Keynes: the return of the Master

Andrew Gamble
Published 03 September 2009

J M Keynes understood better than most that the self-regulating market economy is a dangerous fiction. Has the crash of 2008 vindicated him?

Prophet warning

The crash of 2008 shattered intellectual assumptions as well as financial institutions. Rational expectations theory and some of its spin-offs - such as the efficient markets hypothesis, which suggests that markets are able to calculate and price all risks - did not fare well. The financial meltdown did not belong to its universe. The crash brought a reminder of the volatility and fragility of capitalist economies, and an end to hopes that booms no longer culminated in busts. For a few days in September 2008, the financial authorities faced the possibility of a complete breakdown of the banking system and the onset of a new Great Depression. This was averted, but only narrowly, and with consequences whose full effects will unfold over the next few years. The economic situation has been stabilised and growth has begun to revive, but the economic outlook remains uncertain, and full recovery is likely to be long and painful.

This sudden eruption of economic and political uncertainty has made Keynes popular once more. We are all Keynesians again, it seems. He may no longer be taught on economics courses, and many economics students may not even know who he is, but in the wider political culture he is still a potent memory. He has been credited with rescuing capitalism once before, so it is not surprising that he should be back on the front page of Time, and spoken of approvingly even in the Wall Street Journal and the Economist. Keynes developed his economic theories in response to the 1930s slump and was not short of ideas about what governments should do. A barbed comment at the time was that if there were five economists in a room, there would be six conflicting opinions, and two of them would be held by Keynes. But at least he had opinions. There has been much unfavourable comment on how little the contemporary economics profession has had to say about this new crisis. The events of the real economy have long since ceased to interest most economists. There are some exceptions, such as Paul Krugman and Joseph Stiglitz, but most of the perceptive writing on the crisis has come from financial journalists and historians.