Keynes Hayek: The Clash that Defined Modern Economics. By Wapshott, Nicholas. (New York, NY: W. W. Norton, Pp. xiv, $). Keynes Hayek: The Clash That Defined Modern Economics by Wapshott, Nicholas New York/London: W.W. Norton & Co., pp., ISBN The Hayek Literature: Nicholas Wapshott, Keynes Hayek: The Clash That Defined Modern Economics. Authors; Authors and affiliations. Selwyn Cornish.
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Request PDF on ResearchGate | On Mar 1, , Meg Patrick and others published Wapshott, Keynes Hayek: The Clash That Defined Modern Economics. By Selwyn Cornish; Nicholas Wapshott, Keynes Hayek. The Clash That Defined Modern Economics (Scribe, ) (application/pdf). Related works: This item. Friedrich Hayek, on the 50th Anniversary of his first lecture at LSE, Credit: LSE Library. The clash between Keynes and Hayek defined modern economics.
Aside from a few months spent on holidays with family and friends, Keynes continued to involve himself with the university over the next two years. He took part in debates, further studied philosophy and attended economics lectures informally as a graduate student for one term, which constituted his only formal education in the subject. He took civil service exams in The economist Harry Johnson wrote that the optimism imparted by Keynes's early life is a key to understanding his later thinking.
According to Skidelsky , the sense of cultural unity current in Britain from the 19th century to the end of World War I provided a framework with which the well-educated could set various spheres of knowledge in relation to each other and to life, enabling them to confidently draw from different fields when addressing practical problems. By Keynes had published his first professional economics article in The Economic Journal, about the effect of a recent global economic downturn on India.
Also in , Keynes accepted a lectureship in economics funded personally by Alfred Marshall. Keynes's earnings rose further as he began to take on pupils for private tuition. In Keynes was made editor of The Economic Journal. By he had published his first book, Indian Currency and Finance. His written work was published under the name "J M Keynes", though to his family and friends he was known as Maynard. His father, John Neville Keynes, was also always known by his middle name.
While he did not formally re-join the civil service in , Keynes travelled to London at the government's request a few days before hostilities started. Bankers had been pushing for the suspension of specie payments — the convertibility of banknotes into gold — but with Keynes's help the Chancellor of the Exchequer then Lloyd George was persuaded that this would be a bad idea, as it would hurt the future reputation of the city if payments were suspended before it was absolutely necessary.
In January , Keynes took up an official government position at the Treasury. Among his responsibilities were the design of terms of credit between Britain and its continental allies during the war, and the acquisition of scarce currencies.
According to economist Robert Lekachman , Keynes's "nerve and mastery became legendary" because of his performance of these duties, as in the case where he managed to assemble — with difficulty — a small supply of Spanish pesetas. The secretary of the Treasury was delighted to hear Keynes had amassed enough to provide a temporary solution for the British Government. But Keynes did not hand the pesetas over, choosing instead to sell them all to break the market: his boldness paid off, as pesetas then became much less scarce and expensive.
In the King's Birthday Honours , Keynes was appointed Companion of the Order of the Bath for his wartime work,  and his success led to the appointment that would have a huge effect on Keynes's life and career; Keynes was appointed financial representative for the Treasury to the Versailles peace conference. He was also appointed Officer of the Belgian Order of Leopold. Keynes was initially wary of the "Welsh Wizard," preferring his rival Asquith , but was impressed with Lloyd George at Versailles; this did not prevent Keynes from painting a scathing picture of the then-prime minister in his Economic Consequences of the Peace.
Keynes's experience at Versailles was influential in shaping his future outlook, yet it was not a successful one for him. Keynes's main interest had been in trying to prevent Germany's compensation payments being set so high it would traumatise innocent German people, damage the nation's ability to pay and sharply limit her ability to download exports from other countries — thus hurting not just Germany's own economy but that of the wider world.
Unfortunately for Keynes, conservative powers in the coalition that emerged from the coupon election were able to ensure that both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the Heavenly Twins — the judge Lord Sumner and the banker Lord Cunliffe whose nickname derived from the "astronomically" high war compensation they wanted to demand from Germany.
