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After being utterly dicredited in the 1970s, Keynes is back in fashion partly because he offers something for everyone

What would you like for Christmas? After a challenging 2008, Wolseley hopes you get what you want (maybe for the first time this year).Me? I want a copy of John Maynard Keynes's "General Theory of Employment, Interest and Money". Everywhere Wolseley goes people are quoting it. Apparently the great man said that one way of dealing with a depression was to pay unemployed men to bury bottles with money in them. Other unemployed men would then dig them up and spend the money. I suppose this was in the days before helicopters and female diggers.

At a recent lecture one of Wolseley's gurus Sushil Wadhwani, raised his eyes heavenward and said "all the answers are in Keynes". If I have understood him correctly Sushil believes that, with respect to the UK economy, the authorities should have used fiscal measures to limit the expansion of the bubble over the last few years and used the surpluses to fund an even bigger stimulus now.

Wolseley finds this talk of Keynes discombobulating. Studying for an economics degree in the 1980s required little knowledge of Keynes. He had been utterly discredited by the failure of demand management in the 1970s. Keynes's ideas were responsible for the resulting "stagflation", a toxic combination of inflation and unemployment which made CDO squareds look like a health tonic.
Does anyone recall the "misery index", calculated by multiplying unemployment with inflation? Its performance in the late 1970s makes this year's iTraxx Crossover index look like a flat line. Britain's Labour prime minister famously told a nation in free fall "you cannot spend your way out of a recession".

But now Keynes is back. Burn your copies of Hayek's "Road to Serfdom" and turn to the General Theory. Like a Harrods hamper there is something in it for everyone. Gordon Brown can gorge on the demand management "fois gras", but I found a lovely bottle of "animal spirits". Keynes was a big believer in the importance of confidence, trust, and human psychology in understanding the business cycle, factors he described as "animal spirits". He did pioneering work on individuals' desire to hold cash, and on their propensity to save and invest.

I may have reservations about Keynes's pump priming and multiplier stuff, but I am with him on the importance of "animal spirits". One much recorded aspect of the credit "bubble" has been the extensive use of mathematical modelling techniques. At the extreme it is true to say that we took natural science models and applied them to markets, forgetting that markets are populated by irrational and (especially true in 2008) emotional agents who will respond in unpredictable but sometimes self-reinforcing ways.

As that great LSE economist Lionel Robbins said: "Economics is the science which studies human behaviour ...". But not everyone is talking Keynes. At a recent party Wolseley saw two prominent economic commentators, clearly disciples of Hayek and Milton Friedman, haranguing Bank of England deputy governor Charlie Bean about the Bank of England's decision to reduce the output of monetary statistics in 2007. "You only did it because the monetary aggregates were flashing red," said one, showing that there are still some who share Friedman's fascination with money supply.
On second thoughts maybe you shouldn't burn Road to Serfdom just yet. Maybe we'll all be reading it in 2009.

Wolseley is a leading practitioner in the credit market. Feedback is welcome at wolseley@creditflux.com