Keynes Hayek: The Clash that Defined Modern Economics

John Maynard Keynes once famously quipped: "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."The underlying question in Nicholas Wapshott's" Keynes Hayek: The Clash that Defined Modern Economics" is whether or not Keynes himself is now one of those defunct economists. And, if so, has Friedrich Hayek, so long in the great man's shadow, spurned and ridiculed for most of his life by the professionals in his field, emerged as the leading intellectual force in economics today?After reading "Keynes Hayek," I can't help but think that the subtitle is misleading. There was never much of a "clash" between the two men, besides a short, public and rather pedantic tit-for-tat in 1931 when Hayek wrote a sharply worded critique of Keynes's "Treatise on Money," a piece Keynes had already admitted was not full baked and marred with inconsistencies. I found these early chapters of the book difficult to follow and digest. Wapshott quotes extensively from Hayek's writing, which is turgid and abstruse, and only rarely attempts to put his arguments in simple English. I found myself agreeing with University of Chicago economist Frank Knight's contemporary complaint: "I wish [Hayek] or someone would try to tell me in a plain grammatical sentence what the controversy...is about. I haven't been able to find anyone on this side [of the Atlantic] who has the least idea."Beyond that brief contretemps, which centered mainly on the uninspiring topic of how basic economic terms like investment were being defined, Keynes simply ignored Hayek, because he could. After all, by the early 1930s Keynes was an international celebrity; Hayek was merely a young and largely unknown lecturer at the London School of Economics with a thick Austrian accent. If Hayek sought to pick a fight with the legendary Keynes , Keynes's strategy was to avoid anymore tiresome direct exchanges with his pygmy rivals and instead bury them under the intellectual weight and rigor of his magnum opus, "The General Theory of Employment, Interest and Money," which first appeared in 1936.After years of trying to influence economic policy by directly influencing the policymakers, Keynes gave up in frustration and instead sought to achieve change by winning over an entire generation of young economists to his theory that during a crisis full employment could only be achieved by government intervention, such as public works projects, that increased aggregate demand. He was successful beyond even his own lofty and confident expectations. He had set off a revolution - and he knew it. Hayek wasn't even able to muster a response.The two men, Keynes/Hayek, simply do not measure up as great rivals like Edison/Tesla or Ali/Frazier. Keynes was a brilliant man - and brilliant in many ways. Hayek was shy, inarticulate, and uncomfortable in the spotlight and outside the world of theory. Wapshott recognizes that and notes "It is worth speculating how the battle with Keynesian ideas would have turned out had Hayek been more of a showman...Had [he] possessed Keynes's self confidence, commercial nous, and his love of performance, he might have been able to persuade that managing an economy was not desirable."But not only was Hayek no showman, with little feel for public relations or how to win over a crowd, he also offered no solutions. The painful reality, he claimed, was that we had to allow the market to naturally find its equilibrium, which could take years and would certainly have punishing effects on workers in the meantime. Any government intervention would only make things worse and delay the arrival of equilibrium and full employment. Wapshott writes: "Hayek was a doubter and pessimist: those who strived to make the world better would likely end up inviting unintended consequences. The free market worked best according to rational decisions based on self-interest and failed to work when tempered by idealism."Keynes, on the other hand, "offered a hopeful view of the future, with everyone employed based on an optimistic view of human nature." It was certainly an easier product to sell. Or, as Milton Friedman once sarcastically put it, "What a wonderful prescription: for consumers, spend more out of your income, and your income will rise; for governments, spend more and aggregate income will rise