Keynes was forced to try to exert influence mostly from behind the scenes. Lloyd George did however win some loyalty from Keynes with his actions at the Paris conference by intervening against the French to ensure the dispatch of much-needed food supplies to German civilians. Clemenceau also pushed for substantial reparations, though not as high as those proposed by the British, while on security grounds, France argued for an even more severe settlement than Britain.
Wilson initially favoured relatively lenient treatment of Germany — he feared too harsh conditions could foment the rise of extremism, and wanted Germany to be left sufficient capital to pay for imports. To Keynes's dismay, Lloyd George and Clemenceau were able to pressure Wilson to agree to include pensions in the reparations bill. Towards the end of the conference, Keynes came up with a plan that he argued would not only help Germany and other impoverished central European powers but also be good for the world economy as a whole.
It involved the radical writing down of war debts, which would have had the possible effect of increasing international trade all round, but at the same time thrown the entire cost of European reconstruction on the United States.
Lloyd George agreed it might be acceptable to the British electorate. However, America was against the plan; the US was then the largest creditor, and by this time Wilson had started to believe in the merits of a harsh peace and thought that his country had already made excessive sacrifices.
Hence despite his best efforts, the end result of the conference was a treaty which disgusted Keynes both on moral and economic grounds, and led to his resignation from the Treasury. Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, The Economic Consequences of the Peace , published in In addition to economic analysis, the book contained pleas to the reader's sense of compassion : I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts.
The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, — abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe. Also present was striking imagery such as "year by year Germany must be kept impoverished and her children starved and crippled" along with bold predictions which were later justified by events: If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp.
Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing. Keynes's followers assert that his predictions of disaster were borne out when the German economy suffered the hyperinflation of , and again by the collapse of the Weimar Republic and the outbreak of the Second World War.
However the historian Ruth Henig claims that "most historians of the Paris peace conference now take the view that, in economic terms, the treaty was not unduly harsh on Germany and that, while obligations and damages were inevitably much stressed in the debates at Paris to satisfy electors reading the daily newspapers, the intention was quietly to give Germany substantial help towards paying her bills, and to meet many of the German objections by amendments to the way the reparations schedule was in practice carried out".
In fact, the historian Stephen Schuker demonstrates in American 'Reparations' to Germany, —33, that the capital inflow from American loans substantially exceeded German outpayments so that, on a net basis, Germany received support equal to four times the amount of the post-Second World War Marshall Plan. Schuker also shows that, in the years after Versailles, Keynes became an informal reparations adviser to the German government, wrote one of the major German reparation notes, and actually supported the hyperinflation on political grounds.
Nevertheless, The Economic Consequences of the Peace gained Keynes international fame, even though it also caused him to be regarded as anti-establishment — it was not until after the outbreak of the Second World War that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job.
However, Keynes was still able to influence government policy making through his network of contacts, his published works and by serving on government committees; this included attending high-level policy meetings as a consultant.
Keynes developed the first upper-lower probabilistic interval approach to probability in chapters 15 and 17 of this book, as well as having developed the first decision weight approach with his conventional coefficient of risk and weight, c, in chapter In addition to his academic work, the s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant.
In Keynes wrote an obituary for his former tutor Alfred Marshall which Joseph Schumpeter called "the most brilliant life of a man of science I have ever read. Britain suffered from high unemployment through most of the s, leading Keynes to recommend the depreciation of sterling to boost jobs by making British exports more affordable.
From he was also advocating a fiscal response, where the government could create jobs by spending on public works.
Keynes advised it was no longer a net benefit for countries such as Britain to participate in the gold standard , as it ran counter to the need for domestic policy autonomy.
It could force countries to pursue deflationary policies at exactly the time when expansionary measures were called for to address rising unemployment. The Treasury and Bank of England were still in favour of the gold standard and in they were able to convince the then Chancellor Winston Churchill to re-establish it, which had a depressing effect on British industry.
Keynes responded by writing The Economic Consequences of Mr.
