THE. In this exclusive interview, Wapshott discusses the reprise of Keynesianism in the wake of the

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1 THE GREAT D BATE The point of writing a book about the dispute between Keynes and Hayek, says author Nicholas Wapshott, is to get all of these debates discussed in a rational, intellectual, grown-up fashion instead of it being two cats hissing at each other E By Jonathan Barnes It s been an 80-year title bout in one corner, John Maynard Keynes, promoter of government stimulus, founder of macroeconomics, and author of the groundbreaking The General Theory of Employment, Interest, and Money; in the other corner, F.A. Hayek, champion of Austrian School economics and defender of free markets. It s one of those rare occasions where a paradigm shift in thought is actually anticipated by an opponent who attempts a counterrevolution before the revolution occurs, says British journalist and writer Nicholas Wapshott, author of Keynes Hayek:. In this exclusive interview, Wapshott discusses the reprise of Keynesianism in the wake of the standings about the actual views of the two great economists, why there s more to Hayek than most people think (and how he differs from Ayn Rand), and why both Keynes and Hayek would disagree with much of what is said and done by their modern intellectual descendents today. Why did you write this book? It is one of those stories that has never been told before. Everybody who knows about political economy knows that Hayek met Keynes and tried to head him off before The General Theory was written. It s one of those rare occasions where a paradigm shift in thought is actually anticipated by an opponent who attempts a counterrevolution before the revolution occurs. Usually, when you have large competing worldviews if you think of Newtonian physics and Einsteinian physics they happen generations and continents apart from each other. But in this case, these two guys actually met and argued face to face and actually became friends over time. Well, not exactly friends, but not enemies either. Why is the story so compelling now? is just a footnote, which really doesn t do him justice. Hayek has grown to be the tortoise in the tortoise-and-hare story, where the tortoise has put on speed in the past 20 years and is now a sort of saint of the right in the way that Keynes is now elevated into this extraordinary saint of the left. How wide ranging is Keynes influence? What Keynes did was to look down on the economy as if he was hovering over it in a helicopter. He looked at it as a whole world, whereas an Austrian School economist will look at things from the ground up, from a microeconomic 38 CFA Institute Magazine Nov/Dec 2012

2 position. Keynes had this holistic understanding of an economy. He saw how all the parts integrated with each other and, therefore, if you wanted to improve employment, then you would increase demand, which would have other ram- - are all Keynesians now. 1 roeconomics but also important concepts like GDP, liquidity preference, the multiplier effect, tax breaks and government spending as an economic stimulus, even the idea of a world bank- Bank. Most of the instruments that any economist uses they are all Keynesian. You can t really put that genie back in the bottle. What is Hayek s contribution? Hayek tried very hard to come up with a general theory of his own, but his book The Pure Theory of Capital is almost impenetrable. Even great minds like Milton Friedman found it impossible to read it was so dry. So, Hayek headed off in another direction, which in a way was his saving grace. It s the reason that we know him today. As an Austrian, Hayek had a close understanding of what the Nazi party had done in terms of controlling the economy of the state. Hayek then wrote his famous book The Road to Serfdom, in which he suggested that the larger the role of the state in the economy, the less individual freedom people have in general. As soon as the book was published, it became a huge success in America. I think ican political philosophy of individual effort, of not wanting to be held by the government. Hayek thought that the government should step back as much as possible and allow the free market to decide things. But at the same time, he wasn t a straight laissezfaire guy. He wasn t Ayn Rand. Ayn Rand thought the government should be totally minimized just patrol the borders of the nation, get out of the way, and let free enterprise do its work. 1 Editor s note: In a more complete version of the statement expressed in the late 1960s, Friedman said, In one sense, we are all Keynesians now; in another, no one is a Keynesian any longer. Nicholas Wapshott How did Hayek differ from Rand? Hayek wasn t as black and white as people like said which is why Ayn Rand called him a compromiser and a damn fool and worse was I believe in the free market, but I think the free market actually does need some regulation, rather like a football game or something, in order to make sure that it is played fairly and to ensure that there is competition. It s easy to reduce all this to a kitchen-table debate. Or in Britain, you might call it a saloon bar argument. Often, people who have read a few books but haven t taken an economics degree they ve read Atlas Shrugged and also The Road to Serfdom or something say, Oh yeah, I agree with all of this. Then, they say, This is how we ought to run a government. It is very tempting. Is there a difference between Keynes and Keynsianism? Everybody knows that what Keynes said is very different from what the Keynesians did. Keynes said if you are going to borrow money in order to get the economy out of a trough at the bottom of a business cycle, you ve got to pay off the debt at the top. He didn t imagine for a minute that there would be vast borrowed structural debt or that an advanced country like the United States would be wildly in debt from decade to decade to decade. He always assumed EVERYBODY KNOWS THAT WHAT KEYNES SAID IS VERY DIFFERENT FROM WHAT THE KEYNESIANS DID. HE DIDN T IMAGINE FOR A MINUTE THAT THERE WOULD BE VAST BORROWED STRUCTURAL DEBT. Photos by Matt Greenslade Nov/Dec 2012 CFA Institute Magazine 39

