The Clash of Economic Ideas
White, Lawrence H., Freeman
At England's stately University of Cambridge in fall 1905, a clever postgraduate mathematics student named John Maynard Keynes began his first and only course in economics. He would spend eight weeks studying under the renowned Professor Alfred Marshall. During the summer Keynes had read the then-current (third) edition of Marshall's Principles of Economics, a synthesis of classical and new doctrines that was the leading economics textbook in the English-speaking world. Marshall was soon impressed with Keynes's talent in economics. So was Keynes himself. "I think I am rather good at it," he confided to an intimate friend, adding, "It is so easy and fascinating to master the principle of these things." A week later he wrote: "Marshall is continually pestering me to turn professional Economist."
At an Austrian army encampment on the bank of the Piave River in northern Italy during the last months of the First World War, a lull in combat gave a young lieutenant named Friedrich August von Hayek the chance to open his first economics texts (not counting the socialist pamphlets he had read during college), two books lent to him by a fellow officer. He later wondered why the books had not given him "a permanent distaste for the subject" because they were "as poor specimens of economics as can be imagined." Returning to the University of Vienna after the war, the young veteran "really got hooked" on economics when he discovered a book by the retired professor Carl Menger. Menger's Principles of Economics (Grundsätze der Volkswirtschaftslehre) of 1871 had colaunched a marginalist-subjectivist revolution in economie theory, a revolution that provided the new ideas in Marshall's synthesis. Hayek found it "such a fascinating book, so satisfying."
Keynes and Hayek would come to play leading roles in the clash of economic ideas during the Great Depression. Their ideas have informed the fundamental debates in economic policy ever since. In 2010 and 2011 their intellectual rivalry even became the subject of two viral rap videos.
Keynes flatly rejected Adam Smith's doctrine of the invisible hand. In the opening paragraph of a 1924 lecture published in 1926 as an essay entitled "The End of Laissez-Faire," he declared: "The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest." Specifically, Keynes denied that decentralized market forces were adequate for determining the volumes and allocations of saving and investment: "I do not think that these matters should be left entirely to the chances of private judgement and private profits, as they are at present." In his book The General Theory of Employment, Interest, and Money (1936) Keynes would emphasize his view that market forces could not be counted on to deliver a great enough volume of investment in the aggregate. An enlightened government should take control.
Keynes was a leading advocate of the view that government should take greater control over the economy. Hayek was a leading advocate of the view that government should interfere less with market forces. They serve as useful representatives of the opposing sides because of their wide influence, not because either took the most polar position available. Keynes did not want to abolish markets the way communist thinkers would. Keynes explicitly rejected Russian communism for three reasons: (1) It "destroys the liberty and security of daily life"; (2) its Marxian economic theory is "not only scientifically erroneous but without interest or application for the modern world" and its Marxist literature more generally is "turgid rubbish"; and (3) it "exalts the boorish proletariat above the bourgeois and the intelligentsia" - in other words, sneers at people like Keynes and his circle. Hayek did not want to abolish government the way anarcho-capitalist thinkers would. …