In 1929 the director of the London School of Economics, William Beveridge, appointed the thirty-one-year-old Lionel Robbins to the chair of political economy and so made him “the youngest professor in the country”. Robbins had a definite agenda, in which the political side of “political economy” was just as prominent as the economic. He disliked the interventionist, semi-socialist drift of much economic theorizing at that time, particularly theorizing at Cambridge, where John Maynard Keynes had growing influence. He wanted LSE to represent a wide range of European economic thought, including the thought of the so-called Austrian School, which revered the entrepreneur and freemarket capitalism.
For some years, Keynes’s principal activity had been to bring together in one place his understanding of both the theory of money, and the practice of banking and monetary policy. These endeavours culminated in the publication of a two-volume Treatise on Money in 1930. Keynes’s blockbuster quickly came to be viewed as the last and best word on the subject. At the University of Chicago, a hard-working postgraduate student, Milton Friedman, took eighty-seven pages of notes on the Treatise. The first words of those notes read “Econ 330 Keynes” and the first sentence recorded the lecturer’s verdict that “General framework of Keynes likely to endure much longer than details”.
In London, Robbins had experienced Keynes’s less attractive side. They had both been appointed to the Macmillan Committee on Finance and Industry, which was intended to find answers to the severe economic downturn then under way. Keynes had been a free trader for most of his life, but in the crisis conditions of the early 1930s he persuaded the majority of the committee to support import tariffs. Robbins, who remained committed to free trade, insisted that he write a dissident minority opinion. According to a later account from Robbins, Keynes “then, as always, was capable of fits of almost impossible anger”. Indeed, he was “furious” with Robbins and treated him “most roughly”.
According to Nicholas Wapshott in Keynes–Hayek: The clash that defined modern economics, the Keynes–Robbins quarrel on the Macmillan Committee had far-reaching consequences. Robbins was so angry that he invited Friedrich Hayek, one of the most promising young men in the Austrian School, to give a lecture series at the LSE. The lectures were seen – by both Robbins and Hayek – as presenting a rival view to that in the Treatise on Money. The purpose of bringing Hayek from Vienna to London was that he should act, in Wapshott’s words, “like a western gunslinger” whose priority was “to target the troublesome Keynes”.
In the summer of 1931, Hayek reviewed the Treatise in Economica, the LSE’s specialist economics journal. The review was extremely critical, alleging that Keynes had been sloppy in his definition of terms, that his meaning was difficult and obscure, that his conclusions did not follow from his premisses, and that he had not read enough of the Continental literature. Implicitly, Keynes was at fault because he had not familiarized himself with the doctrines of the Austrian School, notably its recondite analysis of “roundabout” methods of production. This analysis stemmed from a branch of economics, known as “capital theory”, for which the Austrians were famous.
Hayek’s review appeared technical in character, but it was politically charged. In the Treatise, as in his subsequent and more celebrated General Theory of Employment, Interest and Money, Keynes advocated the active use of fiscal and monetary policy to regulate demand, output and employment. In fact, the key policy prescription of the Treatise was what Keynes termed “monetary policy à outrance” – and what we now call “quantitative easing” – to combat an emerging slump in the global economy. Hayek repudiated this monetary activism as inflationary. He believed that during the boom, banks had the bad habit of extending too much credit for particularly “roundabout” kinds of production. In these credit binges, some entrepreneurs made mistakes and sinned against the free market, and the State should do nothing to ease their pain.
But it was less the content of Hayek’s review that drew attention than its fiercely polemical tone. Hayek – whose work was undoubtedly overseen and approved by Robbins – stayed within the understood boundaries of courtesy in academic debate, but only just. Unfortunately for Hayek, Keynes could retaliate in much the same fashion. In his reply, he said that Hayek had been sloppy in his definition of terms, that his meaning was difficult and obscure, that his conclusions did not follow from his premisses, and that he had not done enough reading, including reading of Keynes’s own work. Even worse, Keynes felt that Hayek “has a passion which leads him to pick on me, but I am left wondering what that passion is”.
Economists have squabbled about many things since the 1930s
Wapshott does a good job setting the debate in context, and bringing the characters and ideas to life. The chapters that focus on “the clash” of the book’s title – the clash that arose from Hayek’s 1931 review of the Treatise – are readable and often fun. It is easy to turn the pages, despite the abstruse nature of the matters at issue. Entertaining anecdotes are interjected whenever the narrative threatens to flag, with Wapshott’s task made easier by the often colourful private lives of the main characters.
The “Circus” of Keynes’s Cambridge disciples no doubt enjoyed the thrill of being present at the conception of such key intellectual advances as the multiplier and the liquidity trap. But Richard Kahn and Joan Robinson, two of the Circus’s most prominent figures, added to the excitement by conducting a long-standing extramarital affair. To quote from the book, “The couple was once surprised by Keynes in flagrante, Keynes telling Lydia [his wife, in correspondence] that the pair were ‘lovingly entangled on the floor of Kahn’s study, though I expect the conversation was only on The Pure Theory of Monopoly’”.
But Wapshott’s book has misrepresented the relative importance of the numerous debates waged by economists, and not just by Keynes and Hayek, in the 1930s. Both the title of the book and the weight of the narrative in the early chapters give the impression that Hayek’s review of Keynes’s Treatise was “the” clash – almost the one and only clash – that defined modern economics. It was no such thing. Bluntly, in the late twentieth century, the dispute between Hayek and Keynes in the early 1930s was regarded by the overwhelming majority of economists as a sideshow to a range of other intellectual battles. Wapshott’s readability may dupe non-specialist readers into thinking that Hayek’s monetary theorizing as a young man was and remains the principal intellectual rival to Keynesianism. That is just not so.
