Welcome Nicholas Wapshott (Bio,Books) and Host Paul Davidson (Journal of Post Keynesian Economics)

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions. Please take other conversations to a previous thread. - bev]

Keynes Hayek: The Clash that Defined Modern Economics

Nicholas Wapshott’s book, Keynes Hayek: The Clash that Defined Modern Economics, attempts to explain the debate that began in the 1930s between two great economists– John Maynard Keynes and Friedrich Hayek– regarding the cause of the Great Depression and the implication of possible cures. Keynes, with a New General Theory, proposed active government fiscal and monetary policies to end the depression. Hayek, using the classical 19th century economic theory of the Austrian school, argued that if matters were left to the free market, given enough time, this laissez faire policy will always restore full employment, prosperity, while guaranteeing personal liberty. Government economic policies, Hayek proclaimed, inevitably led to big government, a totalitarian regime, and individuals reduced to the status of serfs (see Hayek’s book The Road to Serfdom).

In the first part of Wapshott’s book there is a discussion of the standoff literary debate between Keynes (and some of his Cambridge colleagues and students) and Hayek regarding monetary policy, inflation, the role of government, and the possible Road to Serfdom that Hayek proclaimed would result from Keynes’s policy prescriptions.

The last half of the book brings this “clash” of philosophies and debate up to the current era. Wapshott explains how Keynesianism “takes” America and for several decades dominates economic thought and economists policy actions of governmental officials. Wapshott (page 246) credits Paul Samuelson of MIT as “Keynes’s greatest evangelizer” whose writings and best selling textbook provided post World War II Keynesians with their knowledge of “Keynesian” economics. (A sage once defined a “classic” as a book everyone cites but no one reads– apparently for post war “Keynesians,” Keynes’s General Theory is a classic.)

Samuelson’s interpretation was so well accepted since Samuelson claimed [p. 147] that Keynes’s General Theory book “is badly written …., poorly organized, arrogant, bad-tempered, polemical, and…abounds with mares’ nests and confusions.”

Although Wapshott does not explicitly state it, it should be clear that Samuelson set out to provide a simple reinterpretation of Keynes for “Keynesians.” The result has been on ongoing clash between the “saltwater “economics of Samuelson-led “Keynesians” in academia on both coasts of the USA and “freshwater economics” of the Midwestern Universities who took up Hayek’s belief in free market solutions.

The book contends that saltwater Keynesians rode high in policy decisions from the 1940s until the 1970s . In the 1970s these “Keynesians” provide a solution for curing of inflation that failed to stop inflation. Samuelson and his Keynesians invoked the Phillips Curve which predicted a tradeoff between the rate of inflation and the rate of unemployment –even though the Phillips Curve had no real basis in Keynes’s analysis. The freshwater monetarist economist Milton Friedman argued that the Phillips Curve Keynesians were completely wrong. When the failed Samuelson “Keynesian” inflation policy became obvious to all, Friedman’s philosophy of free market solutions, small government and limited monetary expansion policy became the backbone of the 1980s governmental policies under Margaret Thatcher in the UK and Ronald Reagan in the USA and dominated mainstream economic thought for the next three decades.

The last two chapters of the book suggest that with the global financial and economic crisis that began in 2008, Keynesianism has risen again and the clash of philosophies and the winner is yet to be decided by events.

137 Responses to “FDL Book Salon Welcomes Nicholas Wapshott, Keynes Hayek: The Clash That Defined Modern Economics”

BevW March 11th, 2012 at 1:53 pm

Nicholas, Welcome to the Lake.

Paul, Thank you for returning, and for Hosting today’s Book Salon.

dakine01 March 11th, 2012 at 2:01 pm

Good afternoon Nicholas and Paul and welcome to FDL this afternoon.

Nicholas, I have not had an opportunity to read your book and have only a superficial and self taught knowledge of economics but how does Hayek address the components of the Free Market that are decidedly NOT free such as the government infrastructure and subsidies to business as well as restraints on labor?

Forgive me if this is answered in the book but even an idiot such as myself knows there is a large amount of BS in the phrase “Free Market”

Nicholas Wapshott March 11th, 2012 at 2:02 pm
In response to BevW @ 1

Thanks for the welcome, Bev. And thanks, Paul for shepherding me through this. I am looking forward to it. Nicholas

eCAHNomics March 11th, 2012 at 2:04 pm

I was once asked what school of economics I adhered to. None was my answer. Use the tools that are appropriate for the issue at hand.

In that context, wasn’t Hayek just reacting to an overplanned Soviet economy, and Keynes to deficient demand economy of depression.

If so, why debate it?

Paul Davidson March 11th, 2012 at 2:05 pm

Regarding Paul Samuelson and the Taking of America by Keynesians please note :
In their book THE COMING OF KEYNEIANISM TO AMERICA [1996] David Colander and Harry Landreth report that Paul Samuelson stated that after reading the General Theory in 1936, he found the General Theory analysis “unpalatable” and not comprehensible. In his interview with Colander, Samuelson said that: “The way I finally convinced myself was to just stop worrying about it [about understanding Keynes’s analysis]. I asked myself: why do I refuse a paradigm that enables me to understand the Roosevelt upturn from 1933 till 1937? … I was content to assume that there was enough rigidity in relative prices and wages to make the Keynesian alternative to Walras operative”. In other words Samuelson admits he did not understand Keynes’s analysis. Instead Samuelson assumed that Keynes was presenting a traditional general equilibrium classical theory model where wage and price rigidity caused unemployment.
This direct quote from Samuelson should make it apparent that Samuelson’s mind was already so filled with contrary classical theory notions that he never made any attempt to catch the clues to Keynes’s general theory analytical foundation that rested on removing three classical axioms– axioms that were essential to Hayek’s Austrian theory. In 1986, fifty years after Keynes’s The General Theory was published Samuelson was still claiming that “we [Keynesians] always assumed that the Keynesian underemployment equilibrium floated on a substructure of administered prices and imperfect competition”. When pushed by Colander and Landreth as to whether this requirement of wage and price rigidity was ever formalized in his work, Samuelson’s response was “There was no need to”. If sticky wages and prices cause unemployment, however, then there was nothing revolutionary about Keynes’s analysis. Yet, Keynes had a whole chapter in the GENERAL THEORY [chapter 19 –Changes in Money Wages] that even if money wages and prices were flexible, there was no automatic free market mechanism to restore full employment and prosperity.

Accordingly, the entire last half of the book was a clash between those Keynesians who were to impatient to wait till the long run when wages would be flexible and those who thought only the free market long run can solve the unemployment problem.

How does this affect your view that the clash since the end of the Second World War was really between Keynes’s theory and Hayek’s classical theory?

Nicholas Wapshott March 11th, 2012 at 2:05 pm
In response to dakine01 @ 2

Briefly, Hayek was not completely devoted to laisser-faire. He thought free markets had to operate in an established framework to allow them to operate fairly. But he was most certainly opposed to government management of the economy, on the grounds that, like an early surgeon, we did not know enough about economic behavior to get it right. That is why he wanted to privatize as much as possible about government, including city governments that he thought should be private corporations. He thought that governments interfered in an economy simply by administering a national currency — i e fixing the interest rate — and therefore wanted to abolish the Fed and replace it with competing private currencies.

Paul Davidson March 11th, 2012 at 2:06 pm
In response to eCAHNomics @ 4

Keynes also reacted strongly against the Soviet system. In his book, THE GENERAL THEORY, he argued that the state did not have to own the means of production, i.e., nationalized industries. His argument with Hayek was on the way an entrepreneurial system that used money and contracts to organize productin and exchange operated. For Keynes the quantity of money can affect the level of output and employment, given entrepreneurial expectations and contractual commitments, . For Hayek, As Mr. Wapshott points out, Money is assumed neutral, i.e., has no effect on the level of employment and output — at leastt, as Milton Friedman continually argued, in the long run. Thus as this book points out on page 77, Hayek believed a free market in the long run would rfestore full employment and prosperity.

