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09/29/2011 01:41 pm ET | Updated Nov 29, 2011

Nicholas Wapshott's Keynes Hayek

Here's a book with superb timing. Nicholas Wapshott's Keynes Hayek: The Clash that Defined Modern Economics, appears just as the debate over austerity is once again heating up and a presidential campaign is lurching into gear, to the grind of metal and to a haze of blue smoke. Like everything else in this polarized world of ours, candidates are expected to make a clear-cut binary choice that places them in the correct camp: Keynes or Hayek; the government or the individual; stimulus or austerity. Keynes and Hayek are like gold and silver in the late 19th century, an easy label that tries to contain a complex, even mystifying conflict: code words to a base who recognizes those distinctions despite knowing little about what lies behind them. Wapshott's engaging book, a popular history of the intellectual sparring between the two men, and (this makes it so much more complicated), their colleagues, followers, successors and popularizers, attempts to fill in some of the blanks for those who will not be picking up Keynes's General Theory any time soon, or, for that matter, Hayek's Prices and Production. In fact, as Wapshott seems to realize near the end of the book -- and near the end of Hayek's long life -- this was less a profound clash between economic ideas and more about the inevitable differences that emerge from individual personalities and visions of economic policy: Keynesian pragmatism and Hayekian market morality.

Keynes Hayek lays out the characters and sketches in the background. It's the '30s and the Great Depression grips Europe and the U.S. and is a challenge to economists. Where did it come from? What caused it? How do we move past it? In Britain, the Cambridge polymath, John Maynard Keynes, an heir to the neoclassical economic tradition defined by his old teacher, Alfred Marshall, is wrestling with policies that will make chronically high unemployment better. Hayek, on the other hand, arrives at the London School of Economics from Vienna, recruited by the school's head, Lionel Robbins, as a counterweight to the great Keynes. As a representative of the Austrian school, most famously exemplified by Ludwig von Mises, Hayek believes deeply in classical economic principles, which argue that economies will heal themselves and achieve equilibrium if left to their own devices. Hayek, like so many others, is impressed by Keynes. But he's eager to solidify his position at LSE and launches an attack on Keynes's newly published A Treatise on Money. Keynes replies and the conflict begins.

Or does it? Right from the start, Wapshott, the author of a previous book on Margaret Thatcher and Ronald Reagan, leaves us asking all kinds of questions about this much-ballyhooed conflict. How much were careerist considerations involved in Hayek's on-again, off-again sniping at Keynes, who quickly decides to ignore the Viennese economist, leaving him isolated. Why does Hayek fall silent when The General Theory appears? The picture here is unclear. For much of the time that Keynes and Hayek "clashed," their relations were actually quite genial. Keynes might refuse to engage in polemics -- he was working on The General Theory and busy with a thousand other projects -- and he was perfectly happy to let his advocates protect his flank, but his personal relations with Hayek remained warm. While he resisted attacks -- Keynes loved to debate and argue -- he rarely took it personally. Hayek, on the other hand, a foreigner eager to build a career in Britain -- and a man who worried a lot about his reputation and standing -- was both insecure and sensitive to slights, and later in life, before his revival in the '70s culminating in a Nobel, he was clinically depressed.

There was a profound difference in the way the two men thought, which Wapshott touches on a number of times, but he fails to press the point home in his preoccupation with their world-shaking, economically quaking clash. Keynes was the ultimate pragmatist, the rational man, for which policy was never about fixed points and ideologies, but about effectiveness. The irony of Keynes is that while he left behind a powerful school of Keynesians that dominated economic policymaking into the '70s, he was not necessarily a Keynesian himself. He could concede points to Hayek's point of view without feeling he was betraying anything larger. Wapshott again and again refers to Keynes' imaginative theorizing, which Hayek himself after Keynes' death in 1946 showed great respect for (so did Milton Friedman, who was not a huge fan of Hayek's economic work). Hayek lacked that imaginative sweep. Hayek was more rigid, more committed to the classical approach. Over many decades that rigidity became a kind of morality, captured in his own The Road to Serfdom that seemed to equate all government intervention in the economy with totalitarian planning. Hayek's theories, Wapshott notes, were rigorous and detailed, but compared with Keynes, whose limpid writing style bristled with metaphors, anecdotes and wit (not to say the occasional deep obscurity), it felt separated from the real stuff of economic life.

