Friday, 21 January 2011

The real Keynes

Book Review by Graham Turner

Keynes Betrayed, by Geoff Tily, Palgrave Macmillan, 2010

Palgrave Macmillan have republished Geoff Tily’s “Keynes Betrayed” in paperback.

This is an important book because it contradicts so much of the perceived wisdom over Keynes’s policy prescription. And it should be stressed, the errors of understanding Keynes are committed by economists on both sides of the spectrum – right and left – as well as a good chunk of those sitting in the middle.

Keynes was far more concerned about monetary issues than fiscal policy. Unfortunately, most cursory reading of Keynes simply focuses on the General Theory, which was written in 1936. Even then, too many readers of this important book fail to appreciate the chronology of policy advice Keynes was offering in the 1930s – monetary first, fiscal second.

Indeed, Keynes made an enormous – and positive contribution – to policy long before the General Theory was published, as Geoff Tily shows commendably in this book. "Keynes's central policy priority was a permanently reduced long-term rate of interest", Tily argues. Keynes was a leading proponent of central bank long-term asset purchases – today called quantitative easing (QE). Furthermore, he was quite clear about the problem within bond markets which made QE necessary, as shown by his liquidity preference theory. Keynes also understood the importance of targeting the yield rather than merely setting a nominal purchase target for QE.

In all these respects, Keynes had a much greater understanding of the bond market – including the critical role of expectations - than today’s central bankers. The current FOMC has been content to announce an extension of its own, somewhat flawed QE, announcing last November that it would buy a further US$600bn of US Treasuries. Since then, sniping from hawks on the FOMC, a (modest) uptick in economic growth and an unseemly rush to extend tax cuts has sparked a huge sell-off in US Treasuries. And that has occurred just as the S&P/Case Shiller index for house prices is poised to break down to new bear market lows. Federal Reserve chair Ben Bernanke has been forced to admit that the economic recovery in the US is slow. It may well stall, precisely because the Fed chair, and much of the economic establishment, including New York Times commentator Paul Krugman (not to mention the departed, discredited Lawrence Summers and Chrisina Romer) simply do not ‘get Keynes’.

One economist who clearly does is Geoff Tily. His book is based on a PhD thesis, supervised by Professor Victoria Chick at the University College of London. Professor Chick is one of a handful of economists who truly comprehends the importance of monetary affairs in Keynes’s work, and encouraged Geoff to write his thesis.

Geoff provides clear evidence of the role Keynes played in driving the shift towards QE in the early 1930s, long before the General Theory was published. He also dissects the manner in which Keynes’s legacy was traduced by economists, both on the right and soft left in the post-war era, after his untimely death in 1946.

This book is rigorous, and readers will be impressed by the comprehensive manner in which Geoff takes Keynes’s critics to task. It is not the sort of book that can be read in one quick swoop. It is a demanding read, because it is so thorough. It challenges many of the misconceptions over the policies pursued during the 1930s. For these reasons, this book helps to explain why the West has botched its response to the credit crunch.

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