Name : V Jothi Prakas
Stream : MIM
Roll No : 19-I-116
Book Reviewed : Keynes Hayek: The Clash That
Defined Modern Economics
Author : Nicholas Wapshott
Introduction
This book is an astounding account of the life of two eminent economists,
namely, John Maynard Keynes and Friedrich Hayek, their journeys through two
devastating wars that the world has ever witnessed till date – World War I and World
War II, and their pursuit to search for solutions that would enable economic well-
being.
The significant aspects that interested the two economists, whose thoughts
stir many healthy debates till date, are: -
(a) What causes the business cycle to fluctuate and how to control it?
(b) What should be the role of governments in a market?
(c) How should the money be valued?
(d) What is more important to target – Unemployment or Inflation?
(e) Demand side versus Supply side economics.
As is evident, each of the above-mentioned aspects are an extensive
research subject in itself.
Nicholas Wapshott, through this meticulously researched work, has attempted
to present an insight into the these rather overtly simple looking complex issues
through the thought processes of these two economists. In this effort, he has been
successful in telling a rather compelling story of economics spanning over a century
focused mainly on American and British economy. The author has seamlessly
integrated politics with the intense economic concepts that have been prescribed by
these two economists. It is indeed amazing to note that the clashing thoughts of
Keynes and Hayek have not only inspired many modern economists till date, but
they have never lost their relevance either, globally.
This book provides snippets from a number of references from the works of
Keynes and Hayek that clearly establishes distinct clashing thought processes of
these economists. This book also presents extracts of many eminent personalities
which validates the influence that Keynes and Hayek enjoy in the economic
community till date.
One of the early impressing factors while reading this book is the way the
author has titled his chapters which tell a story in itself. The chapter titles are crisp,
makes the reader inquisitive and simultaneously hints at what to expect from the
chapter.
A brief impression of the book is presented in the subsequent paragraphs.
This review intends to concentrate on the economic aspects and the fundamentals of
the underlying economic debate between Keynes and Hayek and its sustenance.
This review has not tried to delve upon the individual characteristics, their personal
lives and the nature of prominent leaders of various countries like Churchill,
Roosevelt, Nixon, Reagan, etc., who have been taking cue from these ideologies
and implementing them, thereby deciding the destiny of the world.
Mentors of the Masters
Nicholas Wapshott elaborates in the very first chapter the influences that
Keynes and Hayek had and more importantly, who can be considered as their
mentors.
Keynes was mentored by Alfred Marshall who was considered “the leading
light of English economics” and had written “English-speaking world’s definitive
economics textbook, Principles of Economics in 1890”.
Hayek belonged to the Austrian school of economics. His mentor was Ludwig
von Mises. Vienna was concentrating on “Theories of capital investment”.
Both, Marshall and Mises, belonged to two distinct school of economic
thoughts and theories. In this context, the author writes, “While a profound division
existed between the British school of economics, centered around the teachings of
Keynes’s mentor Alfred Marshall at Cambridge, England, and the continental variety,
which focused on the theories of capital investment (the money invested in a
business) expounded in Vienna by Hayek’s mentor Ludwig von Mises, there was a
good deal of contact, and a fair degree of misunderstanding, between the two
camps. Marshallian economics was based on a common sense understanding of the
subject and how business worked in practice, emanating from the mercantilist
tradition that had made Britain the most successful commercial nation in history. The
notions of the “Austrian School” were more theoretical and mechanistic, deriving
from an intellectual rather than a practical understanding of how business might
work.”
It is interesting to note that this division in thought process has been nurtured
by Keynes and Hayek, and their exploratory approach towards economics with this
fundamental onset has made them relevant for eternity.
The Economics – Evolutionary Story
The book starts with Hayek requesting Keynes for a copy of Mathematical
Psychics: An Essay on the Application of Mathematics to the Moral Sciences by
Francis Ysidro Edgeworth. Probably, both, Keynes and Hayek, had stuck a common
ground of interest …how scarce resources can best maximize the “capacity for
pleasure.” This subject was explored at length by Francis Ysidro Edgeworth’s best-
known work Mathematical Psychics: An Essay on the Application of Mathematics to
the Moral Sciences, published in 1881. It anticipated a great number of the debates
that would entangle economists over the next century, including notions of “perfect
competition,” “game theory,” and, most important for the impending battle between
Keynes and Hayek, the belief that an economy will reach a state of “equilibrium” with
every able-bodied adult fully employed. Edgeworth was also an early expounder of
theories about money.
