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Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited
Article Type: Alternative strategies From: Journal of Business Strategy, Volume 33, Issue 2
Patrick MarrenConsultant at The Futures Strategy Group, Crystal Lake, Illinois, USA.
Purpose – The purpose of this paper is to dispel simplistic notions of the alleged superiority or inferiority of two great economic thinkers, John Maynard Keynes and Friedrich von Hayek, and to encourage a deeper appreciation of each of them.Design/methodology/approach – Essay.Findings – Economic reality is far more complicated and surprising than any economic theory could possibly be. In addition, the state of economic theory is far less advanced with respect to its predictive power than the state of physics or biology. The major advances in economics appear to be “heads-ups” about previously unimagined sets of circumstances, either imperfectly predicting them in advance (e.g. Hayek and the 1970s stagnation), or more perfectly explaining them once they have already occurred. The simplistic opposition of Hayek to Keynes as avatars of current-day American political/economic camps is stupid and would be rejected by each of them.Originality/value – Examines these issues in what is hoped to be a unique way.
Keywords: Economics, Keynesian economics, Economic theory, Economic doctrines, Economic history, Friedrich von Hayek, John Maynard Keynes, Marxist economics, Bretton Woods, Vienna, liberalism, conservatism
Quick quiz. See if you can identify the two people talking about each other in the following two paragraphs:
Morally and philosophically, I find myself in agreement with virtually the whole of it; and not only in agreement but deeply moved agreement.
[He was] the one really great man I ever knew, and for whom I had unbounded admiration.
The first was John Maynard Keynes, in a letter to Friedrich von Hayek on Hayek’s book The Road to Serfdom and government intervention in the economy.
The second was Friedrich von Hayek, in a letter to Keynes’ widow on Keynes’ death in 1946.
It has become popular lately to oppose John Maynard Keynes and Friedrich von Hayek as the avatars, respectively, of liberalism and conservatism. Well, I think they would find our mania for crude reductionism stupid. Keynes would never have regarded himself as a liberal in the political sense (other than in the traditional British sense of the economic liberal). He said, in response to news of some acquaintances becoming enamored of Stalinist Russia, “If I am going to pursue sectional interests at all, I shall pursue my own […] The class war will find me on the side of the educated bourgeoisie.”
And Hayek was far from the doctrinaire conservative he is so often portrayed as being. His intellectual life began in earnest after the first world war, when he fell in with a group of leftist students. As Sylvia Nasar describes them in her latest book, Grand Pursuit: The Story of Economic Genius, they were “from assimilated, relatively affluent Jewish families,” and “argued about Marxism and psychoanalysis.” “[W]hat went on in the intellectual world of France and England was to them nearly as familiar as what happened in the German-speaking world,” Hayek wrote later.
Post-first world war Austrian politics, like ours today, were intensely polarized, although in their case the division was a bit more substantive: extreme Catholic nationalists versus violent Communists (imagine Occupy Wall Street with guns, versus a Tea Party that actually used theirs). Hayek was repelled by both hard left and hard right, and helped organize a “mildly socialist organization,” the Democratic Students Association, at his university.
Now, Hayek and Keynes eventually had major areas of disagreement, undoubtedly. For example, Keynes, later on in his letter of praise for Hayek’s The Road to Serfdom, included the following quibble about Hayek’s despair over the future of Britain and the west after the wartime intrusion of government controls over the economy: “[D]angerous acts can be done safely in a community [i.e. World War II Britain – PM] which thinks and feels rightly would be the way to hell if they were executed by those who think and feel wrongly.”
Again, I do not mean to suggest that Keynes and Hayek did not have substantially different ideas of the role of government in the economy. But the cartoonish views of these two truly great and subtle thinkers that are projected by many political ideologues these days do not remotely do them justice. In fact, they have pushed me toward an insight that is both liberating and somewhat alarming.
