Hayek and the Keynesian Avalanche
by Brian McCormick (New York: St. Martin’s Press, 1992); 289 pages; $59.95.
In England in the 1930s, there were two opposing schools of economic thought concerning the causes, consequences and cures of the Great Depression. One was headquartered at the London School of Economics, with the principle spokesmen being Friedrich von Hayek and Lionel Robbins. The other was at Cambridge University, with its leading figure being John Maynard Keynes.
Hayek and Robbins represented what was known as the “Austrian” approach, since their ideas about the origins of and solutions to the Great Depression were derived from the writings of Ludwig von Mises, who was the preeminent member of the Austrian school of economics thought. Keynes’ approach, which later became the foundation for what has become known as Keynesian economics, was derived from the Cambridge tradition that had grown out of the writings of Alfred Marshall, whose 1890 volume, Principles of Economics, dominated much of British economics well into the 20th century.
It was in this decade of the 1930s that the future of economics was determined for the next half century. Because what was fought over during those ten years were the following vital issues: the nature of a market economy, the possibilities for socialism, the causes of inflations and depressions, and the role of government in economic affairs. Yet, peculiarly, there has been no comprehensive history of the controversies and debates among economists during this period. Brian McCormick’s Hayek and the Keynesian Avalanche is the first detailed attempt to fill part of this gap in intellectual history.
Professor McCormick has comprehensively read practically all of the relevant literature. He tries to place the ideas of Hayek and Keynes, and their colleagues and followers, in the context of their intellectual antecedents. He attempts to compare and contrast Hayek and Keynes in terms of their philosophical premises and theoretical assumptions. And, at the same time, he tries to give a flavor of the climate of opinion in which Hayek and Keynes argued out their positions. If at the end of the volume, the reader feels that Professor McCormick has been too generous to Keynes and not sufficiently sensitive to all the insights and subtleties to be found in Hayek and the Austrians, it does not detract from the author’s meritorious effort.
The essential difference in the Austrian approach from that of Keynes and his followers concerned the issue of individualism versus aggregatism. The Austrians insisted that economic activity emerged from the choices and actions of individuals, whose interactions generated and created the intricate network of market relationships. And out of these interactions emerged the structures of market supply and demand, the relative prices and wages that determined the profitability of alternative lines of production, and the allocation of resources between different sectors of the economy. If an economy suffered from extensive and prolonged unemployment and idleness of resources, the Austrians argued that the cause could always be found in a resistance to properly price various commodities, resources, and labor in their particular markets. A competitive adjustment of the structure of relative prices and wages could always return an economy to a condition of “full employment.”
Keynes tried to argue that economy-wide periods of massive unemployment and idle resources should not be analyzed in terms of price-cost imbalances in various markets. Rather, the method should be to look at the economy in terms of various “aggregates”; total demand for all goods in the economy in relation to the total supplying of all types of goods in the economy; the general “price level” for goods “as a whole” in relation to the general “wage level” for labor “as a whole.” And he concluded that these aggregates could permanently be out of balance, because when left to its own devices, the market was not self-correcting. For Keynes, the only solution to the massive unemployment of the early 1930s was government deficit-spending to create the additional “aggregate demand” that the private economy was not generating to put all those to work who wanted employment at the prevailing “wage level.”
Hayek and the Austrians argued just the opposite. Keynes’ aggregate-demand, aggregate-supply analysis hid from view all the relative price-cost relationships in the numerous sectors of the economy that, in actuality, determined the profitabilities of producing various products and employing different quantities of labor throughout the economy. For the Austrians, therefore, the problem was not that “aggregate demand” was “too low” but rather that various producers and groups of workers were asking too much in terms of selling-prices to find buyers for their commodities and labor. Right prices would clear the market. And keeping government out of the economy and eliminating all political privileges that retarded free-market competition were the necessary preconditions for a return to full employment.
But the collectivist ideological currents and the influence of special-interest groups were more powerful than the cogency of the Austrian arguments. Hayek, Mises and the Austrians were crushed under the avalanche of Keynesian rationalizations for bigger and more intrusive government. And the legacy of that war of ideas in the 1930s continues to leave its mark on contemporary economic thinking and policy.