Nicholas Wapshott March 11th, 2012 at 2:08 pm
In response to eCAHNomics @ 4

Why debate it? Because not everyone is as rational as you, eCAHNomics. As the presidential contest is showing, America is divided between those who would try to fix the economy through Keynesian methods — such as Obama’s $1 trillion stimulus and his dead on arrival $half trillion Jobs Bill — and those who want to dismantle as much of the federal government as quickly as possible and pay off the national debt. There is not much room for compromise between the two positions. N

bluewombat March 11th, 2012 at 2:11 pm

When Keynesian thinking rode high, so did American prosperity and democracy. Now Hayek is in the saddle and the country is going down the tubes. Coincidence or cause and effect?

DWBartoo March 11th, 2012 at 2:12 pm

Thank you, Nicholas and Paul, for joining us this evening.

DW

Nicholas Wapshott March 11th, 2012 at 2:15 pm
In response to Paul Davidson @ 5

You are right, Paul. The Keynesians did not always understand what Keynes was trying to tell them, even high priests of Keynesianism like Samuelson and Galbraith. Whether the Keynesians were doing justice to Keynes’s GT ideas was the subject of the last conversation between Keynes and Hayek. Indeed, Keynes once wrote to his wife Lydia, I have just attended a meeting of Keynesians. I was the only non-Keynesian there. The GT has also been undermined by attempts to simplify or codify it, such as the Hicks equation. However, as a general introduction to this great divide, the western world was generally administered according to “Keynesian” notions after rearmament in 1936, then between 1945-75. Then stagflation caused some economists to provide an alternative to Keynes and they, including Milton Friedman, were part of Hayek’s second front against Keynes, the suggestion that the larger the government became the more there was a tendency for individual rights to be trammeled. I would therefore stick to my contention that the history of political economy has largely been a battle between the paradigm shift instigated by Keynes in 1936 and various attempts to return to a pre-Keynesian world.

perris March 11th, 2012 at 2:17 pm

Hayek, using the classical 19th century economic theory of the Austrian school, argued that if matters were left to the free market, given enough time, this laissez faire policy will always restore full employment, prosperity, while guaranteeing personal liberty

since there is no such thing as a free market, there never has been a free market, there cannot possibly be a free market, hayek is making am argument based on a fairy tail.

the very concept of ownership is a set of regulations, the concept of a sanctity of contract is a set of regulations, a court system enforcing contracts are sets of regulations

and even the concept of a monetary system or exchange rate is in fact a set of regulations

so hayek is arguing for a story as rediculous as the fairy godmother

what an “economist” REALLY means when they promote the propaganda known as “a free market” is as follows;

“we love the regulations that help us gather assets, we HATE regulations that force us into paying our own bills”

that’s what they mean by this mythical “free market”

Paul Davidson March 11th, 2012 at 2:17 pm

Ncholas do you not think it unusual that Keynes’s General theory, after world war 2, was taught on either the Samuelson interpretation of a Walrasian classical theory with fixity of wages and prices and/or John Hicks’s mathematical model [the ISLM model} -since as you point out Hicks was an LSE person original with a strong attachment to the Austrian theory?.

seaglass March 11th, 2012 at 2:20 pm

“Now Hayek is in the saddle and the country is going down the tubes. Coincidence or cause and effect?” My conservative pals hate democracy for anyone but the wealthy. They argue the founders hated it as well and that’s why we have the system of Gov’t we have. ( Which by design favors the rich and is essentially a Plutocracy with some voting thrown in to give it legitimacy or at least the appearance of popular support.)

Nicholas Wapshott March 11th, 2012 at 2:21 pm
In response to bluewombat @ 9

Bluewombat, it is true that the three decades of Keynesianism in practice, 1945-75, brought untold prosperity to the West. However, a key element of Keynes’s General Theory was ignored: funds borrowed by governments to head off a recession at the bottom of a business cycle should be repaid at the top of the cycle. In a way the Hayekians — let us use a vague term for a great variety of thinkers of the conservative/libertarian persuasion — have never been given a chance to test whether their notions would make sense. Indeed, it was part of Hayek’s cry that the sort of conservative/libertarian utopia he and other members of the Mont Pelerin Society were longing for would never come about. In Europe today, and in the UK under David Cameron, there is something of a Hayekian experiment going on, paying down national debt quickly and trimming the size of the state. We have yet to see whether those experiments will turn out well — the UK is now teetering on a double dip recession, which is hardly a surprise considering the government’s policies — or whether, as Keynes darkly hinted in The Economic Consequences of the Peace, enforced poverty will not cause an eruption in angry citizens looking for simple extreme solutions.

perris March 11th, 2012 at 2:24 pm

such as Obama’s $1 trillion stimulus

that wasn’t keynesian “stimulous”, that was giving middle class assets not only to the wealthy (the antithesis of what most would call keyenesian policy) but giving those assets to the very who created the issue in the first place

Paul Davidson March 11th, 2012 at 2:24 pm
In response to perris @ 12

Yes Hayek was providing a model that was remote from reality– and as Keynes then pointed out, the classical economists such as Hayek lived consistently in this unreal world.

But Keynes attempted to demonstrate in his book, that even if a perfectly competive free market economy could exist, as long as the people in that economy utilized money and money contracts to organize production and exchange, there was no automatic market mechanism to assure full employment. And that Keynes believed was a better description of the real world entrprenurial economy.

ThingsComeUndone March 11th, 2012 at 2:26 pm

Nicholas Wapshott’s book, Keynes Hayek: The Clash that Defined Modern Economics, attempts to explain the debate that began in the 1930s between two great economists– John Maynard Keynes and Friedrich Hayek– regarding the cause of the Great Depression and the implication of possible cures. Keynes, with a New General Theory, proposed active government fiscal and monetary policies to end the depression. Hayek, using the classical 19th century economic theory of the Austrian school,

Whereas mainstream economists generally use economic models and statistical methods to model economic behavior, Austrians argue that they are a flawed, unreliable, and insufficient means of analyzing economic behavior and evaluating economic theories. Instead, they advocate deriving economic theory logically from basic principles of human action, a study called praxeology. Additionally, whereas experimental research and natural experiments are often used in mainstream economics, Austrians generally hold that testability in economics and precise mathematical modeling of an economic market are virtually impossible.

http://en.wikipedia.org/wiki/Austrian_School

Despite ten years of Bush/Obama tax cuts the Austrians still won’t change their views even when real life economic models are used as examples of how wrong they are.
One might think Faith vs Reason might have been a better book title:)

ubetchaiam March 11th, 2012 at 2:26 pm

Thank you Paul for bringing this to the front of FDL and to you Nicholas for participating. One thing I have learned is there is a difference between micro and macro economics; would you elucidate for other readers?

bluewombat March 11th, 2012 at 2:26 pm

So pure Keyenesianism (if there is such a word) has never been put into practice, just like pure Marxism.

Do you have any thoughts as to whether current efforts around the globe at imposing maximum austerity are being done as a way of validating Hayek’s theories, or simply to destroy popular sovereignty and impose oligarchy? Please excuse me if my question is too simplistic.

Nicholas Wapshott March 11th, 2012 at 2:27 pm
In response to perris @ 12

You are onto something, perris. Plainly there is no such thing as a completely free market. But there are such things as market forces, which like water on a flat roof, operate notwithstanding the wish of some that they did not exist. Hayek did not argue for a totally free market — see above — perhaps because he saw that it was impossible to achieve. His alternative was to find an economy in which as much economic activity as possible was left to the market. Even that is not easy, as is evident in arguments from the GOP candidates. Where is the road map to get from here to a Hayekian utopia? How many government jobs will be lost? What would that do to GNP? Unless the safety net that Hayek always argued for is abandoned, will not slashing the public sector increase the national debt, as the Brits are currently finding?

Scarecrow March 11th, 2012 at 2:28 pm

Welcome to our distinguished guests. The book is not just economic thought; it’s a fascinating history, and a fine perspective on how to see the economic/political arguments of those times — right to this day.

