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Keynes v Hayek - A Discussion
Russ Roberts and Nicholas Wapshott

Russ Roberts I'm very much interested in Keynes and Hayek, so I enjoyed reading your book. It's a real tour de force. You've taken a very complicated set of ideas from both men and done a superb job making these ideas accessible. Let's begin with their early years, their relationship. Keynes was the older man; he was world-famous after he wrote The Economic Consequences of the Peace, which was his condemnation of the Treaty of Versailles after the end of WWI. Hayek at this point is a young, aspiring Austrian economist--literally from Austria--who is invited to England to challenge Keynes's voice, who is arguing for a larger role in government and fighting depression. What happened when Hayek came to England? And how did he get there? Who invited him? Talk about Lionel Robbins' role in inviting him.

Nicholas Wapshott There was a new Professor of Economics at the London School of Economics (LSE). He said he was the youngest professor--and that's true professor--in Britain at that time; and he was about 30. And he was determined to ensure that the LSE had a good reputation. Which it already had, but it was a reputation that he didn't entirely sympathize with. Robbins was unusual for an English economist in that he actually read German, and therefore he'd actually read a lot of Austrian economics. And he realized that the Anglo-Saxon understanding of economics was missing an important dimension in Austrian economics. And he also looked north to Cambridge, an hour north of London, to see what Keynes was doing. Keynes was making leaps and bounds in challenging the orthodoxy of economics, mainly for the practical reason that Britain was enduring, in the 1920s, vast amounts of unemployment; would continue right until of course the end of the 1930s. So, it was a deliberate intention for Robbins to woo a good Austrian economist to challenge Keynes, because he wanted the LSE to be the counter-Keynes, if you like. A natural place for people who didn't belong to Keynes's line of thought to coagulate. And that's why Hayek was called for. There might have been other Austrian economists who were probably more distinguished than Hayek. Well, Hayek's teacher, Ludwig von Mises, who was not his exact teacher but his mentor, certainly his intellectual mentor

Russ Roberts Do you have any idea why he was not the choice?

Nicholas Wapshott Nobody's ever written any of this down, but I think of course you can speculate. The fact was that Mises was a much grander figure. He was sort of fully employed, integrated into the Austrian government; and helped as much as possible manage its very tricky economy. Austria-Hungary, of course, disappeared in 1918 at the end of WWI. And Austria was left like a head without a torso. It was a very tricky economy to manage. And Mises, extraordinary person in terms of his resolution about his position, had a lot of things on his plate, including looking after people like Hayek. He encouraged and coddled and even helped him in his love life when Hayek was courting. He invited the young couple around to their home in order to make sure they were solidly enfixed. But Mises was a very grumpy sort of character. He was always falling out with people. Even his wife, who wrote a very generous memoire about Mises, said that he had black moods and sometimes was just insufferable and for no reason had an angry temper. And I think maybe that was against him. Also he didn't speak English very well. And we know from Friedrich Hayek, from movies of Friedrich Hayek, that even late in life his accent was very, very strong; and you have to listen very acutely in order to understand exactly what Hayek is saying. But Hayek had at least spent a year in America, and so he had at least, according to Lionel Robbins, enough English to make his way in London. It is a moot point, though, what would have happened had Hayek been a true English speaker. Because what he was up against in Keynes was probably one of the most eloquent, articulate, intelligent opponents that any intellectual could ever, I suppose, wish for, because there is nothing better than having a very sharp person on the other side of the tennis court, as it were. And he was all those things, and plus, probably because of those things, he was incredibly charismatic. He attracted people around him who wanted to be around him, who enjoyed hearing him.

Russ Roberts He was a tremendous conversationalist, right?

Nicholas Wapshott Oh, absolutely. I don't think there's any doubt. It actually rather complicates this story. There's no doubt that Keynes is an amazingly seductive figure. If he could have only lived one life, it would have been extraordinary, because he was a most imaginative thinker; and so all of his economic work was way outside the box. Which was the sort of think you and I enjoy to play with, as it were. But he did other things, too. He was a civil servant--that is, he worked for the state. Very often at no salary. He didn't work for a salary after 1918. He was a close adviser to a lot of political figures, including people at the very top--prime minister, leader of the opposition, and so on. But he also spent every morning in bed. I must say, an enviable position. He used to sit up in bed until noon with a telephone by his side, as he worked out what to buy and sell. He was an amazing speculator. It is ironic, I think, that of the two people, Keynes is the person who is always described as the person who tinkered with the market and interfered with the market--which is true--and Hayek is the person who would prefer for the market to let things rip, let things happen, let things naturally evolve. But of the two of them, Keynes played the market; he understood the market, particularly in currencies, so well that he built up two fortunes, one after the other. He lost one in 1929, and in two years he'd made it back and more. And he used this skill to help his friends in the Bloomsbury group--people like Virginia Woolf, E. M. Forster, his lover Duncan Grant--he was homosexual half his life and he was heterosexual the other half of his life. I mean, Keynes had everything, simultaneously it seems. He covered a lot of ground. Statistics. Wide-ranging intellectual interests.

Russ Roberts So, Hayek is a strange choice in that he doesn't speak English very well. Better than Mises, but not very well. He gets to England and he gives a famous set of lectures. And as you point out, he gives another lecture in advance of that but doesn't get as much publicity. Talk about the two sets and the reaction he got.

