The clash between John Maynard Keynes and Friedrich von Hayek, beginning in the 1930s, remains the most important economic policy debate today. We often regard the struggle between socialism and capitalism as the 20th century’s most significant economic contest. But since command economies collapsed in the 1990s, the enduring economic problem for modern democracies has been the debate between essentially mixed and essentially free economies. Keynes and Hayek articulated the classic statements of the respective merits of mixed and free economies—and have become touchstones of the debate.
This debate acquired renewed force after the 2008 Great Recession. Keynes’s biographer Robert Skidelsky thought the situation underscored the relevance of Keynes’s recommendations for addressing severe economic downturns. Others, more suspicious of government intervention in markets, looked to Hayek’s business-cycle theory to try to understand the financial sector’s meltdown.
Given the severity of their economic disagreements, it is striking that both men called themselves “liberals.” Hayek’s fierce criticisms of socialism are well-known, yet it is hard to classify Keynes as a socialist—many of his ideas are clearly designed to forestall socialism. Nor did either man consider himself conservative. Both came from upper-middle-class, academic liberal families, wary of reaction and skeptical of religion’s metaphysical claims. Each dealt with conservative politicians to advance particular policy goals, and Keynes also interacted with British Labour Party politicians throughout his career. But if each man had a preferred political home, it was the 19th-century British Liberal Party.
From this standpoint, the struggle between Keynes and Hayek (and their successors) concerns more than economics. It revolves around two related questions: what should liberalism’s agenda be, and how should free societies respond to those crises that undermine economic security and facilitate the emergence of authoritarian movements?
To Hayek, liberalism’s immediate goal was the maximization of negative liberty (that is, freedom from constraint), which he considered inseparable from equality under the rule of law. Though Keynes was also concerned with negative liberty, the bulk of his work emphasized the necessity of economic security and greater equality of outcomes for the preservation of freedom.
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In Hayek vs Keynes: A Battle of Ideas, Thomas Hoerber shows that these and other normative concerns explain many of Hayek’s and Keynes’s different economic ideas and policy recommendations. A professor of European studies at the École Supérieure des Sciences Commerciales d’Angers, Hoerber focuses on their most famous books, Hayek’s The Road to Serfdom (1944) and Keynes’s The General Theory of Employment, Interest, and Money (1936). Comparing these texts reveals already well-known differences between Hayek and Keynes—from their dissimilar views of the state’s economic role to their disagreement over whether economists, policymakers, and legislators should be guided by short- or long-term economic considerations—but also some surprising similarities.
Perhaps their most fundamental disagreement concerned macroeconomics. Much Keynesian (and neo-Keynesian) economics is macroeconomics, focusing upon large aggregates (such as national productivity) and overall employment levels. Hayek, by contrast, feared that macroeconomics encourages the false belief that we can pull levers to stimulate or constrain the economy in predictable ways. For Hayek and his disciples, the real action is found primarily at the microeconomic level.
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The similarities Hoerber finds between Hayek and Keynes are illuminating. Hoerber emphasizes each man’s reliance on narrative to explain his ideas. The degree to which many economists equate economics with the use of mathematical formulae was deeply regretted by Hayek, and would horrify Keynes. In addition each economist sought to rethink liberalism’s approach to the economy. Keynes was prone to rhetorical excess, but generally avoided caricaturing laissez-faire economics as “savage capitalism.” Post-Smithian economics, he knew, acknowledged the importance of a stable framework of rules, as well as of clear, but limited, economic roles for government. Keynes wanted to expand that framework to allow the state to go beyond the limits advocated by 19th-century liberals. Hayek criticized Keynes for fatally blurring the distinction between a rule of law-focused framework and habitual government interventionism, but Keynes was not as comfortable with government expansionism as is often supposed. In a letter to British-Australian economist Colin Clark he suggested that the figure of “25 percent [of GDP] as the maximum tolerable proportion of taxation may be exceedingly near the truth.” Where “the maximum tolerable proportion” truly lay preoccupied both Hayek and Keynes (as evidenced by their correspondence following The Road to Serfdom’s publication), but was never resolved to either man’s satisfaction.