3 IT IS NO SURPRISE THAT IF YOU FIRE A LOT OF GOVERNMENT WORKERS, YOU END UP AS YOU ARE NOW IN BRITAIN, WITH A DOUBLE-DIP RECESSION AND EVEN MORE BORROWING THAN THEY INHERITED IN THE FIRST PLACE. THAT IS THE PROBLEM WITH PUTTING HAYEK INTO ACTION. that it would be paid off at the top of the business cycle by taxing the population. Have Hayek s ideas ever been tested? There has never been a country that has tried the Hayekian experiment. I guess Britain has tried it in the past couple years, and it is no sur- ers, you end up as you are now in Britain, with a double-dip recession and even more borrow- is the problem with putting Hayek into action. It s not surprising that Mr. Romney and Mr. Ryan try not to explain too closely what their tions of it would be if put into action. Who are the true Keynesians and Hayekians today? Actually, it was really only in when people started calling themselves Keynesians again, although President Kennedy boasted that he was a Keynesian. But I don t think Obama has ever said he is a Keynesian. I think that would be like a red cape to a bull. He would be suggesting that he was following a discredited theory, even though what he has been proposing is entirely Keynesian. To be a Keynesian today is a label you want to avoid. Almost everything from the original stimulus onward that is all straight Keynesian stuff that sows money into the system in order to get the economy back on the rails. That is more or less what people like Larry Summers [President Council] or Tim Geithner [U.S. Treasury secretary] would advocate. It is still the orthodoxy, for as much as Hayek has got a hell of a lot of publicity in recent years, the world is still run more or less in a Keynesian way. As for the Hayekians, there aren t very many Austrian economics departments. George Mason University is one of the rare places that has a true Austrian economics department. There is John B. Taylor at Stanford University, who is a proper Austrian economist and a very sophisticated one. But he hasn t got a whole department backing him up. Among the Republicans, there are very few who can honestly say that they are Hayekians. Paul Ryan suggests that he is a Hayekian, but he also says he is a Randian and also a Friedmanite. I think in a way he is just giving a signal to the Tea Party, saying, Hey, I read this important stuff. What would Hayek think of the policies of the central banks? Hayek would prefer that there wasn t a central bank. Logically, he was right in saying that even if you take government out of the economy, if and interest rates through the ability to print or reduce the amount of money in the economy, if there is a Federal Reserve which is run for political reasons however measured or whatever its mission statement you won t have ciently as it should. One of the most interesting things today s political debate, I think, is that it s now fair game to take potshots at the Federal Reserve. In the Republican primaries, every single primary candidate not just Romney, all of them agreed on one thing and that was Ben Bernanke had to go. It is extraordinary. We now have people saying bring back the gold standard instead of having the Federal Reserve. What were Hayek s views on taxation? Hayek didn t believe that you should cut taxes unless the government was in surplus. Actually, he didn t believe 40 CFA Institute Magazine Nov/Dec 2012

4 in borrowing at all. He thought that everybody should be taxed until the government was in the black again. Then, if you got a little surplus, you could cut the tax. That is how distant he is from most people s understanding of the way the economy now works. The notion of cutting tax even though you can t afford it that is what George W. Bush did with the famous Bush tax cuts Hayek didn t believe in that at all. What George W. Bush suggested and what Alan Greenspan was happy to go along with trying to boost the economy by slashing taxes and seeing what happens that s a perfectly Keynesian idea, not Hayekian at all. There are other elements of Hayek which are ignored. People who read The Road to Serfdom must read it amazingly quickly or maybe read the right side of the page and never look at the left side. There is a very clear indication from Hayek that societies should provide homes for everybody, a generous welfare system for people who slip through the gaps, and also universal health care. Does the market prefer one system to the other? is Hayekian. I live smack bang in the middle of Midtown [Manhattan], which is really where private life will say that they really believe in would have preferred there not to have been a Troubled Asset Relief Program. You couldn t that stage. One economist said that everybody is a Keynesian in a fox hole. When push comes to shove, people know that the federal and state governments are such a large part of the economy that if you started trimming them, we would end up with a lot of people in poverty and the economy would shrink, and that is the last thing that you want. Did you find yourself taking sides? I have enormous respect for both men, but I think that we do live in a Keynesian world and it would be amazingly awkward to try to untick it. It doesn t mean that you shouldn t try, I suppose, but I am ambiguous about this debate in many respects. I think my function is to actually get people to debate the real issues. How often is Keynesianism used as a political tool? In the political debate, Keynes has become such a dirty word. This is because in the 1970s, MOST FINANCIAL PEOPLE IN PRIVATE LIFE WILL SAY THAT THEY REALLY BELIEVE IN HAYEK. BUT YOU WON T FIND VERY MANY BANKS WHO WOULD HAVE PREFERRED THERE NOT TO HAVE BEEN A TROUBLED ASSET RELIEF PROGRAM. politicians didn t pay back debt at the top of the business cycle, although they borrowed all of the time in order to provide a temporary boost to the economy. You ended up with large structural debt, and by the mid-1970s, you had stag- and a suffering economy. All the same, it s very tempting for anyone facing reelection to just put the foot on the gas to get over the bump and get reelected. But most politicians are Keynesian anyway, correct? It s interesting. Romney talks the Hayekian talk, but we know that he understands economics, which means that he understands the Keynesian solution that if you want to promote growth, the government has to step in. By the same token, Paul Ryan was in favor of the stimulus. Paul Ryan voted for the stimulus, and he actually asked for stimulus funds for his own voters, his own constituency. Is it realistic to imagine the U.S. paying down its debt? The debt can be paid down. You have to get everybody back to work, and you have to have a booming economy. And then US$15 trillion can actually be paid back? Oh, yes. The American economy isn t soft. It able and hugely productive. It is not going to be paid down in three months, but it can be made manageable by not spending money on silly things or wasting money when you don t have to. Take the military, for instance. There is a lot of argument to say you are better off with more drones and fewer boots on the ground. You don t actually need tens of thousands of American troops permanently in Germany and Japan. All of these bases are costing enormous amounts of money. Nov/Dec 2012 CFA Institute Magazine 41

