Keynes Hayek: The Clash That Defined Modern Economics [Hardcover]

This important book is more topical than I would have imagined just a few years ago. Economics students have studied John Maynard Keynes and Freidrich Hayek for many years, and the contrast between their views of the economy has fueled seemingly endless debate about the merits of government sponsored countercyclical economic policies, among other matters. If you ever took an economics course in college, chances are good that you studied at least some aspects of Keynes' theories, the most popular of which are described in his 1936 book, "The General Theory of Employment, Interest, and Money." Hayek is another matter. Most college students graduate without ever hearing about, much less reading, his most popular work, "The Road to Serfdom," written in 1944. Strangely enough (or perhaps not so strangely, given the current prolonged period of economic weakness and its seeming resistance to some standard Keynesian policies), the popularity of some of Keynes' views has come into question more recently. At the same time, the popularity of Hayek's views has grown in recent years, and the contrast between Keynes and Hayek has become the stuff of rap videos. I am not making this up. Do an internet search on "Keynes versus Hayek," and you will likely find two remarkable (and hilarious) videos produced by Russ Roberts and John Papola. When I mentioned these videos to my art major son, he told me that he had already seen (and enjoyed) them. When art majors start paying attention to differences in economics theories, you know something weird and amazing is happening.

Enough of preliminaries. What about this book? In my opinion, the author, a former senior editor at The Times of London, does a good job describing the history of and events leading to Keynes' and Hayek's theories, along with some of the many arguments between their supporters. (Bear in mind that it isn't clear that either gentleman would agree with all of his modern supporters.) The pace of the book is clearly faster than an academic study, but it still covers a lot of ground, some scholarly and some more anecdotal. (Believe it or not, Keynes and Hayek once spent all night together, alone, on the roof of the chapel of King's College, Cambridge, watching for German bombers during World War II.) The chapter headings of this book provide the most succinct guide to its organization, and they follow:

1. The Glamorous Hero: How Keynes Became Hayek's Idol, 1919 - 27.
2. End of Empire: Hayek Experiences Hyperinflation Firsthand, 1919 - 24.
3. The Battle Lines Are Drawn: Keynes Denies the "Natural" Order of Economics, 1923 - 29.
4. Stanley and Livingston: Keynes and Hayek Meet for the First Time, 1928 - 30.
5. The Man Who Shot Liberty Valance: Hayek Arrives from Vienna, 1931.
6. Pistols at Dawn: Hayek Harshly Reviews Keynes' Treatise, 1931.
7. Return Fire: Keynes and Hayek Lock Horns, 1931.
8. The Italian Job: Keynes Asks Piero Sraffa to Continue the Debate, 1932.
9. Toward The General Theory: The Cost-Free Cure for Unemployment, 1932 - 33.
10. Hayek Blinks: The General Theory Invites a Response, 1932 - 36.
11. Keynes Takes America: Roosevelt and the Young New Deal Economists, 1936.
12. Hopelessly Stuck in Chapter 6: Hayek Writes His Own "General Theory," 1936 - 41.
13. The Road to Nowhere: Hayek Links Keynes' Remedies to Tyranny, 1937 - 46.
14. The Wilderness Years: Mont-Pelerin and Hayek's Move to Chicago, 1944 - 69.
15. The Age of Keynes: Three Decades of Unrivaled American Prosperity, 1946 - 80.
16. Hayek's Counterrevolution: Friedman, Goldwater, Thatcher, and Reagan, 1963 - 88.
17. The Battle Resumed: Freshwater and Saltwater Economists, 1989 - 2008.
18. And the Winner Is ...: Avoiding the Great Recession, 2008 Onward

This book isn't a definitive statement of Keynes' and Hayek's theories. If that's what you want, I suggest going directly to the sources and reading, "The General Theory" and "The Road to Serfdom," both of which can be understood by the intelligent lay reader. Indeed, both were best sellers in their times. (For investors, Keynes' description of "animal spirits" in his discussion of investing and speculation in Chapter 12 is a classic.) Sylvia Nasar has a recently released book, "Grand Pursuit: The Story of Economic Genius," that you might also find interesting.

I am not writing this review to promote Keynes' or Hayek's views. People should study both theories, described in this book and others, and then form their own conclusions. Although Keynes and Hayek disagreed on many things, I will close with a quote from Keynes that I think both men would agree with. "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back." These words ring as true today as when they were written years ago. To learn a lot more about Keynes and Hayek, this book is well worth your consideration.

Anyone who wants to know how the United States and Europe got into the financial mess that we're all in should read this book. It tells the story of the 1930s debates between two great economists: John Maynard Keynes ('Maynard' to his friends) and Friedrich August Hayek (called 'Fritz' by friends and family). These two giants of economics had diametrically opposed views of how things worked. They debated, argued, and took pot shots at one another in academic journals and through proteges, colleagues, and graduate students. That we in the U.S. have had to contend with the top-down hand of Keynesian economics for most of the last seventy-five years is due in no small part to telling differences in the personal styles of the two protagonists. Keynes was tall (6'6"), urbane, gregarious, and articulate. Hayek was short, bookish, introverted, and, shall I say, English-challenged - he spoke English with an accent so thick that listeners found him almost unintelligible. Except for his classic, "The Road to Serfdom," his writing is also tough going, even for those with a high tolerance for abstract turgidity. Author Nicholas Wapshott does his readers a favor by not citing chapter and verse from Hayek's literary pantheon.

