Best frenemies

If John Maynard Keynes and Friedrich Hayek were alive, would they be able to come to agree on what should be done to restore growth to the economy? 

In the wake of the congressional supercommittee’s failure to agree a deal to reduce America’s debt, it seems likely that the profound division between left and right that is Keynes and Hayek’s joint inheritance will lead to more standoffs and obduracy. Is this what they intended, or, in times of national emergency, would they have found a middle way?


While the Keynes-Hayek debate in the early ’30s was vituperative, the two men eventually came to rub along as what teenage girls call frenemies. When the Blitz drove Hayek from London to Cambridge, the gracious Keynes found him elegant rooms in King’s. They found common ground in their love for antiquarian books about economics.

The most notable sign of an intellectual reconciliation was when they contemplated how to pay for World War II and equitably allocate the scarce resources of a Britain besieged by Nazi U-boats. They agreed that rationing was a crude solution to the problem and both wished to maintain prices as the best means of distributing food and other essentials to meet the fairness expected by the British and the unusual circumstances in which the market had to operate.

Keynes found he had to choose between high taxes, inflation or rationing, or a combination of all three. In October 1940, he published “War Potential and War Finance,” in which he rejected rationing and advocated a combination of income taxes and deferred pay to be set aside as “forced savings” for when the war was won. Hayek welcomed Keynes’s proposal as “the only real solution” and the fruit of “the most fertile mind among living economists.”

Hayek suggested a small amendment — that the “forced savings,” instead of being invested in government bonds as Keynes proposed, should buy stocks and shares. He also — to the surprise, no doubt, of many of today’s “Hayekians,” who cherry-pick their hero’s arguments — advocated a “capital levy on old wealth” that would be held in “a kind of giant holding company, [that] would in turn issue shares to the holders of the blocked balances.” 

When four years later Hayek wrote his masterwork, The Road to Serfdom, in which he argued that as government enlarged so did the threat to individual liberties, he sent a proof copy to Keynes, who was effusive in praise. “In my opinion it is a grand book,” he wrote Hayek. “We all have the greatest reason to be grateful to you for saying so well what needs so much to be said.” He went on, “You will not expect me to accept quite all the economic dicta in it. But morally and philosophically I find myself in agreement.”

But Keynes pointed to what he perceived as the fatal flaw in Hayek’s argument. Hayek had written that any civilized nation would want to ensure universal healthcare, a safety net for the old and the poor, and a roof over every head. “You agree that the line has to be drawn somewhere; and that the logical extreme is not possible,” Keynes reminded Hayek. “But you give us no guidance whatever as to where to draw it. … As soon as you admit that the extreme is not possible, and that a line has to be drawn, you are, in your own argument, done for, since you are trying to persuade us that so soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice.” Hayek, for reasons unknown, did not respond to Keynes’s critique.

Would Keynes and Hayek have put their differences aside if faced with the problems we confront today? The warmth that filled their last years reflected their common hatred of Nazism. Yet when the leaders of Britain, America, and most of Europe imposed beggaring austerity as a solution to widespread unemployment, as they are again today, 80 years later, Keynes and Hayek could not agree on the best way forward.

Hayek said, “So far as government plans for competition or steps in where competition cannot possibly do the job, there is no objection.” He conceded that a Keynesian stimulus of cheap money and government-funded make-work schemes may in the short to medium term provide jobs, though he predicted such measures would inevitably lead to bankruptcies and even more unemployment once the stimulus was withdrawn. (Keynes said by that time the economy would have recovered and that “in the long term we’re all dead.”) 

So Hayek would not today endorse President Obama’s $500 billion jobs bill, a Keynes stimulus in everything except name.

As for slashing taxes, the third branch of Keynes’s stimulus remedy to reduce joblessness, Hayek was a long way from the current Republican position of cutting taxes at any cost. “I’m all for a reduction of government expenditures,” Hayek declared in 1982, when asked about Ronald Reagan’s supply side tax cuts. “But to anticipate it by reducing the rate of taxation before you have reduced expenditure is a very risky thing to do.” 

Wapshott’s book Keynes Hayek: The Clash That Defined Modern Economics is published by W. W. Norton.