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Source link: http://archive.mises.org/17884/hayek-vs-keynes-at-the-lse/

Hayek vs Keynes at the LSE

July 27, 2011 by

Regarding my previous post Keynes vs. Hayek BBC debate at the London School of Economics, here is a nice report on the event, which took place yesterday, from John Phelan at the Cobden Centre blog:

By John Phelan, on 27 July 11

July 26th saw one of the most eagerly anticipated economic events of recent years. At the London School of Economics (former employer of Freiderich von Hayek), Professor George Selgin and Dr. Jamie Whyte for the Hayekians and Professor Lord Skidelsky and Duncan Weldon for the Keynesians gathered in front of a packed lecture hall to debate Keynes vs. Hayek. Two other lecture halls were required for the overspill. The debate will be broadcast on BBC Radio Four on August 3rd.

In front of a boisterous crowd, Hayek won fairly easily. Skidelsky’s haughty style contrasted with Selgin’s bullishness and the perennial Keynesian failure to look at the origins of the bust won over nobody in an admittedly partisan crowd. But even an hour of discussion left a few things hanging.


One questioner asked whether the Chinese stimulus package had been so much more successful than America’s because the totalitarianism of China allowed the government to direct the spending more effectively than in the US with its dispersed government.

To my great surprise this question was largely ignored by the Hayekians and waved through by the Keynesians, Skidelsky murmuring his approval for the proposition. I was surprised this question generated so little comment because it proves one of Hayek’s key propositions, namely that economic control goes hand in hand with political and social control.

To Hayek there was no such thing as ‘the economy’, as some separate area of human activity which can be tweaked and tinkered with. The economy is, instead, the whole arena of what Hayek’s mentor called Human Action. Or as Ronald Reagan put it, “a government can’t control the economy without controlling people”

We see this with Mussolini’s declaration that “Fascism entirely agrees with Mr. Maynard Keynes” or with the fascistic Blue Eagle which represented the National Industrial Recovery Act of Roosevelt’s New Deal. The effectiveness of China’s Keynesian stimulus came at the price of Tiananmen Square.

Keynesian diagnosis

One of Skidelsky’s repeated attacks on Hayek was that while he had plenty to say about how we got into the bust he had nothing to say about how we get out of it. Selgin dealt with this very well, but there is another point: if a doctor has no idea why your foot is hurting, would you blithely accept his prescription that it needs to be sawn off?

Whereas Austrian economics is famous for its theory of business cycles, with unsustainable booms leading to busts in which bad investments are liquidated, Keynesian theory is silent about the business cycle. All we get is the concept of “animal spirits”, which simply states that at some point for some reason business people suddenly decide en masse to stop investing, and boom turns to bust. As an explanation for why an economy hits the skids, animal spirits is up there with “in the long run we are all dead” — a typical Keynesian shrug of the shoulders.

And it doesn’t even fit the current slump. The economy hit the skids, as Austrian theory always suggested it would, when the Federal Reserve raised interest rates to stifle the inflation caused by the unsustainable credit expansion of the boom period. Many investments that were viable in an environment of easy credit were sustainable no longer. Animal spirits played no part in this. If Keynes was wrong about the diagnosis, why should we place any faith in his prescription?

Mellon and liquidation

This led inevitably to the introduction of a quote attributed to Andrew Mellon, Secretary of the Treasury under President Hoover when the Wall Street Crash hit:

liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…it will purge the rottenness out of the system

There are two grounds on which to question this. First, this quote comes from Hoover’s memoirs and Hoover was the original executor of Keynesian stimulus.

Second, what actually is wrong with it? Look back at the recent boom. In Britain, the US, Ireland, Spain and elsewhere, we had rocketing house prices based on low interest rates. Lots of house building got under way to cash in, and lots of people were drawn into the construction industry.

Now, if we have too many houses as a result of the boom’s over-investment, we do not need new houses built. It follows that we also need fewer people building them. Elements of the construction industry, in other words, will be liquidated just as Mellon said.

They have to be. Consider the alternative: construction workers are laid off in large numbers and a movement begins to ‘do something’. All that can be done is either monetary or fiscal action directed to keeping these workers building houses we do not need. Anything else is Mellon’s liquidation.