The truth is that Keynes overwhelmed Hayek, simply by making more interesting and relevant statements. Of course, the roundaboutness of production under capitalism may sometimes lead to waste, but that does not justify government inactivity. Economists have squabbled about many things since the 1930s, including the relative effectiveness of fiscal and monetary policies in a world where governments “do something” about deep recessions. But the case for policy activism of some kind is fairly uncontroversial. The concepts and ideas that figured in the Keynes–Hayek debate of 1931 have hardly ever been mentioned in the subsequent debates.
By the 1950s, Hayek was a marginal figure in Anglo-American macroeconomics. Wapshott tries to substantiate the significance of the 1931 spat by seeing it as the source of a later multiplicity of disputes between the Keynesians and free market enthusiasts. But this is neither correct as an account of how the various disputes began and developed, nor as an appreciation of Hayek’s greatness. (And my interpretation – which may be wrong – is that Wapshott is keener on Hayek than on Keynes. As with a good detective novel, the suspense is maintained to the very last page.) Hayek surrendered to Keynes and the Keynesians on money and macroeconomics, and from the mid-1940s rebuilt his reputation by magnificent contributions to political philosophy and the philosophy of law. These contributions have only a tenuous relationship with Austrian capital theory and theorizing about roundabout production methods. Wapshott should not pretend that there was some sort of continuity between Hayek’s early work on money and his later work on the philosophy of the State, or that the 1931 debate had a special role in initiating later arguments.
In the 1970s, Keynesianism was in retreat because over-use of activist fiscal and monetary policy had led to rising inflation, as well as high employment. Hayek returned to fame, not least because Margaret Thatcher was enthusiastic about his work. As has often been related, early in her leadership she harangued the Conservative Party’s research department for being too wishy-washy and centrist. In Wapshott’s words, “she reached for her bag and slammed a copy of Hayek’s Constitution of Liberty on the table. ‘This is what we believe’, she cried”. Wapshott of course discusses this sudden and unexpected revival of Hayek’s reputation, and sees it as part of the Conservatives’ then commitment to monetarist anti-inflationary policies.
But in fact Hayek was never a monetarist in the usually understood sense. The monetarist strain in Thatcherism came, above all, from Milton Friedman who had taken such copious postgraduate notes on Keynes’s Treatise. Thatcher’s indebtedness was not to Hayek the monetary economist, but to Hayek the political and legal philosopher. Here, too, Wapshott misses a trick. In the first volume of her memoirs, The Path to Power, Thatcher says that she first read Hayek as a student at Oxford, at the end of the Second World War. Many people have found this unlikely, or even incredible, and Thatcher herself says that her real conversion to Hayek came in the 1970s. But, in fact, Thatcher’s account makes excellent sense. Indeed, the Conservatives of the 1940s quickly adopted The Road to Serfdom as one of their favourite texts.
But which copy of The Road to Serfdom? There was the full-length book itself, of which only a few thousand copies were printed in the UK in 1944, and an American abridgement in the Reader’s Digest, which had a mass readership across the English-speaking world. Wapshott mentions the Reader’s Digest abridgement and Hayek’s subsequent lucrative lecture tour of the USA. But there was also a third version of the book, which Wapshott overlooks entirely and is of obvious relevance to the story.
Churchill seems to have been fascinated by The Road to Serfdom from the outset, and decided to use it as intellectual ammunition against the Left. At Conservative Party headquarters, Geoffrey Rippon, who had just come down from Oxford (and was later to become a Conservative MP and Cabinet minister), was asked to coordinate the printing and publication of a shortened version of Hayek’s book. (The actual abridgement – which appeared in 1946 – was the work of a Conservative MP, Wing-Commander Sir Archibald James.) The title page of The Road to Serfdom normally carries two quotes, from Hume and Tocqueville, but the edition organized by Rippon replaced these two quotes by one of Churchill’s.
Thatcher, who was President of the Oxford University Conservative Association in Michaelmas term 1946, would surely have been most aware of this edition, even if she had also read the summary in the Reader’s Digest or the whole book. Wapshott says that, when Thatcher defeated Edward Heath for the leadership of the Conservative Party in 1974, she was “an avowed Hayekian”. Contrary to the cynics who believe that any kind of intellectual activity is beyond the capacity of modern politicians, it is entirely plausible that Thatcher had read and thought about Hayek thirty years earlier. (The story is told in “Hayek, ‘The Road to Serfdom’ and the British Conservatives” by Jeremy Shearmur, in The Journal of the History of Economic Thought, 2006.)
Nicholas Wapshott’s Keynes–Hayek is an ambitious, well-written and enjoyable attempt to grapple with fundamental debates about economic and social organization. It is an entertaining account of the work of two powerful thinkers who made lasting contributions to those debates. There is a large pantheon of other great thinkers who would merit the Wapshott treatment. But the author needs to be more candid about the limitations of his organizing principle if his work is to command authority.
Tim Congdon’s books include Keynes, the Keynesians and Monetarism, 2007, and, most recently, Money in a Free Society, which was published last year. He was appointed CBE in 1997 for services to economic debate.
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