John Maynard Keynes: Can the great economist save the world?

Some years ago, I was present when Bill Clinton visited Warwick University, during the dying days of his presidency. The faculty were awkwardly lined up, each of them holding a book as a gift. I noticed that Big Bill wasn't excessively interested in geology, and he didn't do much better with Germaine Greer and her volume of women's poetry. Things were different when he encountered Robert Skidelsky, author of the definitive Maynard Keynes biography. "Keynes!" the President exclaimed, as if recalling a long-lost crony. He told us all how he had always loved the boldness of the man.

"Keynes had the idea of using government money to spend your way out of a depression," the President explained. "That was a major discovery." I realised that Clinton, like myself certainly, had come to comprehend capitalism through the work of Maynard Keynes. And Keynes, like FDR, whom he met and admired, had been right. There really was nothing to fear, least of all fear. Humans need not think of themselves as victims of impersonal economic laws, suffering stoically. With luck, and the due exercise of brilliance, we could learn to save ourselves. Who knows, we might even come to fathom the "dismal science" of economics.

John Maynard Keynes, as his Russian wife Lydia remarked, was "more than economist". He stood at the crossroads of the modern movement, and he moved freely among the competing worlds of Cambridge, Bloomsbury and the Treasury. Keynes was also (at various times, often simultaneously) a civil servant, a collector of paintings and books, a speculator, a farmer, the begetter of British policy towards the arts (he created the Arts Council), and editor and publisher – and of course, a thinker of great originality. He wrote many books, pamphlets and articles, mostly in great haste, and he was a great exponent of simple ironical prose.

In a very English way he combined a socially conservative appearance – he wore silk underwear and tailored grey suits, he sat on interminable committees and didn't care much what he ate – with the readiness to entertain any proposition. Unless they were established by him, he abhorred rules. When he died in 1946, Keynes was given full honours by the British establishment. And yet he was never really one of them: Keynes was too lacking, like Winston Churchill, in "soundness", or indeed "bottom", and much too conspicuous in his cleverness. A bizarre contribution to the debate over his reputation came from the former editor of The Times, William Rees-Mogg, who suggested that Keynes' obsession with the short-term was motivated not by humanitarian, welfarist considerations but by the fact that as a homosexual he could have no real appreciation of the passing of values (or indeed wealth) from generation to generation.

I first encountered Keynes in 1973 on the Central Line, between the power cuts during the miners' strike. In 1970s Britain the over-used adjective "Keynesian" came attached to many less-than-pleasant things. It described what governments did when faced with economic nonperformance and extortionate claims from trade unions. For many critics of Keynes, the term implied a posture frequently adopted in the class war: a disposition to surrender, camouflaged by elaborate technical arguments.

And yet Keynes, as I rapidly discovered, wasn't the man painted by his detractors. He was most easily taken in short doses, often at his best when provoked by some instance of conspicuous stupidity. "I agree with everything in this if 'not' is put in front of every statement," is how he once judged the work of a civil servant. "When the facts change, I change my mind," he is said to have quipped. It is hard to love great and unyielding intelligence. It is also hard to tolerate those who are consistently right while always seeming to change their views. But Keynes freaks are helped along by the biography, which exists, for hard-core addicts, in three stout volumes, but has recently been released in a shorter, 1,000-page single-volume version. Robert Skidelsky's book is one of the great biographies of our time, an account not just of a man's life, or indeed an age, but of the flourishing and decay of a very English style of radically sceptical intelligence. It makes you long to possess even the smallest micron of Keynesian brain power. I've bought and lost several copies, usually on the back seats of cabs in far-off places.

John Maynard Keynes was born in Cambridge, in 1883, at the high-water mark of British world supremacy, and on the fringes of what the Cambridge historian Noel Annan called the "intellectual aristocracy". His father was a less than wholly successful economist who took refuge in university administration, and his well-educated mother came from a Nonconformist family. Keynes went to Eton (the best school of the day, also the most snobbish) on a scholarship. There he debated, discovered he was a homosexual and grovelled in mud. At the Fourth of June (the annual gala day at Eton that celebrates the birthday of George III) the young Keynes wore "a perfect dove" of a waistcoat. Keynes' impregnable self-assurance is an Eton trait, so indeed is his arrogance. He remained faithful to the school even as his ideas changed. In 1944, when he was very ill, he spent weeks in the bursar's draughty office, rescuing the school's finances. Briefly, however, during the post-war New Jerusalem, Keynes seems to have believed that Eton should be reconciled with egalitarianism, taking in poor boys.

From a young age, Keynes was convinced that he was ugly, but this didn't stop him from enjoying love affairs with other "buggers" from his own social milieu. At King's College, Cambridge, he read philosophy and joined the exclusive Apostles' society, through which he met and began his tempestuous friendship with the writer Lytton Strachey. It was Keynes who seduced Lytton's great love, the painter Duncan Grant. In my office I have a full-size replica of Duncan Grant's portrait of the beady-eyed Keynes at the writing board he used, pen raised and ready for business. "We entirely repudiated a personal liability on us to obey general rules," is how Keynes remembered this pre-war homosexual Arcadia. "We repudiated entirely customary morals, conventions and traditional wisdom."

