Podcast Summary

Podcast: LSE: Public lectures and events
Episode: How the clash between John Maynard Keynes and Friedrich Hayek continues to define the difference between left and right today
Host: LSE Film and Audio Team
Guest/Speaker: Nicholas Wapshott
Date: February 13, 2012

Episode Overview

This episode features Nicholas Wapshott discussing the historical and intellectual clash between John Maynard Keynes and Friedrich Hayek, two of the 20th century's most influential economists. The lecture ranges across their personal biographies, intellectual confrontations, and the ongoing impact of their ideas on modern politics—framing much of the contemporary divide between left and right economic thinking. The talk situates the original Keynes-Hayek debates within the context of the LSE and explores their enduring legacy in British, European, and American politics, especially in responses to economic crises.

Key Discussion Points & Insights

1. The Historical Context and Personalities

• LSE’s Role:
  • The LSE was central to the Keynes-Hayek story. Figures like William Beveridge and Lionel Robbins recruited Hayek to the LSE to counter Keynes at Cambridge (03:50).
• Key Figures:
  • John Maynard Keynes: Seen as Britain’s most influential economist, pivotal in shaping economic thought, policy, and practice—famous for his intellect, practical orientation, and flamboyant personality.
  • Friedrich Hayek: Arrived from Austria, influenced by Ludwig von Mises; later became immensely influential, particularly in the US. Less personally charismatic than Keynes, but resolute and combative.
• Their Upbringing and Early Views:
  • Both were shaped by the aftermath of World War I, the Treaty of Versailles, and the fear that punitive economic measures would breed extremism (13:45).
  • “Keynes and Hayek both saw in Paris… that reparations would provoke extremism and tyranny.” (13:20)

2. Clash of Ideas: Keynesianism vs. Hayekianism

• Keynes' Approach:
  • Advocated government intervention to counter unemployment and insufficient aggregate demand, especially in economic downturns; believed in using public spending to stimulate economies (33:00).
  • “At the bottom of a business cycle, if you have protracted unemployment… government as spender of last resort can spend money… aggregate demand is the key.” (34:40)
• Hayek's Approach:
  • Warned against government intervention, seeing it as a path to serfdom and totalitarianism. Believed that manipulating interest rates and engaging in public works would inevitably destabilize markets (29:10; 36:30).
  • “Hayek thought… it was to do with interest rates and nothing to do with demand.” (36:30)
  • Hayek argued that artificial stimulation by government would only cause temporary gains, followed by collapse (“If you artificially reduced interest rates… all of those jobs would collapse…” 27:40).
• Their Debates:
  • Debated via published critiques in Economica, often vitriolic and personally pointed.
  • “This is the method of the duello… fighting like a pair of Kilkenny cats.” – Arthur Pigou, on the vituperative tone (31:50)
  • Their disputes often failed to find common ground, sometimes even definition of terms was elusive (31:00).

3. Transforming Economic Orthodoxy and Practice

• Keynesian Dominance:
  • Keynesianism dominated from the 1940s to the 1970s, credited with postwar economic growth and prosperity (39:00).
  • Hayek was marginalized during this period, but his ideas lived on in select intellectual circles (42:20).
• Hayek’s Counterattack and Revival:
  • Hayek responded with The Road to Serfdom, warning of the dangers of state overreach (41:20).
  • Montage of thinkers at Mont Pelerin Society (including Milton Friedman) provided intellectual artillery for the “Hayekian” resurgence in late 20th century politics (45:10).

