John Maynard Keynes and Friedrich Hayek

"The dramatic redefinition of state and marketplace over the last two decades demonstrates anew the truth of Keynes' axiom about the overwhelming power of ideas. For concepts and notions that were decidedly outside the mainstream have now moved, with some rapidity, to center stage and are reshaping economies in every corner of the world. Even Keynes himself has been done in by his own dictum. During the bombing of London in World War II, he arranged for a transplanted Austrian economist, Friedrich von Hayek, to be temporarily housed in a college at Cambridge University. It was a generous gesture; after all, Keynes was the leading economist of his time, and Hayek, his rather obscure critic. In the postwar years, Keynes' theories of government management of the economy appeared unassailable. But a half century later, it is Keynes who has been toppled and Hayek, the fierce advocate of free markets, who is preeminent."

"He was so convinced that he was cleverer than all the other people that he thought his instinct told him what ought to be done, and he would invent a theory to convince people to do it. That was really his approach."

"Of course the developments since then have been a great fluctuation of interests. For a long period, economics was dominated by a macroeconomic approach that in a sense was formulated by John Maynard Keynes and his revival of an era, as I regarded it, of an erroneous belief in the dependence of employment on aggregate demand, which I thought I had already finally refuted. This form of Keynesianism — which encompassed the belief that there was an unambiguous, statistically demonstrable function or connection between aggregate demand and employment — has dominated the field for the last thirty years. I found that in order to defend my conclusions concerning economic policy, which I derived from my knowledge of economics, I had to devote a lot of time to what is regarded as a scientific method — to the problems of which approach to economics leads to correct results and which leads to wrong results."

"Keynes used the opportunity to protest against the return to gold in any form, though unfortunately it was done in the return at the former parity, and Keynes was convinced by that stage, perhaps as a fact correctly, that with strength British trade unions had achieved, you could no longer hope to maintain aggregate demand at a constant value of money and he hoped that by a gradual and slow decrease in the value of money, you could overcome the resistance of rigid wages."

"Keynes believed that, by taking account of foreseeable effects, he could build a better world than by submitting to traditional abstract rules. Keynes used the phrase 'conventional wisdom' as a favourite expression of scorn, and, in a revealing autobiographical account (1938/49/72: X, 446), he told how the Cambridge circle of his younger years, most of whose members later belonged to the Bloomsbury Group, 'entirely repudiated a personal liability on us to obey general rules', and how they were 'in the strict sense of the term, immoralists'. He modestly added that, at the age of fifty-five, he was too old to change and would remain an immoralist. This extraordinary man also characteristically justified some of his economic views, and his general belief in a management of the market order, on the ground that 'in the long run we are all dead' (i.e., it does not matter what long-range damage we do; it is the present moment alone, the short run - consisting of public opinion, demands, votes, and all the stuff and bribes of demagoguery - which counts). The slogan that 'in the long run we are all dead' is also a characteristic manifestation of an unwillingness to recognise that morals are concerned with effects in the long run - effects beyond our possible perception - and of a tendency to spurn the learnt discipline of the long view."

"Although Keynes was, in spite of himself, to contribute greatly to the weakening of freedom, he shocked his Bloomsbury friends by not sharing their general socialism; yet most of his students were socialists of one sort or other. Neither he nor these students recognised how the extended order must be based on long-run considerations. The philosophic illusion that lay behind the views of Keynes, that there exists an indefinable attribute of 'goodness' - one to be discovered by every individual, which imposes on each a duty to pursue it, and whose recognition justifies contempt for and disregard of much of traditional morals (a view which through the work of G. E. Moore (1903) dominated the Bloomsbury group) - produced a characteristic enmity to the sources on which he fed. This was evident for instance also in E. M. Forster, who seriously argued that freeing mankind from the evils of 'commercialism' had become as urgent as had been freeing it from slavery."

"In the years after 1936, whilst Hayek was working on The Pure Theory of Capital, most economists were convinced by Keynes, whose theory had an elegance and simplicity that Hayek’s did not. Keynes’ theory lacked Hayek’s theoretical rigor in that it was not based on equilibrium (on individual rationality), and there were places in the argument where Keynes relied on loose, informal arguments, preferring to put his trust in intuition rather than formal theory. Keynesians did not solve the problems with capital theory that Hayek had identified: they just bypassed or ignored them. According to Hayek’s methodological criteria, Keynes’ theory was decidedly inferior. Against this, Keynes’ theory provided opportunities for mathematical and statistical analysis that Hayek’s did not. Indeed, though Hayek paid some attention to data, he did so only minimally: he certainly made no attempt to test his theory against statistical data. The choice of Keynesian theory was, at least in part, a methodological one."

