Nicholas Wapshott. Keynes Hayek: The Clash That Defined Modern Economics. New York and London: W.W. Norton and Company, 2011. See here to buy the book.
John Maynard Keynes and Friedrich Hayek were economists who profoundly impacted the twentieth century, and whose influence is still present today. In Keynes Hayek: The Clash That Defined Modern Economics, Nicholas Wapshott discusses their economic views, their personalities, their relationship with each other, and their influence.
Keynes was a British economist who believed that the government should attempt to create full employment through public works programs. He also supported low-interest loans for businesses and tax cuts to stimulate demand. For Keynes, if people had more money in their pockets, then they would spend more, and that would stimulate the economy. While Keynes thought that the government should resort to deficit spending in slow times to improve the economy, he believed that the government in prosperous times should step back and focus more on paying off its debt. For Keynes, the government spending a lot in prosperous times could contribute to unnecessary inflation. Keynes’ thought influenced the Presidencies of Franklin Roosevelt, John F. Kennedy, Lyndon Johnson, and Richard Nixon. Even Presidents who shied away from Keynesian principles in their rhetoric—-such as Dwight Eisenhower, Ronald Reagan, and George W. Bush—-still had policies that could be described as Keynesian, at least partially.
Hayek was an Austrian economist, and he was skeptical of Keynesian principles. For one, Hayek thought that giving low-interest loans to people and businesses that did not save enough could prove disastrous, for what would happen when the loans stopped coming? Would the businesses go belly-up? Second, Hayek feared that Keynesian policies were inflationary in their support for deficit spending and artificially stimulating demand. According to Nicholas Wapshott, Hayek was averse to inflation, having experienced its negative effects in Austria. And third, Hayek did not support Keynes’ belief that the government should seek to influence or tinker with the economy. For Hayek, the government should stay out of the economy in times of slowdown or catastrophe and allow it to arrive at a state of more equilibrium. Hayek also believed that the economy was too complex of an animal for the government to successfully shape, meaning that government influence could have unforeseen, and potentially negative, consequences; for Hayek, prices were the best indicator of what consumers wanted and what the market was willing to produce, and they were the ground at which consumers and producers found agreement. Moreover, in his influential, and controversial, book, The Road to Serfdom, Hayek argued that government attempts to command the economy could lead to totalitarianism, for, if the government could control people’s economic livelihood, what else could it control? Hayek appealed to Nazi Germany as an example of the kind of danger that he was warning about. Hayek was marginal for some time because people were enamored with Keynes, plus Hayek’s economic works could be pretty abstruse. The Road to Serfdom gained Hayek more fame and renown, but it also alienated him from academia due to its controversial nature. Yet, Hayek would have a profound influence on Margaret Thatcher and Ronald Reagan, and later the Tea Party movement in America.
To associate Hayek with the political right would be too simplistic, however, for a variety of reasons. Hayek was supportive of the government having social programs for society’s vulnerable, and he also embraced some form of national health insurance. At the same time, Hayek was very libertarian in areas and did not think that Reagan and Thatcher went far enough (even though Thatcher practically worshiped the ground that Hayek walked on!). Hayek was rather critical of conservatism on account of its nationalistic impulses. Although Hayek and Milton Friedman overlapped in supporting less government, there were differences between the Austrian school of which Hayek was a part and Friedman’s Chicago school. Hayek focused on microeconomics, whereas Friedman believed that society could influence the economy by regulating its money supply; for Friedman, the Federal Reserve could stimulate the economy by increasing the money supply, but it should not do so too much lest it cause hyper-inflation. And Ayn Rand considered Hayek’s work to be rubbish (for some reason)!
In addition to describing their economic thought, Wapshott paints a picture of Keynes and Hayek as people. Keynes for a long time had homosexual relationships, yet he fell in love with a Russian ballerina. Keynes was a compassionate man: he hated war, he thought that the Treaty of Versailles harshly punished Germany, and he wanted everybody to have a job. Keynes could also be intimidating and make people feel inadequate, and yet, as Wapshott states, Keynes was open to changing his mind and admitting when he thought he made a mistake. Hayek was the sort of person I wanted to root for, for he had somewhat of a rags to riches story, in terms of his journey from relative obscurity to growing influence. That gives a lot of us hope, doesn’t it?
There were parts of the book that I found particularly interesting. For one, Wapshott said that Dwight Eisenhower put into effect Keynesian principles, but he did so by appealing to national security: let’s build a national highway system, because that will allow us to transport military supplies during the Cold War! Second, Wapshott referred to Hayek’s response to a critic. A critic was pointing to Sweden as an example of a country that had strong government influence in the economy and yet was prosperous and far from authoritarian. Hayek responded that Sweden was prosperous because it was untouched by World War II, and he argued that there was less freedom in Sweden than many may think! Overall, the critiques of Hayek’s Road to Serfdom were intriguing to me, for the claim that large government influence in the economy could lead to authoritarianism, or even totalitarianism, is widespread in conservatism and libertarianism (or such is my impression). Some critics of Hayek argued that this would not be the case in countries that had strong democratic traditions; some contended that the private sector, too, could be rather authoritarian.
In terms of which economic perspective I agree with more—-Keynes or Hayek—-I will say that I can understand Keynes’ logic more than that of Hayek after reading Wapshott’s book. There are still gaps in my understanding of Hayek’s thought. I can understand Keynes’ rationale that giving people more money to spend will stimulate demand, and that it is better to give people public sector jobs to do useful work than for them to be on the dole. At the same time, Keynesian policies can be risky, in my opinion: the government is going into debt, with the hope that the debt will somehow improve the economy and pay for itself down the road. That is not a sure thing. Keynesian policies can also be inflationary if they stimulate demand without also trying to increase supply. The existence of stagflation in the 1970’s—-high unemployment and high inflation—-makes me wonder if perhaps Hayek was correct in saying that there are so many considerations when it comes to the economy, and so we cannot package everything into a neat Keynesian package of cause and effect. And yet, I liked Wapshott’s quotation of someone who said that we are all Keynesians in foxholes: that, in times of economic catastrophe, few politicians want to let nature take its course, but they would prefer for the government to do something to stimulate the economy.
I was surprised to learn that I had already read another of Wapshott’s books: Ronald Reagan and Margaret Thatcher: A Political Marriage. The book had long been in my mind as an excellent book, on account of its stories and discussion, but the name of the author was not in my mind. I was glad to read another of Wapshott’s books.