12/14/2012 11:21 am ET | Updated Feb 13, 2013

Keynes, Hayek and the Eternal Truths

Over the past year, we've seen a lot of commentary about John Maynard Keynes, Friedrich Hayek, their relationship, their debates, their various ideas and, of course, the movements that sprang up around them, not to say the policies all this engendered. I recently wrote several pieces, here and here, about Angus Burgin's historical study (The Great Persuasion: Reinventing Free Markets since the Depression) of the rise of the conservative, free-market, laissez-faire or neoliberal movement -- pick your phraseology -- from the '30s to the present, with Hayek and his book, The Road to Serfdom, at the center. Nicholas Wapshott published Keynes Hayek: The Clash That Defined Modern Economics earlier in the year, and a variety of Keynesian economists, from Paul Krugman (The Return of Depression Economics and the Crisis of 2008 to End This Depression Now!) to Lance Taylor (Maynard's Revenge: The Collapse of Free Market Macroeconomics) have used Keynes to hammer current free-market policies, from austerity to the efficient market hypothesis. Meanwhile, Keynes' biographer, Robert Skidelsky, continues to write about him and his ideas (How Much is Enough: Money and the Good Life, with his son Edward) and critics from the right continue to portray him as the closest thing to the antichrist this side of, well, Krugman.

So who's right in the popular dichotomy, Keynes or Hayek? My answer, apparently very unsatisfying to many, is both and neither. (Burgin has also been carped at on this question as to right or wrong, though he has a good excuse: He was writing history, not parsing economics.) Both Keynes and Hayek wrote a vast amount over two long careers. Folks still argue about how to read their two seminal works, Keynes' The General Theory of Employment, Interest and Money and Hayek's The Road to Serfdom. The General Theory attempts to capture complex economic concepts through language and is often murky or ambiguous; Keynes himself believed deeply in ambiguity as a condition of the world and of ideas. There's a good case to be made that Keynes would not have agreed with much that was done in his name, notably the mathematization of his ideas by the likes of John Hicks and Paul Samuelson and the Keynesians. Krugman, in a speech at Cambridge celebrating the 75th anniversary of The General Theory last year, admitted that Keynes argued for the radical uncertainty of markets in the famous Chapter 12 of The General Theory, which would seem to contradict the argument Keynes made in Part 1 involving "quasi-equilibrium" models. Krugman defends those models, which he admits were probably not close to Keynes' deepest personal belief (that would have been uncertainty, which undercuts equilibrium). He then tries to square this particular circle by saying that equilibrium -- and the models and math that go with it -- are useful "intuition pumps" for economists to go beyond "word play and prejudice" to new insights. "The trick always," he writes, "is not to take your equilibrium too seriously, to understand that they're aids to insight not Truths." And so the debate about the authentic Keynes rattles onward.

As for Hayek, Burgin makes it clear how taken aback he was by the reaction to 1944's The Road to Serfdom, which sold more briskly than he expected, particularly in the United States. In the U.S., the book was quickly abridged in Reader's Digest, which then provided reprints through the Book-of-the-Month Club. All this gave it a far broader, and a far more ideological, readership in America. (Look magazine published a cartoon version and King Features distributed even more of the condensed version.) This certainly spurred Hayek's career as a public lecturer, but made him uneasy as well. Burgin wrote: "As he repeatedly observed, the message did not always align with its depiction in the hands of its advocates. In particular, he grew frustrated at a tendency among his more reactionary readers to disregard all his caveats and qualifications in order to represent the text as a return to laissez faire." As Burgin notes, the Reader's Digest version was a "re-creation" of the text by Max Eastman and the editor DeWitt Wallace. Both were staunch anti-communists and many of Hayek's qualifications were dropped. As he concludes, "No author can control readers' interpretation of his or her published texts, but Hayek lost control over the words themselves."

In fact, Keynes and Hayek were closer intellectually than one might think, particularly on the issue of government intervention:

"At a number of points in the book Hayek explicitly condoned a vigorous role for the state. He informed his readers that responsible governments could limit the fluctuations of the business cycle through monetary and perhaps even fiscal policy. They could provide those items, like transportation infrastructure, that the price system failed to allocate efficiently. They could maintain quite strict regulations against certain business practices by limiting working hours, requiring sanitary arrangements..."

Keynes himself wrote to Hayek not long before his death in 1946 that he found himself "in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement." Just as many readers of The General Theory found vague and contradictory passages, so too did readers of The Road to Serfdom.

What's the point of all this? Unlike Krugman, and admittedly lacking his deep technical knowledge, I'm more of a Chapter 12 guy, and thus constitutionally against the belief that any economic doctrine, whether from Vienna, the fens of Cambridge or the South Side of Chicago, has much validity beyond its own era and its own particular circumstances. For confirmation of that point one can turn to Keynes himself. Keynes made a number of powerful points about conditions that existed in the '30s and in the post-2008 period. Hayek also made important points about tendencies -- not inevitabilities -- of a collectivist approach, however defined (and he was vague), to lead to totalitarianism, a variant, one might add, to Max Weber's notion of bureaucracies' bias toward growth. But neither man was offering up absolute policies for all times and places; and both knew it.

Krugman actually veers quite closely to that sense of contingency in his Cambridge speech when, after enumerating a few of the deficiencies of The General Theory, he turns and asks why we continually seem to be making the same mistakes of the '30s all over again. His answer, in part, involves what he calls "intellectual, political and financial instability." Intellectually, economists following Samuelson tended over time to blur microeconomics and macroeconomics -- so-called microfoundations. This was an intellectual category error shared by Keynesians and free-market economists. Politically, Krugman posits a mechanical monetarism (Milton Friedman's contribution) that was replaced by the "cult of the independent central bank," embodied by Alan Greenspan, which worked for awhile, until it too failed in 2008. And financially, the Great Moderation plus deregulation produced the situation Hyman Minsky foresaw so clearly of good times producing too much leverage and risk-taking.

Economics has strict limits; it can't speak to matters of faith, metaphysics or Platonic absolutes. That's another category error. Whether you accept Krugman's analysis or not, he's clearly applying Keynes' most profound philosophical contribution to economics, the manifestations of radical uncertainty, in the form of these instabilities -- that is, Chapter 12. (Krugman also suggests inadvertently why the intuition pump of equilibrium has to be handled so gingerly; it's so very easy to mistake appealing theoretical ideals for quotidian reality.) That said, one is left leaning for guidance not on the technical brilliance of Keynes and Hayek, but on a handful of ideas about how the world operates that reside in "wordplay and prejudice" and methodology and that are invariably the first things disciples drop when they set about creating a movement. That's what lasts. The rest is mere empiricism.