Keynes vs. Hayek

Last night I went to a lecture at the LSE by Nicholas Wapshott on the ways in which the economic debate between John Mayhard Keynes and Friedrich Hayek continues to define the policy of the left and the right. In the speaker's own words, he paints his analysis in "broad brush strokes" and as the lecture went on it became more and more clear that his argument was mainly directed to the left and right in America.

Essentially, Wapshott maintains that the economic policies of the left and right since the end of the second world war have been largely defined by the contrasting economic programs of Keynes and Hayek. Following the first world war, the brilliant Keynes arose to prominence and eventually grew to define economics until the 1970s with a focus on raising employment. Thereafter, a paradigm shift catapulted the previously out of favour Hayek into the spotlight to such an extent that his supposed views are now central to Republican, and particularly Tea Party, thinking in the US. Wapshott's caricatures of Keynes and Hayek are not particularly nuanced - Keynes = state spending, whilst Hayek = cutting services and small government - but his talk did raise a few interesting points that I thought I would share.

Wapshott makes a case that the European reaction to the ongoing financial crisis is strongly rooted in a Hayekian paradigm. If one looks at the actions of the conservative party in the UK, it is hard not to see at least a little glee at the rolling back of some aspects of the welfare state. Likewise, in Europe, the ever harsher austerity measures forced upon supposedly 'lazy' southern States appears to suggest an indifference to high unemployment and a fervour for cutting state expenditure.

Keynes, as Wapshott notes, would have been horrified by the potentially disastrous political consequences that such policies entail. Writing, as he did, at a time of both high unemployment and dramatic political extremism, Keynes forsaw an inevitable link between the two. Indeed, The Economic Consequences of the Peace accurately predicted the rise of extremist politics in Germany following the crippling measures imposed by the allied forces in the treaty of Versailles.

What Wapshott clearly fears, and not without good reason, is that the austerity purges enacted by national and European governments may well bring about the same disenfrachisement that precipitated the rise of Fascism in Europe. Inevitably, when this austerity comes from an external, foreign power, the inherent risk of stoking nationalist fervour is increasingly aggravated.

Another key point to emerge from the talk was the relationship between public and private sectors and the way in which debate on this relationship has become increasingly toxic in recent years. Keynes obviously favoured a degree of state intervention to ward off the dangers of high unemployment, but Wapshott also notes that Hayek himself admitted the need for a welfare state that could cater for basic services, like health and education - not that you'll ever hear this from Libertarians. The key to the argument is not State vs. Private, but where the line between the two should be drawn.

This point is something all too readily forgotten by many on the American right today. The choice is not, and has never been, between an extreme laissez-faire economics or an absolute Statist solution, but whether circumstances demand State intervention or not. Those that paint Keynes as a dangerous Socialist, moreover, for advocating State solutions, are fooling themselves. Keynes was an economic pragmatist, and as the facts changed so did his opinions. Instead, what the right's vilification of Keynesian economics, and its trumpeting of a debased Hayekianism, demonstrates, is its inflexibility, as well as its willingess to pursue ideology over practical politics. These are, of course, the very same criticisms thrown at so-called 'Socialists' that advocate a degree of regulation.

A quick glance through the car-crash television series that is the GOP nominaton race tells you the degree to which a small government ethos is ingrained in Republican economic policy. Despite very strong evidence that deregulation of the market played a pivotal role in the crash of 2008, the right's answer is to strap the patient down for another dose. It is the right's inability to understand the practical requirements of today's economy, and it is their unwillingness to view the State as anything other than the boogie man, that makes them so dangerous.