Monday, September 14, 2015

Hayek on Keynes's Ignorance of Economics

Friedrich Hayek talks to Leo Rosten about John Maynard Keynes.


  1. Due solely to luck, I happened to notice in the TV guide that Hayek was the guest on Firing Line in November 1977 so I got out my trusty student cassette recorder. Recently, the episode was finally put on DVD. This is just about the first thing I ever heard about Keynes and “The General Theory” because NO leftist hipsters were Keynesians in the 1970s. I had already been an Austrian for more than four years. So, the first thing I learned was that Hayek claimed the TGT was basically a hoax, an ad hoc argument for certain expansionary policies for the 1930s in Britain. It took me several years to refine this transcript.

    Mr. Buckley: Well, how would you account for the almost unanimous opinion of liberal Democrats that in order to reduce unemployment it is necessary for the government to pursue vast spending projects? Since you speak of this as being almost manifestly ill-advised, the question arises why such superstitions should survive?

    Mr. Hayek: Well, it’s almost entirely the work of one man – in a way a genius, Lord Keynes – who is much more concerned about influencing current policies than about advancing the right sort of theories and he was operating then in a very peculiar situation. Now in Great Britain, a successful attempt was made after World War I – which brought a good deal of inflation – to bring prices down to the pre-war level. Prices came down but wages did not, so you had in the 1920s a position in Great Britain where wages were internationally too high and Britain had become noncompetitive on the world market. The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages. Notice these real wages had been artificially increased by increasing the value of the pound. So because the pound was par to its former level, people receiving the same wartime salary and wages, or inflated wages, could buy much more. Wages had not come down.

    Now, his first argument was wages must come down. Then he found that was politically impossible, so he must find another way. Instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages and then by a curious intellectual somersault I would almost say he led himself to believe that even bringing down money wages was not of any use. It involves a very complex economic argument and all he concluded was that – well, we must inflate, in short.

    End of Part 1

  2. Part 2

    Now notice several things. Keynes was a genius, but a genius who spent only a fraction of his time on economics – one of the busiest men I ever knew. But he knew very little economics except particularly the Cambridge tradition, and he was much more concerned to influence policy at a particular moment than develop a true theory. In fact, the last time I talked to him was after the war. I knew him very well. When I asked him wasn’t he getting alarmed about what his pupils who swallowed all this theory were doing after the war when the danger was clearly inflation, his answer was:

    “Oh, don’t mind. My theory was frightfully important in the 1930s. Then, we needed an expansion to correct a situation. Do trust me. If this theory becomes dangerous, I’m going to turn public opinion around like this”.

    Six month later, he was dead. And as usual, what happened is that the very doctrine – pupils of this man did apply to completely different situation a theory which was designed to influence policy in a particular situation. The only thing I blamed Keynes for is to making his theory more attractive and effective, he called it THE general theory. In fact, he knew precisely that it was not a general theory, but it was an argument to persuade government in the 1930s to do particular things.

    Mr. Buckley: It was an ad hoc?

    Mr. Hayek: It was entirely ad hoc. He was one of the most fascinating men I knew, but the personal magnetism of this man not only persuaded the younger generation of economists. And if I had been a much younger man and a student, I probably would have been swept off my feet as were most of the people.

    Mr. Buckley: Like Nixon.

    Mr. Hayek: No, no. (laughter).

  3. Later on the same show:

    Mr. Hayek: You’re perfectly right, but I’d like to add one thing. You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you’re doing good to the people in general. The politicians didn’t want to hear anything more than that – to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.

  4. Nobody cares what Hayek thinks about economics. Friedman did not think Hayek was qualified to teach economics at University of Chicago. The Koch Bros plucked him out of obscurity to popularize policies that transfer wealth upwards.

    1. Friedman was a Chicago School guy. The Chicago School thought that people only cared about their gross income, not their take home income. They liked inflating the currency. New money goes to the big bankers first and then to the major corporations they invest in (along with high end luxury goods). The Chicago School is a form of Keynesianism, and therefore transfers wealth upwards.

      You Sir (or Ma'am) have it precisely backwards.

    2. "Nobody", includinging yourself, has bothered to spend 3 minutes understanding what Hayek had to say. You guys are all graduates of the Jethro Bodine School of Logic and Rhetoric.

      Jethro: Gosh, Uncle Jed. We ain't never heard that before. Can't be true if WE haven't heard it before.

      Jed: That's right boy.

    3. As I recall, Hayek won the Nobel [sorta] Prize in 1974. I agree that no statist wants to think about that or what Hayek had to say. Statists are profoundly insecure while congenitally anti-intellectual and incurious. How else would a statist respond to Hayek expressly stating that KEYNES TOLD HIM TO HIS FACE that in essence TGT was nothing more than a completely ad hoc temporary policy proposal? That sounds like a very important piece of information.