Keynes versus Hayek: who was right?

Keynes/Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

During World War II, John Maynard Keynes and Friedrich Hayek apparently spent many nights on air raid duty together. Yet their respective supporters continue to fight to this day. The recent financial crisis and the huge government response to it has re-ignited the debate about who was right.

Keynes's big idea was that it is possible to tame the business cycle and maintain employment levels during slumps. In hard times, governments should boost demand through tax cuts and borrowing money for public works. The debt is repaid when things improve. Hayek disagreed. In his view, attempts to fine-tune the economy are futile. He also worried that increased public spending leads to a bigger state, putting economic freedoms at risk.

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Nicholas Wapshott shows how the debate started, and developed. The first two chapters detail the early lives of both economists. The book then spends 200 pages detailing their biggest point of disagreement demand management. The section ends with Keynes's death in 1946. Wapshott then moves on to Hayek's influence on post-war politics and finishes by assessing the two economists' impact on current policy. Wapshott concludes that Keynes retains the larger influence. However, he acknowledges that European austerity measures, and growing calls for cuts in America, both reflect Hayek's scepticism about the state.

Whether Keynes fully deserves the higher profile is debatable. Large Keynes-style budget deficits and stimulus packages have so far failed to restore much growth after the 2008 crash. They were also unable to prevent the lost decade' of near-zero growth in 1990s Japan. Indeed, Keynes is a dirty word in some economic circles. Meanwhile, central banks are attempting to use cheap money to increase output, something both economists opposed.

Wapshott also explores the reasons Hayek was overshadowed by Keynes (to the point where some economics courses barely mention him). It was only after he wrote The Road To Serfdom in 1944 that people started really taking notice of the Austrian-born economist. Perhaps that's because his work was as much about politics as economics, and Hayek was known in Chicago as a Professor of Social and Moral Science rather than an outright economist. Nonetheless, his quest to cut back the power of the state won him allies. Milton Friedman, for example, was a fan of his view that central banks should control the money supply.

Wapshott does a good job of explaining the duo's sometimes complex theories. There are some amusing anecdotes and weak points are few (the omission of Hayek's contribution to West German post-war economic thought is perhaps the biggest). Overall, it's well worth a read.

Keynes/Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott is published by WW Norton and Company, price £18.99.