by a multiple of your additional spending; tax less, and consumers will spend more with the same result."The upshot was that the post-War free world was decidedly Keynesian. Or at least it was Keynesian in that the economic policies were driven by Keynse's legion of bright-eyed and motivated followers who adopted his prescriptions with near religious intensity and devotion. Alan Peacock of LSE argued that Keynes, who died suddenly at the age of 62 in 1946, was the "Kerensky of the Keynesian Revolution." That is, a moderate who got the revolution moving, but who was quickly kicked to the curb by the wide-eyed true believers. Indeed, it is worth noting that the vast majority of students have learned Keynesian concepts not from reading the master directly in "The General Theory," but rather from his American acolyte, Paul Samuelson, whose "Economics: An Introductory Analysis" has been printed in forty languages and has sold 40 million copies over the past half century. As Samuelson once arrogantly put it: "I don't care who writes a nation's laws if I can write its economics textbooks."Once politicians discovered the electoral power of Keynesian economics, the revolution really took off as presidents of both parties aggressively used fiscal policy to prime the economy in tune with the electoral cycle. By 1965, the United States and the western world had never had it so good. Everyone was enthralled with Keynesian prescriptions they believed had delivered two decades of strong economic growth, low employment and low inflation. John Maynard Keynes was named Time's Man of the Year - nearly twenty years after his death.But that honor may have been the high water mark for Keynes, as the 1970s introduced something that Keynesian economists thought impossible: sustained high inflation and high unemployment (stagflation). Wapshott likens Keynesian polices by the 1970s to a wonder drug that after awhile starts to lose its potency. By the time of the Reagan 80s and the collapse of the Berlin Wall and the general loss of faith in socialism, Hayek and his followers, Milton Friedman foremost among them, suddenly and surprisingly came into fashion. Hayek, who received the Noble prize in 1974 and died in 1992 at age 92, had lived long enough to confidently say, "I told you so." By the 1990s, Democratic president Bill Clinton was committed to balanced budgets and free market economists had taken over the international institutions created by Keynes at Bretton Woods, the World Bank and International Monetary Fund. In the long run, so it seemed, Keynes was dead.And then the worst economic crisis since the Depression hit in 2007 and the immediate response from the conservative Republican administration of George W. Bush was a stimulus and bailout package along almost pure Keynesian line. Evidently, "everyone is a Keynesian in a foxhole."So is Keynes "defunct"? Not by a long shot, Wapshott concludes. The cult-like conviction of his adherents in academia and government may have tempered since the stagflation of the 1970s, but Keynes fundamentally altered how we think about the economy and society's relationship with it. Today, Keynes's approach to understanding an economy from the top down (macroeconomics) rather than from the bottom up (microeconomics), as Hayek did, has become standard. The macroeconomic metrics that Keynes pioneered, such as Gross Domestic Product (GDP), remain the essential yard sticks for measuring the health of an economy. Finally, Keynes's general point that the economy can and should be managed by the government has become an established fact, although those who claim Hayek as their intellectual godfather prefer to see the economy managed by the government's influence on the money supply through interest rates (monetary policy) rather than through tax cuts and public spending programs (fiscal policy). Many politicians, particularly those of a conservative stripe, may preach Hayek on the campaign stump, but once in office, and especially in the midst of economic crisis, they unabashedly embrace Keynesian solutions, either because they work or simply because they are politically expedient.Milton Friedman was certainly ahead of his time when, in 1966, he noted with his usual ironical wit: "In one sense, we're all Keynesians now; in another, nobody is any longer a Keynesian."

