The Magazine

Dueling Economists

A century of back-and-forth between Hayek and Keynes.

Jul 1, 2013, Vol. 18, No. 40 • By CHARLOTTE ALLEN
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John Maynard Keynes (1883-1946), godfather of the “stimulus” and the “multiplier,” and Friedrich Hayek (1899-1992), who argued that government intervention in the economy breeds prosperity-killing economic distortions, weren’t just polar opposites in economic theory. They were real-life sparring partners. And as Nicholas Wapshott points out in his double biography, their ideas played themselves out in Great Britain, where both Keynes and Hayek lived and taught, and in the United States, where the economic philosophies of both informed the highest levels of policy-making—at different times, of course.

Friedrich Hayek, 1960, John Maynard Keynes, 1944

Friedrich Hayek, 1960, John Maynard Keynes, 1944

bettmann/corbis, time & life pictures/getty images

During the 1930s, Keynes, at Cambridge, and Hayek, at the London School of Economics, debated each other in person, by proxy (both had coteries of disciples), and in newspaper columns, and exchanged febrile levels of correspondence over a harsh review that Hayek had given Keynes’s A Treatise on Money (1930). They also spent a night together as unlikely comrades in 1942—on the roof of the King’s College Chapel at Cambridge, where they stood, shovels in hand, as part of a volunteer brigade set up to deflect whatever incendiary bombs the Luftwaffe might pour (but fortunately never did) upon that great medieval edifice. 

 One of the few things that Keynes and Hayek (who became a British subject in 1938) had in common was a loathing of Nazi Germany, each for different reasons. Another thing that Keynes and Hayek had in common was outrage at the bleeding of Germany and its World War I ally, Hayek’s native Austria, by the Treaty of Versailles and its Austrian counterpart, the Treaty of Saint-Germain-en-Laye. The brutal reparations exacted by the victorious Britain, France, and the United States, the forced dissolution of the Austro-Hungarian Empire (in whose army the patriotic Hayek had enlisted at age 17), and the resultant massive inflation that beggared the middle classes threatened to destroy Austrian civil society. Keynes, by then a British Treasury official who had tried unsuccessfully to dissuade the Allies from seeking the ruin of enemies already starving from wartime privation, published The Economic Consequences of the Peace in 1919, a damning account of the Versailles negotiations that accurately predicted the extremist politics that were to follow. The book made Keynes “something of a hero to us Central Europeans,” Hayek later recalled. It was the last time—except, perhaps, for that night defending King’s College Chapel—that the two were to see eye to eye.

Keynes was the son of a Cambridge economist, John Neville Keynes. His mother, Florence, had graduated from Cambridge’s all-female Newnham College, and she later became the first woman mayor of the town of Cambridge. So it was, perhaps, inevitable that Keynes would eventually fall under the spell of his father’s Cambridge mentor, Alfred Marshall (1842-1924), then England’s leading economist. Marshall shepherded Keynes out of his chosen field, mathematics, and into economics. Keynes worked in the civil service’s India Office and, in 1909, became a lecturer at Cambridge, where he continued to teach off and on for the rest of his life. At Cambridge, the young Keynes also fell in with the Bloomsbury Group: Lytton Strachey, Virginia Woolf, E. M. Forster, and the like. Keynes was by then a notoriously promiscuous homosexual, which made him a natural for Bloomsbury; but his interest in the mundane field of economics (in the eyes of artsy Bloomsburyites), as well as the patriotism that prompted him to join the Treasury’s war operations in 1915, led to a rift. The final break came in 1925, when Keynes married a Russian ballerina, Lydia Lopokova, whom the group despised as an intellectual lightweight. (It was nonetheless a surprisingly happy marriage, given Keynes’s sexual history.)

Keynes was not a socialist, but he did believe that market capitalism alone could not prevent, say, the runaway inflation he observed in postwar Germany and Austria. He also rejected the classical economics theory, propounded by his mentor Marshall, among others, that while supply and demand may never be entirely congruent—there will always be “business cycles” that generate job losses as the cycles play themselves out—a kind of equilibrium of nearly full employment will even things out in the long run.