The book had to end, and we seem to be in the middle of an era in which the contending sides can be judged. Krugman argues that we’ve have a great experiment to test the views — see the US, see Europe, see the results of austerity — and the results are in — a clear vindication of at least his view of Keynes. Do our guests agree?

eCAHNomics March 11th, 2012 at 2:28 pm

As I thought.

I don’t suppose that actual, ya know, well, um, like real evidence makes much difference to the neoclassical school.

I don’t have much respect for most economists. In favor of those of they past, they developed tools which we, by now, should be smart enough to apply when they are applicable.

What impressed me most about Keynes, is that he seemed to be one of the few who looked at the real macroeconomics problems and tried to figure out what to do about them. Whereas most of the others were stuck in their own micro-microeconomics bubbles.

But isn’t the point today that neoclassical economics highly favors the 1%ers, which is the real agenda of economists wannabes in the corridors of power?

Nicholas Wapshott March 11th, 2012 at 2:29 pm
In response to Paul Davidson @ 13

Unusual? Not really. Keynes himself worried that all the subsidiary clauses and second thoughts and footnotes that he had removed from the prose of the GT could not be taken into account when finding a simpler form from which economists could work. The problem with simplifications such as the famous Hicks equation is that there is no room for subtlety — let alone his key omission, that Keynes was describing a system operating through time.

Ludwig March 11th, 2012 at 2:30 pm

What do either of you gentlemen make of the notion of “privatized Keynesianism” as an description of the private debt-fueled maintenance of the US economy since Reagan — with the subsequent transfer of the debt onto the public when returns could not be maintained?

DWBartoo March 11th, 2012 at 2:30 pm

A recent Gallup “poll” suggest that only 18% of “the people” favor direct government investment in jobs, through rebuilding the infrastructure and other direct job “creation” activities, most preferred that “small business” be the “engine of recovery”… suggesting that deficit hysteria and “trickle-down”, so-called “economic theory”, have bemused public “perceptions”.

Do you sense that worsening “conditions”, which despite the last, “positive jobs report” are likely to prevail, as I see it, that there might be a shift in “public sentiment”, Nicholas, and, if so, how long a time and how much worsening of “conditions” for the many, and especially the “middle class”, do you imagine or consider shall be necessary for that shift toward embracing more direct government “involvement” to become manifest?

Especially, given the “backdrop” of the “settlement” of fraudulent Bank behaviors in the housing crash, the “particulars” of which “settlement” are neither clear nor, apparently, to soon be forthcoming … leaving aside, for the moment, the effect of that settlement upon a number of aspects of the Rule of Law.

DW

eCAHNomics March 11th, 2012 at 2:31 pm

But Hayek is working out so well for Greece, as it did for Indonesia and the other Asian Tigers. Except for Malaysia, of course, which thumbed its nose at IMF. There are hoards of evidence that contractionary policies during downturns is horrific.

ubetchaiam March 11th, 2012 at 2:31 pm
In response to Paul Davidson @ 17

So glad you said this as it is the very point made by Yanis Varoufakis in his interview at naked capitalism ; “The above illustrates nicely the economists’ tragedy: The ambition to create the ultimate model results in a theory of human behaviour which cannot hold unless the humans populating the model operate like inanimate algorithms following slavishly a particular script. “

perris March 11th, 2012 at 2:32 pm

perhaps because he saw that it was impossible to achieve. His alternative was to find an economy in which as much economic activity as possible was left to the marke

which is code for;

“we LOVE regulations that facilitate our insatiable appetite for gathering other people’s wealth, we HATE regulations that force us into paying our own bills”

Where is the road map to get from here to a Hayekian utopia?

that road map leads to the well known “robber baron” economy

Paul Davidson March 11th, 2012 at 2:32 pm

Keynes was for balancing the operating budget of government — but for deficit financing the capital budget of government. Keynes wanted deficit spending to create (in cooperation with private initative[as he said in THE GENERAL THEORY]) productive capital improvements, e.g., infrastructure, better water systems, etc.

And in fact, President Eisnerhower, while not a “Keynesian”, embarked on the largest public works project in history — the US interstate highwway system — financed by deficits. Was that not productive?

And do not entrepreneurial firms continually finance large investment projects by deficits? and does a successful firm ever have a zero total debt on the liability side of its balance sheet?

ThingsComeUndone March 11th, 2012 at 2:32 pm

Hayek, using the classical 19th century economic theory of the Austrian school, argued that if matters were left to the free market, given enough time, this laissez faire policy will always restore full employment, prosperity, while guaranteeing personal liberty.

The Bush years were a time of laissez faire policy that Obama continued its been ten years how much longer until we get full employment?
I think the Messiah might come back before laissez faire economic policy gives us full employment. Has there ever been now or historically a case where laissez faire economic policy ever delivered full employment?
There certainly has been many laissez faire policy governments since then the Bush/Obama years come to mind as does the President Hoover years.
When your honest fact changes theory.

Nicholas Wapshott March 11th, 2012 at 2:34 pm

Ha! There is no doubt that the Austrians offer a faith-based economics that few outside of George Mason University would recognize. But beware, tax cutting is a Keynesian remedy. As I report, “Reagan’s tax cuts made Hayek distinctly nervous. ‘On the scale on which it is being tried, I’m a little apprehensive,’ he said in 1982. ‘I’m all for reduction of government expenditures, but to anticipate it by reducing the rate of taxation before you have reduced expenditure is a very risky thing to do.’

eCAHNomics March 11th, 2012 at 2:36 pm
In response to perris @ 29

*g*

Spot on.

Nicholas Wapshott March 11th, 2012 at 2:37 pm

Briefly and put simple, all economics was microeconomics before Keynes’s General Theory. Austrian economics is microeconomics. Keynes’s great breakthrough in the GT was to look a the economy as a whole, as if it were a huge mechanical device, in which if you wanted to increase, say, employment, you would need to increase, say, demand. All economics today is macroeconomics and alternatives such as the Austrian School are, ironically perhaps, measured by macroeconomics, a Keynesian construct.

ThingsComeUndone March 11th, 2012 at 2:39 pm

The book contends that saltwater Keynesians rode high in policy decisions from the 1940s until the 1970s . In the 1970s these “Keynesians” provide a solution for curing of inflation that failed to stop inflation. Samuelson and his Keynesians invoked the Phillips Curve which predicted a tradeoff between the rate of inflation and the rate of unemployment –even though the Phillips Curve had no real basis in Keynes’s analysis. The freshwater monetarist economist Milton Friedman argued that the Phillips Curve Keynesians were completely wrong. When the failed Samuelson “Keynesian” inflation policy became obvious to all,

One could argue that debt from the Vietnam War was the more important factor in the bad economy back then and that Keynesian job creation policies under FDR were not at the level needed to avoid the bad economy that followed.
Milt’s policies led however to decades of lower living standards for the average worker, whose living standard was only held up by women joining the work force and increased credit card debt.

masaccio March 11th, 2012 at 2:40 pm

That is the thing that strikes me about the early part of your book: it looks like England has always rejected Keynes, and has suffered long sieges of unemployment. You write that unemployment was more the 10% for years during the 20s. It has a masochistic feel to it.

Scarecrow March 11th, 2012 at 2:40 pm

I thought the chapter on the initial debate between Hayek and Keynes, in which H was brought in to challent K in the journal for the LSE to be strangely familiar and saddening. We had a relatively unknown academic attack K partly via ridicule, but not in terms non-economists would have understood. And this is happening while K is trying to explain to non-economist politicians what needs to be done to deal with a million unemployed in the UK.

