The Keynes Solution: The Path to Global Economic Prosperity,   ISBN:9780230619203

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This is an excellent book and should be required reading for anyone who has even the faintest interest in economics and finance. It will give those who have not had the intellectual gumption to digest The General Theory of Employment, Interest, and Money (which includes this reviewer and according to the author, Paul Samuelson)a reasonably clear picture of what Keynes was really trying to tell us. It also exposes some of the intellectual dishonesty that had pervaded economic theory in its quest to be considered a science. I will conclude this rant with the observation that this book is a fine counterpoise to all of the economic mumbo-jumbo we hear from most of our legislators as well as the majority of our CEOs

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I found the book disappointing!

The book dismisses the "axioms" of the classical economics based on weak arguments and without discussing the theory and reasons behind them. For example it argues that Efficient Market Hypothesis is only valid when future is certain, or printing money by the central banks does not lead to inflation. The arguments of the book generally rely on the historical events rather then the science of Economics. The author frequently attacks economists like Alan Greenspan and Milton Friedman however he does not substantiate these attacks with enough evidence or theory. I event found the author's interpretation and representation of the Keynes ideas dubious and doubtful.

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The Keynes Solution by Paul Davidson and Keynes: The Return of the Master by Robert Skidelsky

These two new books re-introduce John Maynard Keynes to current policy makers dealing with the failure of de-regulated financial markets. They also introduce Keynes to a new generation and provide excellent background information on how Keynes' legacy is being re-applied in today's fiscal and monetary policies, stimulus plans and debates at the G-20 on how to reform global finance (see my own proposals at [...]).

Both Skidelsky and Davidson offer similar and excellent policy advice based on Keynes' concepts and proposals. Both authors call for a re-instating of an updated Glass-Steagall law to again separate "plain vanilla" retail banking still insured by FDIC to protect depositors and disallowing investment banks from participating in any government insured access to financial bailouts or subsidized credit from Treasury or the Federal Reserve. We at Ethical Markets have advocated this since 2008, along with the levying of a 1% financial transactions tax by G-20 agreement; a Financial Crisis Insurance Fund assed on all excessive risk-taking financial firms; a "too-big-to-bail" statute to allow for orderly break-up of oversized banks that pose systemic risk; banning credit default swaps not cleared on regulated exchanges, and other provisions to downsize overgrown financial sectors that have become predatory on the real economies of "Main Street."

Neither Skidelsky or Davidson go this far, although both cite the need to tame finance and its unregulated global casino unleashed on the world in the 1980s by US President Ronald Reagan and British Prime Minister Margaret Thatcher. Neither author addresses the issues still outside most economic boxes: the devastation of the planet's ecosystems by 300 years of fossil-fueled extractive industrialization. The need is to internalize such devastation and social costs into prices, company balance sheets and national accounts. Nevertheless, both these books do shed light on the deficiencies of political reforms currently debated in Washington, London and other capitals of OECD and G-20 countries. Both authors offer ideas for restructuring and reforming global financial architecture but stop short of fundamental re-thinking of models of human development beyond economics and GDP-measured growth. Skidelsky is the deeper thinker and draws conclusions from Keynes' longer-term vision on how to break the hold of money-obsessed economic ideas of "progress." Skidelsky goes beyond Davidson's prescriptive policies and examines ethical and moral issues ignored by economics and calls for more inter-disciplinary approaches to social progress. Neither author touches on the pressing need to reform money-creation itself and the fractional reserve banking which turned money-creation over to private banks as backed only by debt on their loan books. The widespread movement to audit, reform and even fold the private US Federal Reserve System into the US Treasury are not mentioned by either author as proposed by the American Monetary Institute. Clearly, we must now move beyond Keynes, important as his reforms are, and re-integrate public policy using inter-disciplinary systems approaches that enfold, but go beyond economics - revealed again by both authors as a profession with few if any pretensions as science.

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This book has major errors in it regarding Keynes's application of his weight of the evidence variable w, where w was defined on the unit interval [0,1], from the A Treatise on Probability (1921) which he called uncertainty in the General Theory (1936).It is simple to see that uncertainty is a negative function of the weight of the evidence,w.Define U to equal uncertainty.Define w to equal the weight of the evidence.Let U=f(w).If w increases then U decreases and if w decreases then U increases.It is as simple as that.Keynes defined a w=0 to be a situation of ignorance or complete or total uncertainty in the TP,as opposed to a w=1 which would be a necessary and sufficient condition to use a unique probability distribution.Neoclassical economists assume both a w=1 and linear probability preferences .Davidson,like Shackle and the Post Keynesians,Institutionalists,and Cambridge Keynesian school, assumes a w=0.It is not possible to calculate any kind of probability relation,be it cardinal,ordinal,or interval,if w=0.This situation arises in a dynamic economic context over time when one is considering scientific invention that leads to the promise of predictable, positive technological change,innovation, and advance in future kinds of capital goods, as well as creating a severe, potential threat to businessmen, due to the decay and obsolescence of their current stock of capital goods which would occur if these future breakthroughs did occur.The problem is that the timing and the particular forms or types of successful technological breakthroughs can't be predicted.This is obviously a non stationary process.Now non stationarity is a necessary condition for non ergodicity.But non stationary processes can certainly be ergodic.Davidson is simply confused here.Keynes recognized that the world was made up of both ergodic and non ergodic processes.Unfortunately,Davidson applies his non ergodicity assumption to the wrong market.Davidson applies it to financial markets.There is a long 400-500 year history that demonstrates repeatedly, time and time again, that past and current speculation always leads to some kind of future economic problem.