5 You could reduce the cost of Medicare. There are elements of the market that could be introduced into Medicare. I know people will scream and shout, but it will actually reduce the cost of Medicare, which would mean that Medicare wouldn t necessarily go bust. Obamacare is an amazingly wasteful way of providing health care. It is about three times the price of what Western Europe pays to provide for its people. How does all this play into the European crisis? The events of broke the euro. The policy. It was a backdoor means of unifying politically the European nations. It was a German French idea to sort of suck everybody in and then, once they were in, to get all of these countries to fall in line with what the central bureaucracy in Brussels would like them to obey. That all went terribly wrong because all of those Mediterranean countries and Ireland that were allowed into the eurozone did it on cooked books, if you like. Now, what is happening is that Germany is the lone voice, because France threw out its semi-hayekian, or at least conservative, president in Sarkozy. So, the only one left preaching the let s-make-the-books-balance Hayekian stuff is Angela Merkel. This is such an echo of what brought Keynes of World War I, Keynes retired from the Paris Peace Conference in disillusionment, saying that if you punish Germany for having brought the world into war, if you punish them by reducing them to an agrarian nation, what you do is increase extreme views. It may well lead to either communism or fascism and there will be a second world war. He was absolutely right, and Hayek understood that he was right. If Angela Merkel insists that the Mediterranean nations pay back their debts too quickly and they predict that it will take at least a decade of poverty in those nations this is a recipe for extreme politics, as you can see in the last two to three years of election results. The irony is that this time, it is Germany beggaring the rest of Europe, whereas in 1919, it was everybody else trying to beggar Germany. The European nations have long memories about what Germany did twice to them in the 20th century. I think Keynes and Hayek would agree that what is going on in the name of Hayek right now from Mrs. Merkel is a recipe for disaster. THE ONLY ONE LEFT PREACHING THE LET S-MAKE-THE- BOOKS-BALANCE HAYEKIAN STUFF IS ANGELA MERKEL. THIS IS SUCH AN ECHO OF WHAT BROUGHT KEYNES AND HAYEK TOGETHER IN THE FIRST PLACE. What would avert disaster in your mind? ways of ensuring that there is growth in all of the Mediterranean countries. At the moment, ish people are already unemployed, and they haven t even started cutting their government. That is true to a lesser extent in the other European nations, and even France and Italy, which are very large economies, are in danger. So, I think that if Merkel doesn t relax, or if the Euro- things will happen. Have you seen the Keynes vs. Hayek rap anthem on YouTube? Many times, both of them. I am a great pal of Russ Roberts [George Mason University economics professor and coproducer of the video], and it is brilliantly done. The second version they did with even bigger production values, it is ingenious, in a weird way, of course, and if you come to it fresh, it is not easy to understand. On the other hand, if you have read my he gets it absolutely right. He is fair to Keynes even though he is a Hayekian. I think Russ Roberts and I have very similar motives, which is to get all of these debates discussed in a rational, intellectual, grown-up fashion instead of it being two cats hissing at each other, which is often the way that politicians and people who take sides like to discuss these things, where it all comes out of their gut. not a good way to get to the truth. Jonathan Barnes is a freelance journalist and author of the novel Reunion. 42 CFA Institute Magazine Nov/Dec 2012