The debate only seemed to stall any efforts to actually spend money to put people to work and relieve the suffering, so they continued to suffer — which the H followers thought to be the correct, moral answer. The parallel is the stimulus debate in 2009 and later, where the controversy prevented even Dems from believing they could do what their best econ advisers told them was necessary. And so we’ve left millions unemployed even though it cost little/nothing to borrow/create money to put them to work. So maybe “creating a controversy” was the whole point?

eCAHNomics March 11th, 2012 at 2:40 pm
In response to Paul Davidson @ 30

Well, there was that whole WWII U.S. central planning experiment, which produced war equipment coming out your ears, the intended outcome, and for once, no evidence of an unintended outcome.

Not to mention that every economy that has ever transitioned upward from third world has done so thru mercantilist, or protectionist, or a form of central planning called infant industry selection (a flag, a national anthem, an airline, a steel mill, auto plants, semiconductor facility) to give the short version.

Nicholas Wapshott March 11th, 2012 at 2:42 pm
In response to Ludwig @ 25

I think there is a lot in what you say. It was not public debt that caused the events of 2008/9 but private debt that could not be funded. In such circumstances the public debt looked in retrospect to be at a high level. And adding to the national debt with a Keynesian stimulus, such as Obama’s $i trillion booster and his $half trillion aborted Jobs Bill, frightened many who are confusing household economics with economics. Private debt was way out of whack, by the way, not least because interest rates were kept deliberately low to avert a broad recession after 9/11. That is an entirely Keynesian notion, notwithstanding that its main facilitator was Alan Greenspan, who owed more to Ayn Rand than JMK.

ThingsComeUndone March 11th, 2012 at 2:42 pm

Ha! There is no doubt that the Austrians offer a faith-based economics that few outside of George Mason University would recognize.

George Mason I take it is like Harry Potter’s Magic school? Why did Reagan push tax cuts that even Hayek thought large was he creating a Shock Doctrine event or was his plan to leave America so broke that Keynes and FDR’s job creation ideas could never be tried again because of the large debt Reagan left us?

Paul Davidson March 11th, 2012 at 2:42 pm

Yes but after long discussions with Hicks, I managed to get him worked up enough that he wrote an article entitled “ISLM:An Explanation” which I published in the JOURNAL OF POST KEYNESIAN ECONOMICS in 1980-81 winter issue. In this article Hicks recanted on his ISLM mathematical model and wrote “As time has gone on I have myself become dissatisfied with it [the ISLM model]. Hicks then went on to indicate this ISLM model was not even a potted verion of Keynes’s General Theory.

eCAHNomics March 11th, 2012 at 2:45 pm

The 1970s was the only decade of inflation in the half decade post-WWII. It was caused by inflationary monetary policy: Burns was the worst head of the FRB until Greenspan came along; OPEC oil embargo, Nixon price controls.

Don’t see any reason why 1/5 the post-WWII period, with identifiable special causes, should play such an important role in econ policy now.

Nicholas Wapshott March 11th, 2012 at 2:46 pm
In response to eCAHNomics @ 33

I find it hard to disagree with you. btw, Hayek was in favor of regulations, so long as it ensured the market operated as a free fair market. Somewhere along the line — as in much complex theoretical work — there have been simplifications so that today it is assumed Hayek was flat against regulating the market. How wholesale deregulation led to the events of 2008/9 is a fascinating history. Yet the lesson of the Great Recession that has been avoided is that banks and financial institutions have too much regulation. That doesn’t make much sense. . .

ubetchaiam March 11th, 2012 at 2:48 pm
In response to Paul Davidson @ 41

As also indicated by this “The small band of Keynesians who refused to bastardise Keynes, authors like Leijonhuvfud and Minsky, continued to say sensible things at the time when IS-LM Samuelsonianism was bandied about as… Keynesianism.”.

eCAHNomics March 11th, 2012 at 2:49 pm
In response to Paul Davidson @ 41

Well, well, well, well.

Time to rescind Hicks’ Nobel.

Nicholas Wapshott March 11th, 2012 at 2:49 pm
In response to masaccio @ 36

No, Keynes was embraced by both parties between rearmament and the mid-seventies, with startlingly good results. The strange thing today is how the old battles about debt and spending remain much the same as they did in Britain in the twenties and thirties, when Keynes took on the government and the central bankers. As for masochism, Keynes said that there was something in the personal makeup of some economists that led them to believe that only if there was pain could there ever be any gain. His brilliance was to show that a great deal of the pain could be avoided. That remains true today. Just ask the Brits.

seaglass March 11th, 2012 at 2:50 pm

Nicholas how does Keynesian theory play out in the present situation where the State is actively destroying our Industrial base and large segments of the so called service economy by sending it all offshore?

Nicholas Wapshott March 11th, 2012 at 2:51 pm
In response to Scarecrow @ 37

You are spot on, Scarecrow. The difficult thing to explain is that Keynes’s easy route to full employment is ignored by so many politicians and voters. Once voters always took the easy route; now it seems they are more worried about the national debt than they are in getting/keeping a job.

eCAHNomics March 11th, 2012 at 2:52 pm

Naive me.

During the 1990s, I thought that the ideal economy would search for the most market oriented regulations that would come to grips with the market imperfections that exist. I thought that would be the really important area for intellectual investigation and policy experimentation.

Naive bc I failed to recognize during the 1990s that ALL the U.S. econ policy was dishonest and oriented to increasing wealth and income of 0.01%ers.

bluewombat March 11th, 2012 at 2:54 pm

Again, do you have any thoughts as to whether current efforts around the globe at imposing maximum austerity are being done as a way of validating Hayek’s theories, or simply to destroy popular sovereignty and impose oligarchy? Please excuse me if my question is too simplistic.

Ludwig March 11th, 2012 at 2:54 pm

something in the personal makeup of some economists that led them to believe that only if there was pain could there ever be any gain.

Not masochism; moralizing sadism.

ThingsComeUndone March 11th, 2012 at 2:55 pm

Hayek was not completely devoted to laisser-faire. He thought free markets had to operate in an established framework to allow them to operate fairly. But he was most certainly opposed to government management of the economy, on the grounds that, like an early surgeon, we did not know enough about economic behavior to get it right.

What made him think that private industry could get it right better than government if they all try and reinvent the wheel about what works? At least when a well regulated government sets guidelines there is a minimum of safety.
We need that safety so drug makers don’t sell heroin unregulated or Oxy like they do today in Florida.
We need that safety so the chicago meet packing plants of yesterday don’t return to their past unhealthy practices. I do think government should pick and choose a minimum standard like for LED lights, for health and safety etc. I do think government should create jobs and protect green energy in America from low cost China green energy. Either we make the products and have the economic benefit of the jobs or China will and they get the benefit.

That is why he wanted to privatize as much as possible about government, including city governments that he thought should be private corporations. He thought that governments interfered in an economy simply by administering a national currency — i e fixing the interest rate — and therefore wanted to abolish the Fed and replace it with competing private currencies.

This has worked in the real world where? Chile tried this with SS and they have huge problems their SS system only works because Chile kept control of the copper mines and uses the cash to pay for their SS.
Of course government control of copper is anti Hayek.

Nicholas Wapshott March 11th, 2012 at 2:56 pm

I think Reagan was unduly influence by his own experience with taxes — he ended the war with a punishing tax bill and, having served in the armed forces, felt the money would never be well spent by any government department — and the “Laffer curve” that showed there was a sweet spot that would maximize tax revenues that was far lower than punitive tax levels. It is a short leap between Laffer and imposing no or little tax at all. And there was the Milton Friedman logic: if you want to reduce the size of the state, the most direct way is to cut taxes then insist the nation lives within its means by cutting the public sector.

eCAHNomics March 11th, 2012 at 2:56 pm
In response to Ludwig @ 51

Not in the slightest. See 49.

Paul Davidson March 11th, 2012 at 2:57 pm
In response to eCAHNomics @ 38

you raise a good point about mercantilist policy and international trade. the biggest mercantilist countries currently are China, Germany, etc. and they often seem like “economic miracles”. But look what happend to the 1970-1980s mercantilist Japan over the last two decades– of continuing slump.

