Nicholas Whapshott’s 2011 book Keynes Hayek: The Clash That Defined Modern Economics, is a useful primer for those looking to understand the careers and philosophies of the two foundational economists. Perhaps its most striking insight is that neither seemed as absolute about the fact that his philosophy fit all times as the followers of both seem to be. The book describes two thought leaders who displayed some of the typical characteristics of academics — intellectual ability, curiosity and vanity. Our current climate seems so polarized that the fact that the two remained interested in each others’ work and corresponded somehow seems revolutionary. Whapshott de-polarizes the views of the two men most responsible for establishing the ends of the spectrum along which the current economic debate is conducted. He addresses the misconception that Keynes always and everywhere promoted government spending and that Hayek defended the free market without exception. He also reviews the economic events of the last five years and points to the influence of each economist on responses to the recent crisis.
Where Keynes focused on the role of government spending — manipulating levels of taxation, as well as spending — in smoothing out the economic downturns, Hayek’s main focus was the money supply. Keynes’ primary concern was unemployment; Hayek’s, inflation. Where Keynes believed the government should fill gaps in market demand, Hayek thought that money must operate as a “neutral factor” to ensure the long-term health of the economy, and downturns must be weathered more organically. Liberals favoring an active government embraced Keynes; conservatives fearing an intrusive government looked to Hayek. But ideological lines blurred: in his summary of the recent crisis, Whapschott describes the process by which former President George W. Bush — a proponent of Hayek’s free market philosophy — took a Keynesian approach to addressing the 2008 crisis through tax cuts, deficit spending, and direct government interventions in troubled financial institutions. President Bush’s bailout measures, continued through Barack Obama’s first term, are the most recent example of political action swinging from one end of the spectrum (Hayek’s belief in light regulation of the free market) to another (Keynes’ advocacy of government fiscal intervention to address economic downturns) to match changing circumstances. Each end of the spectrum has also absorbed its share of scrutiny. Just as Keynesianism endured its greatest credibility test in the era of stagflation — which contradicted the Keynesian idea that high unemployment and high inflation could not coexist — the 2008 crisis put Hayek’s philosophy to the test, as critics blamed deregulation for sparking the crisis and government intervention was needed to contain it.
It was no accident, Whapschott writes, that Hayek found his greatest success in America. He gave a name to an economic philosophy Americans had been practicing since the nation’s founding. “It was in America, where free enterprise has always been a national creed, that Hayek’s beliefs made the most progress, partly because the nation was founded on the notion that individuals should be free from government. Generations of Americans had practiced Hayek’s philosophy long before he articulated it.” Many Americans may have practiced a more severe strain of the philosophy than the man himself; some current proponents of Hayek might be surprised, as I was, by the book’s explanation that he favored universal health insurance.
Whapshott’s discussion of the policy battles roiling the politics of the U.S., U.K. and other European nations invites speculation about what Keynes and Hayek might say if given a spot on a morning talk show. The U.K.’s experiment with austerity appears to be bearing Keynes out. Paul Krugman predicted the failure of Britain’s austerity measures and has criticized them relentlessly, pointing out to debt hawks that Britain’s public debt once topped 250% of GDP in the World War II years – roughly five times its current level — and returned to growth. Austerity has not, so far, brought the kind of returns in market confidence its proponents promised.
Like the debate over austerity politics, discussion about the extension of central EU fiscal controls over member nations appeals to Keynesians and frightens proponents of Hayek. Federal Reserve purchases — first of troubled assets and then of Treasury bonds — are a new kind of government intervention neither would have recognized. They are not direct taxation or spending measures, but efforts to insulate the economy by manipulating the money supply. They seem to take cues from both thinkers. The European Central Bank is likely to draw on the Fed’s actions in some form as part of its long-term response to its nations’ overhangs of sovereign debt.
Today’s economic debate might be labeled “Keynes v. Hayek,” but recent economic policy making might be more accurately termed “Keynes/Hayek.” At a recent meeting, I heard the following description of the legacy of a prominent foreign policy strategist: “He was an absolutist. We need absolutists. But in the real world, politics is the art of the possible.” The tone of the current economic policy debate often frames Keynes and Hayek as absolutists; Whapschott’s account deflates that notion. What the two would say in response to the current debate is unknowable. But Whapschott’s account suggests that both might be somewhat surprised how much of the current debate is happening not near the middle of spectrum, but at the poles.
