Keynes and Hayek

On October 4, 2011, in economic theory, by Jon Lewis

Keynes Hayek: The Clash That Defined Modern Economics. Nicholas Wapshott. W.W. Norton & Company 2011, pp.382, $28.95 With high rates of unemployment and even higher rates of underemployment plaguing the United States, there are many calls for President Obama and the Congress to do something to alleviate the situation. Although President Obama has not made [...]

Keynes Hayek: The Clash That Defined Modern Economics. Nicholas Wapshott. W.W. Norton & Company 2011, pp.382, $28.95

With high rates of unemployment and even higher rates of underemployment plaguing the United States, there are many calls for President Obama and the Congress to do something to alleviate the situation. Although President Obama has not made much headway in promoting his jobs bill, there is an emerging bipartisan consensus in Washington that reducing corporate income taxes could induce much-needed economic growth. Underlying the debates between liberals and conservatives is a philosophical disagreement as to how much, and indeed whether, the federal government should intervene to counter unemployment and to foster job creation.

Ideas are shaped by historical context. They can also take on a life of their own, freed from those who formulated them, and subsequently impact the course of history in surprising ways. Such is one of the premises underpinning Nicholas Wapshott’s ambitious new study of the parallel lives of and debates between John Maynard Keynes, who advocated government intervention in the economy, and F.A. Hayek, best known for championing the free market. Keynes, who was British, and Hayek, who was from Vienna and is associated with the laissez-faire Austrian School of economics, were two of the twentieth-century’s preeminent political economists. While Keynes was more concerned with the perils of mass unemployment and advocated government spending to counter recessions, Hayek was primarily concerned with what he perceived to be the deleterious effects that inflation had on a society and cautioned against governments intervening in the free market.

In Keynes Hayek, Wapshott, a journalist formerly affiliated with London Times and the New York Sun (full disclosure: I wrote a couple of opinion columns for, and received compensation from, the latter newspaper several years ago), defines his recent work as an attempt to answer the question of who was right, Keynes or Hayek, and to demonstrate that the academic disagreements between the two men continue to define the liberal-conservative political divide to this very day.

The author traces both the intellectual and personal dispute between the eponymous economic giants. We learn that both men’s ideas were shaped by the mass inflation that engulfed the vanquished powers of Central Europe after the First World War. Hayek, whose family personally experienced mass inflation in interwar Vienna, developed a strong bias against governments adopting inflationary measures to fix an allegedly broken economy.

Whereas Keynes argued that government should act in order to improve people’s lives, Hayek believed in the futility of government intervention. Wapshott contrasts the optimist Keynes with the pessimist Hayek, who we are told suffered from clinical depression. “Keynes believed that man had been placed in charge of his own destiny, while Hayek, with some reluctance, believed that man was destined to live by the natural laws of economics as he was obliged to live by all other natural laws.” If one accepts Wapshott’s characterization of Hayek’s pessimism, this begs the question of whether one can be an optimistic Hayekian, believing in the limitation of man to create his own destiny and yet believing that the future is necessarily going to be better than the past.

The author’s greatest contribution to furthering our understanding of the Keynes-Hayek dispute is his discussion of how most presidents, even Republicans who employed Hayekian rhetoric, have implemented Keynesian measures. “For many Keynesians,” writes Wapshott, “Reaganomics was little more than a thimblerig, a political gimmick that, behind the macho Hayekian rhetoric about slashing the size of government, set off a public spending spree on defense that boosted aggregate demand and economic growth.” George W. Bush, after the 9/11 attacks, acted as if he were working right out of the Keynesian playbook with “massive federal spending” which included, among other things, “pork barrel projects, such as the building of fire stations in Maine, that had nothing to do with keeping America safe.” This massive spending splurge would, of course, be criticized by the Tea Party who argued that Bush’s and the Congressional Republicans’ irresponsible spending led to the sovereign debt crisis with which the United States must now contend.

Although rich in detail, highly informative, and generally well written, Keynes Hayek suffers from two notable weaknesses. First, the author could have done more to define and to explain some of the economic and financial concepts that he discusses throughout the book. A lay reader without a background in economics or monetary policy could easily find the earlier chapters rough going. While the work has a selected bibliography at the end, it would have benefited from a glossary that would have made it easier for those with only a rudimentary knowledge of economics to better appreciate the nuances of the debate between Keynes and Hayek. The other major weakness in the work pertains to Wapshott’s seemingly capricious utilization of descriptive terminology. Alan Greenspan is an “ultra-conservative”; the Cato Institute is “conservative”; and Hayek was “never a conservative, but had become a libertarian, but he did not propose a state of anarchy.” Adam Wolfson is at first referred to as a “neoconservative thinker”; just several pages later, he is a “conservative political scientist.” Whether these are accurate descriptions are up to the reader to decide.

So, when all is said and done, who has won the debate: Keynes or Hayek? Wapshott leans toward Keynes, referring to Milton Friedman. “Although Keynesianism has been declared dead a number of times since the mid-1970s, Friedman’s acknowledgment in 1966 that ‘in one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian; is a more accurate, if teasingly ambiguous, assessment of the state of economics in the early twenty-first century.” Yet, at the same time, Wapshott acknowledges that the Tea Party’s adoption of the Hayekian message advocating for small government has made American politics increasingly Hayekian. The battle, it would seem, rages on. Whether the Tea Party will be a lasting force is American politics remains yet to be determined.

In conclusion, Keynes Hayek is an exploration of how two men and their very distinct ideas about the role of government impacted twentieth-century economics and politics. While a useful addition to modern economic history, this work will be appreciated more by those already familiar with the Keynes-Hayek dispute than those who are coming to the subject for the first time.

Jon Lewis (c) 2011

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