"The Hayek-Keynes interchange during 1931-32 is sometimes characterized as a “debate.” Actually, as economic historian Bert Tieben writes, “One may conclude that what characterizes the Hayek-Keynes controversy is the absence of debate.” Both sides launched their broadsides, and that was about it. There was no sustained, considered, fruitful exchange. Neither side persuaded the other to change its mind, nor even persuaded the other that there was much of value in its own position."

"One of the things I’m sure you’ve read are the letters in The Collected Writings of John Maynard Keynes between Hayek and Keynes. Hayek comes out very badly in those letters, in my opinion. Keynes comes out like the kindly, generous uncle, and Hayek comes out like a very arrogant, self-centered young man, which he was."

"If you read about the tussle between the two great economists, you are struck by two things. First, how pragmatic a man John Maynard Keynes was. And second, how utopian the ideals of Friedrich Hayek are. This is odd, as each man attached himself to a polar opposite political philosophy: Keynes's ideas were adopted by idealistic lefties, while Hayek's thoughts were lapped up by conservatism, a philosophy that by definition rejects dogma. It is as if we have gone through the looking glass."

"Hayek devoted his life to exposing the intellectual errors of socialism. But many of those he was anxious to reach and convince were not socialists, but liberals and conservatives. The intellectual opponent who provided the most searching challenge to Hayek to Hayek's worldview was not on the Left, but a fellow liberal–John Maynard Keynes. Hayek's work can be read at one level as a long debate with Keynes and the Keynesians over the political means and policies which would best safeguard a liberal society. Much of Hayek's political effort after 1945 was devoted to trying to reverse the influence of Keynes on economic and social policy."

"I think the world of both Keynes and Hayek, the former as a wise practitioner whose economic theory is completely ridiculous (it took Hicks, Samuelson, and other serious economists to "make sense" of Keynes' impenetrable prose---"make sense" not by clarification of Keynes' ideas, but rather by offering an alternative analytical framework in which underemployment equilibrium is possible), and the latter as brilliant intellectual who was almost destroyed (despite his Nobel prize) by his adherence to the bizarre and irrelevant doctrines of the Austrian school, whose economic theory was dogmatically dictated by its paranoid fear of state intervention."

"It all depends on the situation – that is the point. Sceptics like me always look at the concrete situation, question it, think about it – and then decide. Government measures to support demand are not per se evil. Insofar John Maynard Keynes was right at the time, and he prevailed in the scientific dispute against Hayek. I personally witnessed that – Hayek never got over this defeat and attributed it more to the general Zeitgeist than to scientific knowledge. After the war, he changed from being a strict economist to become a social philosopher. He developed a theory of cultural evolution of society, which is very deterministic and contradicted his previous scientific beliefs...[…] In my eyes, both of them are advocates of the market economy, but with a different emphasis. Keynes was a very sceptical mind, this is why I feel more closely related to him. […] His lesson is the following: it is not the case that the market is always good and the government is always bad, that the market is always rational and the government always acts irrationally. There are good and bad governments, just as there are good and bad functioning markets."

"One of the oddities of Hayek’s career is that while his professional standing was secured through his work as an economist, he had by the mid-1940s given up economics as his central intellectual activity. A major reason for Hayek’s shift into social philosophy was that he believed – correctly – that he had lost the debate with John Maynard Keynes about the causes of the Great Depression. There can be no doubt that his encounter with Keynes was the most important event in his intellectual life. Yet he had little insight into Keynes either as a thinker or a human being. He told me that during their acquaintance he never realised that Keynes had been homosexual – a surprising admission, as it was hardly something Keynes concealed within his circle of friends. The two men had quite different kinds of minds – Keynes’s swift and mobile, with an almost clairvoyant power of entering into the thinking of others; Hayek’s slowly probing, inwardly turned and self-enclosed. They were nonetheless on cordial terms. Keynes found Hayek rooms in King’s College when the London School of Economics (where Hayek became a professor of economics in 1931) moved to Cambridge for the duration of the Second World War, and for a time the pair shared fire-watching duties on the roof of the college when it was feared that Cambridge might be bombed. With characteristic generosity, Keynes – while firmly rejecting its claim that government management of the economy is bound to lead to totalitarianism – heaped praise on Hayek’s anti-socialist tract The Road to Serfdom when it appeared in 1944. The differences between the two thinkers were as much in their underlying philosophies as in their economic theories. Both were sharply aware of the limits of human knowledge. But whereas Hayek invoked these limits to argue for non-intervention in the economy, Keynes recognised that bold action by governments is sometimes the only way in which the economy can be lifted out of depression – as when Roosevelt (to whom Keynes had written an open letter in 1933) successfully adopted some aspects of Keynesian thinking in the New Deal."