Keynes famously said that unemployment could be solved

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again

His modern day disciples, it seems, think that we can build a prosperous economy around the building of houses no one will ever live in.

Larry Summers

I have to give Weldon some credit. For anyone even vaguely involved in the economic policy making of the last government to show his face in public takes real nerve. He was rewarded with a titter from the smattering of Keynesians when he quoted with approval the words of Larry Summers, who described the coalition’s belief that spending cuts are necessary for recovery as “oxymoronic”. Weldon suggested that Summers could have dispensed with the ‘oxy’.

This is, of course, the same Larry Summers who said of the recent Japanese tsunami

It may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength

Perhaps Weldon could find an adjective for this?

It is quite a bizarre argument that a man can destroy his house in year one, rebuild it in year two, and at the end of that second year pat himself on the back for increasing his GDP by the cost of his new house. But then you are through the looking glass with Keynesianism. The doctrine holds, after all, that the more you spend the richer you get. Predictably it wasn’t an argument which impressed the tough crowd at the LSE.


Jonathan M.F. Catalán July 27, 2011 at 12:33 pm

I can’t wait for the podcast. I heard the Hayekians did great. I really wish they put it on video, though — it’s more interesting when you can see what’s going.

kff July 27, 2011 at 12:48 pm

I believe Krugman used that quote in an op-ed to support the notion that this was Hoover’s policy which led to the Great Depression.

Of course, on the very next page, Hoover writes that despite this advice from Mellon, Herbert knew that this was an unrealistic approach only supported by troglodytes.

Thanks for the summary.

Juraj July 27, 2011 at 1:48 pm


Skidelsky is a typical state apologist, arrogant, without a foggiest idea about human action. Just pointing at phony GDP figures, begging for some sort of national investment bank that would eventually socialise all “investments” and praising Keynes, nothing to show in theory, or practice. He could only appeal to the Keynesian side by making little “funny” remarks about Hayek.

Selgin did pretty good and I liked Whyte’s philosophical take on it however I was disappointed that none of the Hayekians emphasized the main problem that is the state currency. If Rothbard were sitting there, he would have delivered a devastating critique of the Keynesian model, those two made it quite easy.

Their Keynesian argument can be summed up into something like this:
* Hayek/Austrians want to just stand and do nothing
* When Austrians do recommend something, it’s liquidate which is a “no-no”
* Look at China’s or Germany’s GDP – they are doing it right
* We had to bail out banks otherwise cash machines would stop working and the sky would fall
* Reduced government spending would not induce more private investment or spending
* We, the statist quo, know better than millions of people in the market
* We can change our models and predictions of unemployment or GDP growth, we can be always right! Austrians can’t since they don’t quantify but they use some wacky thing called “praxeology”
* Debt doesn’t matter (but we’ll keep always saying that it matters in “the future” and thus extending it forever) because it can be paid when economy grows. That is, in our understanding, when GDP induced by more debt rises.

Stephan Kinsella July 27, 2011 at 3:00 pm

A rumor I heard–Krugman will be challenged to a formal debate at the LSE. Since Lord Skidelsky has set the tone of the debate, now the Master himself is the next logical step in the Keynes v Hayek debate; surely only Krugman can truly fit in Lord Keynes’ shoes.

Aussie_Austrian July 28, 2011 at 6:42 am

Is that from a half-reliable source? Would love to attend that debate.

Love your lectures on IP!