This was a time when Keynes was already an established political economist
at King’s College, Cambridge, England and Hayek was relatively a budding
economist at Vienna.
Keynes was a celebrated charismatic economist with an intricate
understanding of economics and public finances. He was recruited to negotiate for
enormous loan from American creditors during WW-I. Such was his charm that he
was subsequently a part of the committee that decided on the reparations that needs
to be paid by the defeated nations like Germany. Keynes, being free spirited, was not
convinced with the Treaty of Versailles and felt unjust reparations were imposed on
the defeated nations, which reflected the public opinion of the defeated nations like
Austria and Germany. He expressed his views on reparations through his article The
Economic Consequences of Peace, in which the central idea was …the peace talks
were nothing of the sort. The lust for vengeance and a desire to see Germany
permanently humbled for provoking what he described as “the European Civil War”
would likely lead to another world conflict thereby, predicting setting-up a stage for
another World War. The translation of English articles to German and Austrian made
them conversant with the English mind of economics while vice versa being limited,
the British were not exposed to Austrian theories. This translation made Keynes
quite popular not only in Britain but in whole of Europe as well.
If this was the contribution of Keynes in WW-I, Hayek was an officer who
fought the war by rendering his patriotic duty towards the Emperor. Though
belonging to a family of academic background just like that of Keynes, he was not a
bright student like Keynes. It was during the boredom of long waits during the war
that he was drawn towards economics, which he pursued later, when WW-I ended.
Hayek went trotting from University of Vienna to Zurich and back to Vienna where he
completed his degree within two years. Having introduced to Mises, who
subsequently became his mentor, for a job, he started working as a legal assistant to
a government body set up to administer the settling of war debt between Austria and
other nations, thus working in a similar field to that of Keynes. It was during this time
that he experienced inflation to hyperinflation with every monthly pay cheque as is
mentioned In just eight months Hayek was awarded two hundred pay rises.
Experiencing the hyperinflation, he was drawn towards understanding the
value of currency and towards this Keynes thoughts in Tract on Monetary Reform
impressed him. The author amicably brings out this aspect and probably one odd
point where Hayek agreed with Keynes as “We all read eagerly his famous
contributions . . . and my admiration for him was only enhanced by the fact that he
anticipated in the Tract on Monetary Reform [Keynes’s 1923 book, largely drawn
from his Guardian contributions] my first little discovery,”29 Hayek recalled. The “little
discovery” that Keynes had “anticipated” was that by fixing a currency’s price to gold
— “the gold standard”—domestic prices would fluctuate and could not be controlled.
Governments were faced with a choice: to have a fixed-price currency or fixed
domestic prices. As Keynes put it, “If the external price level is unstable, we cannot
keep both our own price level and our exchanges stable. And we are compelled to
choose.” At this moment, Keynes and Hayek were thinking along similar lines—
simultaneous inspiration…
Hayek was gaining knowledge by reading various theories and trying to
explore the ambience for the conditions it is being challenged with. He went to
America where he witnessed how unbridled capitalism operated and started
pursuing PhD at NYU. He would enthusiastically attend lectures of Wesley Clair
Mitchell, an established authority of business cycles, the phenomenon whereby
economic booms (periods of fast economic growth) were followed by slumps
(periods of contracting economic activity). But due to paucity of funds, he returned,
just to find a letter awarding him Rockfeller fellowship which would have allowed him
stay a year longer which now was in vain.
When he returned, Mises took him under his wings and started mentoring
him. It was during this period that Hayek read Mises’s 1920 Economic Calculation in
the Socialist Commonwealth and his landmark 1922 Socialism: An Economic and
Sociological Analysis. Wapshott writes that these reads unsettled Hayek’s social
democratic beliefs and helped convince him that collectivism was a false god. As
Hayek put it, “Socialism promised to fulfill our hopes for a more rational, more just
world. And then came [Mises’s Socialism]. Our hopes were dashed. Socialism told
us that we had been looking for improvement in the wrong direction.”
