned back to the halls of academe or to the drivers seats of taxis . . .
I’ve always believed that Keynes and Hayek of the Austrian School were at opposite poles of thought about what to do in economic slumps, but Skidelsky seems to feel they were closer in general economic outlook than either realized. I’ve always been fond of the Austrian school, so I’ve tended to ignore Keynes, but I’m going to give Skidelsky’s book a chance to sway me a bit over to JM’s side.
What’s interesting is the vogue for (comparatively) ancient economists like these that has developed in the current crisis. Lots of Big Government Intervention folks are turning to Keynes as a guide as to how to get ourselves out of this mess. (Paul Krugman – come on down!) Others are dragging out characters like Hayek. Marc Faber, the fabled investor and guru, recently criticized Krugman for entirely ignoring the Austrian School in his discussion of why economists missed the coming problems, and noted there were a number of folks who did warn about the coming storm. (Check out David Tice at www.prudentbear.com) I notice on the Hayek Center website (http://hayekcenter.org) that they promoting a Der Spiegel story that claims a Hayek-inspired central banker saw the problems arising years ago, suggesting Hayekian principles might have avoided what we have landed in.
So, both Hayek and Keynes are current and relevant again.
I wonder where I would fit in on the spectrum between these two econ-gods? I thought it was crazy to drain the world’s treasuries last year and this to prop up crappily run and wildly irresponsible banks and companies so that they could linger on, being crappy and irresponsible. I’d have let more Lehmans crash. Hayek believed that crises cleansed the market of diseased organs, and the great clearing of a slump would set up the next beneficial cycle. The crash would have been a lot bigger, but the recovery would come and be sustainable sooner, I think. (Jim Rogers has often argued the same thing.) So it sounds like I’m a Hayekian. But Keynes said no one should assume a market is necessarily self-correcting, and if you let it go too far down you’ll do true, long term damage to demand and productive capacity, so governments have to act to stop a full-scale deflation and implosion. Well, I agree with that too. Does that mean I’m a Keynesian? I wouldn’t use government money to prop up chronically sick and cancerous companies, but I’d keep demand alive by getting money out to the plebs with programs like EI (I’d extend its payments) and perhaps bunch of public works projects that everyone would agree need to get done, and I’d let that money in people’s pockets re-inflate the economy by flowing into the surviving companies that didn’t cause the problems in the first place. The reason I’d not give money to the banks and other companies that are suffering is so that I’d have it to give to common folk who are the economy’s underlying demand.  Then you’d get good, organic growth, clear the market of the diseased material, and we’d be coming out the other end in better shape.
What would Keynes and Hayek have thought of that combo? Well, I suppose I’m going to have to wait for Skidelsky’s book to finally hit the bookstores here to find out.
