Robert Skidelsky: “Can we afford the economy to deteriorate even further?”

Robert Skidelsky breaks moulds. For instance, in politics. He was a Labour Party member, but also a Liberal Democrat and a Conservative. And he fell out with all three, publicly. But his legacy is not to be found in politics but in the History of Economics. His three-volume biography of Keynes has made of Skidelsky the leading historian of the famous British economist, and one of his greatest advocates, too. Skidelsky, who was appointed Lord in 1991, follows the pragmatism of Keynes as much as his tendency to reduce the value of economics as a science but, at least to our knowledge, he does not believe that economists should play a similar role to that of dentists, as his master said.

Skidelsky’s latest book How much is enough? is proof of this detachment from the accumulation of capital and an attitude about money as something that is essentially a means to achieve what Keynes called “the good life”.

Where is Keynes now? The crisis caused a resurgence of his philosophy between 2008 and 2010, but since then there has been a backlash in favour of austerity.

In the worst moments of the crisis, people realised that there was something more important than ideology: reality. So there was only one option: we had to create money, and as much money as possible at that. The idea was “let’s get rid of this situation, and we’ll see what happens next.” But once the situation stabilised, at least relatively, the old economics made a comeback. People began to worry about the consequences of the decisions that were taken during the crisis, those large bailouts, after our unsustainable deficits resurfaced. And there something extraordinary happened: the return of Hayek.

Why extraordinary?

Because no one takes Hayek seriously as an economist. Nevertheless, when we seems to be out from the worst of the crisis, Hayek began to be taken into account by policy makers and by what I call ‘amateur economists’. Hayek is an extraordinary thinker, but the way his theory has been ‘absorbed’ reduces it to a single concept: let things collapse because then the economy will start from scratch and will recover again.

Let the system ‘repair’ itself.

Exactly, let’s not inject money into the economy and not rescue the banking system. The problem, according to this theory, is the cause of the crisis. The problems arise because there has been a missallocation of massive dimensions of resources; this is what triggered the recession, and so now we must deal with these excesses. We must decide how many houses were built that should not have been built, and then let the surplus of homes fall, for example. If you did that, the real economy would be reduced to its real wealth, which that misallocation of resources from the bubble had led to grow artificially–perhaps by about 10%, although that depends on each country. Once this is done, the economy will recover.

No one says that openly, but that seems to be the underlying principle.

Of course, no politician would say that aloud. But their advisers do believe so. For them, this is the ‘new normal’. What does that mean? That we’ll have to be much poorer than we thought we were. And it’s the fault of that misallocation of resources, a misallocation which in turn was caused because the banks lent too much money.

I’m not saying that this analysis is totally invalid. On the contrary, I think there’s a lot of truth in it. But it raises a question of a different order: can you afford, from a political standpoint, that things crumble and deteriorate as much as you are saying they should? After all the suffering that has been inflicted? Does anyone think that’s could be dangerous?

The truth is also that, whether from one school of thought or another, economists have generally seen their prestige plummet. Ordinary people are just suspicious that economics isn’t exactly a science.

It depends. In daily life you can not live without the law of supply and demand. That is very clear. It’s crucial. Beyond that, there is nothing very clear, with some exceptions, such as the Ricardo’s theory of comparative advantage, without which international trade can not go very far.

But that’s Macroeconomics. Classical economics, which is what makes up most of the economy studies up to Keynes, was in fact Microeconomics. Macroeconomics started its disconnection from Microeconomics with the Quantity Theory of Money [which establishes the relationship between the quantity of money in circulation and prices]. Then, Keynes rejected that theory, but in turn widened the gap between Macroeconomics and Microeconomics, too. The consequence is that Macroeconomics is not truly a science.

What is it, then?

It can be understood as part of the theory or science of government, but it should never be transformed into a theory on how to govern society. If Macroeconomics would be studied only in the schools of political science, government or the like, it would be much better. In that case, we could keep Microeconomics, which has always been at the core of the economy, as an independent discipline.

That would be very helpful because Microeconomics helps to calculate the costs and benefits that you will get from any business in any activity. If you want to know how much it costs to build a railroad and what benefits you will get, you use Microeconomics. But when estimating the general welfare of the nation, in terms of stability of the financial sector, then it is not so useful.

But beyond those, say, technical problems, what’s seriously in trouble is the credibility of economists, their honesty.

That’s a real problem, but it’s one we have to be careful with. Because, for example, one of the intellectual fathers of the crisis is the laureate Robert Lucas, who is actually the classic intellectual who lives in an ivory tower made of pure theory. So one must be careful when attributing ulterior motives to economists.

Most economists don’t have an only-academic life, though, they are in the markets, in the business world, and work with that experience in mind. If we examine other sciences, we see for example that most historians and anthropologists, to name a few, are hardly employed by the private sector–even if historians would probably be very useful in the private sector, explaining to employees what happened five years ago, which today is beyond the memory of the average citizen.

The trend also has been strengthened lately, especially in the field of financial economics. There are technical economists in that field that had told us again and again that 2008-like ‘accidents’ were simply impossible. In such cases, you should always ask what the connections are of those people with the asset management industry.

At the same time, governments also employ many economists. I remember once I asked an economist friend how it was that there were so many Keynesians in the public service of the United States, and he replied: “To justify hiring more economists.”