Mises’s principal objection to a communist or socialist society was that it
ignored the price mechanism he believed essential for any economy to operate
efficiently. He argued in Economic Calculation that because in a socialist society the
government owned the main industries — “the means of production”—and therefore
set the prices of goods, the key purpose of prices, to distribute scarce resources,
was made redundant. He claimed that “every step that takes us away from private
ownership of the means of production and from the use of money also takes
us away from rational economics.” Mises’s arguments went to the core of the
debate that was to ensue between Keynes and Hayek, and they presaged one of
Hayek’s eventual contentions, that by ignoring market prices socialism deprives
individuals of their unique contribution to society—to express, through their
willingness to pay a price, their opinion of the worth of an object or service. Central
planning, Hayek would argue, deprives individuals of a fundamental freedom.
While trying to find a government-funded research post, Hayek began writing
an account of what he had learned in America, reporting that cheap credit there was
leading to a boom in capital goods industries that he believed would prove
unsustainable. He extrapolated on the nature of the business cycle, what he
called “industrial fluctuations,” which would become essential to his contribution
to economic theory and the battleground on which he would skirmish with Keynes.
To become a paid university lecturer, Hayek had to publish a piece of original work.
To this end he began assembling facts and arguments for what he hoped would be
an important contribution to the theory of money. This, too, would bring him into
conflict with Keynes.
The highlighted subjects on the above verse were the fundamental topics on
which Hayek’s approach owing to his personal experiences of tough life under war,
prevailing poverty, hyperinflation and his inclination towards Mise’s, his mentor’s,
views, differed from Keynes’s take, which unfolded as a clash that defined modern
economics and provided a foundation for birth place of many economic concepts that
would follow.
Keynes, meanwhile, was part of, as well as, nurtured a group of like-minded
people, the “Cambridge Circus”, to whom he would bounce his thoughts for debates
and incorporate useful suggestions that would emanate from these debates. They
were hard-core Marshallian Society.
Keynes was vigorously promoting people to spend which would end up in
creating employment opportunities. Keynes was against setting the pounds value to
“pre-war” era and setting up against “Gold Standard”, but had to reluctantly accept it.
He was multi-faceted and used to juggle between different roles of a professor, an
original thinker, a writer and a political economic advisor. His drive for government’s
participation in markets sprang up arguments, which is still very much in practice.
As the author brings out It was Keynes’s contention that at the bottom of the
economic cycle a chronic shortage of demand caused a slowing of economic activity,
which resulted in unnecessary unemployment. He argued that in the absence of
private enterprise ensuring adequate demand, governments should provide demand
of their own through public works.
Although Hayek had little to disagree with Keynes’s The Economic
Consequences of Peace and A Tract on Monetary Reform, but had little to disagree
with.
Certain important verses which sets the tone of the clash of the economic
ideas that is the core subject of this book are - Keynes’s repeated pleas for the
British government to reduce interest rates and invest in public works, which ran
directly counter to Austrian School economics, were conducted in English
publications that seldom reached Vienna.
Hayek began to build on Mises’s work and started to delineate the relationship
between money, prices, and unemployment. In his exploration of the working of the
American Federal Reserve, Hayek noted that there were some in the Fed who
hoped to iron out the recurring booms and busts of business cycles. He concluded
that while there might be ways of reducing to a small extent the wildest fluctuations
of the cycle, the goal of ridding America of the business cycle was a fool’s errand.
In their effort to keep consumer prices stable, the Federal Reserve governors
increased interest rates and sold government bonds, a remedy that Keynes had
advocated in the Tract. But, Hayek argued, the consumer price index that inspired
their actions was a blunt instrument that revealed little about the fluctuations of
prices in individual commodities. It was therefore a misleading indicator by which to
adjust general interest rates. He found that to pin interest rate and monetary policy
on such a broad and inaccurate index would as likely exacerbate as cure the
problem the Fed set out to solve. He concluded, “An index of the general price level
cannot yield any relevant information as to the course of the cycle, nor more
importantly can it do so at the right time.”