What is one to make of the Austrian School of Economics? My previous encounters with the movement have been unattractive, to say the least. Ron Paul's dogmatic Gold digging ( Gold, Peace, and Prosperity Pocket Edition ) is actually less bizarre than Ludwig von Mises's writing, with their complete lack of psychological realism and their assertions that the popularity of the detective novel is an expression of anti-Capitalist feelings ( Anti-Capitalist Mentality ) and that the Roman Empire fell as a consequence of excessive government intervention ( Economic Policy: Thoughts for Today and Tomorrow ).On the other hand, the Austrian view that excessive credit causes financial crises seems credible as a partial explanation of the Great Recession; Mises' (who was born two years before Marx died) main opponents were Socialists and Marxists; He was certainly more far sighted than they were and perhaps his excessive zeal should be indulged. And I could be judging the movement based on its least attractive advocates - I've never read any thing by the Austrian's indisputable star, Nobel prize laureate Fredrick von Hayek.So, "Keynes Hayek" a book dedicated to the clash between the grandest theorist of the Austrian school and to the Founder of modern macro - British economist John Maynard Keynes (1883-1946). leavening the economics with a dash of biography and history, surely this work, from Journalist Nicholas Wapshott, would help illuminate the life and ideas of these great economists?Well, yes and no; "Keynes Hayek" is an exceptionally well written book. See for example, Wapshott on Keynes, President Wilson, and America:"Keynes's colorful description of the pious Wilson in The Economic Consequences of the Peace was eagerly picked up by the American Press, who relished an excuse to traduce their beleaguered president with the sharply chiseled words of a seasoned master of invective".'Keynes Hayek' beautifully narrates both the larger politics of the era and the biographical details of both men. Keynes, the maverick grandmaster of unorthodox economics, raised early and high by his sheer genius, was opposed by the Conservative establishment, which actually summoned the up and coming Austrian economist, "like a western gunslinger", to do battle with Keynes.I learnt a great deal about both thinkers, including some potentially embarrassing facts. I didn't know Keynes supported protectionist measures as part of the response to the Great Depression. I guess I shouldn't have: they make sense as part of the Keynesian logic. But protectionism is such a classic issue, that Keynes' heresy on it is particularly startling.And don't you find it odd that, in 92 years, Fredreich von Hayek, the arch advocate of lassiez faire capitalism never had a private sector job?But for all of "Keynes Hayek" stylistic and biographical strengths, it is unfortunately over ambitious in its scope - much of the later chapters are nothing but a mundane history of post war America's economic politics, with the adjective 'Hayekian' liberally added to any deviation from the orthodoxy of the left. Worst yet, the book is weak on the economics. Or rather, it fails to explain the issues properly; People unfamiliar with economic issues are likely to be completely lost several times during the narrative. Frequently, I found I had to stop and think about the "missing elements" in Wapshott' analysis, and sometimes I failed to understand it even upon further reflections. For example, Wapshott said Keynes wanted the British government to reduce interest rates by issuing government Bonds, but I don't see how the latter action would accomplish the former goal.Reading 'Keynes Hayek' for the economic insights in frustrating. In Wapshott's defence, Keynes and Hayek frequently found each other's arguments baffling. But Wapshott doesn't really clear the smog off the debate, opting to merely reproduce its main sallys.Wapshott also sometimes treat the Keynes/Hayek debate in a level too philosophical for my taste: "Thus the two men ... represent two alternative views of life and government, Keynes adopting an optimistic view ... Hayek subscribing to the pessimistic notion that there were strict limits... and that attempts to alter the law of nature, however well intentioned were bound to lead... to unintended consequences".Economically speaking, what are the main differences between Keynes and Hayek? Teasing the answer from Wapshott's book, and from my previous readings, I suspect that the main difference is in the conception of risks, knowledge, and the role of price.In a Capitalist system, new investments are usually made in the face of uncertainly. The Capitalist investing in a new project has no way of knowing whether it would succeed or fail. The result of the attempt are unknowable and impossible to calculate. Investors must have the emotional temperament for risk taking, they must have confidence. But this confidence (which Keynes calls the 'animal spirits') depends on external circumstances. When the economy is weak, investors are less confident, and thus fail to invest. Similarly, families, fearing the crisis cut back on spending, preferring to save more. The result is the paradox of thrift, a vicious circle of avoidance of spending and investing, leading to slow economic growth, unemployment, and idle Capital.Keynesian government spending breaks the vicious circle. As governments don't have to worry that their investments would be profitable, they can spend money in the face of economic hardship, stimulating demand and pushing the economy out of recession.A Hayekian response would focus on the role of prices in guiding economic activities. Investment and spending decisions are not random gambles, but the result of interaction between supply and demand. Keynesian stimulus distorts the markets and undermines the signaling capacity of the free economy, impeding the efficient allocation of resources. And if the crisis was caused by such government induced misallocation, how could any more misallocation help? At best, it would bring short term bubbles, followed by still worse collapses.Hayek's counter argument convinced neither the economic profession nor the political world of the post world era. Keynes - or rather, Keynesian inspired economic views, at times very different from the views of the master - ruled supreme. When Keynesian ideas fell out of fashion - with the rise of Thatcher and Reagan - the economic views of the ascending right mostly followed Milton Friedman; Friedman shared Hayek's Laissez-faire outlook, but had little to do with his economic analysis.The crisis of 2008 saw a great resurgence in the Keynes's fortunes. A set of thinkers as diverse as Greg Mankiw, Paul Krugman and Richard Posner believe that the path to recovery runs through the General Theory. Yet, in a twist on the Hegelian dynamic of thesis-antithesis-synthesis, Hayek is also coming back. The economics of Milton Friedman, with their debt to Keynes and relative moderation, are no longer satisfactory for economic conservatives; It is the hardcore purity of Hayek that they crave.And thus, 80 years after Keynes and Hayek, the clash between them still determines the path we take today. I'm guessing Keynes wouldn't have been surprised. As he put it: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else".