Keynes is often thought of as a Bloomsbury figure. In reality, the relationship was often mutually hostile, not least during the First World War. The Bloomsbury religion consisted of a coterie of bourgeois-bohemian artiness in which private states were exalted and good cleaning ladies much prized. Keynes thrived in the public sphere. He proved to be able to support his Bloomsbury friends financially, while sleeping with some of them, and they in their turn tended to patronise him. Virginia Woolf's diaries are filled with allusions to Keynes' vulgarity. (She described him once as a "gorged seal, double chin, ledge of red lip, little eyes, sensual, brutal unimaginative", though she did also acknowledge his "queer imaginative ardour about history, humanity".) The pacifist Bloomsberries abhorred Keynes' wartime work at the Treasury. They were happy to be found war-exempt jobs (in most cases they became rose gardeners), while resenting the fact that Keynes' astonishing financial skills were making the fighting possible. For his part, Keynes was resentful of the corrupt uses to which his talents were put.

Keynes' first and best book, The Economic Consequences of the Peace, was published in 1919. It came to influence thinking about 20th-century politics as no other book did, with the possible exception of Mein Kampf. It is the work of a whistle-blower, expressing Keynes' fury at the wasted peace. At Versailles, where he represented the British government, Keynes became outraged by the stupidity of the aged men around him. Dishing the dirt on French and British politicians, Keynes pleaded for a non-Carthaginian peace that wouldn't be the pretext for a second war. Although his pleas were in vain, progressives in the United States and Europe later accepted his view that not just the war but the peace that followed it had been in vain.

Keynes might have withdrawn from the world in the 1920s, as indeed did many members of the British rentier class, travelling courtesy of the overvalued pound and generally amusing himself. But he declined to behave according to type. Instead, much to the alarm of the Bloomsberries, he married Lydia Lopokova, a diminutive and wacky ballerina from St Petersburg (her adoring nickname for poor, ugly Keynes was "lanky"; "I want to be gobbled abundantly," the great economist wrote to her), and lent his genius to an understanding of catastrophe.

Before Keynes, economic activity was thought to be governed by a set of rules derived from those that the deity had imposed on mankind and that were enshrined in the gold standard, a totem manipulated by the theologians of the Bank of England. Inflation was interdicted on moral grounds, because it destroyed sound bourgeois finance; and the surplus workforce could always be sent off to the colonies, or left to starve in Ireland. One tampered with such regular occurrences as slumps and mass unemployment only with the greatest imprudence.

But laissez-faire appeared absurd, as well as morally abhorrent, to Keynes. He began to treat economics as if it were any other type of narrative from physical science or modernist fiction. This led him to reject the notion that the operation of financial markets was moral or necessarily beneficent. But it also caused him to reject Marxist economics, just then becoming fashionable among the British intelligentsia.

In the 1920s Keynes visited Russia, where he was able to meet some of his wife's impoverished relatives. Unlike his friends Beatrice and Sidney Webb, or the dramatist George Bernard Shaw, Keynes wasn't impressed by Stalin's Russia. "How can I accept a doctrine," he asked, "which sets up as its bible, above and beyond criticism, an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world?" But Keynes was barely more enthusiastic about capitalism as it was practised in the contemporary world. "Such a system," he wrote, "has to be immensely, not just moderately successful to survive." The Great Slump made it clear that capitalism was neither.

It was Keynes who advocated Britain's quitting the gold standard in 1931, a measure that did bring some relief while earning the opprobrium from the advocates of "sound" money. He wasn't joking when he said that instead of paying out dole money it would have been better for the British government to print a great number of five-pound notes, paying people first to bury them and then to dig them up. And yet Keynes – this is important, given the orthodoxy with which his name came to be associated – never suggested that he had all the answers. What he said, again and again, through the darkest years, was that there was no mystery. Horrendous events could stem from trivial causes, but might require only the most trivial remedies.

Gadding from one conference to another in the 1930s, Keynes occupied a place in the public imagination normally reserved for left-handed tennis players or erratic minor royalty. He was spotted by Bloomsbury cronies telling housewives on the newsreels how they must abjure the thrifty habits of generations. In Washington he alarmed a pundit of conservative views by tipping a pile of washroom towels to the floor in an attempt to show how increased consumption generated work and therefore would aid economic recovery.

"In the long run we are all dead," was how he responded to those who still thought the Crash would go away of its own accord. "But I could have said equally well that – in the short run we are still alive. Life and history are made up of short runs." Keynes speculated in currency, only sometimes successfully. He was a canny investor. The money he made was spent freely – on a secondhand Rolls-Royce and in various not wholly successful artistic ventures of which Lydia was often the central attraction. Less and less appreciated by Bloomsbury, she and Keynes became the odd couple of the decade. Lydia's mots were much appreciated by Keynes. "I had tea with Lady Grey," she once remarked. "She has an ovary which she likes to show everyone."