Mises, however, expanding theories postulated by the Swedish economist
Knut Wicksell, approached intervention in the business cycle in a different way. He
contended that when a central bank reduced interest rates, it interfered with the
natural equilibrium between individuals’ savings and the investment in capital goods
(machinery used to make products). More capital goods were bought with the
cheaper money than could be sustained by the genuine level of saving, which led to
a disequilibrium. Over time, the central bank was left with a dilemma: either continue
reducing interest rates to provide even more investment, which again would pump
too much money into a system chasing too few goods, provoking inflation; or
increase interest rates, which caused investment to slow then shudder to a halt,
bringing about a worse slump than the one the central bank was attempting to avoid
in the first place.
Hayek took Mises’s analysis one step further by examining what exactly
happens when cheap money is used to invest in capital goods. He believed that by
deliberately lowering interest rates and providing money for investment that was out
of kilter with savings, the “period of production” (the length of time needed to produce
goods) was unnaturally extended. The period of production was so long, in fact, that
a good deal of the development of capital goods, in particular “goods of a higher
order” (machinery making goods that are furthest away from goods that consumers
buy) would have to be abandoned as there was no demand (desire by customers to
buy them) by the time they were completed.
For instance, a factory making the ice trays for commercial refrigerators might
go out of business when there was a slump in demand for ice cream.
The nub of the issue, according to Hayek, was that by reducing interest rates,
the central bank interfered in the relationship between savings and investment. He
and the Austrian School believed that all markets over time, including the market in
money, would reach a state of equilibrium where the supply of goods from
manufacturers and demand came to be matched. Hayek suggested that the price
mechanism reflected the tendency toward equilibrium and that any attempt to
artificially alter prices would have dire consequences. In his view, to tamper with
prices was merely to tinker with the symptoms of the shift toward equilibrium. To
artificially reduce interest rates, or the price of borrowing money, merely led to price
inflation, while raising interest rates artificially meant encouraging a contraction of
business activity (a slump).
Behind these thoughts were Wicksell’s postulations on the difference between
the “natural interest rate,” where personal savings equal investment, and the “market
rate of interest,” or the price of credit fixed by banks. For members of the Austrian
School, the business cycle was thought to be set in motion by the difference
between the natural and the market rate of interest. The problem for central bankers
was that it was impossible to determine exactly what the natural interest rate was, so
they inevitably set the market rate of interest at an inappropriate level, thereby
setting off the booms and busts of the business cycle. Hayek believed that by staying
true to the natural interest rate, money in an economy could be made “neutral” and
that fluctuations of the business cycle in those circumstances would be caused by
changes in other factors, such as the development of new products and new
discoveries.
The battle lines between Keynes and Hayek were thus drawn. Keynes
believed it was a government’s duty to do what it could to make life easier,
particularly for the unemployed. Hayek believed it was futile for governments to
interfere with forces that were, in their own way, as immutable as natural forces.
Keynes rejected adherence to the free market as an inappropriate application of
Darwinism to economic activities and argued that a better understanding of the
workings of an economy would allow responsible governments to make decisions
that could iron out the worst effects of the bottom of the business cycle. Hayek
eventually came to the conclusion that knowledge about how exactly an economy
worked was difficult if not impossible to discover and that attempts to form economic
policy based on such evidence were, like a barber practicing primitive surgery, likely
to do more harm than good.
Thus, the fundamental ideological differences in approaching economics by
the two most influential economists of the century were explained in a gripping
narrative with simple examples. This was where the battle lines were drawn.
An important point to note is that Keynes’s approach sounded optimistic,
especially, in a post WW-I era compounded with The Great Depression of 1929,
which had spread an environment of widespread unemployment, high inflation and
drastically reduced investments. However, in similar economic condition, Hayek’s
ideology of leaving things to settle its own natural equilibrium without interfering with
economic instruments, does sound pessimistic.
Hayek being convinced that America, where unbridled capitalism operated,
wasn’t the place where economics was debated, decided to travel to Britain and
wrote to Keynes in 1927. They met in 1928, which the author metaphorically titles
Stanley and Livingstone, when he was invited to a meeting of the London and
Cambridge Economic Service, founded by Keynes in 1923 as a joint venture of
London School of Economics (LSE) and Cambridge University. Within moments after
dispensing with mundane formalities, they got involved in heated debate.