Nicholas Wapshott He was hired like a gunslinger, like a Western gunslinger to come and take out Keynes. I don't think there is any doubt that what the LSE wanted Hayek to achieve was an intellectual framework from which people who opposed Keynes would have a very good grounding in the ability. Look at the weak points of Keynes. So, when Hayek arrived, instead of going straight to the LSE, which you could imagine, which was where he had been invited, he instead went straight to Cambridge, where he gave a lecture to, right in the heart of John Maynard Keynes's world, to the Marshall Society. Alfred Marshall was, in Anglo-Saxon terms anyway, he was the person who knew about classical economics. As all the Keynesians used to say, before they became Keynesians: You'll find it all in Marshall. And the annual Marshall lecture was a big deal. And Hayek was asked to give this. And he completely baffled everybody. He was talking concepts they had never even heard of. And that in combination with his accent; the fact that he had a bad cold at the time; the fact that he had only just arrived in Britain--slightly confused maybe. One thing or another, this large body of Keynesians, many of whom called themselves the "Cambridge Circus," who surrounded Keynes and were his acolytes, disciples. We are talking here devotion way beyond what any teacher could expect from his ordinary students. In the midst of this lion's den of the Keynesians, Hayek laboriously and meticulously, as was his Austrian way, laid out on the blackboard exactly why if you were to derive either cheap credit or if the government were to directly intervene in an economy why things would go wrong before long; and all of the industries you would encourage by cheap credit would go bust. And as he pointed out--the wonderful word that anyone who every heard Hayek in these days--called "fluctuations", which is what Hayek called it--the fluctuations, the business cycle, was really something that you really could not, however much you might want to, at the top or the bottom of the business cycle, the fact was the business cycle was as if a natural phenomenon. And it was very difficult to deal with. And they came away very much impressed with this, and they met mostly with silence. They didn't even jeer him particularly. Absolutely agog, because they couldn't understand a word he said.

Russ Roberts And this is 1930?

Nicholas Wapshott Yes.

Russ Roberts One thing that is interesting to me--and I have been learning about this because Keynes has come back in the news because of the current recession: Keynes's ideas, his great book, The General Theory, comes out in 1936. But he is thinking along interventionist lines long before that. And in the late 1920s a book comes out in America advocating spending and the evils of saving. And Hayek writes a review of it. It's not published in English for quite a while, for a while. But it's really an anti-Keynesian argument. The American economist and businessman who has written this book, whose name escapes me right now--they had made what is essentially a Keynesian argument--that savings can be bad and spending is good. Hayek had answered it; and I think that's part of the reason is invited. So he continued this dialog, which soon becomes with Keynes himself, because he is asked by Robbins to review Keynes's latest book, which is the Treatise on Money. So, talk about that review, which is really quite something.

Nicholas Wapshott It is. I think it's worth bearing in mind that when we think today about profound vision in terms of economic cognizance and the political world, between the left and the right, between those who believe there should be another stimulus in the American economy and those people who believe you should pay off debt as fast as possible and put the economy back to its natural state, as it were--we might think they are vituperative. And if you really want to know where it starts, it may well have started right from the very first shot that Hayek took at Keynes. They had briefly met; they had already started to argue. Which was rather interesting; even on their first meeting. This is not unusual. These are academics, and they are very open public academics, and you might expect them to argue. But the fact that the very first thing they did was to argue was extraordinary. But here, he said in the very first LSE's learned journal, Economica, he wrote a total condemnation of Keynes, without quite getting to grips with what Keynes was talking about. That is, he said--before he wrote it in two halves, which was probably was a tactical error--the first half, he really listed a whole collection of things saying: I don't know what Mr. Keynes is talking about. I don't know whether Mr. Keynes means this or that when he talks about investment, or savings, or whatever. He really didn't get very much past the first base. But the absolutely blank hostility, the absolute streaked counter to Keynes, was already laid down. It's true that he'd built on work that was already done. It was a natural thing for him to do. But it doesn't read like that--and I think it's important to appreciate the tenor of this conversation and the back and forth from both sides. It reads more like a nasty set of blog posts than the way we traditionally think of academic light either today or then. It's dismissive. It's okay to be critical in a review; most people are of books they don't like. But it has an almost personal tone, and certainly an openly critical tone.

Russ Roberts And it was only the first half

Nicholas Wapshott Absolutely. And it was scathing; and it was sarcastic. And this comes, by the way--we're talking 80 years ago now. Certainly Keynes was very well brought up. He was an Etonian and he went to Cambridge. Now in English terms that's not much more ground than that, really. Unless you have a country estate, which they didn't have. But really he was very old bourgeois, way up there in terms of good manners and so on. But at the same time, Keynes had such a viperish wit, a tongue to him, and he found it very difficult not to use it. Lord Kenneth Clark once said of him: Keynes was never capable of dipping his headlights. There was a dazzle about Keynes; and he just could not resist if he saw an easy prey, an easy target, he took a potshot at it. And Hayek, from a similar perspective, he too was bourgeois; he came from a family of academics and schoolteachers. And the Austrian way, in any way, is to be meticulously polite about anything. So it was extraordinary in a way, that these two men, who in normal circumstances, had they met socially and didn't know what each other did for a living would have been entirely charming. But from the get-go, the debate between Hayek and Keynes was poisonous. So, he wrote the first half; and no sooner had he written the first half that Keynes read it and he wrote a repost. The repost was published very shortly after the first half of Hayek's critique was published. This is an unbelievable thing, right? He was not used to being treated in this way. He was used to being treated with some reverence. And he could not believe that this guy who just arrived off the boat from Austria and first thing he did was to send a bazooka in his way. It's worth reading at great length. The economics arguments are so dust-dry. Convoluted.

Russ Roberts One thing I have to confess is that I'm not a big fan of mathematical economics, and I've talked on the program about my preference now for what I often call with my colleague Dan Klein, Smith-Hayek economics, which is more narrative, more conversational, more observing the world and less pretending it can be made rigorous through math. But having said that, I found their confused back-and-forth--I almost longed for some mathematical rigor, because it's as if one was talking in English and one was talking in German. They didn't make a lot of headway. That's the lesson I came out of there with.