Keynes had an answer to the desire of each nation to become mercantilist– i.e., to have more competitive industries so exports grow faster than imports. It was the “Keynes Plan” presented at Bretton Woods! Unfortunately the Keynes plan was rejected by the US delegation under Harry Dexter White.

but 2 years later the USA adopted a form of the Keynes Plan when it introduced the Marshall Plan where the US gave away over four years approximately $13 billion of its GDP to Europe and Japan – and the result was both the giver and the recipients gained economically. If interested in a further discussion of a 21 century Keynes Plan proposal to stop mercsntilism and its resulting exhuastion of debtor nations see my 2009 book THE KEYNES SOLUTION.

ThingsComeUndone March 11th, 2012 at 2:57 pm
In response to eCAHNomics @ 42

It was caused by inflationary monetary policy: Burns was the worst head of the FRB until Greenspan came along; OPEC oil embargo, Nixon price controls.

I’ll have to research Burns sometime.

Nicholas Wapshott March 11th, 2012 at 2:58 pm
In response to Paul Davidson @ 41

Yes, I remember the spectacular Hicks recantation most clearly. What a scoop! It came rather late, however, to unpick the damage that Keynesians such as Vicky Chick believe had been done.

perris March 11th, 2012 at 2:59 pm

And there was the Milton Friedman logic: if you want to reduce the size of the state, the most direct way is to cut taxes then insist the nation lives within its means by cutting the public sector

which of course destroys middle class wealth, there becomes no competition for labor assets and wages plummet, middle class assets plummet and you are left with relying on a “global economy” that will exhaust itself into robber baron models

ThingsComeUndone March 11th, 2012 at 3:00 pm

How do you think Keynes and Hayek would rate Bush and Obama and why? How would they explain their failures in economic policy?

eCAHNomics March 11th, 2012 at 3:00 pm

What made him think that private industry could get it right better than government

Winnah.

The diff betw govt and private ind is that the former is supposed to somehow, somewhere, have some rep of 99ers (not that it makes any diff in the U.S. anymore), whereas private ind has every incentive to turn workers into slaves.

Ludwig March 11th, 2012 at 3:02 pm
In response to eCAHNomics @ 54

Don’t follow how #49 excludes sadism.

Paul Davidson March 11th, 2012 at 3:02 pm
In response to seaglass @ 47

Seaglass — you might be interesrted in knowing that Keynes wrote as early as the mid 1920s against what we now call “offshoring” of domestic jobs — and if the Bretton Woods people had adopted the “Keynes Plan” instead of Harry Dexter White’s proposal of an IMF and a World Bank set up –= there would not be the problem of offshoring of decent US jobs.

Nicholas Wapshott March 11th, 2012 at 3:03 pm
In response to bluewombat @ 50

To be fair, I don’t think that either is at the top of the minds of the people imposing such unnecessary misery on whole populations. I don’t think that Mrs Merckel gives a toss about validating Hayek, nor do I think she is intentionally having Germany buy the rest of the European Union, though some British commentators like Simon Heffer most certainly believe the EU is a racket that will lead to a Fourth Reich. I think it is, perhaps, merely ignorance. The continentals have never been as keen on Keynes as in the US and Britain, yet while they despise “Anglo-Saxon” economics, by which they mostly mean free market economics, they embrace an orthodoxy which is bad for the people of Europe.

perris March 11th, 2012 at 3:04 pm

I don’t think politicians are actually concerned about the national debt, I believe they use the fear of a large national debt as a tool to enforce an austere government so the public sector shrinks

national debt only becomes an issue when the cost of debt reduces demand for credit

interesting that greenspan used “wage pressure” as his barometer for raising and lowering interest rates, which translates into;

“laborers are asking for and getting higher wages, we have to put an end to THAT, so let’s make money hard to get, bringing wage pressure down, we will call it “the economy is heating up so we have to raise rates’

and of course the converse;

“there is little wage pressure, even negative wage pressure, we can therefore make money cheap for the borrowing, we will call that “the economy is stable so we can keep interest rates down”

pretty depraved system, did greenspan come up with that?

bluewombat March 11th, 2012 at 3:05 pm

Ah thank you for the response, and points for punmanship.

eCAHNomics March 11th, 2012 at 3:07 pm
In response to Paul Davidson @ 55

Japan’s mercantilist policies lasted too long. Ref to my prior points about using the appropriate econ tool in the circumstances.

I hate hortatories, but Japan shoulda pursued domestic demand oriented policies once their economy got ginned up.

Marshall Plan (near as I can figure out on the basis of not having read much) was too little, too late, and (drum roll) oriented to U.S. corps. Europe dragged itself out of post-WWII doldrums for the most part.

Just the way the trashed U.S. economy will recover if it does. 99ers will work their butts of to put it back together again, then 1%ers will loot it.

eCAHNomics March 11th, 2012 at 3:08 pm
In response to Ludwig @ 61

You quibble.

Nicholas Wapshott March 11th, 2012 at 3:08 pm

Keynes would, I am sure, find some good words to say about Bush because although he let Greenspan run his economy, and promoted all the policies to do with deregulation and vast tax cuts, he did finally reach for Keynes not Hayek, nor any of the other classical economists. As Robert Lucas, the Nobel prize winner who had done more than most Chicago economists to bury Keynes, declared in the wake of the 2008/9 debacle, “I guess everyone is a Keynesian in a foxhole.” And plainly Keynes would love Obama, though he would have urged him to less timid and provide a larger stimulus than $1 trillion when he had the votes in Congress to do it. Hayek didn’t think much of any politicians, including Thatcher and Reagan who worshiped him. He warned all the Mont Pelerin Society members, including Friedman who joined Richard Nixon’s economics team, to give politicians a wide berth as they were not to be trusted.

ubetchaiam March 11th, 2012 at 3:08 pm

Nicholas,Paul, does Modern Monetary Theory fit your perspectives of being Keynesian?

Scarecrow March 11th, 2012 at 3:09 pm

I’ll ask again whether the last few years of austerity haven’t provided the empirical validation/refutation of the opposing theories? That is, it seems clear austerity is a failure that resulted in exactly the needless human punishment, without economic benefit, that the Keynesians predicted.

And if so, then doesn’t it seem we can see this isn’t a debate about economics: it seems more a proxy debate about ideology and how warring groups view who deserves to win and who deserves to suffer — while claiming it’s all for the overall good. -

- once you make that choice, you can choose your economic doctrine to fit, because there’s a “controversy” about which is correct. E.g., the H followers in the 20s and 30s don’t even seem to have couched their arguments in terms of actually relieving real human suffering. Better to focus the debate on voluntary versus forced savings, and why savings is not now equal to investment, etc, then ask — how do we give people jobs? So, is the economic argument a substitute for this larger debate?

DWBartoo March 11th, 2012 at 3:09 pm

It would depend upon which Brits one asked, Nicholas … even if the “astute elite” Brits might, sometimes, feel the approximate equivalent of shame …

DW

Ludwig March 11th, 2012 at 3:11 pm

What would Keynes have made of Limits to Growth?

DWBartoo March 11th, 2012 at 3:11 pm
In response to Ludwig @ 51

Ah, superb truthing, there, Ludwig.

DW

Paul Davidson March 11th, 2012 at 3:11 pm

I use to teach my classes that Ronald Reagan — with his tax cuts and tremendous increase in military spending — was probably the greatest Keynesian in the White House since FDR. And there is no question that under EReagan the economy improved and unemployment rate declined.

Regaarding Obama — his stimulus plan was only approximately $800 billion of which approximately 40% was tax cuts — and the amount of bang for the buck you get from tax cuts is less than spending on infrastructure, etc.
Moreoever, the payroll tax reduction was particularly poorly timed as a stimulus program since over indebted households (credit card debt particularly) were more likely to use their 2 per cent larger take home pay to reduce their credit card debt — and not buy products of US companies.

