An economics debate in America

Keynes vs Hayek: An ideological battle rages in the run-up to US presidential elections to prove each other wrong.

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 24^th, 2012.