Nicholas Wapshott So, Keynes answered

Russ Roberts And his answer is an attack--not so much a defense, but it's an attack on Hayek, right?

Nicholas Wapshott Yes. Instead of taking into account what Hayek had said about his own theory, he attacked Hayek's theory, which he called the greatest muddle that you could ever come across. He said: this is bedlam; this is argument ad absurdum, which means that you get nowhere. Barely worth talking about.

Russ Roberts But he was attacking Hayek's recent book, right?

Nicholas Wapshott Yes. Which is sort of like: Okay, you review my book, I'll review your book.

Russ Roberts It started off petty and then went downwards. So then the second half comes out.

Nicholas Wapshott So the second half comes out; and it's a bit late by then. You just can't catch Keynes's attention for very long because he's very busy. But the second half of Hayek's assessment came out; and actually in the second half he does get more to grips with the problems of what happens when a government intervenes in an economy and starts disrupting the natural order of things as it were, blowing things out of proportion, putting levers in the wrong place, making readjustments which were untenable. But by then it was probably too late. By then he'd lost all of Keynes's sympathy. Keynes was under the illusion--and actually wrote this--that he had not been given the fair mind, the open mind that any person who had written a book might expect from an academic reviewer. He thought that Hayek had already made up his mind that he wanted to get Keynes; that many of the things he was criticizing of his thoughts he didn't properly address; that it was an ad hominem attack on him, an attack on him as a person rather than on him as a thinker. And so the second and much more substantial part of the review arrived. Keynes, though he was sort of intrigued by Hayek and did mention to someone in a letter, he said: this is a great farago of nonsense but I can't help thinking there's something in it. Which showed an extraordinary honesty on Keynes's part, because he was interested in getting to the bottom of things, the truth of things. But what he was I think irritated by by Hayek was just this sort of blanket condemnation, to arrive out of nowhere and just say: No; If you start doing any of the things he suggests, things will only get worse.

Russ Roberts I remind the listeners, we are talking about not Keynes's famous book, but Keynes's Treatise on Money. And Keynes did concede, to his colleagues and friends, that the book was flawed. And part of what I understood from your book, part of the reason that he does not counter back to Hayek is he was saying: I'm going to write a better book. And he was already well into it.

Nicholas Wapshott It's true. Keynes was already most prodigious at this time in terms of new thought. He was moving very fast. With new books, there's a gap between when you finish writing and when it arrives in bound copies. And already by the time of the book that Hayek was criticizing had arrived, Keynes had moved on. And actually says this very clearly in the Preface. Which is another reason he didn't give Hayek any credit for having condemned him so much: he said he hasn't taken account the fact that my mind is constantly changing on this subject; I haven't come to any deliberation yet; this is just thinking aloud if you like. And this was all clearly explained in the Preface of the book; and Hayek took not much notice of that. And Keynes thought that Hayek had treated him very poorly. They then had a little to-and-fro. And very interesting. These are people writing day by day, like email except that it's hard copy post office. Post office, letters. Twice a day, going up and down the King's College Drive delivering letters from Hayek and vice versa. They were mostly, though, almost like shadow boxing. They were just tweaking each other. If you've ever seen a cat playing with a mouse or something or a cat playing with a dog or a puppy and a kitten together--they were like that. They would go over and kind of thwack each other and run away. That set the tone for the next 80 years of debate really between the two sides, and I must say, although all the people I know on both sides are charming, when they come to discuss each other's work, it still remains at a level of vituperative hysteria, which is amusing and certainly raises the stakes. But I'm not sure that it means you get any closer to discussing clearly what the merits are on either side.

Russ Roberts Let's talk about The General Theory. So Keynes, in collaboration--one of the things that are interesting about your book--you talk about the collaborative process that Keynes was doing with his colleagues and how they helped him work out some of the nuances of The General Theory. After doing all kinds of writing for the general public and helping politicians, Keynes writes a book that he claims at least is for economists, for his colleagues. He tries a different approach. He writes The General Theory and it is a bombshell. It lands with great force and impact. So I want you to talk about two things: 1. How the profession reacted to it, which to me is one of the most interesting parts of the book, and 2. The famous silence of Hayek in the face of it. Talk about those two things.

Nicholas Wapshott So, The General Theory, published finally in 1936, but it took most of the early 1930s to write it. Keynes, having tried to cajole the general public directly, having talked to them, saying to them we need to increase demand if we want to cure unemployment, go out and buy something; and then trying to convince governments that they should be changing policy in order to spend taxpayers' money or borrow in order to spend taxpayers' money on public works and so on--this came to not very much. And so he thought: I'm going to take the long route. I'm going to persuade academics and then the academics in turn are going to change the world. Well, he did it. It's a very confused book, I should say. Almost unreadable--to a modern economist, let alone a modern reader. But that turned out to be part of its charm, and also Keynesians will say this, and they did. People like Paul Samuelson would say it. The great Keynesian textbook writer said that because it was so complicated, so difficult to get to grips with, that was the secret of its success. It's an amazing thought but it seems to be true.

Russ Roberts I have a sociological story, and I'll let you react to it. And part of this comes from the way you describe the reaction. The world is--remember its 1936; we're about to enter what we now call a double-dip, in 1938 in America at least there is a second recession that's very bad; after the Great Depression begins there starts to be some recovery starting in 1933, steady until 1938. Again the economy does very badly. We are in that period where around the world things have been bad for a long time; there is a lot of shaken faith, whether it's legitimate or not, as there is now, a lot of shaken faith in capitalism and free markets. And this book comes along and says it doesn't have to be this way. Government can make it better by spending more money. And necessity is the mother of invention. The clamor and thirst that was slaked by its appearance was due not so much to its being true or proven or empirically right but it was it was the right medicine--it appealed to a lot of people. Is that fair?

