Keynes Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott

A remarkable book. Covers not just the development of Keynes’ and Hayek’s positions, but also how they developed in opposition to each other, then moves on to how their followers (both politicians and economists) have continued the argument over the past 70 years.

I’m not sure how balanced the book is. After reading it, my opinion of Keynes is much higher than it was before, and my opinion of Hayek is lower.

Hayek’s economic ideas come across as an obscure version of classical economics, neither very original or very influential. Hayek’s politics, the idea that any government intervention in the economy inevitably leads to fascism, has the whole of recorded history against it, with the last 70 years as a comprehensive refutation.

Keynes, on the other hand, invented the Bretton Woods system, and laid the foundation for the IMF and World Bank. His criticisms of the Paris Treaty that ended World War I led to the US policy of rebuilding Germany and Japan after World War II instead of trying to hold them down. Despite politician’s rhetoric, his economic and political ideas are the dominant ones in Western society, and have been since his death.

However, this interpretation of mine could be a result of my natural tendency toward Keynesian thinking, and not a result of any bias in the book. After all, followers of classical economics have been looking at exactly the same world as the Keynesians and coming to different conclusions for decades; perhaps from a Hayekian perspective this book proves just how prophetic he was?

In any case, it did show me the massive gaps in my understanding of the history of both men:

  • Keynes pioneered the now-conservative idea that decreasing taxes is the same as spending money to stimulate the economy. In the US, it was first proposed as policy by Kennedy in 1962 to overcome a mini-recession, and the economic data support Keynes.
  • Keynes invented the discipline of macroeconomics, which is partly to blame for why he and Hayek disagreed so violently: they were really working in different disciplines.
  • Milton Friedman, Hayek’s biggest supporter, actually first adopted Keynesian economics, only rejecting them after his study of the causes of the Great Depression in the US. It was Hayek’s politics, not his economics, that Friedman and the conservative establishment of the UK and US adopted.