Wapshott tries to locate the nub of the conflict between the two men in their different views of equilibrium. He has to simplify a lot to get there. Keynes, he argues, lost faith in the ability of markets to reach equilibrium and achieve full employment and output. Markets, these man-made constructs, needed to be helped along. After all, in the long run, Keynes famously said in a concise formulation of a much larger and nuanced philosophy, we're all dead. Hayek believed in equilibrium and, to some degree, argued that governments only created distortions; market forces were natural and needed to unfold naturally. The markets would heal themselves. The future was more important than the present. Wapshott tries to argue that this future orientation suggested that Hayek was, at bottom, an optimist. Personally, that doesn't necessarily fly, particularly compared with the energetic, exuberant Keynes; and even theoretically, that "optimism" depends on how it's framed. Keynes put his optimistic faith in the ability of men to improve their lot. One man's optimism is another's pessimism.

Was that conflict as clear as Wapshott insists? Keynes did advocate that the government needed to step in during the slump to stimulate demand. But he also had a sophisticated sense that no single policy could be useful in all circumstances, and that there were times when markets should be left alone. Keynes did not believe in universal truths; he understood just how variable humanity could be and how uncertain the future always was. In a way, the most important Keynesian bequeath was not a set of knee-jerk policies -- that came later -- but a sense that citizens need not simply accept that they were passive victims of the markets -- of each other -- without the power to change anything. Hayek went on to argue that, in effect, we must wait for the markets to heal; indeed he seems to insist at times that if the state stayed completely out of the economy, then cyclicality would wane.

The most interesting section of Keynes Hayek may well be the early period when Keynes was still alive; the two personalities -- Keynes in particular -- are arresting, and if a lot of this material is familiar, that doesn't make it less appealing. (Wapshott, trying to reach a popular audience, does sometimes overdo the popularity contest element here, as if this is a high school clash between the golden boy and the grind.) After Keynes dies, Keynesianism emerges and Hayek recedes, some of the energy goes out of the book; but despite that, this may well be the most important part of Keynes Hayek, because again it effectively undermines its own thesis: that differences between these men shaped modern economics. If you can say this about anything as varied and complex as modern economics, the "defining" was accomplished not by these two men, but by the images of these two erected and polished by their followers. That process involved considerable alterations and revisions and re-evaluations. Over time, both men were simplified and reduced. Keynesianism -- and the "-ism" is revealing -- became first orthodoxy, then a kind of formula. The insights were profound and useful; but as they became a formula shared by left and right, they were overused, handmaidens to politics. The temptation to stimulate fiscally or monetarily, even for those like Alan Greenspan who claim to worship at Hayek's altar, is simply too great. Hayek himself was turned into a cardboard cartoon (he played a role as he got older), folded into the gods of free markets despite some personal leanings toward socialism. His economics over time were forgotten as his moral tract of World War II, The Road to Serfdom, took off, at least in part because of a title that seemed to sum up a world view, without forcing anyone to actually read it.

We're living at the end of this story. Keynesianism was dealt a serious blow (if not a fatal one) by the stagflation of the '70s. Free market economics, with its very odd pantheon of Hayek, Friedman and Ayn Rand, was dealt a devastating blow (if not a fatal one) by the financial crisis. What's left in the ruins? Who knows? Yes, it is true that politicians in particular continue to adhere to this notion of a great soul-defining clash between these two ghosts from the past. But what occurs on a debate stage or even a presidential podium is really not what defines modern economics. Or at least it shouldn't.

Read more: Nicholas Wapshott's "Keynes Hayek" - The Deal Economy.