Book Review: Keynes Hayek, by Nicholas Wapshott

The British financial journalist's lively retelling corrects the record of the 20th century’s greatest debate

John Maynard Keynes in his study at the London School of Economics | Photo: Tim Gidal/Getty

Anti-planning economist Friedrich A. Hayek taught at the LSE in the 1930s | Photo: Routledge

John Maynard Keynes

John Maynard Keynes in his study at the London School of Economics | Photo: Tim Gidal/Getty

Keynes vs. Hayek: Live at the LSE!

After 28 years of deregulation and dedicated free marketeering, the Bush Administration met the economic crisis of 2008, sometimes dubbed the Great Recession, with billions worth of economic stimulus, and by cutting interest rates and encouraging spending. Despite the trajectory of American economic policy since the era of Reagan, a tax-cutting, “non-interventionist” administration like that of George W. Bush had engaged in good old-fashioned, textbook Keynesian economics.

This cognitive dissonance has appeared on both sides of the Atlantic, and is one of the central themes running through Nicholas Wapshott’s superb new history Keynes Hayek: The Clash that Defined Modern Economics.

Wapshott, former senior editor at The Times (London), has done his homework – the book is an expertly blended narrative history of economic theories and the academic institutions that promoted them, the policies of their implementers, and of two individuals – Englishman John Maynard Keynes and Austrian Friedrich August von Hayek – who stood at the center of what, outside the communist world, was the most portentous economic debate of the 20th century. It is one that remains with us still.


The limits of self-regulation

Keynes Hayek is not heavy on theory – so don’t worry, it’s safe for the lay reader. The heart of the narrative is of course the clash of two titans. Keynes was already a sort of doyen in the British economic world, due to his prominent position at Cambridge, leading the charge against classical economics.

Friedrich A. Hayek

Anti-planning economist Friedrich A. Hayek taught at the LSE in the 1930s | Photo: Routledge

He attacked the establishment by arguing the limits of the self-regulating market, positing that government intervention during economic downturns can stimulate the market and create jobs. Having been a lead advisor during the 1919 Paris peace talks and penning the influential Economic Consequences of the Peace that same year, Keynes was already a towering figure when Hayek arrived in London in 1931.

An up-and-coming luminary of the Austrian School, Hayek entered the fray as the leader of the neoclassical counterattack. Wapshott depicts Hayek’s arrival from Vienna like that of a gunslinger rolling into town in an American Western. Lionel Robbins, chair of Political Economy at the London School of Economics, invited Hayek to join the LSE faculty, with the express purpose of unleashing him against Keynes.

Pistols drawn, Keynes and Hayek, with their dedicated acolytes at Cambridge and LSE respectively, began to critique and berate each other in lecture and print. Interestingly, their convoluted arguments and evolving positions resulted in inconclusive debate, and the exchanges frequently devolved into carp and cavil. Keynes, loquacious, haughty and self-aggrandizing, often dwarfed the cerebral, heavily accented Hayek in public engagements, and sometimes smugly patronised him during personal meetings. However, the dense theoretical exchanges gave way to broader policy implications, especially after the publication of Keynes’ seminal The General Theory, and the adoption of Keynesian policies in Franklin Roosevelt’s New Deal in the U.S. to combat the Great Depression.


Different fears, different theories

In broad strokes, their respective fears fed their positions: Keynes of unemployment, Hayek of inflation. Keynes watched with horror the suffering of the postwar British working class during the high unemployment; Hayek saw his beloved Vienna ravaged by hyperinflation during the same period.

Ultimately, the New Deal’s success and Hayek’s lack of effective rebuttal prompted the “Keynesian Revolution”, by which successive American administrations embraced fiscal intervention, to mostly successful ends (Keynes, who died in 1946, did not live to witness the extent of his success). Hayek, however, abandoned theoretical economics in favour of political economy, penning the influential libertarian classic, The Road to Serfdom. In it, Hayek argued not against the economic errors of interventionist policies, instead postulating that any intervention would ultimately snowball into totalitarianism.

What is apparent in Wapshott’s narrative is the tragic figure Hayek becomes. He suffered endless derision during the years opposite Keynes, detested by his colleagues and, worse, looked upon with indifference. He endured long bouts of depression, going from LSE to the University of Chicago, where he was unwelcome, to relative obscurity at the University of Freiburg. Then came the Reagan-Thatcher revolution, where “stagflation” paved the way for a deregulationist era of supply-side economics. Despite unemployment, high interest rates, reckless tax cuts, and rising poverty, the U.S. economy boomed. Hayek died in 1992, no doubt feeling vindicated.

A fascinating history in itself, Keynes Hayek is a book that holds important lessons for today. The Keynesian Revolution systemically altered the economic structure; as Chicago School hero and later Reagan advisor Milton Friedman asserted in 1965, “we are all Keynesians now.” Government intervention in some form or another has remained since FDR; in Hayekian terms, conservative-inspired subsidies of the private sector are no different from liberal programmes of public works.


Two liberals, two levels of economics

Underneath, Keynes and Hayek were working on different levels of analysis. Keynesianism is a macroeconomic theory, while Hayek was thinking on the microeconomic level. Keynes, in fact, invented macroeconomics. Therefore, modern arguments against intervention still take place within an overall Keynesian framework.

Perhaps most crucial is to understand what Keynes and Hayek were not. Keynes, long derided as a socialist in capitalist’s clothing, in fact categorically rejected socialism. A lifelong member of the now-defunct Liberal Party, Keynes remained diametrically opposed to socialism in all its forms, including the germinal Labour Party and the mild Fabian socialism en vogue in Britain during his time. He viewed his efforts not as an assault on capitalism, but as a savior of it.

Hayek, conversely, has become a hero of the conservative right. Everyone from Newt Gingrich to Glenn Beck has invoked his name while championing the free market. But Hayek was no conservative. In The Constitution of Liberty, he explicitly identifies himself as a liberal.

“While the liberal position is based on courage and confidence, on a preparedness to let change run its course,” Hayek wrote, “like the socialist, [the conservative] regards himself as entitled to force the values he holds on other people.” Oh, and he also supported a national health system.

At a time when both America and Europe are enduring severe economic woes, debating austerity vs. stimulus, intervention vs. free market, it is more imperative than ever to understand who these two men were, and what exactly they stood for. For this, Nicholas Wapshott’s timing couldn’t be better.


Keynes Hayek: The Clash that Defined Modern Economics
by Nicholas Wapshott
W.W: Norton (2011)
pp. 400
Available at Shakespeare & Company
1., Sterngasse
(01) 535 5053 0

Order this book online

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