The millennium's unlikely prophets

B Y N IRANJAN R AJADHYAKSHA niranjan.r@livemint.com
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Both Karl Marx and John Maynard Keynes seemed to have been permanently banished into the dark shadows of obscurity until the bright boys of Wall Street almost brought the world economy down in a speculative fit. Few economists and pundits emerged from the wreck- age with their reputations intact.
Marx and Keynes came out with enhanced status.

This is a paradox. The North Atlantic financial crisis does not fit quite well with the standard Marxist and Keynesian view of the world. Both had said that a market economy/capitalism was prone to periodic crises because of a fall in the rate of profit in industrial and service companies, and a lack of aggregate demand.
The crisis of 2007 and 2008 did not fit into this neat narrative. The main damage was done in a financial sector stuffed with excess leverage and risk.

Keynes' prophetic disciple Hyman Minsky had a better explanation for what happened in his thesis on financial instability, while the American economist Irving Fisher's theory of debt deflation offered a better explanation of the subsequent demand collapse. Keynes mattered only at the third stage, when governments around the world ran huge budget deficits to keep the demand engines chugging despite the global panic. One could also argue--contra Marxist belief--that it was the users of capital (bankers and derivative traders) rather than the owners of capital (the shareholders of global banks) who were the villains of the piece.

“Keynes had little to say about the accumulation of debt and the possibility of associated financial bubbles,“ writes economist Lance Taylor in Maynard's Revenge: The Collapse of Free Market Macroeconomics, his combative and tightly argued book on the collapse of the recent consensus in economics. Taylor strives to reinstate not just Keynes but an entire school of economics. Though not a book for the popular market--as the recent Keynes biography by Robert Skidelsky is--the tone of the book fluctuates between being clinically academic and sharply polemical, a delightful combination often seen in the writings of Keynes himself.

So Taylor can at one place discuss Gaussian distribution of asset prices (the well-known bell curve), while at another place tartly dismiss Milton Friedman, who along with Robert Lucas was responsible for placing some of the most potent sticks of dynamite under the Keynesian edifice in the 1970s, as someone who merely gave a modern spin to the doctrines of 19th century Swedish economist Knut Wicksell. At another place, Taylor dismisses what is called new classical economics, which arose out of the so- called Lucas critique and is a centre piece of contemporary text- books, as “a restatement of extreme nineteenth-century neoclassical ideas decked out in mathematics borrowed from 1960s rocket science“.

However, the deeper point Taylor makes is that much of modern economics is actually derived from insights provided by economists in previous ages. He powerfully illustrates this in almost every chapter in his book.
The great masters have been for- gotten as the history of economic thought has disappeared from university courses and mathematical elegance has become an end in itself. Economics has suf- fered because it turned its back on its own rich heritage.

How to Change the World by the Marxist historian Eric Hobsbawm is a collection of essays written between 1956 and 2009. The long period it covers ensures that the tone is calm, though always pro- found. Hobsbawm is from a generation of Marxist intellectuals who were rattled by events ranging from the Soviet invasion of Hungary in 1956 to the collapse of communism between 1989 and 1992. Yet he has resolutely stuck to the hope that a better and more humane society is a possibility.
The title of his collection of essays, though it seems a bit presumptuous, is clearly inspired by a famous statement by Marx that philosophers should not just interpret the world but change it.

Though Hobsbawm remained a party animal (as the term was understood in another age), he steered clear of the two extremes that many of his contemporaries embraced: becoming a party hack or settling into world-weary cynicism. Nor did he go down the rabbit hole of postmodernist cultural criticism, which became the sorry refuge of a lost ideology.

Hobsbawm argues in his introduction that “Marx is, once again, very much a thinker for the twenty-first century“ though he also adds later: “The Marx of the twenty-first century will almost certainly be different from the Marx of the twentieth.“ Nor does he shed tears for the Soviet Union and its several clones, uniformly brutal social and economic disasters. For Hobsbawm, the continuing relevance of Marx is three- fold--as a thinker on the econ- omy, about history and human society. One almost gets through the book feeling that Hobsbawm has more hopes for Marx as a thinker than as a guide for political action, which makes the title of his book even more puzzling.

Neither Marx nor Keynes can fully explain what to do about the challenges facing us in the new century, as both Hobsbawm and Taylor freely admit in their books.
Yet they deserve to be read and studied--for their insights into economic cycles, the nature of government, radical uncertainty, the hope of human freedom, and much more. The two books under review offer a window to the worlds of Marx and Keynes.
IN SIX WORDS - Political economy, past and , perhaps future