From Winamop.com

Keynes and Hayek
by Simon King

 

It was late at night, it was winter and it was cold. The wind was gusting through the surrounding trees. Two individuals stood on the roof of King’s College Chapel in Cambridge. It was war-time, so there were worse things that they could be doing than braving the cold on a winter’s night. For instance, they could be on the battle-field, dodging bullets. They were currently acting as fire watchmen during the German Luftwaffe bombings. There was the faint possibility that a bomb might be launched on them, shredding them to smithereens, but that was not very likely. Their names were John Maynard Keynes and Friederich Hayek. Whilst they were antagonists in the intellectual realm, in the realm of human relationships they were good friends.

Hayek looked out at the sky, as small droplets of water fell on his glasses. ‘What is the likelihood of a bomb falling on us, John?’

Keynes smirked. ‘Not very likely, Friederich.’

Hayek turned around, pacing over the august roof. ‘You know something, John?’

‘What?’

‘You prefer it if we avoid discussions of economic theory… because, although we profoundly disagree, we get on well together. We are good friends,’ Hayek said, adjusting the glasses that fell off his large nose. He scratched his thick moustache.

Keynes laughed effusively, his white teeth gleaming below his white own white moustache. ‘Yes, I called your work ‘rubbish’ at one point – in public. As such, you could understand why we would prefer to avoid those weighty topics. We could discuss the weather – or even better, our shared love of classical music.’

‘But you must admit, that we are political animals. However much we might adore music and the arts, we are part of a social and political environment. At this very moment, we might be blown to smithereens by some German bombs. However much we might want to depart towards a purely aesthetic realm, we are ultimately political creatures shaped by our social environment,’ Hayek said, as he took a pipe from his bag. He proceeded to start smoking it.

Keynes smiled fulsomely. ‘Yes, we are social and political animals, yet we are both political liberals. We do have considerable differences when it comes to politics and economics,’ Keynes said, as he scratched his moustache.

‘What could those differences be,’ Hayek asked, as he smoked his pipe.

‘As you well know, prior to this war, the world has been afflicted by the Great Depression. In my view, the private sector is not always efficient. The public sector needs to step in with monetary policies made by the central bank. Fiscal policies need to stabilise the business cycle. We need to manage demand so as to maintain full employment,’ Keynes said.

‘But the price system carries information; the free market coordinates information. Central planners do not have knowledge of what consumers want and desire – the market coordinates this information through prices. Markets are a result of spontaneous order, they are made up of voluntary exchanges. Any interference with the spontaneous order of the free market would disrupt its efficiency,’ Hayek stated.

‘Markets left alone do not lead to full employment,’ Keynes said, as he looked up at Hayek with a whimsical expression. ‘That’s why state interventionism is necessary. Markets left alone also lead to slumps, which is why the government needs to step in so as to correct it.’

Hayek smiled. ‘Markets reach equilibrium when left alone.’

‘There is a direct relationship between the level of employment and the amount of public spending in the economy. We need to reach full employment so as to escape this dire economic situation we have been facing recently. We need to keep interest rates low so as to manage public investment,’ Keynes stated. He had now risen from the crouching position he had been in recently. He paced around the roof of the chapel, inhaling the cold winter air. ‘A progressive tax system that redistributes wealth from the richest to the poorest. As the poor have more spending power, they consume more, which stimulates the economy. The government would create public investment programs so as to stimulate private investment.’

Hayek smiled. ‘The Great Depression has been the result of the misallocation of resources during previous economic booms. Your solution would not provide a sustainable way out of unemployment. The only way out of this malaise would be liquidation of investments and reallocation of productive resources. We currently have a terrible crisis, but we have to prevent this kind of crisis from happening in the first place. Booms and busts are a result of malinvestment, which is caused by government interference.’

Keynes stopped pacing around the roof, as he touched his bald head. ‘We are moved by the animal spirits.’

Keynes, prior to this, had been speaking quite eloquently. All of a sudden, he had started to talk quite gnomically. ‘The animal spirits?’ Hayek chucked. ‘Yes, I have heard that phrase of yours before but, no, I think that economic agents behave rationally.

‘The essence of all this,’ Keynes said, ‘is that I think that struggling businesses need to be kept afloat whilst you want them liquidated. I think that the market needs to steered and directed whilst you want it left alone. Yet we have one crucial thing in common.’

‘What is that?’ Hayek asked.

‘We are both liberals – we both believe in individual liberty. However, although I believe in individual freedom, I do think that this needs to be tempered by social justice and economic efficiency. We both believe in liberal values – we both agree on the ends – but we both disagree on the means of attaining these goals. I favour interventionist solutions whilst you favour free market solutions. We both want to save capitalism from collapsing, which it very nearly did in the early 1930s. We both want to save capitalism from veering towards fascism and communism,’ Keynes announced.

‘But I still think that your interventionist measures are a grave threat to freedom. Central planning interferes with freedom of choice,’ Hayek retorted.

Keynes smiled. ‘Look, look at the stars tonight. We are not been showered by bombs, either.’

Hayek looked up at the stars and smiled.

 

 

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