Keynes vs. Hayek: Book Review
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.