Nicholas Wapshott I think that's absolutely fair. In a way it wouldn't have mattered too much what he said because the important thing was that someone was coming out with a coherent or apparently coherent explanation for why things needn't be as bad as they were, and giving a pretty clear plan to governments about exactly what they might do in order to cure unemployment. And this completely fitted with the public mood that just wanted to be done. And it also fitted with someone like Franklin Roosevelt, who was not a great economist--I don't have to pretend; and even when Keynes went to see him, he didn't understand what he was being told. He was a very good politician; not the best economist. Brilliant politician. Approach: I'm going to try everything. If some things work, fine; if they don't work, it doesn't matter. Because the whole thing is people want to see that I'm trying to solve their problem for them. And I think for maybe 40 years Roosevelt's reputation was sustained by that: that trying was enough. At first it was believed--I was taught--that it was in the air that he had cured the Great Depression. Then the received wisdom became: Well, he didn't, he didn't really do enough, it wasn't real Keynesianism; it looked like it but it wasn't real Keynesianism and that's why the economy didn't recover sufficiently. But at least he tried and that optimism that he created was sufficient to help with the recovery. I don't think either of those is correct. I think monetary policy had a bigger role than either of those, but it makes a good folk tale.

Russ Roberts Where do you stand then on the double-dip, the so-called Roosevelt recession?

Nicholas Wapshott Some people blamed it on the tightening of money--if you are monetarist you blame it on money tightening. If you are a fiscal Keynesian you say he raised taxes and foolishly tried to balance the budget and that's what provoked it. I think it's very hard to know. And I don't think we'll ever know. But those are the two stories you hear. He certainly worked back from his original position of trying to create jobs--he canceled that. And also it was when it seemed that the figures were moving in the right direction, he seemed to ease his foot off the gas. He's a politician; he's risk averse. I think he hoped that he could get by without having to keep doing things that he was worried might blow up in his face. So he retrenched. But who knows?

Russ Roberts Since we are talking about The General Theory, because it is interesting, the collaborations, as you say: this really wasn't all Keynes.

Nicholas Wapshott Keynes was the driving force, undoubtedly; and he also had a sort of one of those umbrella minds that could embrace a whole collection of things all under a single unit and combine them together so that they appear to have a coherent whole. But I suppose the principle amanuensis was Richard Kahn.

Russ Roberts Somebody I'd never heard of until your book.

Nicholas Wapshott Really?

Russ Roberts He's lost to modern graduate economics, I'm afraid.

Nicholas Wapshott Richard Kahn was the guy who actually took an idea which had been floated by Keynes in the 1920s really as a sound practical suggestion to the Liberal Party [in Britain] about how to get people back to work. Keynes's conclusion that every pound that a government to create jobs was not just a pound, because as he explained it a number of times: If you paid the butcher, the butcher would then pay the candlestick maker, and the candlestick maker would then buy something from the corner shop, and the corner shop would then buy something from the dry cleaner, and so on. So he worked out--again, this is probably something you and I would recoil from--he actually tried to work out specifically what that that figure would be. He actually came to a conclusion of 1.4 in Britain. That's the multiplier effect. Now, Richard Kahn took this and said: this is very interesting but he hasn't proven it. And so Kahn--a pretty good genius in his own right--went away and he worked out how that would be the case. And it's a very interesting and very elegant proof. It might not be true by the way, looking back on 50 years. They often forget that the dollar often came from someone who isn't going to spend it; that's the famous critique of Frederic Bastiat, it's the famous critique of Henry Hazlitt, the writer who was an early critic of Keynes and who was eager to dispel this idea that there was this free lunch because of the multiplier. But Kahn worked a lot on this, obviously.

Russ Roberts One of the things that comes out of the book is that there are a lot of conversations constantly going on between Keynes, Joan Robinson, Richard Kahn, and others in this circle of folks that helped him work things out. That's part of the collaborative process, interesting in its own right. Also, Keynes, it should be said--what we're trying to do here is work out why The General Theory got such wide acceptance so quickly.

Nicholas Wapshott There is no doubt that Keynes was an astonishingly good salesman. He was terrific at marketing. He discovered when writing The Economic Consequences of the Peace, first of all, the more lively you make the writing the more people will take notice of it; but he was also very good at the pre-publicity, the op-ed article in support of the argument and so on. There's no doubt that he made sure that everybody knew that he was coming out with a magnum opus. And he also gave, up to the final year of writing the book, a succession of weekly lectures at Cambridge which were filled to overflowing with people who were conscious they were listening to something which was historic. Which it was. I can't think of anything more thrilling for you and I to sit now in that lecture room in Cambridge and actually listen to what was being said and how it was presented. If you can have regrets about this stuff--of course, today everything would be web-streamed, and so we'd be able to see all this stuff and see Hayek and Keynes floundering around with each other's arguments and knocking them on the head. Thrilling.

Russ Roberts And you recount many examples of the exhilaration many economists feel when they encountered these idea of Keynes's, read the book for the first time. What I find remarkable--I alluded to this earlier--it really isn't like Einstein lecturing or to take another example, Andrew Wiles lecturing on Fermat's last theorem, where you realize you are at an historic moment. It was an historic moment, but the evidence for the claims is very different. Economics isn't as scientific as physics or math. And people of the older generation--and there was a generation gap here, as you chronicle--sat there puzzled, saying: I'm not sure this is right; it's certainly wrong by our past standards of what is right; it goes in the face of everything I've learned. But the young people ate it up like popcorn; they could not resist it, and it carried the day.

