Keynes' interpretation of Hayek is still relevant for today's economic policy makers

Discussion in 'Economics' started by Frederick Foresight, Jan 9, 2018.

  1. https://www.economist.com/blogs/freeexchange/2014/03/keynes-and-hayek

    ON MARCH 10th 1944, seventy years ago this month, a relatively-obscure Austrian émigré published a book that would become one of the great classics of 20th-century economic literature. The new economic ideas of John Maynard Keynes were much in fashion in that period; this new book judged them rather harshly.

    The dissenter from the growing consensus around Keynes was Friedrich von Hayek, an economist from Vienna. The book was the "Road to Serfdom", in which Hayek argued that the extension of central planning is the start of the growth of constraints on individual liberty, which inevitably leads to the emergence of tyrannical regimes, both communist and fascist in nature. It was the culmination of four years' work—and several decades challenging many of Keynes' new economic theories, particularly on what governments should do during depressions.

    That has often been portrayed more recently as a battle between two economic titans. Hayek, in the 1970s, came to be seen as opposing everything Keynes and the Keynesian consensus stood for. More recently, many see the change towards more free-market ideas since the 1980s as the victory of Hayek's ideas over Keynes'—a process that has since reversed as a result of the Great Recession. This academic battle of ideas has even made its way into popular media. On Youtube, there is a series of rap parody videos of the academic battle between Keynes and Hayek, available here, here and here.

    But Keynes himself in fact did not dislike many of Hayek's ideas in the "Road to Serfdom". On the contrary, he had indirectly helped Hayek to write it. When Hayek and the rest of the London School of Economics moved to Cambridge in 1940 to escape the Blitz in London, Keynes found him rooms at his college, King's, to live and work in, and the two remained in regular contact until Keynes' death in 1946. Ideologically, they also sang from the same hymn sheet: both were liberals with a distaste for authoritarian regimes such as communism and fascism. Keynes agreed with Hayek that fascism was not a healthy reaction against communism, as many contemporaries in Britain thought, but was instead equally dangerous for liberalism.

    Keynes rejected the populist interpretation of Hayek's argument—that any increase in state planning is the first step on the way to tyranny—but agreed with the overall view that the bounds of state intervention needed to be clearly defined for liberal democracy to remain safe (and more explicitly than even Hayek himself did in the book). Receiving an early copy of the "Road to Serfdom" from Hayek personally, Keynes wrote back to him, praising the book. But Keynes thought Hayek should have been more explicit in what sort of red lines would be necessary for increased state intervention not to imperil liberty:

    You admit here and there that it is a question of knowing where to draw the line. You agree that the line has to be drawn somewhere, and that the logical extreme [total lassiez-faire policies] is not possible. But you give us no guidance as to where to draw it...as soon as you admit that the extreme is not possible and that a line has to be drawn, you are, on your own argument, done for, since you are trying to persuade us that as soon as one moves an inch in the planned direction you are necessarily launched on the slippery slope which will lead you in due course over the precipice.

    In short, Keynes took the lessons of Hayek's work as a warning that the expansion of state should be limited and politicians need to know when to stop—which he fundamentally agreed with. Although he thought more state control in some areas may be justified, governments always need to demark a line beyond which they do not traverse. That may be a lesson not only relevant for then, but also for our time as well.
     
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  2. WOW.

    For as much as I've read on these two, and classic Political Economy in general, I don't recall having come across any direct discussion between the two. (If it's back there in my memory, it never got the mental highlight that it deserved, upon reading this in 2018).

    Thank you so much for posting!
     
  3. See the book Hayek might have written if he thought Keynes was not going to change his flawed thinking.

    The Failure of the New Economics (1959) by Henry Hazlitt
     
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  4. erick_red

    erick_red

    the market without regulation would be a barbarism and a state interfering in the whole economy is the great awkwardness, you should look for the balance between both parties, so that some generate profits and others are not scammed
     
  5. speedo

    speedo

    "In short, Keynes took the lessons of Hayek's work as a warning that the expansion of state should be limited and politicians need to know when to stop—which he fundamentally agreed with. Although he thought more state control in some areas may be justified, governments always need to demark a line beyond which they do not traverse. That may be a lesson not only relevant for then, but also for our time as well."...Aye, there's the rub.
     
    tommcginnis likes this.
  6. Sure, it's all about finding the right balance. Because neither extreme is either desirable or sustainable.
     
    tommcginnis likes this.
  7. There is either liberty or there isn't. No balance.
     
  8. Only faith-based ideologues (read: fanatics) believe in absolutes. Real solutions reside somewhere between the extremes.
     
    Last edited: Jan 9, 2018
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  9. speedo

    speedo

    There are no real absolutes but the political climate is defined by those who would voice such extremes which cause heavy alienation of not the other side but the moderates who are disgusted by the lot of them. The corruptibility and abuse of power is another issue.
     
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  10. Visaria

    Visaria

    Keynes was a great economist. His ideas were supposed to be a remedy to take the economies of the '30s out of depression. But govts who want more control used his ideas for more state control. Hence Keynesian economics was born even though it didn't have anything to do with the free market principles of Keynes himself.
     
    #10     Jan 9, 2018