Hayek vs. Keynes

, biography of John Maynard Keynes writes this nice article.

He says biggest advantage Hayek enjoyed was he outlived Keynes by nearly 50 years. This allowed Hayek to spread his influence and Keynes to lose out his.

The Austrian economist Friedrich von Hayek, who died in 1992 at the age of 93, once remarked that to have the last word requires only outliving your opponents. His great good fortune was to outlive Keynes by almost 50 years, and thus to claim a posthumous victory over a rival who had savaged him intellectually while he was alive.

Hayek’s apotheosis came in the 1980’s, when British Prime Minister Margaret Thatcher took to quoting from The Road to Serfdom (1944), his classic attack on central planning. But in economics there are never any final verdicts. While Hayek’s defense of the market system against the gross inefficiency of central planning won increasing assent, Keynes’s view that market systems require continuous stabilization lingered on in finance ministries and central banks.

Both traditions, though, were eclipsed by the Chicago school of “rational expectations,” which has dominated mainstream economics for the last twenty-five years. With economic agents supposedly possessing perfect information about all possible contingencies, systemic crises could never happen except as a result of accidents and surprises beyond the reach of economic theory.

He points this crisis again shows how Keynes was the winner during Great Depression and is a winner now. Hayek’s ideas lead to austerity which does not work in recessions like these and Keynes to more spending which helps solves the problem:

Whereas for Hayek recovery requires the liquidation of excessive investments and an increase in consumer saving, for Keynes it consists in reducing the propensity to save and increasing consumption in order to sustain companies’ profit expectations. Hayek demands more austerity, Keynes more spending.

We have here a clue as to why Hayek lost his great battle with Keynes in the 1930’s. It was not just that the policy of liquidating excesses was politically catastrophic: in Germany, it brought Hitler to power. As Keynes pointed out, if everyone – households, firms, and governments – all started trying to increase their saving simultaneously, there would be no way to stop the economy from running down until people became too poor to save.

It was this flaw in Hayek’s reasoning that caused most economists to desert the Hayekian camp and embrace Keynesian “stimulus” policies. As the economist Lionel Robbins recalled:  “Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments and…fostering the disposition to save was…as unsuitable as denying blankets and stimulus to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating.”

So follow Keynes now:

To prevent further crises of equal severity in the future, Keynesians would argue for strengthening the tools of macroeconomic management. Hayekians have nothing sensible to contribute. It is far too late for one of their favorite remedies – abolition of central banks, supposedly the source of excessive credit creation. Even an economy without central banks will be subject to errors of optimism and pessimism. And an attitude of indifference to the fallout of these mistakes is bad politics and bad morals.

So, for all his distinction as a philosopher of freedom, Hayek deserved to lose his battle with Keynes in the 1930’s. He deserves to lose today’s rematch as well.

Krugman, Delong, Richard Koo and others would love this article for sure. But many would just hate it.

I however agree on one point for sure. Keynes died too early and his followers stretched his ideas to an extreme of government at all time. Keynes theory of more government expenditure was for Great Depression and I don’t think he would have agreed to the extreme of government at all times.  He was a genius in many ways and was institutions builder. His other achievements and theories never really got the appreciation and his name was carried forward in anything to do with government…

He never got any chance to settle debate with Hayek/Friedman and others…

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One Response to “Hayek vs. Keynes”

  1. A primer on Austrian Economics « Mostly Economics Says:

    […] Hmmm..This explanation is what makes most Keynesian angry with  Austrian school. It does not really have a prescription to ease the depression kind of situation: […]

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