Skip to comments.The Tale of the Dueling Economists (Keynes and Hayek)
Posted on 10/29/2011 2:34:17 PM PDT by reaganaut1
JOHN MAYNARD KEYNES and Friedrich Hayek. The names conjure opposing poles of thought about making economic policy: Keynes is often held up as the flag bearer of vigorous government intervention in the markets, while Hayek is regarded as the champion of laissez-faire capitalism.
What these men actually thought about the economy and each other is more complicated, as Nicholas Wapshott demonstrates in Keynes Hayek: The Clash That Defined Modern Economics (W. W. Norton, $28.95). This lively book explores one of the most pressing economic questions of our time: To what extent should government intervene in markets? And in that search, it traces the interaction of the two men most responsible for the way we approach this question: the British economist Keynes and the Austrian economist Hayek.
Both men came of intellectual age in the aftermath of World War I. They lived through the boom of the 1920s and through the Great Depression and arrived at radically different views of the wisdom of letting free-market capitalism run its course.
Keynes concluded that markets would not automatically provide full employment and that during downturns there could be long periods of large-scale unemployment. He argued that it was the governments duty to relieve the plight of the jobless by increasing aggregate demand for goods and services.
Mr. Wapshott, a Reuters contributing columnist and a former senior editor at The Times of London, skillfully reconstructs the context in which Keynes formulated his theory. During the 1920s, Britain endured persistently high unemployment. Successive policy makers, worried about rising expenditures and falling tax revenue, ignored Keyness calls for public spending, setting off what he called a vicious circle.
(Excerpt) Read more at nytimes.com ...
Apparently, Keynes was the originator of the idea that the victors were too hard on Germany after WWI and shouldn't have pressed Germany so hard for reparations. Conventional wisdom now says the harsh treatment made Germany bitter and was the underlying reason for WWII.
Because I recently learned it was Keynes that pushed this theory, I am beginning to think that maybe the opposite is true; perhaps had the allies been HARDER on Germany at Versailles we may NOT have had a WWII.
Some F. A. Hayek quotes I like:
Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has control of the means must also determine which ends are to be served, which values are to be rated higher and which lower, in short, what men should believe and strive for.
To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.
There is perhaps no single factor contributing so much to people’s frequent reluctance to let the market work as their inability to conceive how some necessary balance, between demand and supply, between exports and imports, or the like, will be brought about without deliberate control.
A spontaneous order is a system which has developed not through the central direction or patronage of one or a few individuals but through the unintended consequences of the decisions of myriad individuals each pursuing their own interests through voluntary exchange, cooperation, and trial and error. This process of spontaneous evolution is not restricted to explaining the growth of the economic order but can also account for the development of language, money, culture, law, social conventions and even morals and ethics. Although the spontaneous order develops through individuals pursuing their own interest, the individuals still behave by following commonly held rules rather than by acting in a random fashion, and these rules are themselves the product of evolution.
Many of the greatest things man has achieved are not the result of consciously directed thought, and still less the product of a deliberately coordinated effort of many individuals, but of a process in which the individual plays a part which he can never fully understand.
Perhaps the fact that we have seen millions voting themselves into complete dependence on a tyrant has made our generation understand that to choose one’s government is not necessarily to secure freedom.
Liberty not only means that the individual has both the opportunity and the burden of choice; It also means that he must bear the consequences of his actions. Liberty and responsibility are inseparable.
The sub-prime mortgage fiasco was driven by big gov’t’s collusion with Wall Street’s collusion.
Oh, how I wish.
I think we will see renewed interest in the neo-classical schools, but the dyed-in-the-wool Keynesians will never renounce their religion. They will, instead, spend years tinkering with their multipliers to account for their embarrassment.
Much as the pre-Copernicans had to constantly rejigger their formulas when the Sun didn't orbit the earth properly.
Can't believe this wasn't posted earlier on the thread.
Yeah, I’m being awfully optimistic. I suspect you’re rightthat they’ll concoct a slew of ad hoc hypotheses to try and explain away their flawed worldview.
IMHO “economists” are irrelevant. Little more useful than the physicians who once used leeches to bleed patients.
The principles of all major current economics schools of thought, precede our current reality of ongoing, massive trade deficits. There’s simply nothing economists learn in their studies, which even considers the impact of massive, national de-industrialization.
There is nothing taught in economics theory, which accounts for reality as it exists today. Therefore, to economists, today’s reality simply does not matter. The sky could be green for all economists consider our trade deficit.
Up is down. War is peace. Manufacturing does not matter.
No consideration of the rather massive problem, that America has now exported virtually our entire manufacturing base and now buys what we used to make, from communists.
It’s as if, that massively inconvenient fact simply does not exist. It’s like ignoring gravity!