"Keynes’s own experience told against Hayek’s theories. As one of the 20th century’s most successful speculative investors, playing the markets on behalf of his college from a phone at his bedside before he got up for the day, he understood – in a way that the inveterately professorial Hayek did not – the ineradicable uncertainty of economic life. As a member of the British delegation at the Paris Peace Conference in 1919, Keynes had been horrified at the punitive conditions imposed by the Allies, which he forecast would destroy the German economy and lead to an upheaval that would “submerge civilisation itself”. Keynes had an acute sense of the risks posed to social stability by misguided economic policies. In contrast, Hayek consistently ignored these hazards."

"The three quarters of century that followed Austria’s collapse in the 1930s can be seen as a duel between Keynes and Hayek. Keynes, as I was saying, begins with the observation that under conditions of economic uncertainty we would be imprudent to assume stable outcomes and therefore had better devise ways to intervene in order to bring these about. Hayek, writing quite consciously against Keynes and from the Austrian experience, argues in the The Road to Serfdom that intervention—planning, however benevolent or well-intentioned and whatever the political context—must end badly. His book was published in 1945 and is most remarkable for its prediction that the post–World War II British welfare state already in the making should anticipate a fate similar to that of the socialist experiment in post-1918 Vienna. Starting with socialist planning, you would end with Hitler or a comparable successor. For Hayek, in short, the lesson of Austria and indeed the disaster of interwar Europe at large boiled down to this: don’t intervene, and don’t plan. Planning hands the initiative to those who would, in the end, destroy society (and the economy) to the benefit of the state. Three quarters of a century later, this remains for many people (especially here in the U.S.) the salient moral lesson of the twentieth century."

"Hayek cut a silly figure: a tall, erect, thickly accented professor in high-cut tweed, insisting on the formal “Von Hayek” but cruelly nicknamed “Mr Fluctooations” behind his back. In 1936, he was an academic without a portfolio and with no obvious future. Yet we now live in Hayek’s world, as we once lived in Keynes’s. Lawrence Summers, the Clinton adviser and former president of Harvard University, has said that Hayek’s conception of the price system as a mind is “as penetrating and original an idea as microeconomics produced in the 20th century” and “the single most important thing to learn from an economics course today”. This undersells it. Keynes did not make or predict the cold war, but his thinking wended its way into every aspect of the cold-war world; so too has Hayek’s thinking woven itself into every aspect of the post-1989 world."

"To prevent further crises of equal severity in the future, Keynesians would argue for strengthening the tools of macroeconomic management. Hayekians have nothing sensible to contribute. It is far too late for one of their favorite remedies – abolition of central banks, supposedly the source of excessive credit creation. Even an economy without central banks will be subject to errors of optimism and pessimism. And an attitude of indifference to the fallout of these mistakes is bad politics and bad morals. So, for all his distinction as a philosopher of freedom, Hayek deserved to lose his battle with Keynes in the 1930’s. He deserves to lose today’s rematch as well."

"My life has been dominated by my differences with John Maynard Keynes. That turns almost wholly on the - I believe, false - conviction that there is a simple relationship between aggregate demand for consumer goods and the volume of employment. Keynes was one of the most intelligent people I knew but he understood very little economics. He must not be blamed for his disciples. He knew the danger of inflation."

"He was a relatively sensible man. Unfortunately, he died in 1946, and so it was left to his very orthodox pupils, who out-Keynesed Keynes, which dominated the next 30 years, and so we have been living through a period in which Keynes became a sort of saint and any critic of Keynes became a third-class citizen. Now, they've discovered that Keynes was wrong, and my reputation is reviving."

"Inspired geniuses possessing a great power of conviction are not necessarily a blessing for the society in which they spring up.John Maynard Keynes was undoubtedly one of the great men of his age, in some respects representative and in others revolutionary, but hardly the great scientist whose growing insight moves along a single path."

