Keynes vs Hayek by Nicholas Wapshott

I start my economics study with Keynes vs Hayek – a book I presume is aimed at the masses as a general overview of the theories and the political/economic backdrops where they were applied. The book does not delve deep into the theories per se but paints a very entertaining and engaging picture of the era and the main players.

Keynes has a talent for showmanship – which results in his participation at the Versailles.   The short sightedness of the leaders, their constant bickering and lack of any compassion for the losing countries disillusions him so much that he ends up writing “The economic consequences of the peace” – a very astute and foreboding book predicting the collapse of Mark and civil upheaval in Germany. The book catapulted Keynes to popularity not only in much of central Europe (i.e., Germany, Austria) but also in the US. He was much sought after in magazines and newspapers for opinions on thorny economic issues of the times.

While Keynes was enjoying the limelight, Hayek was getting his education under Mises in  University of Vienna and lates joined LSE in 1931 – on recommendations of Lionel Robbins. This set the dual with Keynes at Cambridge and Hayek at LSE.

Keynes published The General Theory of Employment, Interest and Money in 1936, which advocated state intervention to ameliorate the sufferings during the low points of economic crises. Classical economist believed in Say’s law, which says that “supply creates its own demand”. Keynes rejected this and claimed that demand, not supply is the key variable. He argued that by artificially increasing demand (say by state sponsored public works) will decrease the sufferings and unemployment at the low points in the economic cycles.

Hayek on the other hand believes that booms and busts are natural parts of economic cycle. A bust comes because of bad allocation of capital and as long as the capital is not correctly allocated, the problem will continues. Spending money by creating artificial demand is not a viable course of action. Left to its own devices the market will come to equilibrium.

I am going to read a serious economics textbook soon. Meanwhile, this is a very worthwhile read.


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