Keynes: the return of the master, By Robert Skidelsky<br />Keynes, By Peter Clarke

Economics is in a sorry state. The joke used to run that economists have predicted five of the last two recessions. They lamentably failed to warn us about this one, the worst slump in three-quarters of a century. The Queen was hardly alone when she wondered aloud a few months ago, "Why did no one see it coming?"

In all the instant books, articles, conferences and reports generated by the crisis there is little answer to that regal query, and no new framework for thinking about how to rebuild prosperity. The intellectual colossus who might furnish us with such a gift has not yet emerged. So we turn again to what he himself would have termed "some defunct economist" - John Maynard Keynes, who died 63 years ago, at the age of 63.

Events have thrust Keynes back into fashion: "We are all Keynesians again", you might say. Peter Clarke, former professor of modern history at Cambridge, where Keynes spent much of his life, and Robert Skidelsky, author of the definitive life of Keynes, have both come up with timely accounts of the rise, fall, and rise again of Keynesianism, each part-profile, part-polemic, and part-exercise in what Clarke calls ""anachronistic ventriloquism" – trying to guess "What would Keynes do?"

Skidelsky's account of the "return of the master" is the more technical, Clarke's the more personal, more rooted in Bloomsbury and Keynes's role "on the extreme left of celestial space". Clarke it is, for example, who offers up the names Keynes gave to the trade he picked up round London, all recorded in the great economist's diaries from 1901 to 1915: "Stable Boy of Park Lane, "Auburn Haired of Marble Arch", "Lift Boy of Vauxhall" and so on. He later married a ballerina. Keynes's sexuality remains more difficult to fathom than his economics.

Would Keynes have sensed this financial storm approaching? Yes, Clarke and Skidelsky agree, because he would have detected the same weakness in the financial system he saw in the 1920s – an inability to distinguish between risk and uncertainty. David Viniar, chief financial officer of Goldman Sachs, said when the money markets froze in autumn 2007, for example, that his team were witnessing events that, according to their model, "could occur only every 10-to-the-power-140 years". Goldman Sachs had thus suffered a once-in-every-fourteen-universes loss, and on several consecutive days.

The use of ever more incomprehensible investment vehicles and mathematical models to manage, price and diffuse risk that was in reality unmanageable brought the financial system to the brink of collapse. The "mispricing of risk", former US Federal Reserve chair Alan Greenspan called it - but it wasn't getting the price wrong that was the error, but trying to set any price on it at all.

Way back in 1937, Keynes explained with typical clarity the difference between risk and uncertainty. "By 'uncertain' knowledge I do not mean merely to distinguish what is known for certain from what is merely probable...the sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatsoever. We simply do not know".

"We simply do not know" was something seldom heard from economists and investment bankers in the long boom. They were, and surprisingly still are, paid handsomely to pretend that they do know, despite much evidence to the contrary. That conflict of interest remains unchecked.

Just as he did when he witnessed the insanity of trying to make Germany pay for the Great War in 1919, Britain returning to the Gold Standard in 1925, or the disastrous attempts by governments to balance their budgets in the crises of 1929 -1930, Keynes would have done everything to warn of the dangers of the credit bubble. He would be writing prolifically, but also blogging, twittering and getting on the telly, like Vince Cable, but with more global clout. Keynes would also have recognised, as others have recently, that America's vast trade deficit with China – and the debts it has created - represents a looming threat to global prosperity, even peace, just as international debts created so many tensions in the 1930s.

But what Keynes might be able to tell us, as no one can now, is how we get ourselves out of this bind, even as the West's governments adopt his prescriptions to spend their way out of recession, piling their debts even higher. As Skidelsky says: "The stimulus packages now being implemented may restore the world economy to its previous rickety condition, but they will do nothing to address the structural imbalance... Indeed they will aggravate it, since the stimulus will replace private debt by public debt, without creating new resources to finance it".

One contemporary wrote this about Keynes at the Bretton Woods conference in 1944: "Keynes must be one of the most remarkable men that ever lived – the quick logic, the birdlike swoop of intuition, the vivid fancy, the wide vision, all combine to make something more several degrees beyond the limit of ordinary human achievement... The Americans sat entranced as the god-like visitor sang and the golden light played round".

Despite their best efforts, neither of Keynes's vicars on earth is quite able to recreate that golden light. We will remain in the economic darkness for a while longer.

Sean O'Grady is economics editor of 'The Independent'