It is a bit presumptuous to review a book that I haven’t finished yet but I thought there were already a few clear lessons in the book Keynes Hayek, about the intellectual feud between John Maynard Keynes and Friedrich Hayek. But I’m going to do it anyway, by focusing on a point that I think exposes parallels between the 1930s when the clash between Keynes and Hayek was just beginning and today.
To put the story in perspective, Hayek was brought into the clash by Lionel Robbins of the London School of Economics, almost solely as a battering ram to attack Keynes (who was based at Cambridge). Hayek’s job interview at Cambridge was a series of four lectures to friendly audiences selected by Robbins, after he gave a lecture at Cambridge which Keynes did not attend, that left the audience speechless, and not in a good way. A chapter which describes Hayek’s critical review of one of Keynes’ books ends with:
As the summer of 1931 turned to fall, Hayek’s most pressing, indeed almost sole concern was whether Keynes would deign to respond. Keynes would have been within his rights to have ignored Hayek’s ill-tempered critique on the grounds that he had far bigger fish to fry. […] Had he been a less generous character he might have argued that there was little point in engaging with the obscure Hayek, whose conservative approach to economics was a given, when Keynes was busy truing to save the world from economic oblivion
The ‘trying to save the world from economic oblivion’ makes it sound as if Keynes had the ear of every policymaker, eager to hear his prescription of what would help avert the growing collapse. However, at this point, Keynes was just beginning to be listened to on economic policy, having served more as a ‘Cassandra’ in previous years, most notably with his opposition to England returning to the Gold Standard at the level where it left it before World War 1. Instead of accepting a return at a lower exchange rate, in effect accepting that the price level had risen during and immediately after the war, the government was forced to raise interest rates in a period when the economy was already in recession, which led to a long period of high unemployment, a lost decade that began a full decade before the Great Recession.
The opposition to Keynes’ policy prescriptions was driven by the ‘hard money’ crowd who believed that returning to the Gold Standard at a lower exchange rate would shake confidence in the holders of Britain’s debts and lead to a crisis. Instead, of course, the high interest rates and parsimonious spending policies led to a decade of 10% unemployment. Keynes argued this could be avoided by government spending on infrastructure projects:
Keynes costed his employment program in the face of Conservative jeers that the money would be wasted. He argued that, on the contrary, it was by not taking action that the nation’s resources were wasted. Unemployment benefits were already costing taxpayers £50 million annually, not counting poor relief. In the previous eight years the unemployed had been paid a total of £500 million to do nothing. It was a staggering squandering of resources. Such a vast sum could have built a million new homes, or renewed a third of Britain’s roads, or provided every third family with a free car, or could have set up a trust fund large enough to allow free entry to movie theaters for everyone in Britain until the end of time. “But this is not nearly all the waste” he [Keynes] wrote. “There is a far greater loss to the unemployed themselves, represented by the difference between the dole and a full working wage, and by the loss of strength and morale. There is the loss in profits to employers and in taxation to the Chancellor of the Exchequer. There is the invaluable loss of retarding for a decade the economic progress of the whole country.”
The similarities with recent years are striking. There is the argument of ‘do something’ to help the economy (for example from Paul Krugman, who initially criticized the stimulus as being too small, in his role as the latter day Cassandra), and the counter arguments mostly from conservative think tanks that say doing something will be a waste of money (Solyndra!) or that doing something to stimulate the economy won’t work, or will be a sugar high leading to catastrophe down the road are almost scarily similar to the arguments that Keynes faced before Robbins shipped in Hayek to start attacking with more vigor (and some plausible deniability since some of Robbins’ animosity towards Keynes was personal from the time they both sat on an economic advisory committee headed by Keynes).
There have been some improvements in both arguments with Hayek and the Austrians leading towards Milton Friedman’s articulation of the Monetarist school of economics and Keynes towards New Keynesian theory which recognizes the limitations of fiscal policy to smooth the economic cycle (although still holding onto the important conviction that times of deep economic recession are where it can be most effective).
However, the anti-Keynesians (think Peter Schiff, Zero Hedge, and any economist who signed onto Romney’s economic plan) have abandoned any progress and continue to just hound their opponents with quasi-intellectual polemics that might well have been written in the 1930s by Robbins, Hayek and any number of their followers. Even Milton Friedman, who took some of the useful aspects of the Austrian school on monetary policy and the role of money in the economy, crafted in his (very long, very dry but still interesting Monetary History of the United States, 1867-1960, cowritten with Anna Schwartz) has been largely cast out of conservative orthodoxy, best exemplified by Rick Perry’s thinly-veiled threats towards Ben Bernanke for his monetary policy that was in large part based on Bernanke’s admission on behalf of monetary policy makers of yore to Friedman and Schwartz:
““I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again”
So, the lesson from history is that
, umm, doing the same thing in similar situations doesn’t work when an economic doctrine that has significant flaws on its own is pushed by its supporters in a way that uses fewer rigorous facts and relies mostly on polemic and bomb-throwing to try to bait the other side into an argument, it should be viewed with a healthy dose of skepticism. Remember that the next time a Nobel laureate is called a ‘unicorn’.