In 1937 Keynes suffered a heart attack. The remaining nine years of his life consisted of a series of wars: against a recurring series of terrible attacks; against the "bandit states" of Europe; and against the bureaucratic, Brit-hating wartime culture of Washington. Returning to the Treasury, Keynes once again conducted life-saving negotiations, criss-crossing the Atlantic by plane until the poor state of his health obliged him to travel by boat. The Empire was going fast and Britain had hocked everything in its efforts to survive. But there were those among the anti-imperialist lobby in Washington (well represented among the internationalists who now fashionably styled themselves Keynesians) who considered bankrupt Britain as great a threat to peace as Stalin's Russia. "May it never fall to my lot to have to persuade anyone to do what I want, with so few cards in my hand," Keynes exclaimed. He believed, or at least acted as if he did, that some portion of Britain's enormous debts should be forgiven. No one agreed with him.

In the wartime creation of the post-war world institutions at Bretton Woods – many of which had been Keynes' idea – he behaved as if he were not the representative of a now-humbled power. Too impatient to be a good negotiator, the dying Keynes none the less cut a fine figure in Washington, and at Bretton Woods he appeared to contemporaries as a near-magical figure equal in totemic significance to Churchill. But he had failed in his primary objective, which was to arrest the post-war slide of Britain. Already within months of Keynes' death, the nearly $5bn American bailout had been spent unsuccessfully shoring up the overvalued pound, or vainly shoring up the idea of Empire.

The most penetrating criticism of Keynes came from Friedrich von Hayek, an Austrian lecturing at the London School of Economics, who famously became Mrs Thatcher's favourite economist. Hayek had witnessed the catastrophe of state during the hyperinflation of the 1920s. He had his own, purely economic reasons for disagreeing with Keynes; but he also suggested that the Keynes style of liberalism, by increasing the scope of state power, would end by extinguishing the bourgeois freedoms it purported to save. Somewhat unconvincingly, Keynes responded that "dangerous acts" were all right so long as they were perpetrated by the right people – ie, by the progressive, socially congenial elite educated at Oxbridge or Harvard. Keynes remained a statist who believed that "moderate planning" was better than laissez-faire.

But in Britain, above all, the continuation of government intervention tended to produce mediocrity, as was clearly revealed in the 1970s. With the worldwide dismantling of government powers, he appeared redundant, and the Keynesian lessons were rapidly forgotten in the whirlwind of deregulation. It has taken another banking failure and the prospect of a worldwide slump for them to be aired again. After the panicked bailing out of Wall Street, laissez faire once again seems less than wholly attractive, though there are still those each week who write letters to the Financial Times deploring the way in which, yet again, the resources of the state have been mobilised to save the practitioners of contemporary capitalism from their own follies.

I've often wondered whether my lost, scribbled-over, broken-backed copies of Keynes still exist. If they do, I suggest that I and their possessors should meet. The sort of Keynesian venue I have in mind is not a gathering of economists and power brokers but a scarred piece of earth in some not-favoured part of the world. Here we might discuss not such tedious matters as "the marginal propensity to consume", nor the niceties of "demand management" (questions that probably bored Keynes even as he formulated them) but what, exactly, capitalism is for, and whether, as Keynes periodically hoped, it could ever be significantly modified or superseded.

Never much attracted to the prospect of Utopia, in 1927 Keynes none the less set out to describe the ideal society in an essay entitled Economic Possibilities for our Grandchildren. It would be a hippyish post-Bloomsbury place where no one worked too hard and people would be able to value today over tomorrow, the good over the useful. "We shall honour those who can tell us how to pluck the hour virtually and well, the delightful people who are capable of taking direct enjoyment in things," he said, less than wholly convincingly, concluding meanwhile, "we must go on pretending that fair is foul and foul is fair."

Within the wealthy bubble bohemias of Carmel or Notting Hill, in any High or Main Street, you can find hour-plucking aplenty, though not of course in the workers' barracks of Guangdong Province or the Hoovervilles of Johannesburg. But the shoppers of the West are going home, emptying the world's malls. I learn from CNN that nine out of 10 workers in America are kept awake by anxiety in relation to economic upheavals. We'll survive as long as the planet allows – because as Keynes ruefully acknowledged, raw capitalism is tenacious, filled with animal spirits. So we will continue to pretend that foul is fair. It is even more difficult now to imagine capitalism vanishing than it was in Keynes' day. But I suspect that this wouldn't have surprised, or excessively bothered him.

"We do not know what the future will bring," he said, "except that it will be different from any future we could predict." Whereas others might have despaired at so much uncertainty, Keynes, happily for the rest of us, rejoiced. And that is why we still need the real Keynes, not for the obsolete doctrine, which we can safely discard, but as the sceptic and visionary he was.