As Keynes and Hayek were building their economic models at the same time, their debate was very much dominated by terminological definitions. This work became probably one of the most influential economic treatises immortalizing Keynes as one of the greatest 20th century economists. His lasting legacy, that was to become known as Keynesianism, is an economic perspective that argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes. The theory, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank, and fiscal policy interventions by the government, to stabilize economic output over a business cycle. However, there is an increasing agreement today that Hayek, although controversial, was one of the most influential 20th century economists.
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I n a famous free-market economist made a significant decision. He knew that in Arkansas the state laws made divorce easy — and cheap. But his real love, previously married herself, had told him that she was now free to remarry. So the economist got a job at the University of Arkansas and, once resident, also got a divorce, quickly and efficiently, all at a very reasonable price.
The episode shows a certain consistency in Friedrich Hayek 's actions at this juncture of his long career. Many former friends, however, took the view that his behaviour was deplorable. As moral conservatives, they were shocked, though perhaps they should have remembered Hayek's frequent protestations that he was not himself a conservative but an old-fashioned liberal.
Such cross-cutting standards of judgment are still on display today, not least in the United States. Glenn Beck has rediscovered Hayek as a hero, but the great prophetess of libertarianism, Ayn Rand , privately scourged him as a "total, complete, vicious bastard". Such opinions cannot all be right. Here is one reason to welcome the close attention that Hayek receives in about half of Nicholas Wapshott's book. It harnesses the author's skills as a journalist in a lucid and accessible introduction to Hayek's work.
There is one curious omission: no mention of Hayek's central emphasis on prices in providing information as well as incentives hence the ready availabilty of divorce in Arkansas is signalled by its low price. Wapshott's focus is not so much on economic theory as on its relevance to economic policy-making.
Hence the inevitable pairing, in the other half of his book, of Hayek with John Maynard Keynes , on the grounds that this was "the clash that defined modern economics". Again, the author has done his homework in getting on top of the vast literature about Keynes — some of it of recent vintage. For these are not dead and dusty debates among professional economists but ongoing skirmishes in an ideological struggle that started in the s — an 80 years' war with no final victory yet in sight.
Keynes and Hayek exemplified two different approaches. Keynes came from the heart of a Cambridge tradition later continued in that other Cambridge in Massachusetts that saw economics as a humane discipline or moral science, providing tools for earnest attempts to do good in the world.
Hayek, by contrast, with his background in the Austrian school, was absorbed in a quest to understand the abstract beauties of the price mechanism, with some impatience for restless advocates of quick-fix solutions. Little wonder that there was a clash, in temperament as much as doctrine, between the two. Wapshott brings out their mutual attraction in personal relations and intellectual interests, while structuring his book around a prolonged duel between the two men, each with supporters ready to act as seconds in a more combative spirit than the principals.
The most damning thing that Keynes said about Hayek's work was that it was "an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam". His logic was thus an irrelevant abstraction, its beauty purely formal. The most damning thing that Hayek later found to say about Keynes's general theory was that it was "a tract for the times". Interestingly, as Wapshott notes, Hayek applied the same phrase, in the same pejorative tone, to his own most famous publication.
His popular book The Road to Serfdom , published in , suddenly gave the austere Austrian a degree of name-recognition in the same league as Keynes, not least in the US. With the New Deal and subsequent wartime prosperity as object lessons, liberals on both sides of the Atlantic adopted the Keynesian mantra that full employment could only be guaranteed by government. Conservatives seized on Hayek's tract as a timely warning of the perils down the road.
But whereas Keynes surfed his wave of fame, Hayek quickly became alarmed at having inadvertently written a bestseller — "a very corrupting experience", he decided. Hayek was not always the fastidious scholar. As Wapshott notes, he was guilty of "misappropriating" the aphorism with which Keynes had reproached the sterility of orthodox inertia in policy-making — "in the long run we are all dead". Hayek refused to come up with any policy option, preferring to trust the market, however long it took to show its self-correcting tendency.
He refused, too, to take seriously the general theory's insistence that the outcome for the economy as a whole, in aggregate, may defy analysis purely in terms of the behaviour of individuals. Yet everyone recognises this dimension as macro-economic today, even those who are strongly opposed to Keynesian policies for stimulating and regulating effective demand. This poses a problem for an account of the eighty years war that polarises it between Keynesians and Hayekians.
For in policy terms, it was surely Milton Friedman who, in the s and 70s, seized the moment to proclaim a counter-revolution against Keynesianism. It is a point that Wapshott well recognises.
Friedman, an ardent new dealer in his youth, was an economist who fought with same macro-economic weapons as the Keynesians, but sought to substitute manipulation of monetary policy, through interest rates, for that of fiscal policy, through taxing and spending. This statement reads like that of a Protestant heretic who defies the Pope, only to insist on his own variant reading of Christian doctrine.
Hayek, by contrast, was not a heretic but a preacher of a different religion altogether. Topics Business and finance books. Economics reviews.
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The Tale of the Dueling Economists
The names conjure opposing poles of thought about making economic policy: Keynes is often held up as the flag bearer of vigorous government intervention in the markets, while Hayek is regarded as the champion of laissez-faire capitalism. This lively book explores one of the most pressing economic questions of our time: To what extent should government intervene in markets? And in that search, it traces the interaction of the two men most responsible for the way we approach this question: the British economist Keynes and the Austrian economist Hayek. Both men came of intellectual age in the aftermath of World War I. They lived through the boom of the s and through the Great Depression and arrived at radically different views of the wisdom of letting free-market capitalism run its course. Keynes concluded that markets would not automatically provide full employment and that during downturns there could be long periods of large-scale unemployment.
Keynes - Hayek by Nicholas Wapshott - review
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