4. Modern Resonance and Politics

• US Politics:
  • The Tea Party and many Republicans invoke Hayek’s ideas, emphasizing small government and market primacy (46:45).
  • Obama’s stimulus policies were described as “Keynesian,” although the debate over scale and effectiveness persists (49:00).
• UK/EU Austerity:
  • The current UK government’s austerity policies are compared to Hayekian prescriptions (54:00).
  • Europe’s response to the sovereign debt crisis mirrors themes found in the original Keynes-Hayek debate, with potential for social unrest if unemployment and austerity persist (56:00).
• Debate Endures:
  • “Strangely, 80 years on, the debate is alive and well… arguments remain entirely pertinent and appropriate for understanding the politics in Europe and the United States today.” (58:33)

Notable Quotes & Memorable Moments

• On Keynes’ Personality:
  • “He had a stoop because he spent his whole time looking down on people… He was incapable of dimming his headlights.” (17:50)
  • “There was no fight too small for him to turn and answer his critics.” (20:15)
• On Hayek’s Character:
  • “He was literally buttoned up… three buttons all buttoned up… He had a broken German accent which was very difficult to follow.” (25:20)
• On Their First Clash:
  • “Richard Kahn said, ‘am I right in thinking, Professor Hayek, that if I go out tomorrow and buy an overcoat, that will actually contribute to unemployment?’” (27:25)
• On The Long-Term Impact:
  • “It would have been extraordinary if one had punched the other out of the ring eighty years ago, because the whole history of economics, and therefore the world, would have been very different. But they didn’t, thank goodness.” (58:10)
• On Political Legacy:
  • “The Tea Party is a driving force, which has as its Bible Hayek’s Road to Serfdom.” (46:45)
  • “We are now in a position which I think John Maynard Keynes, if he were alive today, would recognize… you might get in some countries in extremist politics and extremist solutions and extremist leaders.” (56:00)
• On the Resurgence of Hayek:
  • “He (Hayek) lived long enough to see it, but he didn’t live long enough to benefit very much from it. It’s very sad what happened to Hayek…” (85:45)
  • “The strength of character to be, you know, right there out on the edge, saying rather like Millwall supporters, ‘nobody likes us and we don’t care.’” (87:10)

Important Timestamps

• LSE’s place in the debate, the personalities: 03:50–13:30
• Keynes’ background and early work: 13:45–18:40
• Hayek in Austria and early influences: 18:45–25:20
• Hayek’s arrival at LSE and initial debates: 25:57–31:00
• The viscous written debates in Economica: 31:00–34:00
• Keynes publishes General Theory, Keynesian ascendancy: 34:40–40:00
• Hayek’s Road to Serfdom, American reception: 41:20–42:20
• Mont Pelerin Society & Hayek’s intellectual legacy: 45:10–46:45
• The Keynes vs Hayek divide in contemporary policy (US, UK, EU): 46:45–58:33
• Discussion: Keynes/Hayek on modern Europe & extremism: 59:48–61:00
• Discussion: Ratings agencies, state capitalism, China: 62:00–64:30
• Q&A: Similarities between Keynes and Hayek, their personal relationship: 65:00–68:00
• Q&A: Did Hayek understand Keynes’ General Theory? 69:29–71:00
• Q&A: On law of unintended consequences, Popper’s influence: 71:00–78:30
• Q&A: How do Hayek and Keynes shape the left–right divide today? 78:32–80:38
• Q&A: Do Keynesians understand Austrian Business Cycle Theory? 80:38–83:30
• Q&A: Was Hayek’s revival ideology or response to real events? 83:45–87:10

Key Takeaways

• The Keynes–Hayek debate is not just an academic one—its terms and tensions define much of the modern political discourse between advocates of government intervention and partisans of market freedom.
• Their personal rivalry was matched in intensity by the difference in their economic philosophies but was sometimes leavened by personal kindness and mutual respect.
• Keynesianism dominated mid-20th century economics, while Hayek’s ideas lay dormant until their revival alongside the neoliberal turn of the late 20th and early 21st centuries.
• Today’s debates over austerity, stimulus, and the appropriate role of the state play out along the same axes first set by these two thinkers, showing the longevity and centrality of their intellectual clash.

For Further Reading:

• Keynes Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott (the speaker’s book, cited throughout the lecture)
• Hayek’s Nobel Lecture (“The Pretence of Knowledge”)
• George Orwell’s review of The Road to Serfdom