Keynes vs. Hayek: A Century-Spanning Economic Debate
In the 1930s, faced with various problems such as the economic crisis arising from the market economy, Keynes and Hayek, these two masters of economics, launched the most spectacular economic battle of our time.
This ideological struggle not only advanced humanity's understanding of the operation of modern market economies with increasingly complex financial and monetary market systems, but also actually gave rise to the "Keynesian Revolution" in economic theory, thus producing modern macroeconomics.
Looking at the current global economic landscape and trends, the situation remains complex, volatile, and uncertain. Seriously exploring the theoretical legacy of these two masters' economic thought still holds practical significance for understanding the current complex economic situation. While both masters have written many classic works, reading them can feel difficult and obscure if you lack understanding of their era and the origins of their views.
Today's recommended book, "Keynes vs. Hayek," chronicles the process of the two masters' acquaintance, debate, and understanding in a biographical format, systematically examining their debate from an ideological perspective.
The author, Nicholas Wapshott, is a British journalist and biographer. He graduated from the Department of Politics at the University of York in 1973 and later became a reporter for Reuters, serving as a senior editor for the London Times and the New York Sun. The book contains a large amount of first-hand material he collected, hopefully providing inspiration.
Below, we share a brief excerpt from the book's introduction.
This may be the most unusual period in the long-standing battle between the two giants of 20th-century economic thought. During World War II, John Maynard Keynes and Hayek, together or alone, stood on the roof of King's College Chapel at Cambridge University throughout the night. Their task was to watch the sky and guard against German bombers dropping incendiary bombs on the picturesque English town.
In the spring and summer of 1942, in retaliation for Britain's bombing of the medieval German cities of Lübeck (home of U-boats) and Rostock (where Heinkel bombers were manufactured), German planes bombed a series of strategically insignificant British cities. Exeter, Bath, and York were reduced to ashes, and the ancient buildings in the cities were in danger.
British journalists coined the term "Baedeker Blitz" because the commanders of the German air force seemed to choose their bombing targets in Britain according to the Baedeker, a German travel guide that rated cities based on their cultural value. Although Cambridge had few important military industries, it had a university founded in the Middle Ages, so it was definitely on the Nazi's destruction list.
Night after night, King's College teachers and students, armed with shovels, took turns patrolling the top of the magnificent Gothic chapel (the foundation stone of which was laid by Henry VI in 1441). Firefighters at St. Paul's Cathedral in London found that once an incendiary bomb exploded, there was nothing they could do; but if an incendiary bomb landed on the roof without being ignited, throwing it over the eaves would minimize the damage.
King's College Chapel ( King's College Chapel
So, the nearly 60-year-old Keynes and the 41-year-old Hayek leaned their shovels against the limestone railing and sat on the roof waiting for the German air raid. They both worried that they were not brave or agile enough to save Cambridge's fragile stone houses.
This scene is particularly fitting for the two economists who had long resisted the Nazi threat. They had both foreseen the coming tyranny and Hitler's rise in different ways. At the outbreak of World War I, Keynes was a young economics researcher at King's College, and he joined the British Treasury to raise funds for the Allies from Wall Street. By the end of the war in 1918, the British Treasury kept Keynes to advise on how to extract war reparations from defeated Germany.
What Keynes saw at the Paris Peace Conference shocked him. While the victorious Allied leaders, spurred by revenge, inflicted suffering on the German people with harsh economic penalties, Keynes viewed the matter from a completely different perspective. He believed that deliberately reducing a modern trading nation like Germany to poverty would plunge its people into poverty, creating conditions for extremist politics, riots, and even revolution.
Keynes believed that the Treaty of Versailles, far from ending World War I justly, had sown the seeds of World War II. Upon returning to his homeland, he wrote "The Economic Consequences of the Peace," denouncing the folly of the Allied leaders. This book became a global bestseller, launching Keynes onto the international stage as an "approachable economist."
Hayek also possessed Keynes's sharp and incisive eloquence. During World War I, he was a young soldier in the Austrian army, returning from the Italian front to Vienna, which had become almost a ruin, with the people losing confidence. Soon after, Hayek and his family experienced the terrible inflation that swept through the Austrian economy, witnessing firsthand the disappearance of his parents' savings. From then on, he vehemently opposed anyone who advocated using inflation to correct a broken economy. He was determined to prove that there were no easy solutions to thorny economic problems. He gradually realized that proposals to solve unemployment through large-scale public spending programs would not only lead to uncontrollable inflation but also to political tyranny.
Although Keynes and Hayek shared a similar view on the shortcomings of the Treaty of Versailles, they spent most of the 1930s arguing about the future direction of the economy. Their disagreements included the role of government itself and the threat of government intervention in the economy to individual liberty. This debate escalated, even taking on the air of a religious feud. After the 1929 stock market crash triggered the Great Depression, they offered diametrically opposed opinions on how to restore the ailing global economy. In the end, although both men had come to terms with their inability to reach a consensus, their fervent followers continued to debate long after their deaths.
In September 2008, another Wall Street collapse occurred, triggering a new global financial crisis. President George W. Bush, while ostensibly supporting Hayek's view of the sanctity of the free market, faced a stark choice: to stand by and let the market undergo a depression comparable to that of more than 80 years prior, or to quickly adopt Keynesian remedies, using hundreds of billions of dollars in government borrowing to rescue the faltering economy and prevent greater damage.
Contemplating the dire consequences of allowing the free market to deteriorate further, George W. Bush quickly abandoned Hayek and embraced Keynes. Newly inaugurated President Barack Obama oversaw another round of massive borrowing, injecting borrowed money into the economy. But before the stimulus funds were fully spent, the Tea Party movement launched violent protests against the unprecedented level of public debt, demanding a change in government policy. In October 2008, Tea Party supporter Sarah Palin rebuked Treasury Secretary Henry Paulson: “Let me be clear, the American people do not like government bailouts.”
Political commentator Glenn Beck urged the American people to reread Hayek's 1944 book, Road to Serfdom, which revived Hayek's reputation, sending the long-forgotten Austrian to the top of the bestseller lists. Keynes was out; Hayek was in.
The debate over the merits of free markets versus government intervention raged as fiercely as it had in the 1930s. So, who was right? Keynes or Hayek? For 80 years, this question has divided economists and politicians into two camps. To this day, the stark differences between these two eminent scholars remain an insurmountable chasm between liberal and conservative thought. This book attempts to answer this question.
