Money and Government: A Challenge to Mainstream Economics
Allen Lane (£25)
(Buy at Amazon)
The battle over what macroeconomic tools governments and central banks should use to stabilise the economy has raged ever since John Maynard Keynes published his General Theory in 1936. Ten years after the financial crisis, we are no closer to consensus.
In Money and Government: A Challenge to Mainstream Economics, Robert Skidelsky makes the case for an active fiscal and monetary policy, including boosting government spending when the economy is in recession. He argues that the call for austerity when times are bad is based on faulty assumptions about human behaviour.
The book is divided into four parts. The first deals with the development of macroeconomic theory up to World War I. This ranges from the debate over the British recoinage in 1696, when there was an attempt to take debased and counterfeit silver coins out of circulation, to the 19th-century debates over monetary policy and the development of the gold standard. The next section deals with the rise of Keynesian economics in the 1930s, and its decline in the 1970s and 1980s.
Skidelsky then moves on to the crisis of 2008, examining both its causes and governments’ responses. The concluding chapter looks at how macroeconomics needs to evolve to meet the demands of the post-crash world.
As Skidelsky notes in the introduction, his book has its origins in a series of lectures he delivered to third year economics undergraduates at the University of Warwick, where he is emeritus professor of political economy. As a result, the book is long, dense and complicated. Even those who studied economics at school, or have a professional interest, may find it hard going in places. But his basic argument is easy enough to grasp.
Skidelsky argues that modern economics, while it has made some concessions to the thought of Keynes, is still fundamentally flawed because it is based on “economic man” – the idea that everyone acts in a purely rational way, with perfect foresight.
In contrast, Keynes placed great emphasis on the “animal spirits” of sentiment and expectations. These are not always rational and create uncertainty, which discourages investment. Policymakers and economists need to incorporate these insights into their models and recognise that governments have an active role to play not just in stabilising the economy, but also intervening in decisions through regulation.
It’s a shame that there is no condensed and simplified version of Skidelsky’s learned book that could appeal to a non-specialist audience. As it is, the density of the arguments will deter a wider public from being converted to the author’s vision.