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By T. S. Tsonchev


The Montréal Review, September 2012


 "Keynes Hayek: The Clash that Defined Modern Economics" by Nicholas Wapshott (Norton, 2011)


"I heartily recommend Nicholas Wapshott's new book, Keynes Hayek: The Clash that Defined Modern Economics.... Many books have been written about Keynes, but nobody else has told the story properly of his relationship with Hayek. Nick has filled the gap in splendid fashion, and I defy anybody--Keynesian, Hayekian, or uncommitted--to read his work and not learn something new."

--John Cassidy, The New Yorker


For anyone interested in economics, but not familiar with the ideological battles that have been shaping economic policy in the last hundred years, Nicolas Wapshott's recent book "Keynes Hayek: The Clash That Defined Modern Economics" can be a useful introduction to the subject. Published three years after the near collapse of the financial markets in 2008, in a period of still looming economic uncertainty in the U.S. and Europe, Wapshott's intellectual biography of Keynes and Hayek is a timely reading.

The book is far from boring, its almost 300 pages end quickly leaving the reader with a set of basic concepts that could be helpful for understanding the original work of John Maynard Keynes and Friedrich von Hayek. For readers already acquainted with the work and ideas of these two economists, "Keynes Hayek" offers a general picture of the their lives and relationships. It also shows the context in which the intellectual battles were formed and waged.

The book could be a pleasant reading for everyone, only if Wapshott was less sympathetic to Keynes's personality and ideas. Of course, neutrality cannot exist in such a fundamental debate as the role of state in economy--which is the core of the ideological clash between Keynes and Hayek --but Wapshott's too overt support for Keynesianism would certainly dissapoint those readers who expect a ballanced and impartial double biography.

From the beginning of the book to its end, we are told the story of the "progressive" thinker Keynes (and his "followers"), who fired "the starting pistol for the Keynesian revolution" and the opposite story of the "conservative" man Hayek (and his "band"), who "blinked," "hopelessly stuck" in the mud of the "road to nowhere." So, for a Keynesian, Wapshott's work is a triumphal feast confirming the rightness of Keynes's theories. While for libertarians and neo-liberals the book is a painful, irritating experience.

Another flaw, in my opinion, is Wapshott's excessive discussion of the emotional side of Keynes-Hayek rivalry. The reader is lost in a forest of quotes of reciprocal and gossipy attacks, which Wapshott often uses as examples to emphasize the humiliation and contempt with which Hayek was treated by his adversaries, while stressing the nobility of Keynes's character and ideas. Although juicy the story of the emotional side of the debate is much less important than the detailed exposition of the thinkers' competing ideas.

Here a few random examples from the book that give a sense about Wapshott's attitude:

On Keynes:

"In December 1965 Time gave its "Man of the Year" accolade to John Maynard Keynes. Keynes was the top, the Tower of Pisa, the smile on the Mona Lisa."

On Hayek:

"One young Harvard economics graduate student, Robert Bryce, enjoyed the added allure of having just arrived from Cambridge, England, where he had been thought by Keynes himself and had attended Hayek's seminar at the LSE with the attitude of a Christian minister witnessing a cannibal ceremony."

On Keynes:

"Even the mighty mind of the British philosopher Bertrand Russell could be intimidated by Keynes's dazzling intelligence. "Keynes's intellect was the sharpest and clearest that I have known..."

On Hayek and Keynes:

"Hayek then adopted the oratorical device a bloodstained Marc Antony employed when extolling the virtues of the newly assassinated Julius Caesar [Keynes]."

On Hayek:

"Professor T.V.Smith of the University of Chicago turned up the heat, calling Hayek's argument "hysterical", "alarmist", "overstrident"... Another University of Chicago professor, Herman Finer [...] dismissed Hayek's "jungle of fallacities."

Wapshott is not an economist; he is a good journalist, former senior editor at The Times of London. The lack of formal economic education perhaps prevented him to write a better book. Yet his interpretation of the Hayek/Keynes's debate attracted the attention of the professional economists. While the fellow journalists and liberal intellectuals enthusiastically embraced the book, it was fairly criticized by economists like Mikko Arevue, who wrote in a review for the Adam Smith Institute that Wapshott's work "fails to provide a full account of Hayek's economic thinking in general, and the critique of Keynesian theory in particular."

John P. Cochran, a free-market thinker and professor of economics, assessed the book as biased. In a commentary published in the Quarterly Journal of Austrian Economics, Cochran noted that Wapshott presented Keynes as "Dudley Do-Right, 'The Glamorous Hero'" who worried about unemployed and who liberated the economic thought from the ideological shackles of classical orthodoxy. While Hayek, according to Cochran, was presented as the "anti-hero"-"the hired gun" from the Austrian School, who was out "to do harm" to "Keynes, the economy and the lives of others". In their reviews, both Arevue and Cochran agreed that Wapshott's "Keynes Hayek" fails to provide "sober" answers to the recent financial crisis and economic recession.  

