The best books on John Maynard Keynes

Let’s start with the Roy Harrod.

The Harrod is the first biography and, actually, the only official biography of Keynes. Harrod had the great advantage of having known Keynes and was, of course, an admirer. The book was written six years after Keynes’s death but it still has its virtues. He has the virtue of intimacy and of knowing Keynes very well and knowing the time very well.

The downsides of the book are its omissions. There are three big omissions. The first is that Harrod leaves out any references to Keynes’s conscientious objection to the First World War. Keynes basically disapproved of it, though he served it in the Treasury, but if he hadn’t he would have been a conscientious objector.

The second omission is Keynes’s homosexuality. For most of his life Keynes had boyfriends, the main one being Duncan Grant, the painter. They remained friends though their sexual relationship ceased. But when Keynes was middle-aged, in fact he was 40, he met and fell in love with the ballerina Lydia Lopokova and they married. Any hint of his homosexuality is missing from the Harrod book.

The third omission is Keynes’s quarrel with the United States over the reparations from Germany after the war, which Keynes felt had too many strings attached and compromised independence. Harrod essentially omits anything that might muddy Keynes’s reputation as the great saviour.

The homosexuality he probably had to leave out since he was writing before the kiss-and-tell biography and people didn’t discuss that kind of thing much in those days. My own biography of Keynes has superseded this one, he says arrogantly, but not entirely. I didn’t know the character, of course.

So Harrod’s book is more of a hagiography, really?

It is a bit of a hagiography, yes, but he did the economics very well. I wouldn’t decry its virtues.

What, in a nutshell, are the economics?

Keynes attacked the classical economists who believed that economies are essentially fully employed such that government intervention is unnecessary. He said that economies are subject to slumps and crises and that if crises happen then we must pump air into the leaky balloon, much like the stimulus package now. His realisation was that economies are unstable, that they deflate and slide, that unemployment can go up and people suddenly don’t spend as much, that this is likely to happen from time to time and governments should prevent it from happening because the costs are so huge. For the past 30 years Keynes has been largely ignored because Reagan and Thatcher thought the markets were essentially stable and under control. People are realising now that this was a very one-sided view.

And the Davidson book?

Ah, yes. Well, Davidson is a bit of a lonely pioneer. His book on Keynes is a straight, honest, succinct statement of what Keynes was about and it has the great merit of putting uncertainty at the centre of Keynesian theory. This was something people ignored even when Keynes was at the height of his popularity. Why? Because people don’t like uncertainty. Mainstream economists think that people have correct expectations about the future. It’s mad really if you think about it. I mean, you can perhaps be certain about tomorrow but if you are thinking about investing in a new plant or a new process you have to think in years, you have to acknowledge that things can go wrong, people make mistakes. Uncertainty is very central to Keynes, but even when he was in the ascendant it was rather omitted. But Davidson held fast and has, I think, been vindicated. When an economy has a big shock people don’t redirect their spending; they stop spending.

That the future is uncertain is obviously true. I don’t understand how anybody could oppose that view.

Ah, well, it’s very mathematical and the classical economists do their maths so that the equation comes out right. Most non-economists would see it as a lot of nonsense, but it goes back to the Newtonian view of economics, which is that a pendulum swings to the left and right but ends up back in the middle. It is basing economics on natural science, but in order to do that you have to assume that human beings are like robots, that they are just a collection of atoms. I don’t think that’s how you do economics and nor does Paul Davidson. When there is a shock or uncertainty we like to keep our money, not just under the bed, but we don’t like to spend it. Davidson was outside mainstream Keynesian economics but I follow his view in my books and I give him credit for focusing on the uncertain expectations.

What about Minsky?

Minsky. Minsky died in 1986 and he taught at an obscure university in St Louis. When he died there were some reverential notices but he was not generally well-known. However, he made a very important contribution to Keynesian economics. He thought that financial systems ought to be a way of transforming money, a conduit between people who had a bit of money to invest and others who needed to borrow that money. But what he pointed out was that, in fact, financial systems are just speculation, that some people are making huge amounts of money for themselves by speculating. So, suddenly now people are asking: Is this a Minsky moment? And I think it is. He got the financial system very, very right by emphasising its speculative nature. People like George Soros and Warren Buffet believe the same thing, that people get excited about speculating and go too far in one direction, leading to collapse. They think: “Oooh, we can make lots of money,” and you get what become toxic securities.

