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Battling economists Hayek vs. Keynes, and a short reading list

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One of the most enduring battles among economists in the minds of antagonists on the right and left of the political spectrum is the battle between F.A. Hayek and John Maynard Keynes. Many on the right believe that Hayek's 1944 book, "The Road to Serfdom," was an argument against the 'welfare state,' and social welfare legislation like Social Security, Medicare, Medicaid and food and income assistance to the poor. They also believe that Keynes' 1936 book, "The General Theory of Employment, Interest, and Money," was an argument for government control of the economy.

But Hayek, in his book, didn't question the role of the state in helping those at the bottom of the social and economic hierarchy. And Keynes never argued for state command and control of the economy.

Here are some quotes from Hayek's Chapter 8 of his book, which he titled "Security and Freedom."

"There is no reason why in a society which has reached the general level of wealth which ours has attained the first kind of security should not be guaranteed to all without endangering general freedom."

The kind of security he was referring to is freedom from hunger and poverty. Hayek goes on ..."there can be no doubt that some minimum of food, shelter and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody."

Then he writes, "Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of uncertainty, few individuals can make adequate provision." Among those hazards, Hayek explicitly lists "sickness," "accident," "earthquakes" and "floods." In this genre, one could easily conclude Hayek would support temporary state aid to workers put out of work in deep economic recessions.

For his part, Keynes in his book didn't argue for state control of the economy, and he never argued against private property rights nor did he argue for state ownership of capital or the means of production. What Keynes argued was that there can be times in a market economy when the aggregate of all spending for goods and services, including investment goods, can be less than what is required for all resources, including labor, to be fully employed. And that condition of less than full employment can exist without an economy's self correcting mechanisms getting us back to full employment in any kind of timely fashion. Further, that these times are often correlated with low and even near zero interest rates, which make central bank policies that increase the money supply or liquidity ineffective. In such times he argued for increased government spending, preferable on public works public and public goods in order to spur the economy more quickly to full employment.

Regarding Hayek's book, Keynes is reported to have said in a letter to Hayek, "In my opinion it [The Road to Serfdom] 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 a deeply moved agreement."

Here Keynes was referring to Hayek's main argument in the book that Socialism, or the ownership by the state of all capital, and the necessity of state planning of the whole of the economy which that entails, is essentially an impossible task that inevitably leads to a command economy and to totalitarianism. Remember, Hayek was writing in 1944 with the terrible aftermath of the rise of Hitler and the National Socialists, i.e., the Nazis, in Germany and Mussolini and his Fascists in Italy still recent history. And the dictator Stalin and his Communists were in control in the Soviet Union.

It wasn't so much in the content of The Road to Serfdom, that the differences between Keynes and Hayek were so acute, it was more on Keynes' argument that increased government spending, and deficit spending at that, was needed to get an economy out of a recession. Hayek wasn't convinced. He saw the remedy to recessions to be an increase in liquidity or money, engineered by a central bank leading a lowering of interest rates and more investment spending.

But as Keynes pointed out, if interest rates are already near zero, that most probably won't work.

For those who want more of Hayek and Keynes, here is a short reading list. While the list is short, some of the readings are not.

Hayek's Road to Serfdom is worth the read. The link is to a definitive edition by Hayek scholar, Bruce Caldwell of Duke University. Whatever your political leanings, there is much to agree with in the book, unless, of course you have sympathy for dictators.

As for Keynes' book, "The General Theory of Employment, Interest, and Money," If you are a trained economist, or have at least had some college courses in Economics, by all accounts go ahead and read or reread it as the case may be. But for the novice it can be a tough read. Instead one might try reading the "Introduction by Paul Krugman to The General Theory of Employment, Interest, and Money, by John Maynard Keynes." Even that can be tough going for the non economist, but easier than reading Keynes himself. Keep in mind, in addition to being a scholar, Krugman is an avowed advocate of Keynes and modern Keynesian ideas.

For more depth on differences between Keynes and Hayek that go beyond the Road to Serfdom including the notion that at times government action is needed to right a capitalist market economy from a recession as advocated in The General Theory, one could read, Keynes Hayek, The Clash that defined modern economics, Nicholas Wapshott W. W. Norton & Company; 2011.

Before reading that book, one can read the review by by Mikko I. Arevuo.

For more on Hayek's Road to Serfdom you might read Hayek scholar Bruce Caldwell's 2010 working paper on Hayek on Socialism and on the welfare state.


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