Nicholas Wapshott Absolutely. When the books arrived in boxes in Harvard they were pounced upon. You have to move on to something like the Beatles' Sgt. Pepper or something. Harry Potter maybe, or maybe an iPad. People lining up for it. There was a sort of Steve Jobs element about Keynes--they just adored him. The interesting thing is that many of the opponents of Keynes, including people like Nicky Caldor, who actually helped Hayek amazingly with his original review and critique of Keynes and helped him with a number of other important translations--but he started off as a Hayekian and then he switched over. And everybody switched over in the end, including Lionel Robbins, even, with amazing reservations--Lionel Robbins was a very sentient fellow. But at the same time he said: I am sorry that in the 1930s I resisted a policy which might have made life easier.

Russ Roberts I think that's a huge part of this. You've got somebody suffering; somebody comes with a new cure, a new medicine--could be shock treatment, radiation, leeches--but this person has been suffering for so long and you say: I don't think that's going to work. That person is drowned out by the applause for the new technique.

Nicholas Wapshott To some extent. I don't want to be unfair to Keynes. Obviously there was a great deal of creativity in his work. But part of the appeal was that he had a new cure for something people desperately wanted to fix.

Russ Roberts So, here's this puzzle. We've talked about this problem before with Larry White, and maybe with Pete Boettke. The General Theory comes out, and Keynes's natural opponent, F. A. Hayek, is silent. Nothing is heard from him about this book, which is a book that is a devastating intellectual challenge to his whole world view. He has already responded to previous efforts by Keynes. And yet he does not review the book and does not write on it. One thing I learned from your book that I did not know is that Robbins rather than asking Hayek to review the book for Economica asks Arthur Pigou. Talk about that and then Hayek's silence.

Nicholas Wapshott As you can imagine, Keynes was such a manipulator of public sentiment that he knew there was nothing like controversy to attract people to your cause, or indeed encouraging people to buy your book, which is pretty simple. And therefore get to grips with your argument. And therefore he sent Hayek proof copies of The General Theory, saying: You might be interested in this. Expecting Hayek to come back over the top as he had, 6 years before, with a wonderful devastating critique. And certainly the first half of Hayek's review of The Treatise on Money could have just been reissued, almost, in critiquing Keynes, saying: I don't know what investment.... Although you point out that Keynes went to great pains to clarify some of those issues. He did, and I think for once Keynes was actually trying not to make this all smoke and mirrors, where in the past he may have been happy for it to be smoke and mirrors. This time I think he really wanted people to get to grips with what was really a genuine revolution in the way we understood economics. I know that we can look at all the various bits of The General Theory and point out that each one of them is flawed, and it doesn't provide a coherent whole, but the outcome of The General Theory was a total change in the way we understand economics and the relationship between governments and the economy.

Russ Roberts Absolutely. There was no such thing as macroeconomics. I want to come to that. We're sticking with why Hayek didn't do anything.

Nicholas Wapshott If we had Hayek here with us now, it's something which I suspect even if we had an hour with him, we still wouldn't get to the bottom of it. He gave a number of explanations over the course of his long life why he really did not go for Keynes when it came to The General Theory, which after all was the big idea, the big notion, and the big challenge to his thought. And he's made a number of, well, barely credible things. He said: I was worried that just like the previous book he'd say I've changed my mind, and so I didn't even bother. Doesn't help. I think that what does seem to be clear is that one of the things that was thrown up by the original debate between Hayek and Keynes was that they both came to the conclusion that there were elements of capital theory that needed to be addressed properly. And Hayek himself set out on what he thought was going to be a substantial new work on capital theory. And he just got so bogged down in it that by the time that, in 1936, I guess really he was like I am now really: he was blocked knowing what to say. I think it was a much larger mountain to climb than he'd ever imagined. He found it less interesting than he'd been expecting; and he just got bogged down in it; when the book finally came out, nobody took any notice of it. I think that it was in contrast to what Hayek looked across at Keynes and saw this facility for explaining himself, this clarity, this public acclamation.

Russ Roberts Keynes being raised to people's shoulders and carried high in public esteem.

Nicholas Wapshott I think all of that didn't help Hayek. Hayek was sort of frozen in inaction, if you like. I think that's the nearest I can get to why he didn't do anything about it. He did around the edges. In the whole of his life he kept going back to The General Theory, picking off this bit or that bit. But what would be ideal and what would be amazingly helpful today looking at the problems that we had is to have Hayek's proper, definitive checklist of why The General Theory was wrong. And I'm afraid we haven't got it. It's funny, as you were saying that I had the exact same image of your opponent being carried off on the shoulders of the crowd with the cheers and delight; and you are standing in the corner and you want to say: But wait, wait, wait. But nobody wants to listen to you, that's number 1. It's very demoralizing. You figure, well, I'll write my own great book and it will answer it. I don't have to answer it right now. Time is long. Of course, it is; it turns out the debate does get more complicated as the next 50 years go on. He figures: I'm in the process of finishing my great book and that will be my answer. And as you point out, that book is a muddle; Hayek wasn't particularly proud of it; it didn't come out the way he thought.
My claim--and we'll never know--is that Hayek in that book was trying to create what has always been the gold standard, which is a microeconomics-based theory of macroeconomics, an individual decision-based theory of how the overall economy behaves. We're still in that struggle right now in economics. And he couldn't do it. There's nothing to be ashamed of; it's perhaps too hard. And he comes to that view, I think in the 1974 article, his Nobel Prize lecture, "Pretence of Knowledge." To me, that's his answer; he basically says: The economy's too hard. We don't have the knowledge to understand the underlying processes and we should concede as much. And that's really his last word on macroeconomics.

Russ Roberts Yes. I think if you were only to read one piece by Hayek, I think that Nobel lecture is probably the most interesting, the most honest, the most candid, and the most thought-provoking of them all. It's a glorious piece.

