Fun With Economics: Keynes v Hayek

Keynes Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott

My rating: 5 of 5 stars


I must be among the few to describe as a "page turner" a book comparing the economic theories of John Maynard Keynes and Friedrich August Hayek.  The two economists are stalking horses for the two competing conceptions of modern macroeconomics -- the top-down, fiscal policy theory of Keynes and the bottom-up, monetarist theory of Hayek.  Still, guilty:  this well-written, thoroughly researched book combines history, economics and character study.  The combination results in a readable and fascinating discovery of modern economics, how the characters of men shaped its development; and the politics of its development.  Most satisfyingly, we are left at the end with uncertainty -- neither the advocates of monetarism nor those of fiscal policy having produced wholly satisfying accounts of the national economy.  This is as it should be, since the real world has not provided the empirical answer.

No depth of background nor understanding of economics as a discipline is required to read and enjoy this book.  The focus of the book is on the interplay between character, events and politics, and not on the crunching of numbers.  Even a knowledgeable reader will likely come away from this book with a better understanding of the grounds of the arguments; and especially, how the arguments between monetarists and interventionists were more shaped by the political realities of any given time, than by the empirical evidence that could lead to sound judgement. 

I regret that the texts written by Keynes and Hayek themselves, are so frequently nearly impenetrable.  "Even for a trained economist with the benefit of decades of hindsight, the differences between the two men are often erudite to the point of impenetrability," notes Wapshott at one point.  So it is that, unless we are prepared to undertake a years-long education in "the dismal science," we must submit to the transliteration of their writings by others.  The Pure Theory of Capital may one day grace my shelves, but as a reference only; and will not likely be perused end to end.

The larger, political, divide between the two accounts of economics is clear enough.  In later years, Hayek retreated ever farther from any notion of gov't intervention in the economy. He believed in privatization of "all those [services] from education to transport and communications, including post, telegraph, telephone and broadcasting services, all the so-called 'public utilities,' the various 'social' insurances and, above all, the issue of money." (Hayek,Law, Legislation, And Liberty: A New Statement Of The Liberal Principles Of Justice And Political Economy,v.3, 1979)  In Hayek's vision, the liberal utopia would be a society in which nearly every aspect of life was governed by "quasi-commercial corporations competing for citizens." (Ibid.)  Representative democracy was a "tyranny of the majority" that unnecessarily limited individual liberty and led inevitably to political corruption.

So, the great irony of this debate may be that Keynes, broadly regarded as the "revolutionary" who trampled down classical economics and its monetarist basis, emerges as the "conservative."  "Conventional conservatives have regarded Keynes as a dark and evil influence bent on undermining the free economic system.  In fact, however, he helped save the free system at a time when much more radical changes in it were being seriously advocated." (Herb Stein, 1986)  Keynes saw as his mission the "rehabilitation" of capitalism so that it would continue to outperform alternative, socialist systems.  In that respect, we may conclude that he succeeded.




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