Book Review: "KEYNES / HAYEK," by Nicholas Wapshott

Just because economics is widely derided as "the dismal science," and just because many of us can't make heads or tails of economic theories, be they macro- or micro-, doesn't mean we should therefore dismiss or ignore economists: like it or not, they matter. "I don't care who writes a nation's laws," wrote economist Robert Samuelson, "if I can write its economic textbooks." Similarly, it's been said that "Even the most practical man of affairs is usually in thrall to the ideas of some long-dead economist." Long before Arthur Laffer created Reaganomics by drawing a bell curve onto a cocktail napkin, economists like Adam Smith, Thomas Malthus, and Karl Marx, among others, have been influencing our lives.

Economics and economists matter, and in particular John Maynard Keynes mattered for the 20th century, first by advancing and then by elaborating the then-heretical notion that governments have a legitimate role to play in a modern economy (particularly in a troubled modern economy). Keynesian ideas like public works programs and deficit spending were implemented in the U.S. beginning in the 1930's, albeit with mixed results, as President Roosevelt and his advisors sought to lift America out of the Great Depression; and Keynesian ideas ruled here and elsewhere for the next three decades or so, decades of (perhaps coincidentally?) widespread prosperity. Throughout those decades of Keynesian supremacy, it seemed to have become settled wisdom that goverment could in fact be both effective at guiding an economy and benign in doing so; even the likes of Richard Nixon and Milton Friedman grudgingly acknowledged that "We are all Keynesians now" (more or less).

Then came the 1970's: the economic strain of Washington's "guns and butter" policies, Nixon's cynical attempts to mask economic problems long enough to get re-elected in 1972, and a series of Middle East oil shocks, culminating, in 1980, in the election of Ronald Reagan. Reagan was no admirer of Keynes, to say the least, or of the active government Keynes promoted. Reagan's hero was Austrian economist Friedrich von Hayek, author of "THE ROAD TO SERFDOM," champion of free-market economics, and a deeply suspicious opponent of government efforts to manage or even to influence an economy. Hayek's concerns were only partly economic; he didn't believe government intervention could be effective, at least not in the long run (to which Keynes famously replied, "In the long run, we are all dead"), but more than that, he simply distrusted government (coming of age in post-WWI Austria could do that) and feared its encroachment on personal liberties. For Hayek, even the most benign and well-intentioned "big government" would inevitably devolve into tyranny, a conviction that his followers have both echoed and exaggerated over the years.

Hayek was also Margaret Thatcher's intellectual idol, and his theories--or her interpretation of them--were the foundation of Britain's "Thatcher Revolution". Since Reagan, and for the past three decades, American economic policy in particular has been dominated (in theory, at least) by the ideas of Hayek, and open advocacy of Keynesianism has all but disappeared. As with the application of Keynes' ideas in preceding decades, the record of Hayek's disciples has been mixed, and the blessings of unregulated markets remain open to question. What is unquestioned, however, is that the Hayek approach, or at least variants of it, has become the new economic orthodoxy. Distrust of government is rampant, deficit and debt concerns have taken center stage even during times of high unemployment and low growth, and the very idea of Keynesian stimulus is considered tantamount to socialism or worse.

Now, from this brief sketch, you might conclude that perhaps the best economic path to follow would be some combination of Keynes and Hayek; and while Nicholas Wapshott never comes right out and says so, his book certainly leads one to that conclusion. For in fact, economic wisdom and economic policies actually depend (like so much else in life) on circumstance and context, and the proper economic prescription in one case will be the wrong one in some other case. That seems like common sense, but it's an insight that has been lost over the decades as economists (and their adherents) have clustered into rival "schools," often spending more time disproving each other's claims than actually helping the real economy. Blind allegiance to Keynes led to deficit spending even during times of full employment and therefore to inflation and unnecessary government debt, a tactic Keynes never advocated; and blind allegiance to Hayek has led to the "tax cut" monomania of current Republican politics and to reflexive opposition to such ideas as guaranteed national healthcare--an idea of which Hayek, by the way, approved.

Hopefully, Wapshott's book, which combines biography with intellectual analysis, also leads to an appreciation of both men, Keynes and Hayek, who, despite their intellectual antagonism, held each other in cautious regard and found more common ground than their respective followers have acknowledged. Perhaps it's an unintended tribute to the power of both men's ideas and both men's personalities that they have been alternately canonized or vilified. Keynes died in 1946, but has remained the bete noire of conservatives who blame him for everything from government debt to inflation to "failed stimulus" programs; Hayek, who lived until 1992, became and remains a favorite bogeyman of the left, derided as being more of a "propagandist" and an ideologue than an economist (despite being awarded the Nobel Prize for economics in 1974. Partisans on both sides of today's political divide could benefit from reading "KEYNES / HAYEK," as could anyone who wants to understand what the book's subtitle calls "The Clash That Defined Modern Economics." Or, for that matter, anyone who wants to understand either Ron Paul, Paul Ryan, or Paul Krugman.

Comments

[Jack Shifflett]

I'm surprised that you would be expecting to find a "realistic solution" on my blog, probably the least likely place for such a thing to surface. However, as you refer to the "current political climate," perhaps we should at least hold out some hope for climate change--and remember, we have to be the change we want to see. Finally, please stop dribbling on my blog; it's very annoying and hard to get off the screen.

[Mike Kincaid]

Are you suggesting a compromise between competing economic theories? Very realistic solution in the current political climate. More dribble to come and yes I did mean dribble. Mike