David Glasner on Keynes, Hayek, Cassel, and Hawtrey

This is one of the best blog posts I've read in a while - one of those posts that really drives home the value-added of the blogosphere. I don't agree entirely with all of it, so let's take it piece by piece. It essentially makes two points: that the Keynes v. Hayek mania is ridiculous, and that Cassel and Hawtrey deserve more credit than Keynes and Hayek

Keynes v. Hayek

I strongly agree with Glasner here. I consider this blog (and myself) pro-Keynes and pro-Hayek. I like them both a lot, and while they obviously disagreed on specific points, I don't see Keynes as a whole as conflicting with Hayek as a whole. For some reason, though, people have latched on to this idea that they are polar opposites. This mentality has existed beneath the surface for a while. Keynes has always been a pariah in Austrian circles, and Hayek (before Friedman took his place) has always been a sort of short-hand for reactionary economics among left-wingers. But I'm not sure that ever defined the men for people like it has in the last couple years. And while it's been bubbling up all over the place, we really have two people to "thank" for this development: Russ Roberts and John Papola with the Keynes v. Hayek rap, which I suppose could be credited with making people familiar with the names "Keynes" and "Hayek" who weren't before. But I think it also needs to be credited with lowering the quality of the discussion at the same time that it broadened scope of the discussion.

Roberts and Papola will often protest that there's nothing "wrong" with what they had Keynes say, and they'll note that Skidelsky gave it the thumbs up. This is mostly true. You had a few Keynesian buzzwords thrown in with definitions that were passable with an acknowledgement that some poetic license was involved. The problem is precisely what Glasner puts his finger on in his post: "As I observed in September after watching the first Keynes-Hayek debate, we can still learn a lot by going back to Keynes’s and Hayek’s own writings, but all this Keynes versus Hayek hype creates the terribly misleading impression that the truth must lie with only one side or the other, that one side represents truth and enlightenment and the other represents falsehood and darkness, one side represents pure disinterested motives and the other is shilling for sinister forces lurking in the wings seeking to advance their own illegitimate interests, in short that one side can be trusted and the other cannot."

It's not that any of Keynes's words were "wrong" (although I would have written it differently), it's that he was advocating top-down solutions, he was getting special favors from government, he was acting like he could (and he wanted to) plan people's lives, he was a jerk to Hayek, he was on the side of the cronies and crooks, he was irresponsible, he was indifferent about war, etc. It wasn't the economics that was the problem. There wasn't a whole lot of economics in the videos (particularly the second one). It was that Roberts and Papola are pounding the story that Keynesianism is the anti-bottom up, illiberal, cronyist, cheating side. Papola continues to protest to me in correspodence that he's presenting an entirely legitimate view of Keynes, but Russ Roberts has come out and said it's all about ideology for him, an admission that should probably have made even more of an impact on people than it did. This presentation of the history of economic thought as a clash of the titans needs to stop. My assessment is it's doing far more harm than good.

Cassel and Hawtrey

Glasner goes on to talk about who he thinks really ought to be recognized instead of Keynes and Hayek: Gustav Cassel and Ralph Hawtrey. I found this discussion interesting, in part because I know Keynes was so influenced by Cassel and I think considered himself on the same page as Casssel (I don't know if Keynes knew Hawtrey very well, but he may have). Cassel and Keynes were brought to Berlin together in the 20s to advise the German government, and a lot of Keynes's Tract on Monetary Reform (1923) draws on Cassel's work from a few years earlier.

Keynes agreed on the monetary sources of the depression as far as I'm aware, and he agreed with the Hawtrey-Cassel solution of leaving the gold standard, and indeed he celebrated these departures in the early 1930s. I don't think it's quite right to draw this sharp line that Glasner does.

Keynes's point on the gold standard was that money was a "limiting factor" rather than an "operative factor" (this comes out in his letter to Roosevelt, but also more clearly on pages 230-236 of the General Theory). Tight money could drive economies into depression for all the reasons that Keynes and many other economists at the time laid out, and that money would have to be loosened to enable a recovery. But Keynes's broader point was that the level of output and employment is a function of investment demand, which itself is function of entrepreneur's expectation of future yields. I think it's wrong to see the General Theory as a theory of recessions - I think it ought to be read as a theory of the determinants of output and employment. There's discussion in it of the problems associated with golden fetters, but that alone doesn't give you a theory of output and employment, which is the book's object.

I've never personally seen any substantial disagreement between Keynesianism and market monetarism. I think there's something to be said for monetary policy becoming relatively less effective in a liquidity trap (something Glasner isn't entirely in disagreement with himself), but that hasn't lead any prominent Keynesians to disagree with market monetarists, just as Keynes was right there with Cassel and Hawtrey advocating and then praising the exits from the gold standard in the 1930s.

I would put it this way: Contrary to Say's Law, money opens the door to general gluts, and general gluts can cause depressions. Keynes recognized this quite clearly, and as a result advocated what today is called market monetarism. But Keynes rejected Say on a more fundamental level, pointing out that even when purchases and sales were balanced, the balance might not be struck at a full employment level. Was he right? That's a tough call. The Depression didn't end in 1933, and there's pretty strong reason to believe increased (public) investment demand in the early 1940s determinantly put an end to it. That seems to be a mark in Keynes's favor (although, of course, not a mark against Cassel and Hawtrey... there's no need for Scott Sumner to make a Keynes-Cassel rap!). But perhaps if devaluation continued even more vigorously it could have all been over and done with in 1934. Maybe. What's a good test? Anyone? Does comparing today to the 1930s offer a good test of whether the Cassel-Hawtrey strategy alone could have addressed the problem?


btw - anyone not following Glasner's blog should be.