Reading Nasar’s book, or any account of the history of economics (Robert Heilbroner’s The Worldly Philosophers is probably the best example of the genre), one is pushed toward the conclusion that revolutions in economics do not necessarily give us the sort of all-encompassing model of the economic universe that, say, Newton or Einstein gave us for the physical world. Most of the great advances seem to be of the “it ain’t necessarily so” variety. Adam Smith gave us the idea of the “invisible hand,” which convinced many people that economies were naturally self-regulating, and John Stuart Mill, Marx and others posited that the fate of the worker under capitalism was inevitable and eternal immiseration.
But it were not necessarily so: a series of Victorian reformers in the second half of the nineteenth century, along with a new generation of economists (notably Alfred Marshall) showed that humanitarian reforms (child labor laws, the vote for all adult males, etc.) were not necessarily inconsistent with improving conditions for laborers, as long as worker productivity also increased.
Later, when the depression presented economists with undeniable excess capacity sitting idle next to prolonged mass unemployment, Keynes showed how it was logically quite possible for an equilibrium to exist in which these two seemingly contradictory elements could persist in tandem for long periods. This contention violated one of the basic tenets of classical economics; declining wages, in the view of classical economists, would have to entice the owners of excess capacity into employing the now-cheaper workers. But reality contradicted that proposition, and Keynes told us why.
Hayek, in turn, identified the potential drawbacks of excessive government intervention into the economy. His book, while wildly popular when it was published, had little influence over economic policy until the 1970s stagflation in the US and the evident breakdown of the British postwar economic model. It is interesting to note that his large-scale thesis turned out to be wrong: 1970s Britain, while perhaps inefficient and economically stunted, had not, in fact, turned into the sort of totalitarian state Hayek was writing about in 1943 (his obsession at the time was not in fact so much the USSR, but Nazi Germany). But his observations about the negative effects of excessive government control over large swaths of the economy turned out to be correct. Over-management by “Keynesian” policymakers could, in fact, be a bad thing, even if it did not turn a country into a dictatorship.
Of course, Keynes himself had a far humbler idea of the ability of policymakers to “fine-tune” economies. His less ambitious goal was “not to be found in abolishing booms and thus keeping us in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom” (even this cruder goal has proved difficult to manage, as the excessively loose – but politically popular – monetary and fiscal policies of the 2000s showed).
My larger takeaway is this: Keynes’ and Hayek’s greatest contributions to economics were not their attempts at all-encompassing models of economics writ large, nor even their highest-level conclusions. They were “heads-ups” about particular plausible present and future states that could confront us, along with analyses as to their causes and effects. The history of economics seems to be a progression from crude certainty to a more sophisticated uncertainty. Economic reality evolves past previous pat explanations of it and regularly presents us with sets of circumstances that violate “the rules.” Instead of increased certainty and a more reliable comprehensive model, economists at their most useful have tended to warn us about things to which our simplistic worldviews would tend to blind us.
This is the “alarming” conclusion I referred to above. I used to like to think of economics as at a stage of development similar to that of, say, physics or biology: that is, consisting of a generally accepted, comprehensive model of reality that is constantly tweaked by academics, but that can be expected to last a long time, until another Einsteinian genius comes along and re-racks the whole framework.
Unfortunately, economics appears to be far less tractable a subject than physics, and there is no popularly accepted model. Adam Smith was not the Newton of economics, but perhaps the Aristotle; Keynes was perhaps a Tycho Brahe or Kepler. Just as Brahe noted that previous beliefs about the orderliness of celestial motions were incorrect, Keynes showed how previous pleasing notions of the self-correcting nature of economies were contradicted by the facts; like Kepler, Brahe’s student, Keynes developed theories to explain these particular disconcerting facts. But we are very far from even a Newtonian-level understanding of macroeconomics, far less the more general, micro-to-macro-level post-Einsteinian standard (reliable, if incomplete) theory of everything that we have in physics.
Economics so far has told us how economies work in certain defined circumstances (Adam Smith); it has told us certain ways in which they can break down (Keynes and Hayek). But it is very far from being able to predict reliably the exact effects of particular policies in the real world. And there is a reason for this. We “economic actors” are not particles, all identical (or predictably varying), nor are the rules by which we operate clear even to ourselves.
