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

This fine book is easy to read and very well-written. It tells the gripping story of the conflict between Friedrich Hayek and John Maynard Keynes.

Hayek, who never worked in the private sector he idolised, started from the idealist assumption that "to explain any economic phenomenon it was convenient to assume that over time an economy would reach a state of equilibrium in which all resources would be fully employed." He did not have to prove it, since it was an assumption, but he then treated it as true of the real world.

By contrast, Keynes started from the real world, where "It is a complete mistake to believe that there is a dilemma between schemes for increasing employment and schemes for balancing the Budget - that we must go slowly and cautiously with the former for fear of injuring the latter. Quite the contrary. There is no possibility of balancing the Budget except by increasing the national income, which is much the same thing as increasing employment."

In their debate in the 1940s, Hayek admitted in The road to serfdom that "the case for the state's helping to organize a comprehensive system of social insurance is very strong." Keynes pounced, "as soon as you admit that the extreme is not possible, and that a line has to be drawn, you are, on your own argument, done for, since you are trying to persuade us that so soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice." Wapshott comments, "Hayek did not attempt to answer the points raised in Keynes' letter ..."

Further, it is not undemocratic to plan if democratically-elected governments follow a people's desire for planning, as we do with our NHS.

Wapshott notes, "Another strand of Hayekian thinking, that the free market, left to its own devices, would correct its own mistakes and ensure prosperity for all, suffered a near mortal blow in the summer of 2007." Robert Lucas, the Nobel Prize winner whose life's work was to attack Keynes, admitted in 2008, "I guess everyone is a Keynesian in a foxhole."

Class interests and affiliation decide what happens to ideas. Finance capitalists love Hayek. At a 1970s Tory meeting, Margaret Thatcher waved a copy of his The Constitution of Liberty, slammed it down on a table and shouted, "This is what we believe!"

Despite some misgivings based on a review warning that Keynes's theories had been misrepresented, I finally decided the subject matter of this book was a little too compelling to overlook.

Having now read it, I have to say that, although I will not claim total familiarity with the theories, those I did have knowledge of seemed well presented, and much of the rest is given as direct quotations.

Which isn't to say that the original review was wrong, just that possibly any errors that may be in the text do not detract from the overall story.

And it is quite a story, of a battle of minds, and ideologies, that is still raging many years after the protagonists' death.

Both men are presented by Wapshott as extraordinary thinkers. But Keynes, in life and in death, is seen as overall the more influential, his ideas adopted by governments both obvious and surprising. It's no secret that successive Labour and Democratic governments have followed the Keynesian path. But that more-or-less Keynesian policies were adopted by Eisenhower, Reagan and Bush Junior carries a little more irony. Even one of the supposed cornerstones of conservative Reaganomics, the Laffer curve, transpires to be lifted from Keynes.

However, Reagan also professed a Hayekian belief in small government, and Thatcher was supposedly a true disciple, although both leaders' policies were effectively characterised by the man himself as "Hayek Lite". The only other regimes Wapshott associates with Hayekian principles are Pinochet's in Chile and the Conservative part of the current UK coalition government, shortly, it appears, to lead us into a triple-dip recession.

Keynes is presented as a towering intellect with a desire to improve society whose persuasive skills enabled him to gain access to and influence the movers and shakers of his day. He was not above a little academic skirmishing, even apparently enjoying his correspondence with Hayek in the thirties when the two discussed their respective ideas in correspondence.

Hayek comes over as slightly less satisfactory, as the sometimes mean-spirited, devil-take-the -hindmost type. Some of his debating tactics seem unpleasantly underhand, and there's something rather tacky in the story of how he dumped his wife (though it was a little early for him to be able to do it by text).

Ultimately, what stands out is how contemporary the issues are, as with Keynes warning of the danger of extremism in Austria in the face of austerity imposed by allied reparations (think Greece), or the dangers of hording money in times of crisis when what is needed is consumption, the paradox of thrift, although Wapshott does not call it that. And towards the end of the book there is a comment that Schumpeterian "creative destruction" has never been given a chance, which is open to dispute. On a micro scale, the fact that the likes of Woolworths, Comet and HMV have gone under is creative destruction in action. However, to have left the world economy to its own devices when Lehman Brothers went bust would have been a social experiment too far.

In conclusion, then, despite the possibility that the author may have at least not made the theory clear, this is a book worth reading, one which will help readers understand one of the principal ideological struggles in politics today, and give food for thought.

Finally, a note on the writing and editing. Overwhelmingly this is clear and holds the interest, and is largely well proof-read, though for the pernickety there are a couple of errors to enjoy. Early in the book (page 10) the author tells us that Keynes appealed on behalf of starving Austrian women and children in May 1918, which should surely be May 1919. The past participle of slay is slain, not slayed (page 37). And on page 258 Friedman is said to have "donned" his cap at Hayek, not "doffed". But just three ain't bad.

The book tries to suggest that the whole of economic agrument on policy falls into two camps. Austrian and Keynesian. This is simplistic and misleading. However the idea of seeing the debate on policy from the two camps is interesting and entertaining.

The book lacks depth of explanation of either Keynes or Austrian theory. This means that anyone who does not already know them (and by this I mean what Keynes wrote, not what Keynesians wrote after his death) will find the significance of many of the comments reported from the debate difficult to understand properly.

The author also fails to consider the complexity of the various schools of economics. While he explains that Keynes successfully introduced the idea of looking at the economy from 'the top down' - macroeconomics - he does not clearly explain the reliance of Keynes on the demand side alone. Consequently he misses an important aspect of the criticism of Keynes in terms of markets and understates the important move to reconsider the supply side as a policy issue. Instead the author seems to think it is part of the monetarist counter-revolution, which it is not.

But perhaps the most disappointing aspect of the book is the sloppy mistakes. The author attributes views to people they never had in broad generalizations and makes mistakes on dates and people. For example, getting the date of Margaret Thatcher becoming Prime Minister wrong, which was not the same day as Hayek's birthday as he claims (a month and four days out respectively), and making Ben Bernanke Chairman of the Fed on Friedman's 90th birthday, over three years before he actually got the job! Such mistakes makes one wonder how many other inaccuracies got past the proof readers and has devalued the entire work.