Hayek v Keynes
I am giving a talk soon about the famous, and widely discussed, ‘debate’ between Hayek and Keynes back in the 1930’s. It is much travelled ground so novelty is not my aim. Just some clarity. These are [incomplete] notes to myself to help along the way.
Let’s begin with what I call the ‘Robbins Paradox’:
“That [democracy] carries with it liberty to destroy other liberty is undeniable; and we may agree with … Professor Hayek that, for this reason, popular government carries with it very grave dangers. But this is just one of those paradoxes of life.”
This is simply a recognition of the tension between concepts of liberty that undergird capitalism and concepts of popular government that undergird democracy. Robbins seems to be acknowledging that there is therefore a similar tension between the reach for economic efficiency, which he believes is the long run guarantor of increasing wealth, and the equally important search for social justice and inclusion, which is the long run guarantor of social stability and health within which business can operate most effectively.
Elsewhere Robbins backs away from the rigidity of what we would now recognize as orthodox economics. He suggests that there is a structure in an economy that can be elucidated by ‘economic reasoning’, but that this reasoning is distinct from the ‘economic formalism’ that has swept all before it. This is to argue that whilst formalism may look as if it subsumes reasoning, its obsession with its own rigor and completeness leaves aside a more realistic vision of what people actually do when they transact in an economy. People may decide ‘in the right direction’ when faced with changes in economic facts, but they may also err from conclusions suggested by the kind of logic formalist models build in. So all we can say is that there are tendencies or generalities in the direction in which economies move in response to changes, we cannot be certain of what those changes will produce.
In other words, in this interpretation of Robbins, the economy remains foggy or inscrutable, and economics is far less precise than its more ardent practitioners argue it is. This is in accord with Hayek’s later ideas about knowledge in the economy, and bear a distant relationship with Keynes’ idea that uncertainty is a critical driver of economic activity.
So fog abounds and errors are the norm. How activity is coordinated we have to get to later.
Next we have Hayek:
“We can either have a free Parliament, or a free people”
“There is all the difference in the world between treating people equally and attempting to make them equal.”
It seems to me that Hayek resolves the Robbins paradox by erring in the side of ‘liberty’. He never argues extensively of persuasively on behalf of popular government. Indeed he is notorious for having supported authoritarian regimes that had no compunction in removing the popular will from government as long as those regimes then advocated free market and pro-capitalist policies. Clearly Hayek was no friend of democracy.
Why?
Because he saw it as an inevitable stepping stone towards collectivism. Hayek is typically “Austrian” in his adamant objection to anything that smells, even slightly, of populism. The rule of the mob sends shudders of fear down the spine of every Austrian theorist. They are so vigorously and viscerally opposed to any form of liberty reducing government that they are unable to tell the difference between social democracy and authoritarian regimes of either left or right.
But notice that the reduction in liberty they abhor pertains only to the economic sphere. It has no traction in pure politics. Hence Hayek’s ability to square dictatorship in the political realm with freedom in the economic realm. Indeed on a closer examination it looks as if Hayek dislikes democracy precisely because it is a sort of middle ground that allows the blending of economics and politics and thus encourages the mob to seek the institution of redistributive policies that would be perfect representations of the mess the Robbins Paradox invokes in our minds.
Lastly we have Keynes:
“The political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty”
Keynes recognizes the Robbins Paradox as being real and immanent within modern societies. In order to protect economic efficiency, at least somewhat, he ends up articulating short run intervention in the economy to keep the wheels from falling off and disrupting the social order. If economies can only be relied upon to produce a satisfactory ‘equilibrium’ in the long run, and if they can be shown to be unreliable even then – he argues that sub-optimal equilibria are far from unusual – then we ought not wait for the long run, but we ought act to offset the economy’s miscalculation and prevent the slide into unrest that so scarred Europe in the 1930’s. Hence his famous dictum: “In the long run we are all dead”.
So the debate between the two, at least in the late 1930’s, is about two very different reactions to the Robbins Paradox. On Hayek’s side we have a defense of liberty and thus free markets that is both idealistic and pessimistic. It is idealistic because it posits the operation of the market as being an ideal that no end of central planning can emulate. Indeed government interference, however well intentioned, is most likely to make matters worse. So Hayek advises we ride out the storm and allow ‘market forces’ to play themselves out. Note that Hayek does not argue that these market forces are necessarily ‘natural’. He acknowledges their human origins. He simply argues that so complex is the economic system that we interfere at our risk, and that the effort of classical economists to reach even a minimal understanding of that complexity suggests we are better off being steadfastly passive in the face of business cycle downturns.
On Keynes’ side we have a pragmatic response. He defends capitalism by supporting it more tightly within a combined economic and political structure. He too recognizes the reality of market forces, but he tells us we can mitigate the storms and seek shelter in the government’s ability to augment investment and demand. This smoothes out the economy’s trajectory and minimizes the damage it does to any citizen’s personal wellbeing or association with society.
Hayek, at least earlier on, was clear he thought all economic theory ought to begin by being based on equilibrating micro foundations. Later on he realized that a fuller picture of how an economy actually works required that economists extend their theorizing to encompass non-economic social structures and institutions since those things are in constant feedback with the economics system. Keynes was more content with attacking the existing micro foundations and by taking a more holistic perspective that we nowadays call macroeconomics. Hayek objected to this ‘aggregated’ view because he thought it obscured essential details about how economics decisions are made, and the impact this decisions may have.
At a deeper level the two, who appear so divided, are much more closely aligned. They both recognize the role played by uncertainty – Hayek through his ideas about the dispersal of knowledge and the fact that this asymmetry causes calculation errors on the part of individual entrepreneurs; Keynes through his notions of “animal spirits” and the consequent miscalculations of business. They both, therefore, depart from the perfect knowledge and rational decision making of orthodoxy.
Eventually, I think, we can bring ideas such as evolutionary epistemology, as articulated, for instance by Karl Popper, Hayek’s close friend and interlocutor, to play in order to bridge the divide between the two camps.
If we look at the economy as a learning process firmly situated in time/space, with decisions being partly rational but error prone and limited by pervasive uncertainty, with money active rather than neutral [an unlikely concession by the Hayekians!], and with its path being in a constant state of becoming rather than arriving at an equilibrium – thus recognizing the reality of the system’s openness and constant turmoil – we can accommodate parts of both Keynes and Hayek.
Whether this is valuable or possible is for another time.