In addition, in a review for The New York Times, Nancy F. Kohen, a historian teaching at the Harvard Business School, wrote, "At times, it seems that the author [Wapshott] is as much under Keynes's charismatic thrall as some of his disciples" and the book "would have been even stronger with more attention to Hayek and the evolution of his thought."


Keynes, sixteen years older than Hayek, became popular in the 1920s after publishing "The Economic Consequences of the Peace"--a candid critique of the economic and political clauses of the Versailles Treaty that punished the defeated Central Powers with huge reparations and territorial cuts. Keynes wrote this book after serving during the war as a loan negotiator for Britain with her American creditors. After the war, he participated in the peace talks in Paris as a member of the British delegation. His observations at the Peace conference prompted him to write the book. Wapshott quotes the letter that Keynes sent to his mother during his stay in Paris, "I've been utterly worn out, partly by work and partly by depression at the evil around me... The Peace is outrageous and impossible and can bring nothing but misfortune... I suppose I've been an accomplice in all this wickedness and folly, but the end is now at hand."

The main argument of "The Economic Consequences of the Peace" was that the harsh punishment of the defeated in the war nations, Germany and Austria, would not make the winners-France, Italy and Britain-more secure or wealthier. On the contrary, a devastated and impoverished Germany, which was the economic engine of Europe before the war, would destroy the very ability of the European economies for recovery and perhaps would lead to another war. For Keynes, the belief that an impoverished Germany would secure the peace and well-being of Europe-an idea promoted at the time mainly by France-was completely wrong. As Wapshott notes, "Keynes revealed that France's main intention was to ensure that Germany was reduced to a nation of rustic paupers, while the French and Italians had a secondary aim: to bail out their bankrupt economies."

"The industrial future of Europe is black and the prospects of revolution very good," Keynes predicted in 1919. He was right. Europe had never fully recovered, a communist revolution didn't succeed in Germany, but with the Nazis regime a revolution in her political system did happen in a little more than a decade after the creation of the Weimar Republic. The radicalisation of the German politics was a result of the post-war economic troubles that Germany experienced, although they were not the only cause for it.

Written only in two weeks, in Grant and Vanessa Bell's farmhouse in Charleston, East Sussex, The Economic Consequences of the Peace became a world bestseller-a year after the publication, the book was translated and sold internationally in 100 000 copies. Although criticised by the nationalistic British press as pro-German and accused by his former employer at the National Service (and later prime-minister) Neville Chamberlain as disloyal, Keynes won devoted followers among the young Cambridge economists and became a public intellectual respected in Britain and abroad, especially in Germany and Austria, the home of the young Hayek.

At the time when Keynes's star raised, Hayek was studying law, economics and psychology at the University of Vienna. In 1918, he returned from Italy, where he had served as a telephone officer in the Austrian army. Back in Vienna, suffering from malaria, Hayek had found the old imperial capital "in the throes of inflation and semi-starvation." Like many young people at the time whose lives and dreams were overturned by the war, he had not a clear vision what profession he should pursue. He wanted to take a degree at the University of Munich where one of his favourite authors, the sociologist Max Weber, was teaching, but the financial difficulties of his family and the sudden death of Weber prevented the realization of his plan.

In contrast with Keynes, the young Hayek had a first-hand experience with the devastation that the war and reparations had caused to Austria. Indeed, Hayek's life and social environment were very different from the life and surroundings of Keynes. Not only their age, but also their social experience and education were distant. Keynes was an Englishman, born and raised in Cambridge, one of the intellectual centers of a sea empire ruled by merchants and bankers. Hayek was an Austrian, born and raised in Vienna, the splendid multicultural capital of an old continental empire, still ruled by aristocrats. Keynes was the son of intellectuals, groomed and educated at Eaton and Cambridge and mentored by Alfred Marshall, the author of the "Principles of Economics," and as a young don in his twenties, he joined the free-spirited Bloomsbury group. Hayek was the child of patriotic middle class parents. He didn't attend an elite school, and unlike Keynes, he was a poor student. His freedom-loving character became apparent early on after he was expelled not ones but twice from school because, as he admits, of his "obvious ability and laziness and lack of interest."

Undoubtedly, the particular life experiences influenced the direction of Keynes and Hayek's economic thought. Moreover, in the case of Hayek, the University of Vienna where he began his studies was home of an emerging school of Austrian economists who prepared the theoretical and philosophical base for the neo-classical anti-Marxist, pro-free market economics of twentieth century. Hayek wouldn't become the economist we know now if in 1921, after his graduation, he wasn't hired as a legal assistant to a government organization led by Ludvig von Mises, dealing with the war debt between Austria and other nations. Mises, who would become the leader of the Austrian School of economic thought, introduced Hayek professionally into economics and influenced his intellectual development. Under Mises's influence Hayek soon abandoned the social-democratic ideas he had had as a student.

