Apr 10, 2012

The greatest economic debate of the last century: Keynes Vs Hayek

I recently finished listening to the audio version of Nicholas Wapshott's book 'Keynes Hayek: The Clash That Defined Modern Economics”. I very much enjoyed this book — which is detailed and entertaining and conceptual all at once. The book basically outlines, the lives, works, influences and inter-relationship of two great economists of the twentieth century- F.A. Hayek and J.M. Keynes whose opposing and conflicting view points competed to dominate the political economic discourses of the world for the past century and continue to do so. Keynes,a proponent of government intervention and direction of the economy was able to dominate the discourse until 1970s whereas Hayek, a proponent of free markets dominated the scene from 1970s to 2008 as per the author.

In 1930s, when the world was thrown into a turmoil by the Great Depression, these two economists emerged with competing claims on how to restore the world into balance and revive growth. Keynes, who was an internationally well-known figure for his role in the negotiations of allied forces with defeated Germany at the end of World War I and his popular works such as The Economic Consequences of Peace, came up with the idea that governments should play a greater role in the economy by manipulating with the aggregate demand of the economy and cure unemployment and enhance economic growth. He believed unemployment to be the most severe problem of any economy and government could solve the problem by increasing government expenditures and undertaking extensive public works, however unnecessary or wasteful they be. He thought the government actions were necessary to correct the 'failures of markets' and save 'capitalism' from itself. His ideas took time to be popular but really took off with the Second World War engulfing most of the economies of the non-communist world.

F.A. Hayek
F.A. Hayek, on the other hand, was a little known Austrian economist who believed that any intervention by the government in the economy would do more harm than good. He believed inflation caused by government's wasteful expenditure to be more evil than the unemployment itself. As per Hayek, markets are too complicated and consist of too many individuals with too diverse beliefs to be understood or properly managed by a central authority. In his highly popular book, he outlined how small interventions in the economy can lead countries into totalitarianism. He contested that totalitarian regimes like fascism were not a reaction to capitalism but socialism in disguise. He put forward the ideas that free markets when undeterred or misled by government actions correct themselves and were the only source of prosperity.

Unlike Hayek's ideas which seemed fatalistic and pessimistic, Keynes ideas were pro-initiative and optimistic and hence got really popular with leaders and governments around the world as they started using his ideas to expand the role of governments in the economy. At it's height in 1970s, Keynesian-ism was all over the world with almost every non-communist country following it's tenets. The government's role, expenditures and debts shot up with time. In the euphoria, Hayek's pessimistic sounding ideas and warnings were forgotten and Hayek remained an outcast in the mainstream economics, which continues to be the trend today as well.

J.M. Keynes
Keynes with his ideas formed the basis for new aspects of economical studies – macroeconomics. Before him, there was no division between microeconomics and macroeconomics. There was only economics--it was called "classical liberalism". Keynes legacy is immortalized by this new discipline within economics. Hayek, on the other hand, frustrated by the ignorance of mainstream economists and politicians, formed Mont Perelion Society- a small community of the then beleaguered minority of free market economists. That small initiation today has evolved into a worldwide movement of libertarians. Hayek's legacy too lives on with the ever-growing libertarian movement.

The book would be an interesting read to anyone who follows history of economical thoughts and is interested in economics. It is also enlightening for anyone wishing to engage in the one of the most popular economic debates: Can governments fix the broken economy? Can governments bring economic growth or prosperity or is it the markets?

Following are the titles of the chapters of the book, which help shed light on what the book is really about and how it is organized.

1. The Glamorous Hero: How Keynes Became Hayek's Idol, 1919 - 27.
2. End of Empire: Hayek Experiences Hyperinflation Firsthand, 1919 - 24.
3. The Battle Lines Are Drawn: Keynes Denies the "Natural" Order of Economics, 1923 - 29.
4. Stanley and Livingston: Keynes and Hayek Meet for the First Time, 1928 - 30.
5. The Man Who Shot Liberty Valance: Hayek Arrives from Vienna, 1931.
6. Pistols at Dawn: Hayek Harshly Reviews Keynes' Treatise, 1931.
7. Return Fire: Keynes and Hayek Lock Horns, 1931.
8. The Italian Job: Keynes Asks Piero Sraffa to Continue the Debate, 1932.
9. Toward The General Theory: The Cost-Free Cure for Unemployment, 1932 - 33.
10. Hayek Blinks: The General Theory Invites a Response, 1932 - 36.
11. Keynes Takes America: Roosevelt and the Young New Deal Economists, 1936.
12. Hopelessly Stuck in Chapter 6: Hayek Writes His Own "General Theory," 1936 - 41.
13. The Road to Nowhere: Hayek Links Keynes' Remedies to Tyranny, 1937 - 46.
14. The Wilderness Years: Mont-Pelerin and Hayek's Move to Chicago, 1944 - 69.
15. The Age of Keynes: Three Decades of Unrivaled American Prosperity, 1946 - 80.
16. Hayek's Counterrevolution: Friedman, Goldwater, Thatcher, and Reagan, 1963 - 88.
17. The Battle Resumed: Freshwater and Saltwater Economists, 1989 - 2008.
18. And the Winner Is ...: Avoiding the Great Recession, 2008 Onward

Happy Reading!