Academic journal article Journal of Private Enterprise

Hayek and Keynes: What Have We Learned?

Academic journal article Journal of Private Enterprise

Hayek and Keynes: What Have We Learned?

Article excerpt

"The great debate is still Keynes versus Hayek. All else is footnote."

-Mario J. Rizzo, New York University

I. Introduction

By 1932, the world was engulfed in depression, and the economics profession was enlivened by the debate between John Maynard Keynes and Friedrich A. Hayek on the causes and cures for that depression. The debate is conventionally dated to have begun with Hayek's two-part review of Keynes' Treatise on Money (Caldwell, 2004, p. 177). The debate was aimed at the profession and carried chiefly out in professional journals such as Economica and Economic Journal. As Caldwell (2004, p. 176) observes, "their exchange was one episode in the much larger story of the making of the Keynesian revolution [including] the battle between Cambridge and the LSE. . ." The aforementioned journals were the house publications of the two schools.

The debate was held outside the view of the general public. But in 1932, it broke out with letters to The Times (of London) in a manner making the essential arguments accessible, if not to the general public, at least to the readers of The Times. The policy recommendations are presented clearly by both sides. The letters are lengthy (almost mini op eds by today's standard), but the analysis is sketchy and limited by space considerations. There is little room for hedging, and conclusions are presented starkly. The reader gets the gestalt of the two sides, shorn of the complexities of their respective models. Brevity has benefits.

It is chiefly a battle of London versus Cambridge. The opening salvo was a letter dated October 17, 1932, and signed by six economists: D.H. MacGregor of Oxford and five Cambridge men: A.C. Pigou, Keynes, Walter Layton, Arthur Salter, and J. C. Stamp. The University of London response was printed two days later and signed by T.E. Gregory, F.A. von Hayek, Arnold Plant, and Lionel Robbins. The positions staked out, however, came to be most associated with Keynes and Hayek (the third and second signatories, respectively, on their sides). For shorthand, I will refer to "Keynes" and "Hayek." I do so both for ease of exposition (form), and because I believe the views in the two letters by and large represent the mature positions of Keynes and Hayek (substance). I take note where that may not be true.

II. Keynes Letter

Keynes opens with the observation that in time of war it is "a patriotic duty" of private citizens to curtail consumption to release resources to the government "for a vital national purpose." In other words, citizens must save more. The conditions of 1932 require quite the opposite. There is a "lack of confidence," and there is no guarantee that savings will be transformed into either public or private investment.

The private economy intensifies the effect of a lack of confidence, and discourages all forms of investment leading to consumption output. As a consequence, private economy cuts down national income by almost the amount of additional savings.

In a depression, the public interest requires that the public consume, not save. And citizens acting collectively should spend collectively even on projects such as a "swimming-bath, or a library, or a museum."

In this letter, we see a number of key propositions that came to be associated with Keynes. First, investment is depressed by a lack of confidence. In The General Theory, Keynes (1965, p. 149) would write: "There are not two separate factors affecting the rate of investment, namely, the schedule of the marginal efficiency of capital and the state of confidence. The state of confidence is relevant because it is one of the major factors determining the former, which is the same thing as the investment-demand schedule."

Next there is the paradox of thrift (Keynes, 1965, pp.175- 85) and the multiplier (Keynes, 1965, pp.126- 28). And finally there is the view that spending of any kind may be preferred to thrift. "Pyramidbuilding, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything else" (Keynes, 1965, p. …

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