Keynes's ideas prevailed, at least until the "stagflation" of 1973-74. They came out on top not only because of Keynes's winning persona but also because Hayek's prescription for curing the Great Depression--a "bottom up" approach for government to do nothing and to let the market work its will, find bottoms, and regain an upward path--were politically untenable. Doing nothing is often perceived as not caring. However, it beats doing the wrong thing. As some sage once said, "Don't just do something. Stand there." Keynes was a relentless and effective salesman for his ideas to boost a sagging economy--heavy public spending, cutting taxes, and reducing interest rates by increasing the money supply. If the names of Messrs. Obama and Bernanke come to mind, you're connecting the dots. Though he died an early death at 63 in 1946, Keynes's ideas had legs that persist to the present.

It's worth noting that, before Keynes, there was no division between microeconomics and macroeconomics. There was only economics--it was called "classical liberalism" in the day. Before Keynes, math economics was not a big deal. After him, it was, and that torch was carried from the late 1940s to the first decade of the twenty-first century by Nobelist Paul Samuelson, probably the most prominent and influential of Keynes's intellectual disciples.

Drawing extensively on primary and secondary sources, Mr. Wapshott paints the scene in London with an eye for the telling detail as "the great debates" began in the 1930s. Keynes and his minions dug in at Cambridge, while Hayek and his were encamped at the London School of Economics. These chapters are riveting reading; he even tells of two economists (one of whom was married to yet another economist) being caught in flagrante on the floor of the unmarried economist's apartment. Who said if you laid all the economists in the world end to end, they'd never reach a conclusion?!

He continues with Hayek's 1947 founding of the Mont Pelerin Society (a.k.a. "Friends of Hayek"). He moved to the United States in 1950 where he was turned down for employment, first, by the Institute for Advanced Studies at Princeton and then by the faculty of the Department of Economics at the University of Chicago. Nonetheless, Hayek was hired at the University's Committee on Social Thought, where he stayed until 1960; his salary was privately funded. The Society later bogged down in internal conflict, causing Hayek pain and discomfort in the early 1960s. That was at a time when his first heart attack was misdiagnosed by physicians.

He then returned to Europe, first at the University of Freiburg in Germany and then to the University of Salzburg in his native Austria. Along the way he produced books and papers that are still in wide circulation today. Winning the Nobel Prize in 1974, as he did (ahead of Friedman in 1976), was the best revenge of all. The rise of Margaret Thatcher in Great Britain and Ronald Reagan in the U.S. a few years later further boosted Hayek's stock with the public praise both heaped upon him. In characteristic fashion, he was less enamored of them. He died in 1992 six weeks shy of his 93rd birthday.

It helps that Mr. Wapshott writes well because a reader needs no background or interest in economics to understand and enjoy this book. Not to worry about getting bogged down in the arcane vernacular of economics. In fact, the book is so well done that I'm amazed that more in the media haven't (yet) picked up on it because it explains so much of where we are today, how we got here, and, by implication, why a non-Keynesian veer in our current economic trajectory may be worth considering; BusinessWeek carried a five-installment serialization, however.

The author is not an advocate for either combatant. He is a journalist who does a whale of job doing what the best journalists do: find the information, tell a great story, and let the facts speak for themselves. And here's a great audio interview with him:[...]

I found the book highly readable and mostly accurate. Aside from some minor typographical errors, the only mistake that I caught was Mr. Wapshott labeling the great Austrian economist, Joseph Schumpeter, a member of "the Austrian School of Economics." Though he was born in what was then part of the Austro-Hungarian empire, Schumpeter didn't subscribe to the Austrian School of Menger, Wieser, Bohm-Bawerk, Mises, and Hayek.

A complaint, however: the index is poor. Reference-like books, which is how I see this one, need first-rate indexes. Serious readers often go to the Index before we go to the Table of Contents. As one who has indexed two of his own books because I refused to entrust that crucial job to someone chosen by penurious publishers, I know first-hand that indexing, done right, is a non-trivial undertaking. But when, for instance, twenty-odd page numbers are cited beneath a single main heading, as happens in "Keynes Hayek," well, that's just plain unhelpful. Worse, it disses the reader. For those with more interest in indexing, Nancy Mulvaney's book, "Indexing Books," is, for my money, the best there is. The 15th edition of the Chicago Manual of Style had a first-rate section in it that quoted heavily from Mulvaney. CMS16 does not, however, and that's a huge disappointment in an otherwise seminal reference work for writers. Mulvaney's book is organized, easy to read, and helpful in executing a task that is far more difficult and challenging that I ever thought it could be. Computerized searching of a manuscript is a help, but it's also a crutch on which one should not lean hard because it's made of balsa wood.

Still and all, this is a superb and timely book. I recommend it without hesitation or qualification.

P.S. If you want to see a latter-day parody of Keynes and Hayek in rap videos that have gone viral, check out econstories(dot)tv. They are hilarious.

Nicholas Wapshott's Keynes Hayek brings clarity to the reader's understanding of 20th and 21st Century economic policy, both in the US and globally. Wapshott describes how Keynes became the well-known father of active economic governmental policies, and how those policies were applied to avoid economic catastrophe in the US and globally. Wapshott describes Hayek, who won the Nobel prize in economics but was a less well-known libertarian, and who became the champion of Milton Friedman and other modern leading Republican and conservative economists in the US, the UK and globally. The book shines a bright light on the differences between the Keynesian and Hayekian theories over the decades, and the their consequences, particularly in the US and UK following World War II. Wapshott's research shows the lip service given to conservative economic policy, but its abandonment during the run-up of enormous deficits in the US during the administrations of President Reagan and President George W. Bush. Kaynes Hayek is a must read, particularly in view of the stalemate between President Obama, who is trying to apply Keynsian theory to reduce unemployment, and the Republican-controlled House of Representatives, which appears to be applying a veto because of Hayekian theories. Similarly, Keynes Hayek is very informative on developments in the UK, where the Conservatives have brought Hayekian policies to the fore, but where the outcome has been at best questionable. Wapshott's book is a very well-written and timely read.