I used to think Hayek was the only way. Now I am partial to switching between different methods as the cycles dictate.I do believe in this post Covid world we are living on monetary heroin. Sooner or later we'll need a correction. A full Hayek reset.As Keynes and Hayek would argue, there needs to be a line. Government to build the infrastructure, individuals to build the ideas, and demand.As with many things in life. Necessity forces people to take action.

This is an excellent and enlightening read. Far too often these two men have been presented by partisans of the other in extreme terms - socialist/Marxist for Keynes (who was anything but) and verging on fascist for Hayek (again, anything but, he loathed the Nazi regime).In time both men came to respect the other (Hayek always respected Keynes, but the latter's massive ego perhaps meant it took some time for him to truly respect Hayek). As somebody firmly in the Keynes camp in terms of economics, I came away with a new view of Hayek the man and his views (though still firmly disagreeing with his alter-life arguments that private enterprise should rule virtually all parts of economic life). The book's great strength is in the extraordinarily evenhanded way it presents the arguments and personalities of both men. Only at the very end does one have an inkling that the author may slightly favour Keynes views on balance. Although, as he points out, a blend of both is now commonly accepted by economists across the world, and that is hard to argue.Well done Nicholas Wapshott. Thank you for taking such a divise matter and explaining it so cogently and so humanely.

This book has lots to recommend itself to the general reader with an interest in modern history, politics and economics. The author does a wonderful job of explaining how the Keynes and Hayeks views on how an economy works/should work differed and gives a brief summary of their earlier lives that suggests how, to some extent these views were conditioned by their experience of things like war and economic depression earlier in their lives. I found it really informative of how (in Europe and the USA anyway) the political left and right have been divided, post-WWII along Keynesian and Hayekian economic lines.There's also a lovely treatment of their clashes in economic and academic publications - it's really well written so that you get a sense of the passion and emotion behind their letters and publications even though they're couched in very academic and measured terms. Can't recommend this book highly enough.

This was a relatively unmemorable read, so much so that I actually forgot I'd finished it. Keynes and Hayek didn't see eye to eye. Perhaps there was a vague attempt at understanding one another, but it didn't work and it didn't last.So much for the above summary. Actually this is one of those slightly irritating books that suggests a narrative (i.e. the relationship between Keynes and Hayek) but in reality is little more than a pair of biographies.

This book was a really interesting and well written account of the two economists and their interactions. The format is both exciting and informative - definitely not the dry read it could have easily been. A good mix of description about their lives, their personalities and of course their economic theories. As someone with limited existing economic knowledge the book struck the right tone: always clear enough to be easily understood but without feeling simplified or condescending. Highly recommended!