The author writes “Hayek found a friend in London: Robbins, who, rare among
British economists of the time, read German and had explored the works of
European economists, including Mises, the Swede Knut Wicksell, and the Austrian
Eugen von Böhm-Bawerk. Vigorous and ambitious, Robbins was elevated by the
director of the LSE, William Beveridge, to the chair of political economy in 1929 at
the age of thirty-one, becoming “the youngest Professor in the country.” On his
appointment, Robbins determined that the LSE should counter Cambridge, the
home of Marshall and Keynes, as the fount of wisdom in British economic theory by
presenting the full repertoire of European thinking. Hayek, too, had high hopes.” and
clearly brings out that Robbins, a former socialist labour organizer, who made the
clash between the two titans possible as he was attracted to Hayek's article
“Paradox of Saving”. Hayek was strongly influence by Böhm-Bawerk “roundabout”
production.
Robbins, being impressed by Hayek, invited him to deliver four lectures at
LSE in Feb 1931 based on his study of the business cycle and his attempt to prove,
in “The ‘Paradox’ of Saving,” that recessions were not caused by a lack of desire
from customers to buy goods, which clearly brings out that Hayek concentrated on a
push towards Supply Side economics.
Hayek delivered his first lecture at Cambridge wherein he was given a cold
reception by vigorous Marshallian Society members. Things got worse due to his
problem with English oratory skills and explanations with equations. Having got the
first taste, things changed drastically at LSE wherein at the end of every lecture
people felt that a different dimension of economics is being introduced to them who
were used to Keynes largely.
While Keynes started work on A Treatise on Money in 1924, owing to his
settling with the marriage and wife's infertility issues, rapidly changing economic
conditions post WW-I and the onset of The Great Depression of 1929, he kept
reviewing this piece but could never put them together for one complete healthy read
when it was published in 1931.
This can be considered as one of the most tumultuous times of the world
where, on one end, the world was suffering with the consequences of American
induced The Great Depression, while on the other end, defeated nations of WW-I
like Germany and Austria were suffering from the heavy reparations imposed on
them. These gave rise to widespread unemployment and inflation. Indeed, the
predictions of Keynes in The Economic Consequence of Peace were coming true in
Germany. Rise of Hitler and government investment in production related to defence
and infrastructure as a preparation for forthcoming war, led to control of the situation
in Germany producing employment opportunities and controlling inflation. This
proved Keynes claims of benefits of Government’s interference in the Markets and
controlling the economic situation. The other core suggestion of Keynes was to
encourage Government investment even through controlled deficits. He
painstakingly advocated that such deficits will be taken care off by careful
administration of tax slabs and the returns arising from employment opportunities
created which will reduce the burden of transfer payments as well as increase the
spending of the people, thereby strongly advocating Demand Side based strategy.
His take with respect to attaining natural equilibrium in the long run was In the long
run, we all are dead.
During this time, Hayek harshly reviewed A Treatise on Money, in an effort to
draw Keynes attention and engage in an ideological dual with him. As anticipated,
Keynes did engage in battle of sorts with Hayek which ended in an ugly personal
skirmish with no constructive direction.
Sensing this early, Keynes deputed one of the members of the Marshallian
society with core ideologically aligned economists, often referred themselves as
‘Cambridge Circus’, Mr Sraffa, to aggressively counter this combat, while he was
working on the classic The General Theory of Employment, Interest and Money. This
time he wanted to be careful, hence, he not only bounced the ideas with, and sent
for galley proofs to the members of Cambridge Circus but also sent advance copy to
Hayek and tried incorporating any valid objections by quashing counter arguments
before its publication. Thus, the classic was born in 1936, which was the last work of
Keynes. One of the “Cambridge Circus” member, Kahn was a major contributor in
proving the famously known as Keynesian multiplier.
When Hayek’s review on Keynes’s latest piece was keenly anticipated, given
the reputation of harsh review and outlandish bout on A Treatise on Money,
surprisingly, this time it was much sober and in fact close to no review. This was
because Hayek was writing his own General Theory titled The Pure Theory of
Capital, which was an immersive experience for him that let seldom other things to
disturb, and he hoped that it would be a befitting reply to Keynes’s work. However,
his arguments a by the time it was published in 1941, the world was a different place.
Hitler has paraded the world into WW-II in 1939 and was in the middle of intense
economic conditions in 1941, that his work made little ripples. One other reason was
many of the Hayek’s disciples like Kaldor, have deserted him and joined Keynes’s
camp.