Nicholas Wapshott March 11th, 2012 at 3:12 pm
In response to eCAHNomics @ 60

To put it another way, perhaps: Hayek was under the illusion that enlightened self interest would ensure that private industry was run both efficiently and honestly, giving the benefit to both employees and customers. But that did not happen. As Alan Greenspan confessed to Congress: “The whole intellectual edifice collapsed. I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms. … I was shocked.”

perris March 11th, 2012 at 3:17 pm
In response to Paul Davidson @ 74

I use to teach my classes that Ronald Reagan — with his tax cuts and tremendous increase in military spending — was probably the greatest Keynesian in the White House since FDR. And there is no question that under EReagan the economy improved and unemployment rate declined.

reagan raised taxes, more then any peacetime president before, and he did that because his wealth redistribution scheme marketed as “tax cuts” destroyed the economy, that was the only reason he backtracked on his redistribution scheme

what he did by the end was redistribute tax burden and market that as tax cuts

and I don’t know what you are talking about as the economy, the middle class all but dissapeared under reagan’s polices, the economy improved for the 1 percent, everyone else saw their assets become a distant memory

clinton won by campaigning aganst the reagan/bush economy, it certainly did not improve under those reagan

Nicholas Wapshott March 11th, 2012 at 3:17 pm
In response to Paul Davidson @ 74

As J. K. Galbraith put it, “[Reagan] came into the presidency as the country was experiencing a rather disagreeable recession and [implemented] lots of strong Keynesian policy, borrowing, unfortunately, for arms. One of the results was an improving economy in the Eighties under Ronald Reagan. And one of the amusing facts of that was that this was done by people who didn’t really understand Keynes and who were critical of him. We had involuntary anonymous Keynesianism.”

SouthernDragon March 11th, 2012 at 3:17 pm
In response to ubetchaiam @ 69

Great question.

Nicholas Wapshott March 11th, 2012 at 3:19 pm
In response to Ludwig @ 72

I am sorry but I don’t know enough about this, but Keynes was early on in his career v interested in Malthus on population growth etc. It may be worth seeing what he made of the notion of growing populations and scarce resources.

Paul Davidson March 11th, 2012 at 3:22 pm
In response to ubetchaiam @ 69

Modern Monetary Theory has some elements that come close to Keynes’s theory of money. For example, Keynes believed tha most modern money was CHARTALIST — that is that money was that thing that the State declared was to be used to settle contractual obligations. And since the State was always the last rersort enforcer of contractal commitments — money is Chartelist.

Modern Monetary Theory tends to be more limited in that its proponents suggest that Money is only that thing that the State declares is necessary to pay one’s taxes.

Ludwig March 11th, 2012 at 3:25 pm

As I understand it, Malthus was an apologist for Dickensian industrial slavery. Limits to Growth on the other hand, appears to have scared the dickens out of capitalists.

Nicholas Wapshott March 11th, 2012 at 3:26 pm
In response to SouthernDragon @ 78

It is always a bit of a risk trying to interpret what Keynes and others thought about something that came after them, but if we assume that modern monetary theory suggests that there can be deficits so long as they do not prove inflationary, then I would think that Keynes would have agreed, notwithstanding that he did not intend governments to run a current account deficit but was happy for them to invest in capital projects. It is interesting to me that while Friedman was once considered a bogeyman to Keynesians — particularly in the Seventies — he thought of himself as a Keynesian, as this little read essay suggests: Friedman, Introduction to the facsimile edition of Keynes’s “The General Theory of Employment, Interest and Money” by Verlag Wirtschaft und Finanzen GmbH, Düsseldorf 1989, part of the series Klassiker der Nationalökonomie. p 6.

March 11th, 2012 at 3:26 pm
In response to perris @ 29

perris, you clever devil, you. Excellent points. Free markets, my ass!! Like unicorns.

Nicholas Wapshott March 11th, 2012 at 3:27 pm
In response to Ludwig @ 81

Ha!

perris March 11th, 2012 at 3:27 pm
In response to Paul Davidson @ 80

Modern Monetary Theory tends to be more limited in that its proponents suggest that Money is only that thing that the State declares is necessary to pay one’s taxes.

came up with a pretty good one liner defining money myself;

“money is caveat labor”

Paul Davidson March 11th, 2012 at 3:28 pm
In response to perris @ 76

No one said that increasing GDP per se must automatically improve the standard of living of all ther residents of a nation. It is true that the relative distribution of workers has falling since the eary days of Reagan — but with a bigger GDP pie, the workers during most of the Reagan years , even if the share of the pie was not rising, were better off than during the Carter years.

Again in the Clinton years GDP rose significantly, while the relative share of workers did not — but most of the 99% were not unhappy with their economic fate during most of the Clinton years — and Clinton actually ran a government surplus in some years!

tjbs March 11th, 2012 at 3:29 pm

I’ve been reading and deduct this

1%ers control the economy and make economic choices that they think will grow and are the best for the economy the excess will trickle down to us witness the latest report where they grabbed 97% of the income increase-Hyenas

99% control a messy decision making process where as the best of the whole society while costs, in education health care and old age care are a base line cost, along with the systems that support the system electric, roads and the oil to run the country a minus from the hyenas perceived possible maximum profit or bottom line ? Keynesians

It is about it who seizes control, no ?

Nicholas Wapshott March 11th, 2012 at 3:31 pm
In response to DWBartoo @ 71

I think there is a political problem in Britain when those who are imposing austerity on the rest of the nation are so comfortably well of they are immune from the effects of their own policies. You would imagine that this is something Labour would exploit when the next general election arrives.

perris March 11th, 2012 at 3:33 pm
In response to Paul Davidson @ 86

No one said that increasing GDP per se must automatically improve the standard of living of all ther residents of a nation

well, when you say “nobody said it” I think you really mean “the one percent never said it”

of course if assets grow, those producing said assets should reap the rewards, I can’t believe anyone wants to argue against THAT point

labor is where all assets originate, so the fact that people might argue against labor benefiting from the fruits of that labor tells the very story we are discussing on this thread

Nicholas Wapshott March 11th, 2012 at 3:35 pm
In response to tjbs @ 87

At the bottom line it is surely about democracy. If there were a solid majority in favor of a Keynesian solution, and that majority were translated into seats in both Houses, then we could have Keynesian policies. What is fascinating is how the Hayekians — I use the term loosely — have been so successful in managing the debate so that you would imagine from listening to them that the problem with America is that there are not enough rich people and that the rich are not rich enough. Now when there is 8 per cent unemployed — which in some states is more than double that — to successfully frame the political debate in favor of the rich is a triumph. How did they do it?

ubetchaiam March 11th, 2012 at 3:36 pm
In response to Paul Davidson @ 80

“Money is only that thing that the State declares is necessary to pay one’s taxes.” is there some other way I’m not aware of?

Scarecrow March 11th, 2012 at 3:37 pm

Who are the most prominent Hayek followers — among economists — today? and do they acknowledge/cite him?

eCAHNomics March 11th, 2012 at 3:38 pm

BevW, plz email me re suggestion.

ubetchaiam March 11th, 2012 at 3:41 pm

“How did they do it?” ; by confusing the public with the idea that an economic system is the basis of governance. Capitalism is an economic system, democracy is a governance system and they are anathema to one another.

DWBartoo March 11th, 2012 at 3:41 pm
In response to Ludwig @ 81

Nice turn of phrase, Ludwig!!!

