I feel
like this was a weird book for me to read. At times I liked it, was bored by
it, hated it, and loved it. It was really a roller coaster ride because it does
a lot. This book tells the life stories of Keynes and Hayek. It explains their
work and economic theories. It analyzes their legacies. Lastly, it covers
modern economics and politics through the lens of their conflict. I come away
with the perspective that these were two great men, both very smart. I would
only call Keynes a genius, but both were extremely wise. The fundamental
concerns they dealt with were political as well as economic, since they argued
over the role of the government in the economy.
Before I
get into the substance of the ideas that each man had, it is interesting to
note that Keynes and Hayek had an interesting relationship. Hayek was younger
and looked up to Keynes before developing different economic ideas, as Keynes
was one of a few who argued that the indemnities placed by the victors of WWI
on the losers were too high, an appealing message to Austrians like Hayek.
After a long period of disrespect and argument in the 1930’s, the two
eventually had a truce on a personal level, though their followers would still
duke it out. The two men still argued with one another but forged a deeper
respect and even guarded university buildings from firebombs together during
the Blitz.
The motivations
of each of the great economists were different and led to different thinking.
While Keynes was an economist to apply solutions to peoples’ lives, Hayek was
much more interested in economic theory for its own sake. This reasonably led
to the development of macroeconomics from Keynesian theory and microeconomics
from Hayekian theory. It’s also probably the reason that libertarians in the
vein of Hayek (and Milton Friedman) tend to be more idealistic and utopian in
their ideas. Some argue that they’re even religious. It’s because Hayekian
thinkers/libertarians are really not thinking about the world as it is, but rather
as it could be. Keynes used an analogy that’s informative. The following idea
is ugly and a sort of “so-stupid-it-just-might-work” strategy that is useful in
the real world, but could never conform to Hayek’s ideals about how an economy should
run. The author of the book writes, quoting Keynes:
“If the Treasury were to fill old
bottles with banknotes, bury them at suitable depths in disused coalmines which
are then filled up to the surface with town rubbish, and leave it to private
enterprise on well-tried principles of laissez-faire to dig the notes up
again,” he wrote, “there need be no more unemployment and, with the help of the
repercussions, the real income of the community, and its capital wealth also,
would probably become a good deal greater than it actually is. It would,
indeed, be more sensible to build houses and the like; but if there are
political and practical difficulties in the way of this, the above would be
better than nothing.” To emphasize how a commonsense grasp of economics
differed from how economics worked in real life, he repeated his ominous
conclusion that “just as wars have been the only form of large-scale loan
expenditure which statesmen have thought justifiable, so gold-mining is the
only pretext for digging holes in the ground which has recommended itself to
bankers as sound finance.”
One
reflection I’ve had while reading this book (which is not an original thought)
is that economics is politics. When you think about other sciences, biologists,
geologists, and mathematicians get into their fields to discover truths.
Economists generally don’t. They usually have some sort of preconceived
political idea or allegiance that they seek to prove. I am not saying this is
everybody, but the field is so tied into politics that I really can’t see it any
other way. Hayek’s political observations, which Keynes generally agreed with,
are in my opinion his wisest ideas. Hayek’s primary concern with government spending
is not to dispute that it will have positive effects on the lives of ordinary
people. Rather, as an Austrian in self-imposed exile, he identified a serious
negative impact of the increased power of the state that is caused by its
increased spending: totalitarianism. Being from Austria, a country trapped
between Hitler and Stalin, it was clear for him to see how a strong and
powerful state could be used for evil. To me, the most critical facet of that
state is then its connection to democracy. The Road to Serfdom is a
product of its times in alleging that high government spending leads to
tyranny. That correlation has been mixed up in modern Europe, where
non-tyrannical, democratic states spend more than ever before. So long as the
state adheres to the rule of law and the will of the people, tyranny is avoidable.
A strong state is just a tool that
can be used for good or for evil, and if it is tied to a free and fair
democracy where one person equals one vote, it should act in the interest or at
least the desires of a majority of its people. The popular approach posed by
followers of Hayek and “the enemies of big government” is to reduce the size of
the state so that none can wield that tremendous power. If this could be done
in the utopian way that libertarians dream of, such that democracy and
representative government could be preserved, I would support it. However, I
think this is an idea that’s better on paper than in reality. Because a weaker
state cannot regulate the economy, I think that markets move towards monopoly.
With no power to break up these monopolies, the power of the state is no longer
the relative power that can produce oppression. After all, what libertarians
often fail to acknowledge is that the state is not the only source of
oppression. Instead, the natural tendency is for corporations or wealthy elites
to take power, hijack the state, and diminish the power of the majority of
non-rich people. This leads to the opposite of the other utopian dream-world:
communism. While the communist utopia ends in a massive and oppressive state,
the libertarian utopia ends in massive and oppressive corporations. Tyranny can
further be imposed from outside in the failed libertarian utopia since other
states that are stronger could enter such a fractured country and conquer it.
The author
is kind of unclear on who’s side he is on throughout most of the book, but in
the final chapters, he shows that he is clearly a Keynesian in most respects.
At the very least, he has strong condemnation for the neoliberal consensus that
is represented by the economic policies of Reagan, Thatcher, Bush Senior, and
Clinton. Woohoo, I’m just reading more books by authors who agree with me. But
that said, these facts are damning. Wapschott writes that “public debt grew
from a third of GDP in 1980 to more than half of GDP by the end of 1988, from
$900 billion to $2.8 trillion.” He writes that Reagan entered office when
America was the world’s largest creditor and left us the world’s largest
debtor. The irony is that that was just Keynesianism for the rich. For all the
talk of reducing the size of government, Reagan just cut taxes on the rich and
moved money from social welfare programs to military spending. That has been
the modus operandi of the Republican Party ever since. Nobel Prize-winner
Robert Lucas was once quoted as saying that, “Everyone’s a Keynesian in a
foxhole.” It has special application to Republicans, especially Reagan and Bush
Junior, who despite entering office with Hayekian ideals, almost immediately
abandoned them when the going got tough. It is easy to be a utopian until you
actually have responsibility for the economy.
Miscellaneous Facts:
- Both Friedrich Hayek and Ludwig Von Mises were inhibited by their poor English, though Hayek was at least understandable and much better than his mentor Von Mises, who failed to impact the English-speaking world as much as his student.
- John Kenneth Galbraith summed up his interpretation of supply-siders’ arguments: “The poor do not work because they have too much income; the rich do not work because they do not have enough income. You expand and revitalize the economy by giving the poor less, the rich more.”
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