Keynes recognized that financial markets ,for the last 400-500 years since the introduction of modern,fractional reserve banking,exhibited the same speculative pattern over and over and over and over again.This pattern was recognized 3,000 years ago by the ancient Hebrew,Israelite Old Testa- ment prophets,with respect to markets for land and property,as well as by Jesus Christ in the New Testament,Aristotle and Plato in Greece,Augustine and Aquinas,and by Adam Smith.The purpose of the 7th year and 50th year Jubilee year celebrations,which were never instituted by Israel's leaders,was to break the back of the speculative cycles in land and property that led to poverty and destitution among Israel's people.

THe pattern is already at work right now.Obama,Bernanke,and Geithner have bailed out the Wall Street speculator crowd again, just as they were bailed out in the early to late 1980's by Paul Volcker and late 1990's-early 2000's by Alan Greenspan .The result is that another bubble in the stock markets is being created.These financiual bubbles are ergodic because the same pattern repeats again and again.New types of financial assets and financing are created by the banking industry.In the 1920's,for example,these new financial assets were balloon payments for houses and margin account financing for stocks.The creation of these new types of assets is called securitization.The next step is debt leveraging.This allows speculators and speculating bankers to maximize their speculative debt financing.The growing bubble is fed by herding and copycat behavior that automatically leads to the creation of a larger and larger bubble.The next stage occurs as the bubble leads to a mania ,which leads to a panic,which inevitably leads to a crash,which always leads to an economic downturn,recession,or depression of some sort.These kinds of events are stationary because they keep repeating over and over again.Their ultimate collapse can be predicted with a probabiity approaching 1.However,they are not Normally distributed.One can't use the Normal distribution to describe the time series data in financial markets .The underlying processes are given by the Cauchy distribution.Davidson vaguely realizes that they are not normally distributed,but fails egregiously to recognize that they are Cauchy.Davidson has failed to take into account the vast,overwhelming empirical evidence that has accumulated over the last 50 years establishing the correctness of Mandelbrot's pathbreaking work on financial markets.
Mandelbrot ,like Keynes before him,recognized that the speculation problem kept reoccurring over and over again.Only the timing of when the bubble will deflate is not known.

Smith and Keynes,like the Old and New Testament prophets,knew how to stop these highly repetitive events from taking place.Both Smith and Keynes realized that a policy of low interest rates for productive entrepreneurs combined with a policy of credit restiction would put a stop to the financial market's constant generation of bubbles.

One can summarize this book as a worthwhile read for the non specialist who does not need to be able to follow the advances made by Keynes in the TP on the weight of the evidence index and in the GT on uncertainty,where uncertainty can be mild ,moderate,severe ,acute or total, or by Mandelbrot's work,since the early 1960's concerning speculation in financial markets as a private, stationary market process that can be controlled .Davidson's view of the speculative nature of financial markets as being nonstationary and non predictable, based on the past behavior of financial markets for the last 500 years ,is simply wrong and had nothing to do with Keynes's views.

Davidson is correct in his criticisms of the neoclassical school's use of a particular distribution,the normal distribution,in financial markets.Unfortunately,he is unable to specify correctly why this is erroneous.It has little to do with non ergodicity and everything to do with the fact that w,the weight of the evidence that represents the amount and quality of the evidence that underlies probability calculations is usually < 1.Only if w=1 can one specific probability distribution be singled out as the correct one to apply in the future to data from the past that is being analyzed today.

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Paul Davidson has done a remarkable job of explaining John Maynard Keynes' key insights, most of which he first introduced to the world in his seminal 1936 "General Theory of Employment, Interest and Money." Unfortunately, for Keynes, that book is fairly impenetrable, so the general public is essentially unaware that the economics movement that bore his name (i.e., "Keynesian") is, in fact, a synthesis of the classical economics that Keynes rejected and Keynes' less controversial ideas. In other words, Keynes' own name was hijacked by what were, essentially, classical economists.

This book is an easy read and easy to understand because it uses the recent economic crisis to compare and contrast neoclassical economics (best exemplified by Milton Friedman and the Chicago School) to true Keynesian economics. If you really want to understand Keynes' insights in detail, pick up a used copy of Anatol Murad's "What Keynes Means," which is a fantastic primer.

If you are interested in reading other accessible economics books by heterodox economists, check out Steve Keen's "Debunking Economics." Like Davidson, Keen is a Post Keynesian economist.