The Keynes-Hayek showdown
By Nicholas Wapshott
The views expressed are his own.
Eighty years ago an anguished debate between two economists began in Britain — and came to shape the politics of the world after World War Two. The differences between John Maynard Keynes and his nemesis Friedrich Hayek sharply described alternative approaches to addressing the ebb and flow of the business cycle, with Keynes arguing that to put the jobless back to work governments could and should intervene in the market and Hayek insisting that such actions were based on an inadequate understanding of how economics really worked and would only delay the day of reckoning.
That snarky disagreement was so vicious and ill-mannered that one old-school economics professor described it as “the method of the duello” being “conducted in the manner of Kilkenny cats.” On Tuesday, in the Asia Society on Park Avenue, New York, two teams of economists, one representing Keynes, the other Hayek, will slug it out before an audience of 250 and bring the debate to America. Seventy years ago, Keynes’s ideas were eagerly embraced by young American economists who began implementing the Cambridge economist’s ideas first in Franklin Roosevelt’s administration, then in every government until Jimmy Carter, when Hayek’s disciple Milton Friedman introduced monetarism as a guiding principle.
The Keynes-Hayek debate has never been so topical. Today the fault line between right and left can be defined as the difference between those, like President Obama, who believe that the broken economy can be fixed by the government providing a giant fiscal stimulus, and those, like all the Republican presidential contenders, who believe government in America is too big and should be dismantled to make way for the operation of the free market. While Obama pushes his Jobs Bill, which would inject about half a trillion dollars into the economy, the GOP in the House is preventing any such manipulation of the economy from taking place.
The belated American Keynes-Hayek debate was provoked after the stock market crash of 2008 and the freezing up of the banks and Wall Street financial institutions the following year. A trillion-dollar Keynesian stimulus was quickly followed by a Hayekian wave of buyers’ remorse that deemed that the swift reduction of the national debt was more important than giving jobs to the unemployed. Congressman* Paul Ryan’s economic plans urging fiscal continence without delay were supported by the Tea Party movement that demanded that new government borrowing cease. Last summer’s debt ceiling talks continued the battle and was met by Obama’s doomed Jobs Bill by which the president is attempting to pin blame for joblessness upon his opponents.
The Reuters debate will put such practical prescriptions and counter-arguments into perspective. Four Keynesians – economist James Galbraith, son of the high priest of Keynesianism, John K. Galbraith; New Yorker columnist John Cassidy, Sylvia Nasar, the historian of economic thought and author of Grand Pursuit; Steve Rattner, the architect of Obama’s auto company bail-out – will slug it out with four Hayekians – Economics Nobel Prize-winner Edmund Phelps; Professor Lawrence H. White of George Mason University; Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute; and Stephen Moore of the Wall Street Journal. If this group of distinguished thinkers follows the spirit of the original debate, the usual academic civilities may soon make way for acerbic fireworks.
The spirit of the original debate is likely to inform Tuesday’s lively discussion, framed like an Oxford Union debate and presided over by Sir Harry Evans, Thomson Reuters’ editor-at-large. Keynes and Hayek first argued over whether deliberately creating new demand in an economy — by cheap money lent by banks, by slashing taxes, and by governments directly investing in public works programs –- could be sustained, or whether, as Hayek argued, such measures would only in the long run delay the day of reckoning. Keynes’s famous riposte was that even temporary jobs were worth having because “in the long run we are all dead.”
After publication of Hayek’s The Road to Serfdom in 1944, a second front was opened against the Keynesians that suggested that the increase in the size of government that accompanied widespread intervention in the economy tended towards a loss of individual freedom and the rise of authoritarianism, a charge that was hotly denied. It is this accusation of inadvertently inviting tyranny that has sharpened the language in what was always a vituperative clash of personalities and ideas.
The ever-quotable Keynes once remarked that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist.” Those words of wisdom have never been more true than today as we face next November a Keynes-Hayek presidential election. Those who attend the Reuters Keynes-Hayek debate, to be relayed live on Reuters.com and posted for all those unable to be there in person, will witness the opening salvos in the latest American chapter of a saga that came to define politics and economics in the twentieth century. What is said may frame the intellectual background for how Americans vote next year.
Nicholas Wapshott’s “Keynes Hayek: The Clash That Defined Modern Economics” is published by W. W. Norton.
PHOTO: Boxing gloves are seen at a gym in the low-income neighborhood of La Vega in Caracas, March 18, 2011. REUTERS/Carlos Garcia Rawlins
*Editor’s note: This article originally identified Paul Ryan as a senator. The sentence has been corrected.