An economics debate in America

Published: February 24, 2012

The writer, a former chief economist of the Planning Commission, is at present based at Cambridge in the UK [email protected]

A noisy ideological battle rages in the run-up to the American presidential elections to prove that the other side is completely wrong. Two ‘Keynes vs Hayek’ videos on YouTube give a flavour of the debate. The BBC and Reuters organised their own debates. Nicholas Wapshott, author and journalist, came to Cambridge University to introduce his book, Keynes and Hayek: The Clash That Defined Modern Economics. Earlier, he had written a book on Ronald Reagan and Margaret Thatcher, describing their views as belonging to a political marriage. In essence, it is the same debate that is being discussed today, albeit, a bit more ill-informed. The objective is shamelessly clear: to defeat Obama in the coming presidential election by not letting him use the government to bring confidence and jobs back to the American economy. Economists arguing that something should be done for the poor, the jobless and socially disadvantaged, such as Larry Summers and Paul Krugman, are being labelled as Keynesians, or even socialists. The real concern is not with the deficits, but the prospect that the economy might revive before the elections, which would mean the end of Republican hopes for the White House. Once elected, even Reagan had forgotten all about deficits.

A Cambridge economist, Lord Keynes’s idea of curing unemployment by government spending which ruled the better half of the 20th century, is making headlines because of the reincarnation of his little known rival, Friedrich August von Hayek. The huge bail outs after the recent global financial crisis have been dubbed Keynesian by the opponents, the radical right or better known as the Tea Party. The latter swears by the name of Hayek, who was brought from Austria to the London School of Economics by Lionel Robbins — the creator of the best known definition of economics — in the 1930s, to counter the rising influence of Keynes. Hayek believed that the private sector had to save and invest to create stable jobs.

While Keynes is a familiar name even in Pakistan Hayek, as an economist of the Austrian school, is confined to textbooks on the history of economic thought with its peculiar theories of interest and time preference. The so-called mainstream economics, which according to Joan Robinson is not meant for the literate, has moved away from both! Hayek’s most important book, The Road to Serfdom argued that Keynes’ economics served to reduce freedom. To him, social justice was a myth. That is why the libertarians in the United States owe allegiance to him, without — it seems — reading the book. It sold like hot cakes after Glenn Beck of the Fox News heaped praise on it in 2010.

The debate reminds me of the last words of Keynes’ General Theory: “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”

Keynes was trying to save capitalism by using the government to inspire confidence in it. Hayek got the Nobel Prize in 1974 for arguing that capitalism can be saved by keeping the government off its back. As Andrew Gamble, professor of politics at Cambridge, put it: “the economics prize was given to Hayek for his political ideas”.

Published in The Express Tribune, February 24th, 2012.

Reader Comments (6)

  • Always Learning
    Feb 24, 2012 - 8:37AM

    PT, your today’s column along with the one from last week are two of the best in Pakistan’s press, not on economics alone, but on any subject. Congratulations.

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  • CAT
    Feb 24, 2012 - 11:19AM

    “the economics prize was given to Hayek for his political ideas”. This is the power of political economy, a much neglected subject in the land of the pure.Recommend

  • Feb 24, 2012 - 1:58PM

    Very glad to see the intellectual debate defined in terms of Hayek vs Keynes. It certainly has implications and consequences for Pakistan. I hope the author brings out these consequences in one of his forthcoming columns. To read somewhat Hayekian perspective, please visit: http://www.efn.net.pk/blog and my paper on “Well Being and Freedom” from http://www.asinstitute.org, a Hayekian think tank in Pakistan!

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  • Bass
    Feb 24, 2012 - 5:36PM

    Thanks for bringing this issue to the core. However, your article does not seem to do the Hayek point of view justice; I support Hayek over Keynes. I would love to see an articile where you define both perspectives and then clarify why you support Keynes.

    Thanks

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  • Ather Zaidi
    Feb 24, 2012 - 6:56PM

    An excellent article, but you have been slightly partial to Keynes, but this can be ignored, congratulations.

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  • meekal ahmed
    Feb 24, 2012 - 8:55PM

    @Ather Zaidi:

    We economists are always partial to one set of thought or the other.

    PT, this is interesting. Thanks.

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