Nicholas Wapshott And when he describes--they were both capable of thinking up similes or metaphors which would allow them to describe a very complex conceptual notion, so that regular people could understand it. When Hayek describes in his Nobel lecture that in order to understand economics it would be like knowing--or this is what my opponents do--they look at a football team and they find out all the vital statistics of all the players involved; they find out what the weather is going to be; they find out everything else they could possibly know--the temperature of the grass--but they still can't predict what the result of the game is going to be. Because actually economic activity is about individual choices, and the only thing you can be certain of is the prices are trying to tell you something. And he says in that essay that if you had all the knowledge--if you knew what the people had eaten for breakfast and what their metabolism was doing that day and if they had a fight with their wife, all that, muscle tone--maybe you could really predict what the outcome would be; but we will never really have that level of knowledge. And that's true about the economy as well. Which is a contraire-scientific thing altogether.

Russ Roberts It is. It's a statement about the limits of reason, which is a statement Hayek gets involved in at that time. He goes through his fascinating time in the wilderness that you write about, which is roughly 1936-1976. Forty years.

Nicholas Wapshott About four decades. And in that time he explores lots of other stuff. He gets into neuroscience, philosophy, and he writes books of political philosophy writ large; and one of the themes in all that work is the limits of human knowledge and the importance of recognizing fundamental unknowability, fundamental uncertainty that can't be resolved by science. It is the great thing that his failure to address The General Theory and then the failure to have an economic theory book himself, that turns out to be the thing he's really best known for today. Which is a totally different, a non-economic study, of people in society. The economy is involved, but this is not economics. Right. And this is what he wrote during WWII. He was an Austrian; he volunteered; he was by no means a Nazi sympathizer or anything like it. There's no anti-Semitism. Though one might expect it out of such a family in Austria. Ironically, Keynes has some anti-Semitism in his youth and in his adulthood. He was very honest about it. The great thing about Hayek is there no side to him. Hayek never tries to portray himself in a better light. He is constantly confessing to things which you think, well, I don't think I would have mentioned. In the middle of the war he says: I was in an absolutely ideal position, you see, because I was an Austrian, so I was not allowed to fight, but at the same time I had all this time; everyone else was busy. I have a place to myself. He went up to Cambridge, lived up in Cambridge and all; and he had a good war, if you put it that way. And the result of it turns out to be the things he's remembered for most of all.

Russ Roberts Correct. The Road to Serfdom.

Nicholas Wapshott Which is a shame, because I don't think it's close to his best book, and it's the one book people read. It's an interesting book. It was important. It made a big splash.

Russ Roberts Talk about that book and how it indirectly became a counterpoint to Keynes.

Nicholas Wapshott You've got to look at Keynes and Hayek through the two different lenses of what they were trying to achieve. Keynes always wanted to ameliorate the lives of others, and he was particularly offended by unemployment that he thought was unnecessary. So, joblessness was what Keynes was worried about most of all. Hayek was worried about something else. He was worried about, and experienced it and his family experienced it directly in Austria after WWI, and that was rampant inflation and what that does in terms of undermining the economy to the general society. He saw Austria cut adrift, losing all of its regular social coherence and becoming prey to extremist thought, revolutionary mobs. And looking at the world after WWII, what he then did during the years of WWII he was trying to work out what it was about both Nazism and Soviet Communism that they had in common. It was a misconception that he came across among many British academics that somehow Communism and Nazism were at opposite ends of the political spectrum. And he put them straight on that and said: No, they are identical. And what they are identical in and the reason they are so tyrannical is that they remove people's ability to operate freely within the free market. And on that, straightforward thought, he built a case against really any attempt for government to interfere with economies, inasmuch as it curtailed the individual's right to take part in the market. And he said that was the road to serfdom, a road to tyranny, if you like.

Russ Roberts Just to clarify one thing: He never said it was inevitable. It's a cheap shot against him that somehow because we are not all enslaved, the book was wrong.

Nicholas Wapshott No, no. It was very subtle, what he was saying. He said that incrementally, roughly, the more a government takes out of the hands of taxpayers their own money and spends it through planners, as the planners can't possibly not genuinely know what the needs are of the taxpayers who gave up the money in the first place, that there is a disconnect; and that very often that can tend towards tyranny. This is all tending. There is no absolute position in that. There are many things in The Road to Serfdom that many people who say they are Hayekians or who have read The Road to Serfdom don't seem to have grasped. I do think there are basic things--if you rely on the markets to keep society honest, if you like, then there are various things that you have to take out of the equation. That people should at least be able to have a roof over their heads and have health care and some form of social security, which the state should provide. That is a deal-breaker for so many people. It's funny--I get a lot of emails from people who send me that paragraph. They know I'm a Hayekian in some dimension--it turns out many but not all--and they send me that paragraph and they say: Well, what about this? And I say: Maybe he was wrong. He's not God. His words are not perfect; he's not infallible. And so maybe he had some inconsistencies relative to my position. I'm a skeptic about the virtues of government-provided health care and social security. But he certainly conceded that. He was very adamant that he was not a conservative. So, conservatives who take him to their bosom are probably missing out as well.

Russ Roberts But Hayek obviously in his writings was willing to countenance many roles for government, and I think one thing that's nice in your book is that Keynes takes him to task on that. So, talk about that famous letter that Keynes writes.,/p.

Nicholas Wapshott It was a quid pro quo. Just as Keynes had sent Hayek an early copy of The General Theory, so Hayek sent him a copy of The Road to Serfdom, which he read on the transatlantic boat. Not a very long book, couldn't take him very long. What he wrote twice about it--that's when he sent off a letter immediately saying: This looks really interesting; I think you are onto something here. I look forward to reading it. And then he read it and he said: This is a really splendid book, and I'm so glad that you pointed these things out because you have spotted something which is really important--that if government keeps growing and growing, then of course there is an enormous danger. If government is in the wrong hands, the wrong sort of people--we've just gone through WWII, we know what we are talking about--that you are absolutely right. There is a truth here. Congratulations. But he then says, just as Hayek is preening himself a little saying: Goodness me, Keynes has just said something nice to me--he then says: But of course what we don't need it less planning. What we need is more planning. Because the more we plan the more we can ensure that the economy is healthy, the people are happy; and altogether that will allow them their freedom. And he also challenges Hayek philosophically saying: If you say it's just a question of where you draw the line before you risk being on the road to serfdom, we agree it's at a different place.

