Keynes versus Hayek

Alasdair Macleod – 07 August 2011

While the whole world seems to be collapsing into a financial black hole, I came across a glimmer of hope in the unlikely form of a BBC radio broadcast last Wednesday. The programme was a debate held at the London School of Economics, the subject of which was the relative merits of Keynes versus Hayek, or state intervention versus free markets.

The debate was chaired by Paul Mason, BBC2’s economics correspondent, and attended exclusively by LSE students, about half of which were Hayek supporters. This was a surprise to those of us not au fait with the LSE of today, perhaps confounding out-dated prejudices that it is a hot-bed of left-wing Keynesianism. It is quite likely that the audience did not reflect the consensus of all LSE students, but at least there were a reasonable number of Hayekians willing to stand up and be counted.

Heading the panel were eminent professors defending one or the other. Much of the debate was entirely predictable, with the Hayekians pointing to the failure of Keynesianism, and the Keynesians accusing the Hayekians of having no constructive solution to the current economic difficulties that doesn’t involve unacceptable pain and misery. Same old, same old: the alcoholic wants more drink, and Mr Nasty says it won’t cure his problem.

The debate was interesting, as Donald Rumsfeld might say, for what was said was said, as well as for what wasn’t said. The leading Keynesian panellist, who has written a biography of the great man, knew in meticulous detail his quotes and writings. He used this to nit-pick the other side, rather than address actual economic theory. The leading Hayekian panellist mostly pointed to the Keynesian failures as evidence against a statist approach. Neither panellist presented their favoured economic theories really cogently. Of course, it is difficult to do this in the confines of a radio debate of 45 minutes, without the wider audience switching off, and in the knowledge that the programme might be heavily edited anyway before going on-air.

What was not mentioned, except in passing, is the role of fiat currency and bank credit in fuelling increasing economic instability. No mention was made of the destruction of savings through monetary inflation and discriminatory taxes, and why savings are so important; a subject where there is sharp disagreement between Keynes and Hayek, and ripe for debate. The simple proposition, that individuals are better than the state at spending their own money was not put forward either.

In many senses the debate was unsatisfactory, and I couldn’t help thinking if Keynes and Hayek were alive today that they would be disappointed at how their views were represented. I have no doubt that Keynes’s views would have altered significantly, because the world has altered fundamentally since he was at the peak of his powers. There is no longer a communist or fascist threat, and much of what he thought appropriate 80 years ago is clearly no longer appropriate – but it doesn’t stop his acolytes thinking so. Hayek would surely be more confirmed in his views by recent events.

Unfortunately, they are both dead, so we will never know. The result of the debate? It was judged a narrow victory for Hayek. Now, that is a glimmer of hope!

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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