In the same year when The Economic Consequences of the Peace was printed, Mises published Nation, State, and Economy--a work not less critical to the Versailles Treaty than Keynes's bestseller, but unknown for the readers outside Germany and Austria. Indeed, the book appeared in English not until 1983. In this work, originally entitled Imperialism, Mises refreshed the notion of the classical liberalism arguing that all economies are interconnected and well-being of one state helps prosperity and economic success of the other states, but only if all they function in the environment of international free market. Mises's idea, although not new, was against the conventional thinking in the 1920s when the zero-sum game (one's gain is equal to other's loss) was considered as an unpleasant, but undeniable truth in politics. Before the Great War, the European nations were in a state of imperial competition, very suspicious to each other and hungry for world expansion. How strong was the policy of economic competition based on confrontation would become apparent in the 1930s, during the Great Depression, when state protectionism would reach its all time heights. In Nation, State, and Economy, Mises was not only critical to the punishment of defeated nations in Versailles, he also suggested a new international order based on laissez-fair in economic relations and on the right of self-determination for every nation. He believed that the world peace would be assured only if nations are politically independent and free to trade with each other. According to Mises this was the cure against imperialism.

According to Wapshott, Mises's works that influenced most the young Hayek were the "Economic Calculation in the Socialist Commonwealth" (1920) and "Socialism: An Economic and Sociological Analysis" (1922). In the first book, Mises argued that a socialist economy would end in chaos because government owns the major industries; government, he believed, was incapable to assess the real value of resources and goods. In "Socialism: An Economic and Sociological Analysis," Mises made a major critique of the scientific logic of the collectivist doctrine. He was against government intervention in economy and insisted that the artificial control and manipulation of prices is harmful. Hayek saw the logic of Mises's free market ideas and never abandoned them. Moreover, he succeeded to upgrade the pure free-market economic thinking with a new, wider philosophical system that included economics, law and justice, and political theory.

The role of government in economy was the battle line where Keynes and Keynesianism clashed with the Austrian School of thought and the neo-liberals. Both Hayek and Keynes believed that "equilibrium" in economy is theoretically possible--balance between savings and investments, full employment and low inflation can be achieved--their differences started with how and when it can be achieved.

Keynes insisted that since society is organized in a complex political system, i.e. in a modern state, the government should not stay indifferent, but take the responsibility to help economy when recessions and depressions happen. Government, Keynes argued, should facilitate and accelerate the process of economic recovery; it should battle the unemployment with measures and resources not available for the private enterprises, and doing so would shorten the periods of economic disequilibrium. Intervention, he believed, would create a balanced economic development and would shield society from the winds of the capitalist economic cycle.

Hayek thought that the only efficient way for recovery was through leaving economy on its "natural forces." He believed that self-regulation and free market are better options than regulation and intervention because the latter do not accelerate the process of recovery, but delay and confuse it. He was convinced that free-market prices are the best available phenomenon for understanding the realities in economy.

Keynes argued that government could use price control for correcting economy, he suggested abolition of the gold standard and manipulation of interest rates through issuing government bonds, and creation of state founded public projects. On the other hand, Hayek insisted that any artificial intervention in prices and production makes economic situation worse even if it may look better in a short term. The reason for this, explained best in his "Law, Legislation and Liberty" (1973-79), was that social world (including economy) is a spontaneous order, a "result of human action but not of human design," functioning on the base of countless individual choices and actions. Hayek believed that no power, even the power of the modern state, is capable to predict or control effectively individual behaviour and its outcomes.

Historically, the majority of democratically elected governments in the well-developed capitalist states have been cautious in applying Keynes's measures in peacetime because of the limitations of political power in democracy. They hold back to control economy knowing that they would be held accountable if they make a mistake, state intervention in market economy would be a risky action since nobody knows with certainty what the results would be. The governments felt also the pressure to keep state budgets balanced.

Wapshott quoted Keynes explaining the rationality of the state sponsored public projects, "With men and plant unemployed, it is ridiculous to say that we cannot afford new developments... When we have unemployed men and unemployed plant and more savings than we are using at home, it is utterly imbecile to say that we cannot afford these things... There is work to do; there are men to do it. Why not bring them together?"

Today, Barak Obama's policy of public spending and big budgets aimed against unemployment in the U.S. is not different from Keynesian common sense and the resistance of the republican Congress to approve such a policy is not different from the position of British government in the 1920s and 1930s. In the past, the usual government response to the Keynesian logic and proposed measures was like those of Sir Richard Hopkins's, given as an example by Wapshott. Hopkins, a spokesman of the British Treasury in the 1930s, argued that unprofitable state investments would undermine British economy, channel national and international private capital abroad, dislocate the labour market, removing workers from more productive and profitable enterprises, and will deprive private industry of the limited capital that the state has to help it.

