Keynesian interpretations of the financial crisis

A by-product of the recent financial crisis has been the renewed interest in Keynes's works. Both in the press and in scientific journals, a crowd of commentators has emphasised the need to scrutinise the General Theory in order to gain a better understanding of the actual macro-dynamics of the economy and of the policy measures apt to help the economy recover from the downturn. But Keynes's thought has been given central prominence also with respect to the understanding of what went wrong at the microeconomic level, with specific reference to the role played by “irrational” agents animated by animal spirits. This paper supplements the influential analysis of George Akerlof and Robert Shiller’s Animal Spirits by arguing that a Keynesian explanation of the actual behaviour of individual agents is to be based more on the Treatise on Probability than on the General Theory itself. Indeed, while it is well-know that the rationale of Keynes's rejection of “Benthamite calculus” is best provided in the Treatise, less attention is usually given to the constructive analysis emerging from his criticism of contemporary probability theory. Through an assessment of Keynes's examination of “the application of probability to conduct” in the Treatise, the paper shows that most of the developments of what is usually referred to as behavioural finance have a Keynesian origin. In particular Keynes hinted at a decision rule different from mathematical expectation, a rule intended to mimic the behaviour of actual agents making decisions under uncertainty. The understanding of the current financial crisis, the paper concludes, would gain from a Keynesian assessment of the rationale for actual decisions as much as from the usual one concerning macroeconomic policy.