"The conception that there is some simple correlation between the volume of aggregate demand for final goods and the total volume of employment derives from the experience of the shopkeeper that a strong demand for his goods secures his prosperity. The conception of such a relation as exists between the strength with which one may suck at one end of a pipe and the pull of the suction at the other end is of course the crudest possible misrepresentation that has been periodically reintroduced into scientific discussion, most recently and with devastating effect by Lord Keynes. The incredible crudity of this approach, congenial to the minds for whom scientific method exhausts itself in measuring the connection between changes of two observable magnitudes, ought to have been exposed long ago. The volume of employment is not determined by the relation of total demand to the total supply of goods and services but by the correspondence or non-correspondence between the distribution of demand among the different goods and services and the proportions in which these different things are offered. This applies not only to the horizontal or cross-sectional but equally to the longitudinal or vertical distribution within the stream of goods and services providing for future needs: the degree to which the volume of this stream is filled up or reduced and the corresponding shifts of demand from later to earlier stages of production or vice versa. Both these correspondence can be brought about only by appropriate changes in relative prices of the different means of production and a prompt adaptation of the quantities supplied to quantities demanded. Demand for labor is not a homogenous aggregate but an extremely diversified force with complex interactions among the parts, which defy any helpful summarization by statistics. All that is certain is that any rigidity of wages and any refusal to adjust them promptly to changing conditions must make it impossible for particular workers to find employment at the given wages, which is a condition that by various interconnections is bound to spread. Freezing the relations among the wages of different kinds of labor must produce unemployment."

"I am in full agreement, also, with Dr. Hayek's rebuttal of John Stuart Mill's well-known dictum that "there cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money," which he expresses admirably in the following passage from his last lecture: "it means also that the task of monetary theory is a much wider one than is commonly assumed; that its task is nothing less than to cover a second time the whole field which is treated by pure theory under the assumption of barter, and to investigate what changes in the conclusions of pure theory are made necessary by the introduction of indirect exchange. The first step towards a solution of this problem is to release monetary theory from the bonds which a too narrow conception of its task has created.""

"In my opinion it is a grand book. We all have the greatest reason to be grateful to you for saying so well what needs so much to be said. You will not expect me to accept quite all the economic dicta in it. But morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement."

"I come finally to what is really my only serious criticism of the book. You admit here and there that it is a question of knowing where to draw the line. You agree that the line has to be drawn somewhere [between free-enterprise and planning], and that the logical extreme is not possible. But you give us no guidance whatever as to where to draw it. In a sense this is shirking the practical issue. It is true that you and I would probably draw it in different places. I should guess that according to my ideas you greatly underestimate the practicability of the middle course. But as soon as you admit that the extreme is not possible, and that a line has to be drawn, you are, on your own argument, done for since you are trying to persuade us that as soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice."

"The outstanding topic in financial circles in the past week has been the ingenious proposal which we owe to the most fertile mind among living economists."

"It is not surprising that Mr. Keynes finds his views anticipated by the mercantilist writers and gifted amateurs: concern with the surface phenomena has always marked the first stage of the scientific approach to our subject. But it is alarming to see that after we have once gone through the process of developing a systematic account of those forces which in the long run determine prices and production, we are now called upon to scrap it, in order to replace it by the shortsighted philosophy of the business man raised to the dignity of a science."

"It would be unfair to blame Lord Keynes too much for the undoubted harm his theories have done, for I am convinced from personal knowledge that had he lived he would have been one of the leaders in the fight against the postwar inflation. Yet he bears in a great measure the responsibility for it."

"In order to understand the situation into which we have been led, it will be necessary to take a brief look at the intellectual sources of the full-employment policy of the "Keynesian" type. The development of Lord Keynes's theories started from the correct insight that the regular cause of extensive unemployment is real wages that are too high. The next step consisted in the proposition that a direct lowering of money wages could be brought about only by a struggle so painful and prolonged that it could not be contemplated. Hence he concluded that real wages must be lowered by the process of lowering the value of money. This is really the reasoning underlying the whole "full employment" policy, now so widely accepted. If labor insists on a level of money wages too high to allow of full employment, the supply of money must be so increased as to raise prices to a level where the real value of the prevailing money wages is no longer greater than the productivity of the workers seeking employment. In practice, this necessarily means that each separate union, in its attempt to overtake the value of money, will never cease to insist on further increases in money wages and that the aggregate effort of the unions will thus bring about progressive inflation."

