Media Spotlight: Keynes - The Return of the Master By Robert Skidelsky
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Economist-bashing has become a popular pursuit since the advent of the crash. Numerous critics have called for the profession to bin looking on economics as a science - something akin to describing gravity and other physical laws - and instead apply some of the rules of risk and uncertainty as laid down by John Maynard Keynes.
Robert Skidelsky’s Keynes: The Return Of The Master does what it says on the tin and looks to rehabilitate Keynes’ ideas to the vanguard of economic thinking.
Keynesian theory fell badly out of favour in the 1970s. This led to economists returning to some of the classical rules laid down by Adam Smith, albeit supercharged with some complicated mathematical modelling.
This, Skidelsky contends, was a grave error. As he states in a neat breakdown of the blame game, be it in governments, central banks, hedge funds, rating agencies or bankers, the real failure is nothing less than the intellectual bankruptcy of the profession of economics.
His main beef is surrounding the collective arrogance of economists is their belief that they can predict the future.
In Keynes’ 1921 book A Treatise On Probability he describes three types of probability. The first is cardinal or measurable probability - assigning a mathematical value to the probability of something occurring. Keynes remarks that there is a limited chance of this working out.
The second type is ordinal probability whereby the only information on an event occurring is the relative likeliness if it happening.
The third type is classified as unknown probability - the Black Swan events as described by Nassim Taleb in his recent book of the same name.
Years later, in 1937, Keynes expanded on his theory contending that uncertain knowledge of the probability of big events occurring made predicting the next European war or stock market crash a matter of luck and little else.
“About these matters there is no scientific basis on which to form any calculable probability,” he stated. “We simply do not know.”
In short, our current economic geniuses have about as much chance of predicting an event as a fairground mystic.
Skidelsky then imagines what Keynes would have done today if he was still alive, on the basis of his ideas.
Reinstating the separation of the utility function of banks and their investment divisions is one step.
Skidelsky also believes Keynes would bar investment banks from accepting retail deposits and approve an automatic ban on their eligibility for public bailouts, thus ensuring that such institutions are never too big to fail.
His last idea is likely to send a shiver up the back of many in the market - to protect sellers and buyers of mortgages by limiting home loans to 75% LTV and 3 x income. This, Skidelsky says, would reduce reliance on credit agencies.
The author concedes that global regulators have already turned their noses up at such changes, instead opting for more stringent regulation of banks.
While he says this idea is not without merit, Skidelsky maintains that lenders are still built on mathematical models and regulators continue to ignore much of what Keynes had to say about uncertainty.
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