Russ Roberts Exactly.

Nicholas Wapshott And he used that example, of course. When Hayek said there are basic things that the state ought to provide, he does say, of course, which is essential, which is that the protection of the state itself, which is defense, is a key thing that every state must have. But then when he goes on to say these other things, that's when Keynes pounces. Keynes says: So, I see, so you can see that there should be some form of social security, some form of pension; in which case, we are both on the same side, really. It's just that you are a little over there and I'm a little further over here. There's some truth to that, of course. And neither of them--Keynes wasn't a socialist, and Hayek was not an anarchist. So in that sense they are close to each other. But still pretty far apart. Miles. Gaping chasm between the two of them. But it was interesting that at this stage how much more generous Keynes is towards Hayek. The passing of time, all sorts of things happening, the concluding of WWII, which I think was traumatic for anyone who lived through it, whatever age or occupation. But those two--particularly Keynes was involved with the management of the war from the British government point of view and the borrowing of money from America--and also trying to work out what the post-war world would look like in its various institutions. Keynes was integrally involved in this. And I think it probably did reflect and the generosity of the letter did reflect that Keynes was writing amazingly high as he had done now for a couple of decades. Right; he could afford to patronize Hayek a little bit. That old Austrian guy who came and started trouble all those years ago. And so he is very generous. But all of that comes to an abrupt end because in 1946 Keynes drops dead. Age 62. And there's this famous conversation where Hayek reminds Keynes of the dangers of inflation; and Keynes says don't worry, I'll temper the excesses of my fans, my followers with ease because I'll just dissuade them from their positions; and he doesn't have the opportunity, because he is gone. I suppose that would be true of almost anyone who had a cult following behind them. Oh, I can handle them; don't worry about that. The Keynesians then took over from Keynes.

Russ RobertsWhat's fascinating about this, again, as pure intellectual history, is at this point Keynes is certainly at his zenith, though there are certainly some good years to come for his reputation. Hayek had a little bit of a comeback, because The Road to Serfdom had a little bit of success. But the world moves in the Keynesian direction for the next 30 years. Governments get bigger. They get more interventionist. And they spend a lot more. That comes to an end partly through the championing of Hayek's ideas by Margaret Thatcher and Ronald Reagan. But the standard story, and I'd like to get your reaction to it--the standard story is: And then in the 1980s Hayek was on the rise because Reagan quoted him, Thatcher quoted him. But the fact is, government still got a lot bigger. It didn't get as big as it could have gotten. We didn't head toward the kind of planning at the national level that many people advocated and industrial planning and various variations on that. But it was not a golden era of laissez faire from 1980 to, say, 2000. It was just a slowing in the rate of growth.

Nicholas Wapshott Absolutely. And it's interesting, Hayek's response. Of course he was constantly asked about Reagan and Thatcher, and he always went out of his way to say he didn't do any advising for them; that he was no part of their economic team. The first thing he said was to snap immediately: Nothing to do with me, those two. Which is not what one would have expected, because there is no doubt that both Reagan and Thatcher had read Hayek. Actually had read him. Fans of him, fans of his work. They also wooed him. Thatcher, certainly, insured that she saw him on a regular basis. But Reagan and Thatcher were still spending a hell of a lot. And actually I think they missed out on some of the essential elements of what Hayek was trying to tell them.

Russ Roberts I interviewed Milton Friedman in 2006, who appears multiple times in your book; clearly someone sympathetic to Hayek's political economy, not so sympathetic to his monetary theory, although they have a little bit of overlap in that they are both skeptical of the virtues of easy money, that's for sure. When I interviewed Milton in 2006 shortly before he passed away, I was recounting how many of his ideas in Capitalism and Freedom, a book written in 1962 I think, how many of them had come into the mainstream, and how at least half full the glass was; and Friedman's reaction, akin to Hayek's I think, was: Look how many of them didn't happen; look how little progress we've made in stemming the size of government and in government regulation.
I want to ask you one speculative question. I was fascinated, and when I interviewed Bruce Caldwell this question came up, and you mention it as well: that Hayek, for reasons of romance spends a year, I think it's a year, teaching at the University of Arkansas in order to get an easy divorce and remarry the love of his childhood, of his young adult life. Do we know anything about his life in Arkansas? Is there somebody alive today--maybe hundreds of people--who took Hayek's economics classes in Arkansas? Actually, I've never come across anyone, ever. Have you? There's no trace of this. Hayek's lost year. Or Hayek's "The Arkansas" year. I was thinking it would make a good movie. Viennese and Fayetteville--I'm fascinated. Could be your next book. The other historical episode I wanted to just quickly ask you about is Joseph Schumpeter, who you don't spend a lot of time on. Schumpeter has a kind of parallel experience to Hayek. He's got this great book on business cycles that he thinks he's going to write. And it also just sort of falls apart. It never coheres, and he publishes it to no effect. He sees himself as a great intellectual rival to Keynes but the world doesn't see him that way.

Nicholas Wapshott There is no doubt that the institutional framework that Robbins provided for Hayek-counter-Keynes meant that in the end, we look at Hayek, even better than Ludwig von Mises, actually, as being the counter to Keynes. Even though they don't actually fit. I guess Mises is the granddaddy of all this stuff anyway. So it actually should be Mises versus Keynes; but that didn't work out. Well, he had a lot of sparring partners indirectly. Friedman certainly becomes one, although Keynes is gone by then; but Friedman certainly ends up battling Keynes in his own way, and cutting him up a bit.

