Keynes vs. Hayek Smackdown: Battle Still Rages Between Long-Dead Economists

By Joyce Hanson, AdvisorOne

To many market watchers, the fight of the century wasn’t the “Thrilla in Manila” that pitted heavyweight champs Muhammad Ali and Joe Frazier against each other in 1975.

No, it was the battle royale that had Cambridge economist John Maynard Keynes opposing Austrian economics professor Friedrich August von Hayek over the course of the Great Depression in the 1930s and on into World War II.

Though both men have been gone for years, their ideas have taken on a life of their own and currently create animated debate between who got it right, the interventionist Keynes or the laissez-faire Hayek.

“Keynes was right about market failures, incomplete information and times when we get prices wrong. To forget this is to consign millions to unnecessary harm,” argued Jared Bernstein, executive director of the White House Task Force on the Middle Class and a member of President Obama’s economic team from 2009 to 2011. Obama’s policies put him squarely in the camp of the Keynesians.

Bernstein made his argument earlier this week at the annual New York conference of the Investment Management Consultants Association (IMCA), which drew 850 attendees at the Marriott Marquis on Times Square.

His worthy opponent, Russell Roberts, a professor of economics at George Mason University and a research fellow at Stanford University's Hoover Institution, countered that Obama’s interventionist stimulus planners have judged their success over the last few years using the false data of predictive models rather than actual facts.

“Macroeconomics isn’t a true science, like biology,” said Roberts, echoing Hayek’s own sentiments. “It’s fake science.”

To underscore the speakers’ points, IMCA screened "Fight of the Century,” a new economics hip-hop music video by John Papola and Russ Roberts of http://EconStories.tv, on the Marriott Marquis’ mainstage. According to the video makers, “Keynes and Hayek never agreed on the answers to these questions and they still don't.”

So who really won, Keynes or Hayek?

While Keynes was convinced that government has a duty to boost spending and intervene in markets during economic slowdowns, Hayek was equally sure that only a laissez-faire stance and the market’s invisible hand could help pull a struggling economy out of the hole.

Maybe the victory was Hayek’s: he won a Nobel prize, after all, and Keynes didn’t.

“The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down…draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate,” wrote Hayek in his 1974 Nobel lecture. “What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity.”

But then again, Keynes won the ear of President Franklin D. Roosevelt, who followed the economist’s advice to let the government print money and create jobs until the depressed U.S. economy revived.

Writing for The Nation in May 1930, Keynes said: “The fact is - a fact not yet recognized by the great public — that we are now in the depths of a very severe international slump, a slump which will take its place in history amongst the most acute ever experienced. It will require not merely passive movements of bank rates to lift us out of a depression of this order, but a very active and determined policy.”

Keynes, who suffered heart trouble for years, died in 1946 at the age of 63 in Sussex, England. Hayek outlived him by 46 years, dying in Freiburg, Germany at the age of 92 in 1992.