Though both were convinced of its inner logic, neither Hayek nor Keynes ever definitively settled whether economics was a positive social science or part of political economy. That is not such a bad thing. We should never forget the basic insights revealed by economic thinking, such as the importance of comparative advantage and marginal utility. But just as people study medicine because they ultimately want to promote the good of health, one of the points of studying economics is to help us realize particular goals considered good for our particular societies.
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Despite their similarities, Keynes and Hayek remain best known for their disagreement over how to address significant economic downturns in capitalist societies. On this subject they prefigure the sharp divisions among contemporary economists and policymakers. Exploring these present-day divisions against the background of the Hayek-Keynes clash is the subject of Austerity vs Stimulus: The Political Future of Economic Recovery, a collection of previously published essays gathered by economic historians Robert Skidelsky and Nicolò Fraccaroli. Focusing on policy decisions made by the British government after the Great Recession, the financial sector bailout, and the subsequent increase in public debt, the essays present both sides of the debate as to whether states should engage in reduced—or increased—public spending after big downturns.
For the most part, “austerians” won the day in Britain and much of Europe. These advocates of relative austerity argued that reductions of government outlays (or even reductions in anticipated spending increases) would free capital and other resources to flow into the more productive private sector. The effects would be twofold. First, austerity would spur economic recovery in more lasting and efficient ways than ongoing government stimulus packages and dovish monetary policy. Second, austerity would address “psychological crowding-out”—the undermining of business and investor confidence caused by awareness of high public debt levels, regardless of the “real” economic effects of such debt.
Austerity vs Stimulus shows we have been here before: specifically in the early-1930s, when Keynes and like-minded economists debated Hayek and his adherents about Britain’s response to the Great Depression. An early section reprints letters to the editor from Keynes and Hayek (cosigned by their respective followers), published in the Times of London within two days of each other in October 1932.
These letters, with minor modifications, could provide concise summaries for the austerity-stimulus debate in our own time. Each side has amassed empirical research to bolster its claims with evidence that didn’t exist in the 1930s, and the differences have become even more politically-charged. Part of that is a question of rhetoric. One of the most ardent stimulus advocates in this book, Paul Krugman, has an unfortunate habit of ridiculing those with whom he disagrees. That might draw readers to the opinion pieces he writes for the New York Times. It generally serves, however, to distract from his argument.
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Economic sociologist Wolfgang Streeck suggests a more important reason for the heightened tension. In his view, the conflict “between democratic claims for social justice and capitalist demands for distribution by marginal productivity” has subsumed the austerity-stimulus debate. By “democratic claims,” Streeck means the various “social rights” that American progressives, continental West Europeans, and social democrats generally believe to be integral to democracy, and which must be delivered by government spending; “capitalist demands” concerns the expectation of private creditors (and others) that cuts in government spending are needed to create space for the private sector to grow.
The conflict between “popular ideas about social justice” and “economic insistence on market justice” (property rights, etc.) permeates virtually all our economic policy debates. In the 1970s, Streeck notes, this conflict was most pronounced in labor policy, where the demands of over-mighty trade unions fostered high inflation, undermining the value of property, capital, and other assets. Today this clash drives the austerity-stimulus discussion, and it is likely to intensify.
Again, we can trace such arguments to Hayek’s and Keynes’s different priorities in the 1930s. On one level, theirs was a technical debate about cause and effect. Neither Keynes nor Hayek invoked rights in the austerity-stimulus debate. Yet beneath the surface, their dispute implied disagreement about what rights are, which rights the state must protect, and how the promotion of particular rights informs the conduct of economic policy, both during crises and periods of calm. Property rights, for Keynesians, often obstruct the realization of wider goods: we must be willing to subordinate them to the claims of social justice. Hayekians, in contrast, maintain that promoting property rights and preserving market orders best serve the well-being of all. Infringement of such rights via government intervention in the market economy should be a rare exception, not the rule.
These debates, reflecting as they do different visions of the good, and how rights are established, protected, and expanded, are unlikely to be resolved in the foreseeable future. Though we might wish it otherwise, economic policy is driven by the “political” dimension of political economy. So long as man is a political animal, no amount of mathematical modeling can change that.