Russ Roberts We didn't talk about it but obviously having the intellectual work of Friedman to fall onto when the Keynesian story fell apart in the 1970s with stagflation played a large role in the ascendancy of Friedman's work and it's influence.

Nicholas Wapshott But don't forget that Friedman also wrote a very generous essay about Keynes.

Russ Roberts Well, that's a nice segue to the issue we left. I think it's important to make it clear that the classicists were very well aware of the business cycle, were very well aware of the fact that there could be unemployment and the human toll it took. But there is a sense in which Keynes "invents macroeconomics". What is that sense?

Nicholas Wapshott He just started looking at the whole discipline of economics from a different position, as if he hovered about sort of ten feet above the air on economics rather than looking at it from ground level. He looks at the big picture of economics. He worked out that an economy was made up of different moving parts, including money, and the interrelationship between all of these elements was the key. And that is why he was suggesting that if you were to inject a little more money here, you would get less unemployment over there. So he thought of it as if it were a machine, a large construction. And that's macroeconomics. That's the way the big picture, the way we understand macroeconomics. To that extent, all macroeconomics today that is used is macroeconomics.

Russ Roberts I liked the way you described it, a phrase I'm fond of. You talked about Keynes's view being top down and Hayek's being bottom up.

Nicholas Wapshott That's a little unfair to Keynes, because modern day Keynesians try very hard to introduce individual behavior into the aggregate story. Well, they've had to do that because of the fact, actually. So many people complained you are looking at it from above. But it's a useful way I think to think about it. That of course led to the other thing, which Keynes disliked and I think Hayek disliked even more, which is measuring the economy. It stands to reason that once you've worked out how this is the equation on which it's all based--well, people will start trying to fill in what the various values mean, start logging in an economy various figures, various measurements. And in a way, economics, which is all macroeconomics--it's true--which is all economics today is sort of modeling; it's econometricians trying to measure different pieces. I mean, an economist today who gets higher by a business is mostly crunching numbers or trying to find a model which will try to find a model into the future so people can invest better. And today is Monday, October 10, 2011; the Nobel Prize was awarded this morning to Thomas Sargent and Christopher Sims partly for that kind of enterprise. But I find it remarkable how little that kind of evidence there is for this debate that we are having. And this to me is the punchline to the story, which is: We had this debate. It starts in the 1930s. It gets more mathematical as we go through the 1970s. The anti-Keynesian story, much of the anti-Keynesian story, becomes an argument within the framework. Which Milton Friedman in some sense was. He was very much in the aggregate in the sense. But the ability to use econometrics to steer the economy to assess the value of public policy--in 1976, Robert Lucas writes a critique of that attempt. That critique pretty devastating, and yet today we continue to have the same debate. There are a bunch of people who say the stimulus worked great; a bunch of people who say no, it was a total failure; a bunch of people who say we need to spend another trillion dollars; a bunch of people who say we have to try something totally different and it didn't work. And the inability to use econometric techniques to settle that debate to me is one of the great lessons of the last 50 years. And most economists don't agree with me. But that's my take.

Russ Roberts I think I do agree with you. It's not the mainstream view. It requires a level of humility and honesty in the face of which most economists would prefer not to speak.
What kind of personal relationship did Keynes and Hayek have? They are so combative early on and yet there are these episodes in their lives where they are socially interacting. Talk about their friendship.

Nicholas Wapshott Yes, because they did have a friendship, and it lasted, 1913 to 1946 eventually. And it was a different friendship, a different sort of friendship, different times. I think right from the beginning it was like two stags locking horns. And they actually never managed to wound each other, because their horns remained locked. They never got any further than locking horns. But as time went on, all of these worlds today, economics in America--they are very small worlds. And the world between Cambridge and London was very small, and they did encounter each other very often. They even attended joint seminars which were held halfway between Cambridge and London, where the Keynesians and the Hayekians--the Austrians--could meet in order to discuss all of these issues. Again, wonderful material which has all just gone to the ether. There are very few descriptions of Keynes and Hayek actually appearing before these groups of people. But they got on amiably enough, and oftentimes on the same side of the argument, which is interesting. I think there was a clear change in 1940, when the London School of Economics was bombed out of London, and the whole college moved to Cambridge. And there is where Keynes extended a hand. As you may imagine. Cambridge is very stratified, like everything else in England. And so however wonderful your college is, there is a pecking order. And the top of which is King's, Keynes's own college. By the way, another job he did, he was the bursar of King's [King's College, part of Cambridge], and he invested enormous amounts of money for King's and made a lot of money for King's. Just in passing. And what Keynes says to Hayek is: Oh, you don't want to stay over in that college. Why don't I find you some rooms in King's? And I must say that is about as generous an offer as you can get. Never mind that we've fallen out in the past, never mind that we have our profound disagreements which we will never come to mind with an agreement on. The fact is you're a decent sort of guy. On the other hand, he confides in his wife, Lydia, I've sat next to Friedrich Hayek yesterday, the top table in King's, you know, still talking as much nonsense as ever about economics. But on other matters they were very close and they were both collectors of or both interested in any way in early economics books. I mean, very early economics books. Which they would share. They would talk about book-buying in general; they would talk about their travels. So in the end they ended up very amiable. And always through Hayek, as much as he would disparage Keynesian ideas, he was always very generous not only to Keynes as a person, as a human being, but also to his intellect. And so when Keynes died, he wrote, as he well might to Keynes's widow, but he wrote a very generous thing, saying he was probably the brightest, most intelligent man that I have ever come across in my life. And if you are Hayek, saying that of Keynes, that's a pretty big thing to say.

End of Keynes v Hayek by Russ Roberts and Nicholas Wapshott

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