Keynes and Hayek: Some Commonalities and Differences
Caldwell, Bruce, Journal of Private Enterprise
In this paper I will reflect on the relationship, both personal and intellectual, between John Maynard Keynes and Friedrich Hayek. Although they were intellectual rivals, the history of their relationship is more complex and nuanced than the usual characterizations suggest.
JEL Codes: B2, B31, B53
Keywords: Keynes; Hayek; Relationship; Business cycle; Government intervention
In this paper I will reflect on the relationship, both personal and intellectual, between John Maynard Keynes and Friedrich Hayek. The two are typically portrayed as intellectual rivals, and the differences between them juxtaposed in rather broad terms: Keynes as favoring government regulation of the economy, in particular control of the business cycle by deficit spending during a downturn; Hayek as favoring a free market economy with minimal intervention by the government. Now though there are certainly elements of truth in such broad portrayals, part of my goal in this paper is to establish that the actual history was (as is usually the case) more complicated, more nuanced, and as an historian I am obliged to add, more interesting.
So what about the actual Keynes-Hayek relationship? The first perhaps surprising fact to note is that when Hayek was a college student in Vienna after World War I, Keynes was one of his heroes, as he was to many central Europeans after the war. This was because of Keynes' condemnation of the harsh terms of the Versailles Peace Treaty in his Economic Consequences of the Peace (Keynes,  1971). Keynes' criticisms of the treaty had little effect, and Hayek was among those who witnessed firsthand the devastating hyperinflation that wiped out the savings of the middle classes in Austria and Germany in the early 1920s, which in many people's minds was instrumental in paving the way for the rise of fascism there. This gave Hayek a lifelong appreciation of the dangers of inflation.
About a decade later Hayek and Keynes crossed swords. In 1931 Hayek was invited to the London School of Economics to give four lectures on monetary theory. The lectures were published that year as a book with the title Prices and Production (Hayek, 1931). People who attended later told him that he was nearly incomprehensible when he was reading the lectures, but whenever he answered questions he was quite clear. Of course nothing impresses an academic authence like someone being incomprehensible, so the end result was that they offered him a job.
In the summer of that year, even before he even began teaching, he published a review of Keynes' new book, ? Treatise on Money, a book that Keynes had been working on for years and which was supposed to establish his credentials as a major monetary theorist (Keynes,  1971). This initiated a fierce debate over their respective theories of the business cycle.
I say fierce because it really was unprecedented: one of Keynes' fellow Cambridge economists chastised Keynes in print afterward, likening his assault on Hayek to "body-line bowling" - this being a reference to the game of cricket, when the bowler aims for the batsman's body rather than for the wicket, a striking metaphor (see Pigou, 1935,pp.23-24).
The grounds for the debate were really quite simple - both men had in their respective theories of the cycle drawn upon a framework that had been developed by a Swedish economist named Knut Wickseil. Wickseil wrote in German. Hayek, of course, read German. Keynes, for his part, in a footnote in the Treatise made the fatally selfdeprecating remark that "in German I can only clearly understand what I know already" (Keynes,  1971, Vol. 5, p.178). It was as if Keynes had painted a bull's-eye on the cover of his book. Hayek's critique was that Keynes had only borrowed a portion of Wicksell's framework, ignoring completely the capital theoretic foundations that Wicksell had developed in another book. In contrast, Hayek had incorporated Wicksell's capital theoretic insights into his own theory. …