Toby Chambers July 27, 2011 at 5:51 pm

While everyone worried about the anemic British economic recovery of only 0.2% and did George Osborne have a Plan B ?, the debate was raging at the LSE between Keynes and Hayek economic policies. Lord Skidelsky offered the traditional Keynes view “We need more stimulus and Government Intervention to get us out of the slump.” We have all grown up with the rhetoric of Keynes and thought we were all disciples of Keynes. I profess to have now switched sides and firmly believe the view put forward by George Selgin that the Austrian school shared by Hayek that markets including Banks should be allowed to fail holds weight. We now have “Zombie Banks” devouring capital that could be directed to private investment. It probably would not get me a seat on the Bank of England Board, but I posed the question to Professor David Miles, the following night at the next debate at LSE that Banks should have been allowed to fail and we now have “Zombie Banks” that devour scarce capital, at a time when businesses need the capital to invest. The response was met with a short “UK Banks are not Zombie Banks,” but then Professor Miles gave a long lecture on how over many years the Banks are increasing their Capital ratio’s to become safer. He failed to respond that those same banks will be competing with private business in attracting capital to repair their balance sheets and this to me is “Zombie,” When they also rely on massive government support. Japanese banks have been caught in this problem for over 20 years, surely it is time to learn the lessons from Japan. This is the real problem that has to be addressed, rather than more stimulus from The Chancellor.
Toby Chambers (small business owner, economist and social entrepreneur)

John Phelan July 28, 2011 at 3:37 am

I totally agree Tony and one of the points Selgin made was that when Keynesians decry bailing out banks (as even they feel they have to) they are, in fact, decrying exactly the same government investment they then go on to clamour for. As Selgin said, putting money into a busted bank is no different to burying it in bottles.

As for the British economy and its weak growth, well, thats what happens when you deleverage on the scale we have to. The reason nobody is spending now is because they are paying for all the stuuff they bought in the decade before the crunch.

Juraj July 28, 2011 at 4:39 pm

For anyone who wishes to hear Toby’s question about Zombie banks being answered:


Approx 67mins in.

James Reade July 28, 2011 at 8:02 am

What a shock – according to an Austrian, the Hayekian side won! Well I never. On a serious note I’m looking forward to actually listening to the debate through my own ears…

It’s nice though to see straw-man-ism well and truly in form in the comments. Please do find me the official Keynesian manifesto where it says that the banks should have been bailed out to create zombie banks. I’m waiting…

Or maybe it’s just that everything non-Hayekian must be Keynesian? If so, that’s a heck of a lot of economics, and bad economics too…

aussieaustrian July 29, 2011 at 1:32 am

OR it’s just other variations of Keynesianism, ie Neo, New Keynesians (Krugman et al) that are making an even greater mockery of what was already poor economics?!

John Phelan August 3, 2011 at 10:52 am

Actually Mr Reade, they took a vote at the end and the host, a BBC journalist, announced the Hayekians as the winners.

Youll get the chance to hear for yourself tonight.

George Selgin July 28, 2011 at 9:46 am

Mr. Reade, when he listens to the podcast itself, will I trust find me pointing out that, in suggesting that even indiscriminate spending–such as building pyramids or digging holes in the ground in order to refill them–was better than none, Keynes in effect licensed indescriminate bailouts. Keynesians may now insist that he was merely being flippant. But that sort of flippancy, allowing for any comprehension at all of how politicians determine where to spend when given free reign to do so, was about as irresponsible as handing a gun to psychopath with the advice that shooting it as “something” is better than not shooting it at all.

Indeed, the central error of Keynesianism–of what Keynes had once intendend to call his “Monetary Theory of Production”–is that it attaches absolutely no significance to how money is spent. Hence Lord Skidelsky’s inability to understand why government spending, of whatever sort, can’t be expected to contribute to long-run growth as much as private spending, which reflects his (and Keynes’s) implicit assumption that it doesn’t even matter whether or not some income is used to maintain and augment an economy’s stock of capital. One needn’t be a Hayekian to see that this, surely, is bad–indeed very bad–economics

Yohan July 28, 2011 at 10:21 am

“liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…it will purge the rottenness out of the system”

I have read that the above quote was not actually something Hoover did, but he was giving examples of some policy suggestions put to him, and in the context of these suggestions he did not agree and did the opposite.

Krugman erroneoulsy refers to this again and again as an example of what Hoover ACTUALLY did. So Krugman once again views economic history through distorted glasses.

Jonathan M.F. Catalán July 28, 2011 at 11:19 am

That was Mellon’s policy recommendation.

Toby Chambers October 15, 2011 at 6:25 pm

social justice NO MORE BANK BAILOUTS mobilize NOW http://epetitions.direct.gov.uk/petitions/17979

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