Sparring Mustachioed Economists

I was listening to NPR's Planet Money in my car about 4 months ago and the host was talking to author Nicholas Wapshott about his most recent book, Keynes Hayek: The Clash that Defined Modern Economics.

He didn't go into too much depth about the substance of the differing theories presented by the two economists, but he did expound upon the debate that went through England's prominent universities with the two sides divided between John Maynard Keynes and Friedrich Hayek.

But it wasn't just a debate, it was a ink based version of a tooth and nail fight between the two economists with sarcasm and acerbic wit dripping off the columns they would take out in newspapers to annoy and make fun of the other.

And something about the thought of two highly regarded economic thinkers who'd been awarded Nobel Prizes resorting to base name calling struck a funny chord with me. I had to read the book.

Ultimately the differing viewpoints and ideas boiled down into a distinct debate of high unemployment versus high inflation. Keynes was all for keeping unemployment low, while Hayek thought interference by the government could possible make things worse and generate an "artificial" inflation.

Though the two came from different Economic schools, I can't help but notice that their environments certainly had something to do with their ideas. Hayek witnessed firsthand in Austria the enormous inflation and instability caused by the war reparations the Axis powers had to pay after World War I. Keynes argued against the reparations, accurately predicting the effects if they were put into place, and witnessed politicians and economists attempting to return the pound sterling to prewar levels which resulted in unemployment coupled with the 1929 Stock Market crash. Each man had their own ideas of how to generate stability, even though they were fundamentally different.

But Mr. Wapshott doesn't finish the book with the concrete formation of the different economic theories by the two economists. Instead he continues to follow into the present while showing the different problems the theories encountered and how new theories and ideas were postulated to overcome each difficulty.

Hayek's views and theories were taken to heart by Milton Friedman who developed monetarism which is controlling the money supply through a central bank to generate price stability. Keynes's views and theories supposedly led to the boom of the 50's and 60's and then to high inflation and slow growth in the 70's, dubbed "stagflation" (a portmanteau of stagnate and inflation), and were then extrapolated into supply side economics and other sorts of ideas that caused my brain to start sputtering and smoking.

But because this book had a debate feel, constantly juxtaposing Keynes's theories against Hayek's, towards the end I found myself asking, "So who's the winner?"

As it turns out, they're both winners. Both of their ideas or at the least extrapolations of their ideas are used. The Federal Reserve raising interest rates try to get people to save more while borrowing less is one way of curbing inflation by making money less available, or by raising the reserve requirement for banks.

Stimulus packages to combat unemployment, and deficit spending to generate more jobs are both examples of Keynes's principles ("But Prof. Keynes! This will lead to enormous debts and inflation in the long run!" "In the long run we are all dead," quipped Keynes).

So although the book is a dense read, it certainly answers the questions "why" and "how" our economic institutions do what they do. And it's just plain fun to read the back and forth name calling.