;~DW

Nicholas Wapshott March 11th, 2012 at 3:41 pm
In response to Scarecrow @ 70

I agree that the Keynes Hayek debate may be about economics on a simple level but it is really about choices in political economy: what is the right role for the government in a modern economy? In practice, of course, all governments run their economies, though many run them badly and, as we have seen in 2008/9, some run them catastrophically. Considering that even Hayek understood that he was merely painting a picture of a utopian market society and that his idea of heaven was living in London and Cambridge during the war, it is amazing how potent his ideas have become. To some extent he made his own luck: his founding of the Mont Pelerin Society was a deliberate attempt to provide intellectual credentials for his utopian vision and he and his followers have been hugely successful in encouraging the work of numerous well funded conservative or libertarian think tanks.

gigi3 March 11th, 2012 at 3:43 pm

Keynes did discuss population in his lecture, Some Economic Consequences of a Declining Population. He reversed his earlier neo-Malthusian view.

http://www.spsw.ox.ac.uk/fileadmin/documents/pdf/WP40_John_Maynard_Keynes.pdf

perris March 11th, 2012 at 3:44 pm
In response to Paul Davidson @ 86

first, I am no clinton apologist however I do need to make a point

Again in the Clinton years GDP rose significantly, while the relative share of workers did not — but most of the 99% were not unhappy with their economic fate during most of the Clinton years — and Clinton actually ran a government surplus in some years!

first, just about everyone thought they came out way ahead under clinton, everyone reaped the rewards so to speak, some reaped more rewards then others

however under reagan most people came out way behind, only a few reaped the rewards

and there is the big difference, even though the laborer might not have realized the legitimate share from the fruits of their labor, the realized a good share, under reagan they lost share

however, the difference here is as follows;

just about everyone did think they gained during the clinton years, even though they might not have realized the legitimate portion of the pie, they did enjoy some portion gained from the fruit of their labor

on the other hand, the majority of people realized less portion then they started with under reagan policies

and there is the difference using your own example

Paul Davidson March 11th, 2012 at 3:44 pm
In response to Ludwig @ 81

On page 362 of THE GENERAL THEORY, Keynes credits “Malthus [with] the notion of insufficiency of effective demandtakes a definite placeas a scientific explanation of unemployment”

In his essay on for our Graandchildren, Keynes argues thast if we can control popultion growth, then his policies for generating full employment will lead to an economic system where relative poverty will be abolished — although it will still not require an equal distribution of income and wealth.

Keynes recognized (page 374 ) that there “are valuable human activities which require the motive of money making and the environment of private wealth ownership for their full fruition….It is better for a man to tyranize over his bank balance than over his fellow citizens…But it is not necessary …that the game be played for such high stakes as present. Much lower stakes will serve equally well.”

DWBartoo March 11th, 2012 at 3:44 pm

Unfortunately, in this country, both “sides” of the aisle are tied to well-off coattails and feel no pain, war or peace, feast or famine, Nicholas.

DW

Nicholas Wapshott March 11th, 2012 at 3:45 pm
In response to Scarecrow @ 92

Well, it seems that politicians have learned their lesson from Reagan and Thatcher’s embrace of Hayek who, perhaps ungratefully, spent a great deal of time denying that he had anything to do with their policies. So even those who are Hayekian often dare not speak his name. There is nothing like pinning an idea to a foreign intellectual for it to be dismissed as claptrap (see Clement Attlee’s riposte to Churchill over his Hayekian “Gestapo” slip). Ron Paul is a rare exception and in speeches has longed for an “Austrian” future. But David Cameron and George Osborne in Britain, who are imposing a Hayekian solution upon the British people, are too wise to say they owed a debt to Hayek.

seaglass March 11th, 2012 at 3:46 pm

“Now when there is 8 per cent unemployed — which in some states is more than double that — to successfully frame the political debate in favor of the rich is a triumph. How did they do it?” They did it by investing in non-think tanks like the Cato Institute and the Heritage Inst. and the AEI and on and on and also by buying up the media and the pols one at a time over 35 yrs. We see the result today everywhere … Increasing ruin for the 99% and enormously increased wealth for the 1%. It works for them and as a side light they have legions of losers that buy their whole world-view even though it runs counter to their own self interests.

Nicholas Wapshott March 11th, 2012 at 3:46 pm
In response to gigi3 @ 97

Thanks. I will read it. The great thing about Keynes is that he is full of surprises. And had such a work ethic — and an astonishing intellect — that it is hard to keep up.

Nicholas Wapshott March 11th, 2012 at 3:48 pm
In response to seaglass @ 102

I agree with your assessment, but it does not quite answer the question: what is it in Hayekian thought that proves so attractive? After all, if Cato and Heritage and so on were peddling unpalatable nonsense then noone would fall for it. There must be something in the hard road seldom followed that is proving attractive even at a time of national misery and discomfort.

hackworth1 March 11th, 2012 at 3:50 pm

The .1 percenters bought the politicians, that bought the legislation, that brought the deregulation, that created monopolies in Media and elsewhere. Concurrently, they made a concerted, protracted, successful effort in convincing the (unemployed) proles that their biggest problems were excessive Federal Income Taxes and State and Federal regulations.

Nicholas Wapshott March 11th, 2012 at 3:50 pm
In response to DWBartoo @ 100

It is certainly true that here we have two conservative parties. And a system of government that works in favor of those who would prefer the government to do little or nothing.

gigi3 March 11th, 2012 at 3:51 pm

My previous link was to the Introduction. Here is one to Keynes’s full text”

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2985686/

The Galton Lecture, delivered before the Eugenics Society on February 16th, 1937.

seaglass March 11th, 2012 at 3:51 pm

It conforms to a culture steeped in the myth of individualism and the self-made man. The myth of Horatio Alger runs deep in this country , very deep.

Ludwig March 11th, 2012 at 3:52 pm
In response to Paul Davidson @ 99

Thanks. Would be very interested to know if Keynes or Hayek recognized the dependency of industrial economics on fossil fuels and what effect if any that had on their theorizing.

ubetchaiam March 11th, 2012 at 3:52 pm

Think Calvinism and it’s impact on U.S. society

Paul Davidson March 11th, 2012 at 3:54 pm
In response to ubetchaiam @ 94

Winston Churchill once said “No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of government except for all others forms that have been tried from time to time.” In a similar vien Keynes saw that capitalism was a very imperfect economic system but it was the best system humans have devised to achieve a civilized economic society. It only had two major faults — namely its inability to provide persistent full employment and its arbitrary and inequitable distribution of income and wealth [p. 372]. He believe his General theory had a bearing on reducing both these faults.

DWBartoo March 11th, 2012 at 3:54 pm

I suspect it is the “psychology” of attractive mythology, Nicholas, magical “thinking”, first the “belief” that one will, someday, somehow, be rich, and second, that “exceptionalism” always prevails; there be “trouble” in more states of mind than Kansas, me thinks.

;~DW

BevW March 11th, 2012 at 3:54 pm

As we come to the end of this Book Salon discussion,

Nicholas, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book about Keynes and Hayek.

Paul, Thank you very much for Hosting this great Book Salon.

Everyone, if you would like more information:

Nicholas’s website and book (Keynes Hayek)

Paul’s website (Journal of Post Keynesian Economics) and book (The Keynes Solution)

Thanks all, Have a great week.

If you want to contact the FDL Book Salon: FiredoglakeBookSalon@gmail.com

masaccio March 11th, 2012 at 3:55 pm

I can’t see that economics does much besides provide an argument for what elites want to do. That’s why I like Keynes. He made it clear that his object was to reduce pain for the unemployed.

perris March 11th, 2012 at 3:56 pm
In response to Paul Davidson @ 111

that’s a good point

I personally believe capitlism would come far closer to the prefection he’s looking for if we could eliminate corporatism

Paul Davidson March 11th, 2012 at 3:57 pm
In response to hackworth1 @ 105

As I always said — we have the best Congress that money can buy!!!

And rfemeber the repeal of the Glass Steagall Act was pushed by Clinton

DWBartoo March 11th, 2012 at 3:57 pm

A delightful Book Salon, Nicholas and Paul, I thank you both.

The proof being that you kept eCAHN’s interest throughout!

I hope that you both might visit with us again, whenever you might find time and inclination.

DW

Nicholas Wapshott March 11th, 2012 at 3:57 pm
In response to ubetchaiam @ 94

I am not quite as pessimistic as you are: I believe that democracy can soften capitalism. Hayek understood that democracy was at odds with his idea of a free market system and deplored legislators who, reaching Congress, wanted to do things which cost money and so increased the size of the state. There is, therefore, a strong anti-democratic element to Hayek’s later writings. Keynes, meanwhile, was certain that capitalism could be tempered by good management of the economy by democratically elected politicians. Indeed, he boasted to George Bernard Shaw ahead of publication of The General Theory, that Shaw’s Fabian gradualist socialism was about to be put out of business because he had fixed capitalism for good: “I believe myself to be writing a book on economic theory, which will largely revolutionise – not, I suppose, at once but in the course of the next ten years – the way the world thinks about economic problems.”

