The Return of John Maynard Keynes


Paul Krugman reviews Robert Skidelsky’s Keynes: The Return of the Master in the Guardian:

In Part I of his 1936 masterwork, The General Theory of Employment, Interest, and Money, Keynes asserted that the core of his theory was the rejection of Say’s Law, the doctrine that said that income is automatically spent. If it were true, Say’s Law would imply that all the things we usually talk about when trying to assess the economy’s direction, like the state of consumer or investor confidence, are irrelevant; one way or another, people will spend all the income coming in. Keynes showed, however, that Say’s Law isn’t true, because in a monetary economy people can try to accumulate cash rather than real goods. And when everyone is trying to accumulate cash at the same time, which is what happened worldwide after the collapse of Lehman Brothers, the result is an end to demand, which produces a severe recession.

Some of those who consider themselves Keynesians, myself included, agree with what Keynes said in The General Theory, and consider the rejection of Say’s Law the core issue. On this view, Keynesian economics is primarily a theory designed to explain how market economies can remain persistently depressed.

But there’s an alternative interpretation of what Keynes was all about, one offered by Keynes himself in an article published in 1937, a year after The General Theory. Here, Keynes suggested that the core of his insight lay in the acknowledgement that there is uncertainty in the world – uncertainty that cannot be reduced to statistical probabilities, what the former US defence secretary Donald Rumsfeld called “unknown unknowns”. This irreducible uncertainty, he argued, lies behind panics and bouts of exuberance and primarily accounts for the instability of market economies.