The philosophical battle between Keynes and Hayek is at once a profession defining conflict and the story of the 20th century. Economists and policymakers have been arguing about the ideas of these two protagonists for decades. Each time a consensus is formed, it changes. Following World War II, Keynesianism won but, after the stagflation of the 1970’s, Hayek regained the upper hand. That should give us a clue about the nature of the contest; neither is absolutely right or wrong. Circumstances and preferences will determine which response is best.
Intelligent Investor published an article on the two giants this week but, to understand them better, I recommend two additional sources. First are a series of rap videos (yes, you read correctly). Economist Russ Roberts teamed up with others to create a Keynes versus Hayek rap video series. Complete with snappy lyrics in rhyme, the videos are an excellent introduction to the ideas and well worth watching. And they are economically accurate, too. Not many rappers can claim that. You can find the two videos below.
The other is a book, The Commanding Heights by Daniel Yergin. This book isn’t about economics; it’s a work of history and features Keynes and Hayek vividly. The book is brilliant and takes examples from all over the world to show how economic philosophy evolved during the 20th century.
As for the great contest, my own view skews towards Hayek. The most amazing thing about capitalism isn’t the wealth or the personal freedom it encourages; it’s the dissemination of information. Milton Friedman famously pointed this out with a pencil. Imagine all that went into making a pencil. Wood has to be sourced and shaped. Graphite has to be acquired. Paint, distribution, retail all have to be arranged. Thousands of people are ultimately summoned to produce an item that costs less than 10c. And they all do it autonomously. The marvel of capitalism is that all this happens every day with no one directing it.
Keynes has made an excellent case for governments to smooth the business cycle but this is mere fine tuning, not real growth. And it doesn’t come close to generating the wonder that the Hayekian view of the world inspires.