Friedrich von Hayek, micro- economist, political philosopher, conservative construct – Part One

A series by Robert Field

Observations  re “Keynes Hayek, The Clash that Defined Modern Economics” by Nicholas Wapshott,  2011

PREFACE:

“The man who shot Liberty Valance” is the heading to a chapter describing the circumstances whereby the London School of Economics in 1931 awarded a professorship to  a young Austrian economist, Friedrich von Hayek, to confront the evolving federal deficit spending recommendations for England of the popular and highly influential John Maynard Keynes.

For Western movies aficionados, the Jimmy Stewart / John Wayne  /Vera Miles / Lee Marvin movie was about an illustrious senator  with a distinguished state, national and international career from a western frontier state whose local reputation and popularity rested largely on his reputedly having won a gun fight duel with a local desperado.    He learns over the course of the movie that the event did not occur as he and others had believed.    (John Wayne actually shoots Lee Marvin from the shadows.)

Is author Nicholas Wapshott signaling that Hayek’s current fame as an opponent of John Maynard Keynes  early theories rests on his relatively  minor and largely  ignored early contribution to and defense  of  traditional micro-economics rather than his later timely political philosophy in strident opposition to Fascism and Communism?

We will see that Hyack’s refutation of  Keynes’s magnum opus, “General Theory of Employment, Interest and Money”, like the  aforementioned killing of a desperado, did not actually occur,  and to the extent that criticism materialized a  decade later, it was  with sufficient caveats that, in the eyes of an observer,  to virtually qualify him as a Keynesian.

However, the facts have not prevented conservatives from seizing upon Hayek as their standard bearer in response to Obama Administration and the vast majority of economists’ desire for greater deficit spending in order to enable the USA to more rapidly recover from this Great Recession.    In short, those who reference  Hayek in most cases are either propagandists or  misinformed.

This is one of a series, to be put in final form and order at a later date.

The evolution of arguably the most important theory of the 20^th Century

According to author Nicholas Wapshott in “Keynes/Hayek”, in 1929, based on observations and “common sense”, but before developing an economic theory, John Maynard Keynes co-authored with Hubert Henderson a pamphlet, “Can Lloyd George Do it?”  It supported government deficit stimulus to energize the faltering economy, arguing “that government spending would cost little, that they would if anything boost business confidence because entrepreneurs would invest to take advantage of the new demand from those newly employed, and that the jobs directly created by the government would be accompanied by new private sector jobs for those who provided goods and services to the newly employed.”

Keynes surrounded himself with a brilliant group of current and former students dubbed ‘The Circus’ who met ( usually without Keynes being present) to consider and comment upon Keynes latest ideas and also  provide suggestions.    Chief among them was the unassuming young economist Richard F. Kahn who often acted as spokesperson for group, meeting one on one with Keynes. (Keynes generously acknowledges the group’s important role as a sounding board and their contributions in his preface in the later  “The General Theory.”)

It was Kahn who in 1930 developed the concept of the “multiplier effect” , to wit:  Government deficit spending during a period of unemployment would not only directly produce added employment but those employed would themselves through expenditures generate jobs for others.  Kahn’s calculations of various factors concluded the ‘multiplier’ for the UK approached 2 for 1, roughly the same that Keynes had conjectured.   In other words, with all factors taken into consideration,  a pound spent produced two pounds of growth in the Gross Domestic Product.

By the summer o f 1932, Wapshott relates, “Keynes began expounding on his post – Treatise thoughts in a series of Monday –morning lectures to his Cambridge students, titled “The Pure Theory of Money,” which were widely attended by members of the faculty, by undergraduates from other disciplines, and even by a number of interested invited visitors…  In October, Keynes announced the new title of his subsequent lectures would be “The Monetary Theory of Production.”

After sharing his new concepts through articles in “The Times” of London, “the articles were collected as a pamphlet, “The Means to Prosperity”, a document that proved to be the base camp to “The General Theory’s” peak.”  According to Wapshott, “He wanted to ensure that his most recent thinking would be available to policy makers convening at the World Economic Conference in June, 1933.”

It was not until February, 1936 that “The General Theory of Employment, Interest and Money” was published and which refuted Hayek and the neoclassical economists of which Hayek  was representative.

“The central argument of The General Theory is that the level of employment is determined, not by the price of labour as in neoclassical economics, but by the spending of money (aggregate demand). He argues that it is wrong to assume that competitive markets will, in the long run, deliver full employment or that full employment is the natural, self-righting, equilibrium state of a monetary economy. On the contrary, under-employment and under-investment are likely to be the natural state unless active measures are taken. One implication of The General Theory is that a lack of competition is not the fundamental problem and measures to reduce unemployment by cutting wages or benefits are not only hard-hearted but ultimately futile.”  Wikipedia

Having earlier wittingly or otherwise followed Keynesian approaches which had brought about considerable recovery, in 1936 (perhaps in anticipation of a presidential campaign) the FDR administration chose to disregard Keynes’s advice and sought to balance the budget as recovery was underway.  The result was the further U. S. depression of 1937 that lasted until the economy was rescued by the deficit spending of World War II.

The post-war decades of near full employment and moderate real inflation was to reduce national debt from the 1946 level of 122% of Gross Domestic Product to 28% by 1970.  Escalated taxation and cuts in spending  during the relative full employment of the Clinton Administration so reduced the national debt as to cause economists concern over the consequences of it being paid off.  (We know what happened shortly afterwards.)

PART TWO