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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.