To get a balanced view of the lessons from the 2007–2008 global financial crisis, the well informed must read what a full range of authors have to say about what caused the crisis and what primary lessons should be drawn from it. I have tried to do that not only by reading and reviewing volumes by those repulsed by the ensuing government interventions, but also by those favorably disposed to them. Books such as Atif Mian and Amir Sufi’s House of Debt (“House of Flawed Analysis,” Winter 2014–2015), Adair Turner’s Between Debt and the Devil (“When Intervention Fails, Intervene,” Spring 2016), and Binyamin Appelbaum’s The Economists’ Hour (“Milton Friedman Caused the Financial Crisis and Other Tales,” Winter 2019–2020) fall into the latter category. All those authors blame blind faith in the market and the deregulation bogeyman, among other causes, for the financial crisis.

British economic historian Robert Skidelsky falls into the latter camp. Skidelsky is a John Maynard Keynes scholar and has published a three-volume biography of the economist. He is also a professor at the University of Warwick.

History / “History of Economic Thought” is the daunting title of Part One of Skidelsky’s book Money and Government, and he does his level best to deliver on that promise. This part traces through the origins, value, demand for, and quantity theory of money, the gold standard, and bimetallism. It closes with a review of the economic role of the state and mercantilism.

It has been quite some time since I read a book with sections so deeply reminiscent of my undergraduate economics courses. Much of the discussion has a textbook feel to it, complete with explanatory equations, diagrams, and graphs. For those familiar with many of these topics through prior study, these chapters likely provide much more background material than necessary to understand the later discussions of the global financial crisis and how Skidelsky believes it changed the role of government.

Rise and fall of Keynes / Skidelsky describes the pre-Depression era “old macroeconomy” as resting “on a tripod of gold, balanced budgets and free trade.” He summarizes much of his life’s study of Keynes in Part Two of Money and Government:

The Great Depression set off a period of experiments in thought and policy. Keynesian economics was the most successful of the results…. It was partly a revolution in monetary policy, involving a break with the gold standard. It was partly a revolution in fiscal policy, which involved abandoning the balanced-budget rule.

Keynes played a high-profile role in the assessment of the then-building Depression from his perch on Britain’s Macmillan Committee on Finance and Industry. Skidelsky explains that Keynes’ work on the committee “shook his faith in monetary policy…. Now his emphasis shifted to fiscal policy, with monetary policy in a purely supporting role.”

Keynes’s General Theory of Employment, Interest and Money grew out of that work. The book, according to Skidelsky, “was to explain precisely why the classical theory was wrong…. Keynes called the book the ‘general’ theory, because he took uncertainty to be the general case, with full information as the special case.” Again, Skidelsky’s explanation of the contrast between Keynes’s model and the classical models, along with Skidelsky’s discussion of the fiscal multiplier, reads like an economics text.

A case study of the “era of Keynes” follows, with the period of full-employment Keynesianism during the 1940s to about 1960 (stage one), growth Keynesianism during the 1960s (stage two), and stagflation Keynesianism during the 1970s (stage three).

The last section of Part Two transitions into monetarism. Skidelsky does not spend much time on Milton Friedman, but he does judge Friedman to be a dishonest scholar as far as economic policy goes:

The motivation for [Friedman’s] work was thoroughly political. Friedman restated neo-classical economics in order to expel the expanded Keynesian state from the economy. Shrinking the state was the scarcely avowed aim of his economics.

The crash and after / To Skidelsky, the financial crisis demonstrated a “back to the future” moment for Keynesian policies: “It forced activist — that is, discretionary — responses from governments that were partly experimental, but that also involved using old tools which had become rusty through neglect.”

After providing some general details about the stages of the crisis, he describes the “energetic government responses” that he apparently approves of:

Governments strengthened deposit insurance, recapitalized and nationalized banks with public funds, and bought toxic assets.… Recapitalizing banks was a fiscal operation, involving governments raising vast sums in the bond markets. It was governments, not central banks, learning from Keynes, not Milton Friedman, that prevented a slide into another Great Depression.

Skidelsky provides some surprising conclusions about the financial crisis in his chapter “What Was Wrong with the Banks?” He does come down hard on what he describes as deregulation in the financial sector as a primary cause of the crisis. This includes criticism of increasing financial innovation in securitization, collateralized debt obligations, credit default swaps, and special purpose vehicles. He writes: “From the 1960s onwards, government gradually relinquished their control over banks and put their faith in market discipline…. They were allowed to do everything,” referring to banking activities on both the funding and investment sides.

Surprisingly, he also criticizes some of the government interventions in housing policy in the run-up to the crisis:

Governments also encouraged banks to lend for political purposes. The root of the 2008–9 financial crisis lies in the American housing market and, specifically, in the government’s attempts to make home ownership accessible to low-income families…. It was the combination of deregulation and government subsidy of bank credit to low-income households which proved toxic.

Conclusion / With rousing flare and noting that it was “the deregulated global market that collapsed in 2008 to 2009,” Skidelsky leaves us with a final chapter that proposes one new or expanded government program after another. In the area of fiscal policy, he primarily calls for a budget-driven strike against weak growth: “The focus should shift from fighting inflation to fighting stagnation. This means using the budget to revive growth, and monetary policy to support fiscal policy.”

Skidelsky argues that a State Investment Bank is needed because of the poor performance of the private banking sector in the lead-up and throes of the financial crisis:

The Investment Bank would be capitalized by the state, and empowered to borrow an agreed multiple of its capital for approved purposes; that is, the state would determine the Bank’s strategic direction, and the managers would have full operational independence. Depending on the Bank’s mandate, such purposes might include investments in energy efficiency, long-term loans to small enterprises and start-up companies through a network of local banks, and support for private venture capital initiatives like Fintech.

He argues that central bank mandates should be expanded to include not only objectives related to output and price stability, but central banks should also be able to “tell the government that fiscal policy is needed” in cases where a central bank policy rate hits its lower bound. He urges that “fiscal and monetary policy should be coordinated, not separated.”

Skidelsky also favors an increase in the intensity of the fight against income inequality:

Optimists and pessimists alike abstract from the problem of automation…. Workers displaced by machines will need to be guaranteed a replacement income. An unconditional basic income guarantee, financed by taxation, will probably be needed in the transition to a less work-intensive future.

He also makes the case that protective trade measures should be ratcheted up given that it is “the primary duty of a government to protect its own people from danger and misfortune.” After detailing the individual arguments for protection, he concludes:

The pressure for Protection is growing. The main reason is that domestic protections for the less educated and less skilled have been progressively eroded at the same time as the speculative power of finance has been enlarged. The result is a substantial increase in insecurity.

Putting aside my disagreements with Skidelsky on economic policy issues, I believe he tries to take on too much in Money and Government. As a result, in many parts of the book his analysis is scattered and lacks depth. Throughout the book, but especially in the closing chapter, he strings together one cursory review of a topic after another, taking on big issues in two or three pages rather than giving them the time and explanation needed. While writing this review, I sometimes struggled to determine which of the many subjects that he covered to highlight. The book would have benefited from deeper focus on fewer topics, as the flow of ideas does not always hold together well.