Scarecrow March 11th, 2012 at 3:57 pm

Many thanks to Nicholas and Paul for coming here and answering so many of our questions. Great, fun discussion.

DWBartoo March 11th, 2012 at 3:57 pm
In response to Paul Davidson @ 116

A double BINGO!!!, Paul.

DW

perris March 11th, 2012 at 3:59 pm
In response to BevW @ 113

thanks for the discourse paul and nicholas, I had a great time and come away with quite a bit of insight I had not realized

great stuff!

seaglass March 11th, 2012 at 3:59 pm
In response to Paul Davidson @ 62

Thanks Paul. I didn’t know any of that. The real traitors in America today are in DC and NY. These people could care less what happens to most of us.

hackworth1 March 11th, 2012 at 3:59 pm

Bill Clinton now says it was a mistake. Bill Clinton blames Rubin.

Scarecrow March 11th, 2012 at 4:00 pm

Also — buy the book, FDLers! It’s a fun, fascinating read; don’t need to be an economist to follow the history and the debates.

Nicholas Wapshott March 11th, 2012 at 4:00 pm
In response to masaccio @ 114

Yes, you are right about Keynes. He was comfortably well off and benefited from the best of everything in Britain. As a result he had a strong sense of noblesse oblige. He was personally affronted that for a whole decade, the twenties in the UK, there was large scale permanent unemployment. It is his inspiration for writing the General Theory, to prove that there was an alternative. Keynes was an elitist, but a warm hearted one.

SouthernDragon March 11th, 2012 at 4:00 pm

Thank you, Paul and Nicholas, for a very interesting evening.

Paul, I’ve read The Keynes Solution. Nicholas, I look forward to reading Keynes Hayek, which I ordered as we started.

Nicholas Wapshott March 11th, 2012 at 4:01 pm
In response to hackworth1 @ 123

Thanks everyone. i really enjoyed the debate. Which continues. . . .

masaccio March 11th, 2012 at 4:03 pm
In response to Scarecrow @ 124

I absolutely agree. This is the most accessible book on economics I’ve got on my shelves.

ubetchaiam March 11th, 2012 at 4:06 pm

Thanks for being here; appreciated. I’ll concur with you about Keynes’ perspective but I was just answering “how did they do it?”

GlenJo March 11th, 2012 at 4:18 pm

I think this is a key point. There have been massive PR on how “government” is broken, and not nearly as much discussion on how corporate governance is also clearly screwed up beyond belief.

Did you know that higher up MF Gobal executives are supposed to get bonuses this year? How can that be possible? The company went BK, and customer money was looted.

The biggest problems I can see is this screw ball belief that completely unregulated markets will not collapse under massive looting.

GlenJo March 11th, 2012 at 4:20 pm
In response to GlenJo @ 130

And thank you Nicholas and Paul for a great discussion!

otchmoson March 11th, 2012 at 4:33 pm
In response to GlenJo @ 130

GlenJo–

I believe you hit the nail on the head: corporate governance that is clearly screwed up. SouthernDragon is hosting an interesting course: Marx in the Morning; and as I viewed the videos, realized that Marx did not offer solutions (at least not that I could see). As I contemplated possible solutions, one that was foremost in my mind was a return to a reasonable code of ethical conduct, REGULATED by the government, and embracing a public good clause that has priority above ROI to shareholders. Seems a reasonable start–but with our current puchased-legislators, how much traction can that possibly gain.

It is my understanding that early incorporation in the U.S. demanded a public good clause (policy) and was reviewed every 10 years to see if compliance was effected. Again–a great idea, but surely not one that we, the unwashed masses, can demand with any hope of attaining.

juliania March 11th, 2012 at 4:35 pm

Pardon me, Mr. Wapshott, but I am having difficulty with the following statement:

“Keynes would, I am sure, find some good words to say about Bush because although he let Greenspan run his economy, and promoted all the policies to do with deregulation and vast tax cuts, he did finally reach for Keynes not Hayek, nor any of the other classical economists.”

Considering that Bush and his economic team fought a costly and unnecessary war in Iraq which was kept entirely off the books the seven years he was doing so, how could he be reaching for any credible economic theory?

And aside from this, which economist in the two you present in your book would approve of the disparity of wealth distribution that presently exists? Which of them would approve of banks having become investment entities with a stockmarket operating at fractions of a second?

Do we have an economy operating which either of them would recognize?

[Sorry, I came too late to the party. Thanks very much for an insightful discussion.]

masaccio March 11th, 2012 at 7:40 pm

I’ll take a shot at the first question. Keynes was eminently practical, and was willing to compromise when it moved things in a better direction. When the politicians refused to change, he found reasonably graceful ways to bow out. I’d guess that explains the author’s view of Bush. In the end, he reached for the tools that would work even though it went against his philosophy.

I don’t know about the second.

Nicholas Wapshott March 11th, 2012 at 7:42 pm
In response to juliania @ 133

I guess what I am trying to relate is that Keynes was a constantly forgiving, patient person who did not assume that everyone understood what he was talking about. And that a sinner reclaimed is as good as an original true believer. The way, by the way, would in Keynes’s opinion only help pump money into the timorous economy of the early 2000s. And as much as you may prefer Keynes to be an opponent of wealth disparity, I cannot recall him opining on the matter. On the contrary, I rather suspect that he was indifferent to material inequalities. He was, after all, not a socialist, nor even a social democrat but a lifelong Liberal. btw, I think Keynes — who played the market brilliantly and made two vast fortunes — would understand, even appreciate the automatic computerization of stock sales.

sn1789 March 11th, 2012 at 9:11 pm

Descriptively The Physiocrats emphasized imbalances in the production and distribution of use-values (specifically corn) as the source of crisis, The Ricardians emphasize imbalances in the distribution of money and commodities as the source of crisis, and the Keynesians emphasize imbalances in the availability of money-credit for investment and consumption as the source of crisis. But the fundamental crisis in capitalism is an internally generated and systemic decline in the rate of profit as production becomes more capital intensive. See David Harvey’s *Limits of Capital*

Also, even if all imbalances could be eliminated under Keynesianism there is the problem of political agency (in the 1970s and especially now). Not enough people with the power to implement the regulatory framework necessary to save capitalism from itself has an interest in doing so. Trying to keep capitalism from crisis and imbalance is like trying to make water stop being H20. As soon as the instabilities of capitalism have been regulated sufficiently and the middle class starts to get substantial the people with power to shape policy (capitalists) will use that power to roll back Keynesianism and roll out neoliberalism. these aren’t just abstract ideas but ideologies organically linked to different moments in the logic of capital accumulation and carried out specific groups with distinct and substantial material interests.

sn1789 March 11th, 2012 at 9:19 pm

And then the 1970s happened and the people with power (capitalists) to shape policy started to see their profits decline (for both internal reasons and as competition returned as Europe and Japan had rebuilt). Capitalists will eventually always opt of Keynesianism via lockout, changing location and changing sector to invest in. Rolling back the Keynesian state and implementing Neoliberal policies. How does your belief in the ability of democracy to soften capitalism stand up in light of the past 40 years of capitalism on planet earth???

Other than blind faith, what sustains your view that “democracy” can soften capitalism in the long run. Even the Keynesian softening only happened because a meaningful % of the world thought (rightly or wrongly) that Russia had found a way out of the cycle of chaos and crisis of capitalism. Keynesianism happened because it became necessary to modulate capitalism in the face of a putative alternative in state-socialism and a vibrant and energy far left leading the CIO in the US. Capitalists only agreed to Keynesianism in order to avoid the worse alternative for them – expropriation.

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