It’s been billed as the Fight of the Century: John Maynard Keynes vs. Friedrich Hayek. And on Tuesday night at the Asia Society it became a high-powered Thomson Reuters debate, moderated by Sir Harry Evans and featuring Nobel Laureate Edmund Phelps on the side of the Hayekians.
Nicholas Wapshott, who introduced the debate, gives a good overview of what’s at stake in an article for Reuters. It’s particularly germane right now, with Keynes acting as a proxy for Obama’s economic policies and Hayek serving the same role for essentially all of the Republican candidates.
Boiled down, it comes to this: Keynesians see a dreadful economy and say that the government should do something about it. Specifically, the government should get the economy moving again by spending money now. Hayekians, on the other hand, mistrust the idea that the government is the solution to any problem, and suspect that more government spending only acts to make matters worse. It’s a stance that makes for compelling political rhetoric: pay less in taxes, and see the economy grow! Nothing not to like there.
But could the Hayekians withstand the scrutiny of a formal debate? They had a hard time of it tonight.
For one thing, the Keynesians had the advantage of history. Keynes is a giant of 20th-century economic thought, who was intimately involved in policy decisions at the highest level and whose works are revered to this day. Hayek, by contrast, has always been a more marginal figure, whose works are borderline unreadable even in the original German, and who had an unhelpful habit of contradicting himself on a semiregular basis. Some of Hayek’s ideas—a nugget here, a concept there—have proved surprisingly resilient over time. But taken as a whole, it’s hard to point to a big-picture philosophy of practical economics in Hayek’s oeuvre as a whole. And as Sylvia Nasar pointed out, when Hayek did make specific statements and predictions about the economies he lived in, he was very quickly proved wrong.
What would Keynes do, right here, right now? That’s easy to answer. Hayek? No one has a clue. He would avoid meddling in the economy, trying to pick sectors and pick winners—and yet Phelps, arguing for Hayek, said he’d like to see a National Innovation Bank. Not a bad idea—but not a way of winning this particular debate, either.
The problem with the Hayekian position is that it’s relentlessly negative: spending doesn’t work, stimulus doesn’t work, all we can do is suffer a nasty bout of deflation and trust in the invisible hand to eventually get us back to work again.
For the Hayekians, the Manhattan Institute’s Diana Furchtgott-Roth was particularly revealing: she would take a question about rescuing the financial system and duck it by talking about how rescuing the auto industry was a bad idea. Or she would ridicule high-speed rail by saying that no one wants to take the train from New York to L.A.—a route that precisely no one is proposing. In other words, the Hayekians were more comfortable with straw men than with messy reality.
Furchtgott-Roth did stammeringly admit that she thinks AIG should have been allowed to go bust, which is exactly the kind of thing that gives Hayekians a bad name. No responsible president would ever have allowed AIG to collapse—it would have meant the end of the financial system as we know it, and a Great Depression to rival that of the 1930s.
And when economist Lawrence White was asked if the U.K. government was following a Hayekian course and whether he thought it would work, he simply ducked the question outright, saying he had no idea.
Meanwhile, the Keynesians were full of real-world examples, either from Keynes’s own history or from the more recent past. The financier Steve Rattner did a good job of defending the auto-industry bailout, saying it saved two million jobs and represented a classic case where the government could step in when the market fails. White responded by saying that GM wasn’t a market failure; it was “a market verdict.” Which is a great sound bite, but sound bites don’t save two million jobs.
Phelps, by far the most reality-based of the Hayekians, was happy to adopt Keynesianism in a crisis. He approved of most of the fiscal and monetary policy adopted by Presidents Bush and Obama in the face of the financial crisis, saying that they “served to remedy a deficiency of liquidity.” He just feels that such mechanisms have outlived their usefulness at this point—that they can help for a year or so after a crisis, and should then be abandoned. That’s an interesting and defensible point, but it seems to me a point for Keynes rather than for Hayek. As New Yorker writer John Cassidy noted, we’re all Keynesians in a crisis—including, it would seem, Ned Phelps.