The Great Economics Debate: Hayek vs Keynes

By Richard Vedder

Today economics is a fundamentally quantitative pursuit, dominated by abstract mathematics and complex modeling, largely removed from the realities of human interaction. But it was not always thus. Economic theory was once concerned with broader questions of society and its values; it was a realm of important ideas that, to paraphrase Richard Weaver, had consequences. Reclaiming economics from the quants is Thomas Hoerber’s objective in “ Hayek vs Keynes. ”

By focusing on the 20th century’s two great economic theorists and their most significant works—Friedrich von Hayek’s “The Road to Serfdom” (1944) and John Maynard Keynes’s “General Theory of Employment, Interest and Money” (1936)—Mr. Hoerber seeks to craft a history of economic thought and, in so doing, assess whether these two “archetypes of economic theory” remain relevant today. Mr. Hoerber, a professor at France’s École Supérieure des Sciences Commerciales d’Angers, uses Hayek and Keynes to explore two of the three major approaches to managing economies that have emerged over the past 250 years.

Hayek represents the tradition of classical liberalism that received much of its early impetus from Adam Smith and was strengthened by a panoply of international scholars in the 19th century, including Frédéric Bastiat in France, John Stuart Mill in Britain, and, later, the Austrian school of economics led by Hayek’s mentor, Ludwig von Mises. This tradition represents the non-interventionist perspective, which holds that market forces alone should largely answer the eternal economic questions relating to how, what, and for whom to produce goods and services.

Keynes, on the other hand, represents the apostles of strong government intervention in democratic societies characterized by competitive market-disciplined capitalism. As Mr. Hoerber describes it, the “General Theory” advocates “a planned economy in which the state sets the framework of economic competition and leaves unfettered the market, with all its positive opportunities for private initiative and freedom to carry on with its good work.” Among the hallmarks of Keynesianism is a concern about over-saving and under-investment in times of economic distress and high unemployment, with government stimulus the proposed solution.

The third major approach, Marxism, was an important foil for both Hayek and Keynes. Keynes’s work was a response to the Great Depression, and he believed he was saving capitalism through occasional government interventions, not destroying it as Marx advocated. Hayek’s work was a condemnation of Hitler’s national socialism; his attack on totalitarian government was the very antithesis of Marxist doctrine.

If Mr. Hoerber is concerned with assessing the relevance of these economic ideas today, the evidence is abundant. The Marxists were ultimately big losers. In the 1950s, Soviet premier Nikita Khrushchev warned capitalist states: “We will bury you.” But the Soviet Union is gone, and Khrushchev’s son lives in the still mostly capitalist United States.

As for Keynes, it seemed in the ’50s and ’60s that he might be right. Keynesian views became accepted not only in the academy but in real-world macroeconomic planning. For a few decades after the Keynes-influenced Employment Act of 1946, U.S. unemployment rates were typically around 5% and never above 8%. Later generations, however, saw the growing ineffectiveness of Keynesian remedies. Despite enormous deficit spending, American unemployment rates rose sharply in the 1970s. Similarly, the vigorous use of Keynesian fiscal stimulus in Japan in the ’90s led to a “lost decade” of almost no economic growth. And the 2009 fiscal stimulus package was followed by 43 months of unemployment above 8%. The evidence shows that societies following the Hayekian classical-liberal model prosper more. High-tax countries with massive welfare states have lower economic growth than more classically liberal economies like those of Singapore and the United States. When government gets even partially out of the way, as it has recently in India and China, growth soars. Unfortunately, Mr. Hoerber misses these realities, along with other considerations essential to understanding his subjects.

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