"Even to those who knew Keynes but could never bring themselves to accept his monetary theories, and at times thought his pronouncements somewhat irresponsible, the personal impression of the man remains unforgettable. And especially to my generation (he was my senior by sixteen years) he was a hero long before he achieved real fame as an economic theorist. Was he not the man who had had the courage to protest against the economic clauses of the peace treaties of 1919? We admired the brilliantly written books for their outspokenness and independence of thought, even though some older and acuter thinkers at once pointed out certain theoretical flaws in his argument. And those of us who had the good fortune to meet him personally soon experienced the magnetism of the brilliant conversationalist with his wide range of interests and his bewitching voice."

"The responsibility for current world-wide inflation, I am sorry to say, rests wholly and squarely with the economists, or at least with that great majority of my fellow economists who have embraced the teachings of Lord Keynes. What we are experiencing are simply the economic consequences of Lord Keynes. It was on the advice and even urging of his pupils that governments everywhere have financed increasing parts of their expenditure by creating money on a scale which every reputable economist before Keynes would have predicted would cause precisely the sort of inflation we have got. They did this in the erroneous belief that this was both a necessary and a lastingly effective method of securing full employment."

"It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathised. He had attempted by a succession of new theories to justify the same, superficially persuasive, intuitive belief that had been held by many practical men before, but that will not withstand rigorous analysis of the price mechanism: just as there cannot be a uniform price for all kinds of labour, an equality of demand and supply for labour in general cannot be secured by managing aggregate demand."

"Keynes had a supreme conceit of his power of playing with public opinion. You know, he had done the trick about the peace treaty. And ever since, he believed he could play with public opinion as though it were an instrument. And for that reason, he wasn't at all alarmed by the fact that his ideas were misinterpreted. "Oh, I can correct this anytime." That was his feeling about it."

"As a man with a great many ideas who knew very little economics. He knew nothing but Marshallian economics; he was completely unaware of what was going on elsewhere; he even knew very little about nineteenth-century economic history. His interests were very largely guided by esthetic appeal. And he hated the nineteenth century, and therefore knew very little about it — even about the scientific literature. But he was a really great expert on the Elizabethan age."

"Curiously enough, I will say, Keynes was rather my type of mind, not the other. He certainly could not have been described as a master of his subject, as I described the other type. He was an intuitive thinker with a very wide knowledge in many fields, who had never felt that economics was weighty enough to — He just took it for granted that Marshall's textbook contained everything one needed to know about this subject. There was a certain arrogance of Cambridge economics about — They thought they were the center of the world,and if you have learned Cambridge economics, you have nothing else worth learning."

"In the middle forties — I suppose I sound very conceited — I think I was known as one of the two main disputing economists: there was Keynes and there was I. Now, Keynes died and became a saint; and I discredited myself by publishing The Road to Serfdom, which completely changed the situation."

"Let me begin by answering your question concerning the existence of a crisis in economic theory. I think the answer is that economics is now recovering from a long period of decline that was caused by the transition it attempted to make from microeconomics to macroeconomics. Keynes is clearly responsible for this change although he was by no means alone. But he has contributed, perhaps unintentionally, more than anybody else to the spread of aggregative theorizing, which is the essence of macroeconomics. I personally believe that only microeconomics really explains anything, but it is of necessity limited in its power of explanation. And, precisely because of these limitations in its explanatory capacity, economists decided to construct a new system which they thought to be more scientific: macroeconomics. This attempt, however, was based on erroneous hypothesis and has been a complete failure. I must confess that for the past thirty years I have not been interested in most of the subjects which have occupied the minds of the majority of economists: macroeconomics, welfare economics, employment theory, input-output analysis, the theory of growth, etc."

"Keynes was aware of the differences that exist between the social and natural sciences. He was a man of great intellect but of a rather limited knowledge of economic theory. When I had the opportunity of discussing economists with him, I was taken aback when many surprising gaps in his knowledge appeared. He had not read Ricardo's work carefully, for instance. The theory guiding monetary and financial policy in many countries over the last thirty years is based on Keynesian ideas, and it is based on the assertion that there is a simple positive correlation between total employment and the size of aggregate demand for goods and services. This has led to the false belief that we can permanently assure full employment by maintaining the total money expenditure at an appropriate level. This Keynesian doctrine has caused great harm and is responsible, to a great extent, for the problems the international economy has experienced in the seventies."

"The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45, and yet it remains a book of some interest, which is likely to leave its mark on the mind of the reader. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam."