This article is from the March issue of Total Politics

Keynes Hayek: The Clash That Defined Modern Economics
Nicholas Wapshott
WW Norton and Company, £18.99

Occasionally, a book is published on a subject and at a time when it really does contribute to a contemporary debate. Nicholas Wapshott’s Keynes Hayek has been published just at the moment when governments and economists are debating how to resolve the current financial crisis, with the double problems of stimulus and austerity being sprinkled liberally about.

In the US, this is at the centre of the presidential election campaign, with candidates debating the role of the government and the individual, reflecting the debates between Keynes and Hayek. This discussion has been mirrored in the UK through the clash between the coalition government’s policy and that of the Labour opposition.

Nicholas Wapshott is a journalist, and the author of Ronald Reagan and Margaret Thatcher: A Political Marriage. At the heart of Keynes Hayek is the clash over ideas and theories between John Maynard Keynes and Friedrich von Hayek, between the English academic economist who advised governments and the Austrian academic who became an intellectual refugee. They fought over whether governments should intervene in markets; both were influenced by the impact of  WW1 and had studied the boom and bust of the business cycle. But they came to different conclusions.

Keynes believed that the mass unemployment and misery that marked the end of a cycle could be short-circuited by government intervention and spending.

Hayek thought that altering the ‘natural equilibrium’ of the economy would result in rampant inflation, something that he had experienced first-hand in Austria after 1918.

Wapshott outlines the lives and intellectual development of the two economists, Keynes being the older and more distinguished of the two [to Wapshott’s mind].

This book is as much about the personality and character of the two protagonists and their students as their economic ideas. Keynes was larger than life, with an assured academic and social background. He had a formidable intellect, ruthless debating skills, and was concerned with economics in the real world.

Hayek was more withdrawn, less sure of himself, and did not naturally seek publicity. He had, however, a dogged adherence to his economic beliefs.

Keynes was the ultimate pragmatist, and at times this made him an elusive target for Hayek. Indeed, Keynes’s habit of altering his opinion brought forth the observation attributed to Churchill: “If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three.” Keynes’s apocryphal response was: “When the facts change, I change my mind. What do you do, sir?”

But this was no academic debate isolated from the real world. At its zenith, it took place against the financial crash of 1929-31 and the Great Depression. While Keynes, Hayek and other economists offered their interpretation and remedies, politicians desperately attempted to cope against the background of economic, political and social collapse.

The outcome of the debate had already been outlined by the two men in books and articles. Keynes had the advantage in experience and publications, while Hayek was in the position of offering an alternative critique.

Keynes clearly offered government intervention on a vast scale; Hayek believed, that if anything, this would make the economic depression actually last longer. It is ironic that Keynes, despite his role and influence within the UK, was unable to persuade the national government to adopt his policies. Instead, the government turned towards Hayek’s ideas, without acknowledging Keynes’s intellectual contribution.

In the US, however, Keynes’s influence was greater with the Roosevelt administration, which adopted what would later be seen as Keynesian economic policies.

Wapshott shows that, from 1931 down until the present day, there have been alternating periods of Keynesian and Hayekian influence. After 1945, for around 30 years, successive US and UK governments followed the Keynesian model of directly managing the economy and seeking full employment.

Hayek, subsequently, had a long period in the intellectual wilderness, moving from the UK to the US, and was mostly ignored except by a small number of adherents. This was in spite of the publication of his magnum opus, The Road to Serfdom, in 1944. This had a considerable impact in the US, as it was involved in a war against totalitarian regimes.

Hayek feared that increasing government intervention in the economy would inevitably lead to the undermining of democracy, but within a few years his views were regarded as old-fashioned and irrelevant to the emerging consensus.

As Wapshott points out, neither Keynes nor Hayek was necessarily as dogmatic as their followers would make out.

Keynes died in 1946 and did not live to see the triumph of the Keynesians in government. In 1974, under the impact of the oil crisis and deficits, his theories once more took the back seat in the US and UK, as their economies entered a period of stagflation. Keynesian influence receded as the influence of Hayek’s protégé Milton Friedman and the theory of monetarism grew.  

So, as Wapshott argues, if the period 1945-1974 was the Age of Keynes, then 1978-2008 was the Age of Hayek, when the period was initially dominated by two political adherents of Hayek and Friedman, Reagan and Thatcher. Thatcher read The Road to Selfdom when it was published, and met Hayek when she was leader of the opposition.

Clinton and Bush, then Major and Blair, carried on the policy of encouraging market forces. But in 2008, the financial collapse brought the arguments between Keynes and Hayek back full-circle.

The conclusion most readers will come to from reading Keynes Hayek is that much of the debate was driven by personality and the worst kind of academic rivalry, especially between their respective adherents. Undoubtedly, the economic giants’ ideas influenced the mood of the period and enabled political leaders to ‘pick ‘n’ mix’ depending upon the circumstances.

Today, their views and theories are useful weapons to be deployed in the increasingly bitter debate in the US presidential election, but at heart Keynes Hayek is a very anglocentric debate. It would have been instructive to see how the debate played out in Europe, particularly in integrationist countries and in light of the current euro crisis.

Keith Simpson is Conservative MP for Broadland and PPS to the foreign secretary

Tags: Friedrich Hayek, Issue 45, John Maynard Keynes, Nicholas Wapshott