The General Theory took America by storm. Keynes resumed the role of war
loan negotiator with America during WW-II. The notion of an international orderly
system of currency exchange which gave rise to two organizations, International
Monetary Fund (IMF) and World Bank, happened during this period. The author
brings out this important event as In August 1940, Keynes was given an unpaid
Treasury job that allowed him to rove across all areas of economic policy. In
particular, he was asked to negotiate war loans from America. He developed plans
for a post war economic order to replace the unbridled competition between nations
that had fomented the war, and he invented a more orderly system of currency
trading fixed around a revived gold standard, what became the Bretton Woods
agreement. He was also instrumental in conceiving two other pivotal organizations,
the International Monetary Fund and the World Bank. Taking a detour, with respect to
the World Bank, the author does mention that India had to adopt to liberalisation
policies in order to get loan from the World Bank, which was eventually done in
1991.
However, Hayek too bounced back with his best-known work and which is still
going strong on sales seventy years since its publication in 1944, titled The Road to
Serfdom. In 1947, Hayek proposed a ten-day conference at Mont Pèlerin, Geneva,
Switzerland, with invitation to all prominent economists predominantly who aligned
with Hayekian ideology. They started meeting annually, though the numbers
dwindled, for which Hayek was made the Chairman. It was through Friedman, who
attended this conference and was related to Hayek that the book got a publisher in
America.
The book was a slow starter with University of Chicago press publishing it in
minimal copies and then heading towards unprecedented prints. Though the idea of
not to interfere with the natural economics equilibrium was well received but this
demanded people going into more unemployment and higher inflation bringing in
more misery before the cycle is reverted, lest the equilibrium was disturbed by an
external agency like Government. The idea of tolerance sounded extremely
pessimistic and was never implemented as Keynes ideas were considered more
optimistic to put the economy in shape, quickly.
Hence, the next thirty years witnessed the Keynesian Revolution post demise
of Keynes. It was during this period that his disciples implemented their own
Keynesian Revolution with no Keynes to regulate them. An era of unprecedented
growth, lowering of tax rates, government investment in markets creating
employment opportunities and capital deficit budgeting which was recovered by
spending of the people. This was an era of birth of Macroeconomics with regulation
of Fiscal and Monetary Policy wherein the emphasis was on Demand Side and
Keynesian multiplier was proven in practice.
However, Hayek always considered this growth to be temporarily infused
which would slump at any time and accredited Keynes with tyranny. This can be
seen in Wapshott’s observation In The General Theory Keynes concluded that the
demand for commodities was equivalent to the demand for labor, and so had urged
that aggregate demand be increased to provide full employment. Hayek profoundly
disagreed with Keynes’s analysis, believing it was not supported by empirical
evidence. There were perhaps other ways of reading the figures. As Hayek later put
it, “The correlation between aggregate demand and total employment . . . may only
be approximate, but as it is the only one on which we have quantitative data, it is
accepted as the only causal connection that counts.” The final sentence of The Pure
Theory suggested that Keynes had fallen for a false hypothesis.
Till this time, economic growth was always associated with inflation, i.e.,
higher economic growth would lead to higher inflation. But when low economic
growth was accompanied by inflation, the Keynesianism found itself endangered.
The author distinctly brings out this historical incident terming it “Stagflation” as…
mortal blow by a fourfold increase in oil prices imposed by the Arab oil cartel, the
Organization of Petroleum Exporting Countries (OPEC), in 1973–74 to punish
America for rearming Israel during the Yom Kippur War. The result was higher prices
and the brakes being slammed on economic growth. Traditional tools such as the
Phillips curve seemed no longer to apply. Low or no economic growth was
accompanied by inflation in a combination hitherto thought impossible, dubbed
“stagflation.” The Age of Keynes was in its death throes. The Age of Stagflation had
arrived.
It was during this period that Hayek was again re-visited. Thus, the era of
Thatcher in Britain and Reagan in America arrived where Hayekian ideologies where
given preferences over Keynesian theories and Government’s intervention in
markets where gradually reduced, but could not be completely eliminated. However,
the emphasis was of Government to act only in place where markets couldn’t act.
Moreover, the traits of citizens of Britain and America were different wherein, a
capitalistic framework driven by Anglo-Saxon ideology would regulate on its own but
personal greed would work against free market and necessitated Government’s
intervention for regulation.