And economies themselves are constantly changing; maybe biology is a better metaphor than physics. If we see our current economic reality as akin to the level of development of a human being, then economies in Keynes’ time may have been more like cynodonts, the proto-mammals; and in Adam Smith’s time they may have been at the level of flatworms from 550 million years ago, the first creatures to have brains. Clearly models developed to understand flatworms or primitive mammals cannot be expected to explain the behaviors or physiologies of human beings. Given accelerating technological change, we must expect our economies to continue evolving at a rapid rate; presumably, this will render previous economic theory, based at best on data gathered about the recent past, far less useful or predictive.
Given this reality, the current black/white politically-motivated divide over economics seems even less helpful. Let’s concede that one side or the other – to describe them crudely, the Paul Krugman “Keynesian” “liberal” side, and the “supply side,” “neo-classical,” “conservative” side – may be far closer to being right than the other side (two exactly equally correct concepts probably can never exist on earth, so this must be true). Even accepting that, we must realize that any human model of how economies work is but a crude approximation of a ridiculously, perhaps infinitely, complicated – and fast-shifting – economic reality. So at some level, both sides must be wrong. Pursue the policy recommendations of the “less wrong” as you will: you will be better off, but eventually, reality will present you with results that contradict the predictions arising even from that “less wrong” model.
So the idea that we must choose between Keynes and Hayek is arrant nonsense. Each of them had great respect for the other and for each other’s reasoning, and they learned a great deal from one another. What we really need to do is to abandon the idiotic, simplistic black/white approach to economic policy and ask ourselves what Keynes and Hayek would have agreed upon. Moreover, we should ask ourselves: What would Keynes and Hayek have been most surprised by in the years since their deaths? How would each of them have altered their views, based on changes in reality? What would they have to say to one another?
That would be a far more useful conversation to have than the one that is going on right now. Neither of these men were the pat, predictable sort of ideologues so many seem to wish they were. Hayek, for example, toured America toward the end of World War II, sponsored by a wealthy group of American conservatives who expected him to support their efforts to scuttle the Bretton Woods international trade and economics Treaty currently being debated. But as Nasar writes:
[…] American conservatives were ecstatic [at The Road to Serfdom] and rushed to embrace the Viennese professor. But Hayek proved to be an unreliable poster boy. […] Professor Hayek […] “argued passionately in favor of Bretton Woods.” […] Hayek was by no means intimidated by the discomfiture and embarrassment of his supporters. […] The Washington Post columnist Marquis Childs […] reported gleefully that “the temperature in the room went down at least ten degrees since the Republican Party had decided to take a stand against the extension of the trade program.”
But the architect of much of the Bretton Woods agreement, John Maynard Keynes, was himself capable of disappointing those who expected him to slavishly adhere to doctrine, even doctrine of his own making. To someone who caught him in an inconsistency, he is supposed to have retorted, “When the facts change, I change my mind – what do you do, sir?” This is probably too good to be true, but he did write the following in the Yale Review of June 1933, discussing harsh, black/white opinions on tariffs and free trade he had expressed prior to the 1929 crash:
Looking again today at the statements of these fundamental truths which I then gave, I do not find myself disputing them. Yet the orientation of my mind is changed; and I share this change of mind with many others. […] It is astonishing what a bundle of obsolete habiliments one’s mind drags round even after the centre of consciousness has been shifted. But to-day at last, one-third of the way through the twentieth century, we are most of us escaping from the nineteenth; and by the time we reach its mid point, it may be that our habits of mind and what we care about will be as different from nineteenth-century methods and values as each other century’s has been from its predecessor’s.
Imagine what he (or Hayek!) might have to say about people who, for crude political reasons, blindly advocate simplistic notions of the “methods and values” of one or another thinker of the first half of the twentieth century, well into the twenty-first!
To quote another Englishman, “There are more things in heaven and earth, Horatio/Than are dreamt of in your philosophy.”
A Corresponding author
Patrick Marren can be contacted at: firstname.lastname@example.org