“Keynes made a lot of money investing, but he lost a lot of money too and he came to the view that you shouldn’t speculate, that you should try to find a good solid company to invest in.”

Once, the bank would lend money to someone so that they could buy a house and the loan would be their mortgage. If they defaulted on the mortgage the bank would take the house. It was a straightforward relationship. But now the bank sells the money on and speculates on it. Minsky saw how this might happen. He had something he called a Ponzi scheme where people borrow a lot of money against something they assume will appreciate in value and they borrow more and more but it’s all a big scam. Minsky’s very good on all that – the financial system that should be serving the needs of the real economy actually causes great instability. He deserves credit for that.

And Justyn Walsh?

Walsh’s book is very interesting. It’s a fascinating account of Keynes’s career as an investor. It shows very well the link between Keynes’s experience as an investor, speculating on the markets, and his theory. As an investor Keynes became more and more aware of the market’s uncertainty and volatility. Justyn Walsh is a hedge fund manager and he makes the good point that the people who actually work in the financial system do not believe that people generally have correct expectations about the future. The insiders know they are gambling. So, why do they do it you might ask?

I might.

Well, if you’re an investor and you don’t know what’s going to happen you look for some assurance from asset managers who claim to know. But, of course, if you look back at their record you will probably find that at some point they have crashed very badly. This is what analysts do. If you are an investor you get a report every month saying: This is what’s happening, this is what’s going to happen. Pension funds invest money, give it to asset managers who say they know, they can predict what will happen. But it’s all rubbish. They don’t have a clue. Your money is always at risk but you need to feel reassured so the asset managers try to be like doctors. You go to the doctor in the hope that the doctor will assure you that your health is not as bad as you think. Keynes made a lot of money investing, but he lost a lot of money too and he came to the view that you shouldn’t speculate, that you should try to find a good solid company to invest in. Keynes said that he wanted to make the relationship between an investor and his share as permanent as marriage. That is no longer a suitable image as marriage is more of a one-night stand now, but you know what I mean.

You sound very convincing. So convincing that I can’t imagine what it was that Reagan and Thatcher thought. They must have known that the future is uncertain and volatile, surely?

No! They didn’t know! Reagan and Thatcher were operating on a more abstract plane. They were mainly driven by dislike of big government and therefore had to maintain that markets themselves were inherently more efficient than governments. They dismantled all Keynes’s barriers against untrammelled greed and, since then, there have been five big financial crises.

Because they removed the barriers?

Because they removed the barriers. Before Reagan and Thatcher there were much tighter financial regulations. Until 1999 retail banks were not allowed to invest depositors’ money. This was the last big barrier. The hedge funds that grew up were completely unregulated and their balance sheets were their own responsibility. The trouble is that things were not completely deregulated. After the Great Depression depositors were insured against loss but there was no regulation on what the banks could do. So the profits go to the bank owners but the losses are borne by the tax payers.

You sound as though you think rescuing the banks is a bad thing then? Isn’t it Keynesian to rescue them?

I think you do have to rescue them. You can’t let everything just go kaput. If you are in that hole you have to get out of it. But you do have to put some restrictions on the activities of the banks.

Is that what’s happening now, along with the stimulus package?

Well, at first they were talking about implementing proper restrictions but now that the banks are more or less OK again they seem to be abandoning the plans. They might make some cosmetic changes but I fear they are just setting things up for the next crisis.

And the Chandavarkar book?

He is not well-known. He was at one time director of the IMF and he sort of fell in love with Keynes. This is a wonderful collection of essays about different aspects of Keynes’s life. But he does have this love affair with Keynes and he believes that Keynes was passionately interested in India, which he actually wasn’t. He deals with Keynes’s refusal to go to India for six months on a Royal Commission, saying that it was just an excuse, that he was in love and wanted to get married. He said that Keynes would never have sacrificed his love of India for a woman. But he did. So Chandavarkar is very romantic. But he deals with Keynes not just as an economist but as a philosopher and a moralist. This book shows his range of interests and his contribution to 20th-century thought. I thought this might be a good moment to say: “Read that if you want a broader view of Keynes in the 20th-century.’ In addition to my classic, of course.