Since the Keynesian Revolution, the capital budget deficit model proved to be
optimistic till any major turn of events took over like OPEC’s resolution on petroleum
prices, outbreak of Iraq war, the Twin Tower crash and hunt for Osama Bin Laden,
prevented the Government to make good its deficit and return the surplus to its
citizens. However, the impact of Keynesian Revolution left a sense of optimism
which was difficult to overcome by any political party in power. Hence, even though
Hayekian era dawned but it had to implemented gradually.
Even the Noble Committee had to play neutral by announcing sharing of
Noble Prize between Hayek and Gunnar Myrdal, who belonged to Keynes camp.
The author mentions this conflict as The reasoning behind the Nobel committee’s
decision to recognize Hayek’s contribution to “pioneering work in the theory of
money and economic fluctuations” was not quite the endorsement it seemed. Hayek
had to share the honor with Gunnar Myrdal, a Swedish Keynesian economist and
social democratic politician. According to Friedman,31 by yoking Myrdal to Hayek the
Nobel committee hoped to avoid the charge of sympathizing with the Left. In the
event, the double bill provoked substantial controversy, with Hayek declaring that
Nobel Prizes for economics were absurd and worth neither giving nor receiving, and
Myrdal condemning the Nobel committee for honoring Hayek. Nonetheless
conservatives and libertarians widely welcomed Hayek’s accolade as evidence that
his decades of working against the grain had paid off. The prize was a considerable
personal boost to Hayek, whose years of clinical depression seemed to vanish on
receiving the award. “The Nobel Prize he got in 1974 was the making of him,”
recalled his friend Ralph Harris. According to conservative historian George H. Nash,
Hayek’s Nobel had a threefold effect: “It gave the elderly professor a new lease on
life, it gave American conservatives a sense of buoyancy and of having ‘arrived,’ and
it renewed public interest in the little book [The Road to Serfdom] that had made him
famous.”
The debate between Keynesian and Hayekian approach has become a
legacy of sorts, which cannot be ignored. Their ideologies have become the basis for
many economists, who have taken forward this debate by contributing their bit on
these foundations. The author brings out two class of economists called Freshwater
and Saltwater Economists as inclined to Hayekian and Keynesian principles,
respectively. He writes, On one side were the “freshwater economists,” so called
because their universities clustered around the Great Lakes; on the other, the
“saltwater economists” who hailed from schools on the coasts. Freshwater
economists considered, like Hayek, inflation to be a country’s worst curse; saltwater
economists thought, like Keynes, unemployment more serious.
The author does try to reason out the winner in this debate. But has been
candidly clear that both are winners as their contributions have lasted over a century,
sparked debates to constructive outcomes and more significantly, have been in
practice. The articulations by these economists have not only paved way for
understanding the subject but have also helped in analysing and extrapolating them
for the future. A key element, through which their ideologies have attained eternity.
Shortcomings
The book does suffer from chronological digressions, which on occasions
makes it difficult to align the events. The references, though reflect the
industriousness of the author, but diverts the reader from the core topic of
discussion, which seldom makes it difficult for the reader to comprehend.
Strengths
The book gives us an account of economic proceedings grazing through two
World Wars intertwined with the politics. It succeeds in transforming the reader into
the era and more often feels as if the reader has been an audience in the lectures
that were being delivered by the eminent economists. A feeling of having lived
through a century of economic revolutions amid turmoil truly embraces the reader.
Conclusion
The book is a running account of economic ideologies. It brings to fore the
development of Macroeconomics as a tool to analyse economics in top down
approach rather than microeconomics which analyse in bottom up approach. The
interesting fact is, this division has been distinctly established by Keynes and Hayek.
The goals of complete employment, stable prices, high growth and optimum rate of
interest with the role of government in markets are the issues that have been
approached in two contrasting manner by Keynes and Hayek. While Keynesian
philosophy urges Demand side push, Hayekian ideology urges Supply side push to
the economy with ultimate aim of attaining full utility of resources to attain equilibrium
which would impart maximum happiness to humans, given scarce resources. The
book also presents the significance of conceptualisation of Monetary and Fiscal
policies and grazes through the importance of their inter-dependence. To sum it up, it
is an interesting read which educates the reader about economics and its evolution
as well as is successful in kindling the thinking pandora box of the reader.