Even the American President Frank Delano Roosevelt who started large public projects as part of his New Deal during the 1930s was reluctant to go too far with spending. Wapshott tells us a curious and revealing exchange of opinion that happened after Keynes and Roosevelt met at the White House. Sharing his impressions from the rendezvous with the President, Keynes told Frances Perkins, FDR's labour secretary that he had "supposed the President was more literate, economically speaking." While Roosevelt, after the same meeting where Keynes tried to explain his theories, said to Perkins "I saw your friend Keynes. He left a whole rigmarole of figures. He must be a mathematician rather than a political economist."

The interaction between Keynes and Roosevelt demonstrates the fact that despite the good will which politicians and Keynesians might have had over the years they often experienced difficulties to understand and influence each other. Usually, the academics blamed politicians for their inaction, lack of understanding and fear, while polititians dismissed theoretical abstractions as incomprehesable or inapplicable to real life.

Yet Keynes's prescriptions were used willingly during the Second World War when a full mobilization of public will and resources was possible and desired, and to some extend after the war when the recovery needed coordinated efforts and high levels of organization--something that only government could achieve on a large scale and for a long period.

Hayek believed that the Keynesian ideas were short-term measures aimed to resolve the issues of the time in which they were created instead of a theory or principles that could be applied to economy in general. He assessed Keynes's masterpiece "The General Theory of Employment, Interest and Money" (1936) as "another tract for the times, conditioned by what he thought were the momentary needs of policy." Not once Wapshott repeats in his biography that Keynes and Hayek had a fundamental disagreement over the way we understand economy: Keynes preferred the optimistic, top-down approach where the power of the state is applied over economy for good, while Hayek was pessimistically convinced that the measures of state bureaucracy, applied without knowledge of the individual choices, are doomed to fail.

Speaking about optimism and pessimism, we should not conclude that Keynes was a pure progressive and Hayek a true conservative. Both thinkers were unhappy with political labels and Wapshott's narrative shows that Keynes was a pragmatist, while Hayek was a classical liberal-a believer in the power of freedom and the progress it brings. Yet, Wapshott is not in a complete agreement with this because while arguing that Keynes "was known in America as an economist who, rather than bury himself in abstruse theories, channeled his energies toward practical remedies" and discussing Hayek's famous essay "Why I Am Not a Conservative", he also found a way to say that Keynes was "an eager progressive, keen to help advance the world toward a more human future; Hayek, though he claimed throughout his life that he was not a conservative, was deeply skeptical of the new."

In fact, Keynes addressed his best-known work "The General Theory" not to politicians, but to his "fellow economist", which was a kind of statement that revealed his reluctance his theory to be used in ideological quarrels. Hayek, on the other hand, put clearly in "Why I Am Not a Conservative," "I have all my life described myself as a liberal [...] Whiggism is historically the correct name for the ideas in which I believe. The more I learn about the evolution of ideas, the more I have become aware that I am simply an unrepentant Old Whig - with the stress on the "old" [...] It is the doctrine which is at the basis of the common tradition of the Anglo-Saxon countries. It is the doctrine from which Continental liberalism took what is valuable in it. It is the doctrine on which the American system of government is based. In its pure form it is represented in the United States, not by the radicalism of Jefferson, nor by the conservatism of Hamilton or even of John Adams, but by the ideas of James Madison, the "father of the Constitution."

Keynes died from heart disease in April 1946, in his farmhouse in Tilton, East Sussex. He was "celebrated with services befitting a hero," in the words Wapshott. After his death, the "Age of Keynes" began. Although not applied orthodoxically in politics and economy, Keynesianism was the orthodoxy until the mid-1970s. Hayek died almost half a century later, in March 1992 in Feiburg, not less popular and respected than Keynes. He was awarded with Nobel Prize in 1974, his philosophy became a defining ideology of the politics of Thatcher and Reagan, and he lived long enough to see the collapse of planned economies in East Europe and Soviet Union.


Today, the world faces another big economic challenge. The works and legacy of both Keynes and Hayek are explored once again, and once again we are not sure who of them gives us the right answer. Should we spend, as Keynes advised, since spending has brought us to the edge of financial collapse, or should we leave the economy to heal itself naturally, as Hayek believed, since deregulation caused the bankruptcy of the financial system?

Instead of taking sides, perhaps we have to remember that Keynes and Hayek were wise but ordinary men. They were not saints or prophets. They wouldn't approve distortion of their ideas, and they would not fear to admit their own mistakes and go on to find new solutions as they did many times in their life. After all, this is what Wapshott's book suggests. And this is the most important thing we may learn from it.




Nicholas Wapshott on Keynes and Hayek

Hosted by Russ Roberts



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