Economists are useless, as long as they do not even consider such a basic reality.
This is a very interesting book about Keynes that can be read online.
Keynes comes off looking the stronger individual in this Scotsman’s book. Apart from assessing possible bias, juxtaposing Keyes and Hayek gives an advantage to the interventionists. I find Von Mises’ work to be clearer and more persuasive statements of the laissez-faire position.
It almost seems that the recent recession was the direct fault of Keynesianism. To put it simply, Congress wanted more Americans to own homes so they pressured Wall Street and the Banks. The banks figured they could make Mortgage Backed Securities which they sold on the open market so that they could raise the money to lend to home buyers. Then the investors had too many MBS in their portfolio, so to protect themselves from default they found a sucker in AIG to sell them Credit Default Swaps, which was insurance in case that the MBS couldn’t perform. And MBS couldn’t perform if the people who bought homes didn’t make their payments.
There is more to it, but my point it, the MBS and CDS were all created by essentially the same people, all too appease an appetite for homes that was fueled in large part by congress. But because the people who created the MBS also created the CDS, they had to know that at some point if the MBS went bad it would go really bad, and that the insurers who sold the CDS would default too. Which is what happened, and so then Congress had to step in with the $700 billion.
My point is that the people who did all this had to know that Congress and the Fed would ultimately be forced onto the hook as the insurer of last resort. It is because we have a Federal Reserve Bank with the power to print fiat money that enabled this entire boom and bust (to quote Ron Paul). Without it, the MBS would have been a small market, CDS would never have been created, and the home buying cycle from say 1995-2007 would not have been born.
There is a sort of natural order to the idea that Hayak, a person who valued the private sector, would ultimately appear more “private” compare to a man who pushed aggressively for large government intervention.
we’ve taxed and regulated manufacturing overseas true.
But for tinker toys and dollar store items it doesn’t make sense to make those in the US anyways unless someone can make it nearly automated.
All depends on the bias of the author I guess
It was Hayek’s exposure in the mid-20s to Von Mises’ work “Socialism” that ended Hayek’s earlier sympathies to socialism.
Keynesian economics does not make sense to any thinking person.
History has shown that minimalism in government intervention in the economy produces the best results. Markets create the highest standard of living and are the fairest system.
What I learned was Austrian economics.
Mises is my favorite economist.
Interesting to note, Keynes was a homosexual. He was also a eugenicist (not unusual for his day, it was quite popular)
I agree, but the NYT book reviewer thought the situation was Hayek’s fault. Unbelievable, probably an OWS supporter.
Any first year student of von Mises or Rothbard or Hayek can tear apart Keynes and his Rube Goldberg economic theories without breaking a sweat. The reason Keynes became a household name (especially in socialist, big government households and their vast contingent of Democrat newsroom allies) is because he advocated more socialist big government. Friggin duh. That’s why they continue to use Keynesian theories as a prop for their agenda.
And why not? After all, how many people in the mindless chattering class have the capacity to understand what a huge fraud “Keynesian economics” truly is?
The 10% "savings" in labor costs by off shoring, which is always passed on the the stock holders not the consumer, of manufacturing comes with a HUGE social cost. Not every has an above average IQ and will retrain to be a Bio-chemist. We need these jobs, and any self respecting "conservative" better keep their mouth shut about welfare/unemployment if they like "Free Trade". You cannot be simultaneously against "Free Trade" and also against the welfare state.
I haven't even got into the national security implications....
I attended several colleges over a long period of time (graduated from two) and all I got was a steady diet of Keynes. There was nothing else, in the eyes of my professors.
You and I have our eyes open, seems nobody else on FR WANTS to see the naked ugly truth about what off shoring has done to this once great manufacturing country.
Lemme guess... the same Paul Samuelson textbooks I was subjected to?
It is ironic that the communists here in America (ie., the labor unions) drove their jobs into the arms of the foreign communists. But I don't agree that you and Cringing are the only two people here who understand what a disaster that has been and what it means to America's national security. I think most people are simply resigned to it and see no value in constantly complaining about it.
I don’t think we should have “free trade” with enemy/hostile countries.
In North Korea where a months pay won’t buy a bag of rice, employees are required to go to work even if the factory shut down a decade ago. If they fail to comply their entire extended families, even children, are sent to the concentration camps.
Sound like an idea you’d consider?
Rush does the Free Traders heavy lifting for them in the propaganda area, the limbots mimic him.
How about Lenin and Keynes...
“The setback to Lenin’s project would not have surprised Lenin; the setback to Keynes’ would have surprised Keynes. Lenin’s project will be revived, but not Keynes’, except as a staging post in the march towards Lenin’s goal.”
Yes indeed! It was Holy Scripture.
Keynes wasn’t an economist, he was a marxist thug.