Churchill and continued to argue against the gold standard until Britain finally abandoned it in Keynes had begun a theoretical work to examine the relationship between unemployment, money and prices back in the s. A central idea of the work was that if the amount of money being saved exceeds the amount being invested — which can happen if interest rates are too high — then unemployment will rise.
This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit.
He devotes far more space to discussing the feuding economists' intemperate tone than he does to explaining what they meant. Readers who don't already have a basic understanding of Hayekian and Keynesian economics will get little help here.
The book is riddled with errors of judgment, especially about Hayek's position. Wapshott thinks that Austrian theory is "mechanistic" and based on a belief that the "free market was virtuous. While Austrians tend to think free markets redound to the greatest benefit of the greatest number, that conclusion arose from their scientific understanding of how the world worked, not a moral judgment about how it should be.
Wapshott thinks the Misesian critique of socialism was that prices "were made redundant," when what Mises actually said about socialism is that it made prices, and the information we get from prices, impossible.
Wapshott thinks Hayek's understanding of the function served by prices was not about the spread and coordination of decentralized information and knowledge which it was but rather about freedom. At the end of the book, where you'd expect Hayek's economic views about business cycles to be central to the discussion, Wapshott forgets them entirely in favor of his politics.
It was about complicated notions of price adjustment, especially the vital question of price adjustments for labor. In a s context of very powerful unions, Keynes thought it was politically impossible to achieve the nominal wage reductions necessary to clear the market for labor—that is, to let wages fall so that hiring would be cheaper and unemployment thereby reduced.
He instead promoted inflation as a means to trick labor into taking lower real wages. Wapshott seems to want us to take Keynes' side on this. He writes sentences like, "Keynes believed that the chronic unemployment endured by Britain and America in the s and s was evidence that the full employment equilibrium was a fallacy," without mentioning prices or wages. The point from Hayek's side is that no equilibrium is possible when prices don't or can't adjust.
In neither country did wages—the price of labor—adjust downward in order to increase the demand for labor—that is, employment. In a business cycle bust, did unemployment have to be cured by government manipulation of aggregate demand—by spending any way, any how, as Keynes advocated? Keynes thought that if you have idle people and capital goods, you should get them working again by any means available, even if the projects prove inflationary or produce nothing that anyone wants such as holes by the side of the road.
From Hayek's perspective, booms and busts were caused by unnatural credit creation, setting in motion productive processes say, home building that end up not paying off in the end, given people's real desire for future goods vs. Under normal circumstances, those desires would tend toward equilibrium via adjustments in interest rates. But interest rates are skewed by artificial credit creation.
While the additional credit has short-term stimulative effects booms , in the long run a structure of production that does not match actual saved capital will collapse, leading to damaging busts.
Keynes' most famous quip although he said it before his Hayek fight and in a different context applied to Hayek's worries about the long-run effects of inflationary attempts to put the consumption cart before the production horse. In his book Pure Theory of Capital, the Austrian quoted Keynes' famous line, adding, "I fear that these believers in [that principle] may get what they have bargained for sooner than they wish.
While Keynes himself thought government should spend borrowed money only during recessions, his disciples in government observe no such restriction. Partly because he shifted from economics to political philosophy in the second half of his career, Hayek is often treated merely as a small-government polemicist.
Wapshott, trying to complicate this view, erroneously reports that Hayek believed in universal government-provided health care. It's a shame that a book centered on the years of Hayek's greatest and most influential work as an economist only cements this incomplete reputation. When the Royal Swedish Academy of Sciences awarded Hayek the Nobel Memorial Prize in Economic Sciences, it described his contributions this way: "His theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion.
He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of Von Hayek showed how monetary expansion, accompanied by lending which exceeded the rate of voluntary saving, could lead to a misallocation of resources, particularly affecting the structure of capital.
That lacuna makes his book a maddening missed opportunity for readers trying to understand how the hoary economic-journal arguments of the s might shed light on today's problems.
The years leading up to our cur- rent crisis saw exactly the sort of artificially low interest rates and monetary expansion that Hayek warned would cause unsustainable booms and busts, in this case manifest in the housing market. In reaction to the recession, Federal Reserve policy became highly expansionist.