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Abstract
In this paper I will reflect on the relationship, both personal and intellectual, between John Maynard Keynes and Friedrich Hayek. Although they were intellectual rivals, the history of their relationship is more complex and nuanced than the usual characterizations suggest.
JEL Codes: B2, B31, B53
Keywords: Keynes; Hayek; Relationship; Business cycle; Government intervention
In this paper I will reflect on the relationship, both personal and intellectual, between John Maynard Keynes and Friedrich Hayek. The two are typically portrayed as intellectual rivals, and the differences between them juxtaposed in rather broad terms: Keynes as favoring government regulation of the economy, in particular control of the business cycle by deficit spending during a downturn; Hayek as favoring a free market economy with minimal intervention by the government. Now though there are certainly elements of truth in such broad portrayals, part of my goal in this paper is to establish that the actual history was (as is usually the case) more complicated, more nuanced, and as an historian I am obliged to add, more interesting.
So what about the actual Keynes-Hayek relationship? The first perhaps surprising fact to note is that when Hayek was a college student in Vienna after World War I, Keynes was one of his heroes, as he was to many central Europeans after the war. This was because of Keynes' condemnation of the harsh terms of the Versailles Peace Treaty in his Economic Consequences of the Peace (Keynes, [1919] 1971). Keynes' criticisms of the treaty had little effect, and Hayek was among those who witnessed firsthand the devastating hyperinflation that wiped out the savings of the middle classes in Austria and Germany in the early 1920s, which in many people's minds was instrumental in paving the way for the rise of fascism there. This gave Hayek a lifelong appreciation of the dangers of inflation.
About a decade later Hayek and Keynes crossed swords. In 1931 Hayek was invited to the London School of Economics to give four lectures on monetary theory. The lectures were published that year as a book with the title Prices and Production (Hayek, 1931). People who attended later told him that he was nearly incomprehensible when he was reading the lectures, but whenever he answered questions he...