Keynes vs. Hayek: Book Review
https://www.amazon.com/Keynes-Hayek-Defined-Modern-Economics-ebook/dp/B005LW5K6G/ref=sr_1_2?crid=202BVJKASAO9L&dchild=1&keywords=keynes+hayek+the+clash+that+defined+modern+economics&qid=1625904537&sprefix=Keynes+Hayek%2Caps%2C216&sr=8-2
by Nicholas Wapshott
I liked this book on two of the most influential
economists of the Twentieth Century. Wapshott is an engaging writer who can
combine personal portraits with clear explanations of the underlying issues.
Keynes was likely the most influential economist of the Century, and his
intellectual brilliance intimidated even mega-minds like Bertrand Russell and
Wittgenstein. He was at the negotiations over the end of the First World War
and correctly predicted that its disastrous provisions would lead to another War
in his article The Economic Consequences of Peace. His role as
a Cassandra was further cemented by his prediction of the disastrous attempt of
Britain to return to the gold standard. The Great Depression which started in
1929 led to his radical prescription for a cure: massive deficit spending to
stimulate demand. This attracted the attention of many young economists working
for Roosevelt, and small scale effort were modestly successful until FDR’s
natural timidity led him to pull the plug and plunge the US into another sharp
recession.
Meanwhile, in Germany, Hitler’s massive military buildup
and road building provided a kind of military Keynesianism that produced a
strong recovery.
Back in England, Hayek, who had fought for Austria in the
First War, had presided over the classical economic resistance to Keynes,
strongly opposed to stimulus and waving the flag of Austrian Economics.
After the Second War, Keynes died, and, in Hayek’s words,
“became a saint.” His prescriptions were enthusiastically applied (and over
applied) and producing a two and one half decades of unprecedented prosperity.
The excesses eventually triggered strong inflation (again as Keynes had
predicted) and the dreaded stagflation of inflation and unemployment.
After the War, Hayek had produced his most successful
publication, a long pamphlet or short book called The Road to
Serfdom. Its message was that government intervention in the economy
inevitably led to the kind of tyranny of Nazi Germany, Fascist Italy, or The
Soviet Union. Hence laissez faire capitalism must be allowed to
work its magic.
This became the battle cry of the reaction, and the motto
of Reagan and Thatcher. Thatcher in particular, aggressively deconstructed
British socialism. Reagan talked Hayek, but ran his own military Keynesian
buildup. Meanwhile, brutal austerity managed to squeeze out inflation, at the
cost of high unemployment. Hayek’s ideas were triumphant, though unemployment
remained high. Hayek even got the New Economics Nobel, even though even his
followers, like Milton Friedman, found his economics writings unintelligible.
Self-regulating capitalism came crashing down in The Great
Recession of 2007–2008, and Keynesianism suddenly became respectable again.
Even Robert Lucas, high priest of the anti-Keynesian school of Chicago said “We
are all Keynesians in the foxhole.”
Hayek’s
most important influence was his critique of socialism and economic planning by
governments. Nonetheless, his specific economic
works are criticized even by his supporters.
Milton Friedman, perhaps his most influential follower, found his
economic works incomprehensible and incoherent.
He was not a pure libertarian, and believed universal government
mandated health care and some other social welfare measures. His legacy is tainted by racist statements
and some bad personal behavior.
Keynes,
like Hayek, was a capitalist, but he believed that a smooth functioning economy
sometimes required large-scale government intervention. He was a scientist, not an ideologue, and
frequently changed his mind in response to circumstances and his own evolving understanding.
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