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Cooking the Books 2: Neither Keynes nor Hayek

On 26 July Paul Mason, economics editor of the Tonight programme, chaired a debate at the London School of Economics between supporters of the doctrine of J. M. Keynes (1883-1946) and those of F. A. von Hayek (1899-1992). The Keynesians were represented by Keynes’s biographer, Lord Skidelsky, and an economist working for an international trade union federation; the Hayekians by George Selgin, professor at an American business school, and Jamie White, an eccentric philosopher. The debate was later broadcast on BBC Radio4 and is available as a podcast.

Lord Skidelsky explained Keynes’s basic argument that once capitalism had got itself into a slump there was no automatic mechanism to bring about a recovery; on the contrary, without government intervention to sustain and increase spending, the economy would tend towards an equilibrium position well below full employment. At the start of the 1930’s slump Hayek had advocated “liquidate everything” – let failing businesses and banks go under – but, Skidelsky said, you can’t cut your way out of a slump.

Jamie White, who is rather more than a Hayekian (more an anarcho-capitalist), said that Hayek was right to have advocated liquidation as the way out of a slump; the businesses that survived would be more efficient and their investments would lead the recovery. To the applause of the claque of Hayekians in the audience, he said that Roosevelt’s spending policies had only prolonged the depression of the 1930s. You can’t spend your way out of a slump, he said, as had been shown in the 1970s and was being demonstrated again now.

The American business professor said that Keynes had had no theory as to why capitalism got into a slump in the first place. Hayek had; it was that government monetary policy promoting cheap credit encouraged an artificial boom which led businesses to invest in activities that were not sustainable and which would sooner or later collapse. This had happened in the 1920s and was the cause of the present slump when “over-investment” in housing and finance collapsed. Once this situation had been reached the only way out was to let liquidation take its course. There was no painless exit from a slump caused by an unsustainable boom bursting. The only way to avoid a slump was to avoid the preceding boom by not allowing the government to pursue a lax monetary policy. And the way to do this was to abolish central banking and let the market determine interest rates and bank loans.

It is true that Keynes had no truly coherent theory as to why capitalism got into slumps from time to time. On the other hand, the purely monetary explanation offered by Hayek is inadequate. Slumps are indeed caused by “over-investment” leading to overproduction but this comes about through the anarchic pursuit of profits that is part of capitalism. When a boom is underway the market is expanding; competing businesses assume that they will benefit from this and plan to expand their production; in the end production expands more than the market, resulting in overproduction, a financial crisis and then a slump.

When it comes to how to get out of a slump, the Hayekians have a point. Inefficient businesses have to be eliminated. Marx made the same point but from a different position, seeing slumps as part of a boom/slump cycle that was built-in to capitalism, as periods during which, precisely, unprofitable businesses were eliminated as a condition for capital accumulation to resume.

Unlike both the Hayekians (who say slumps can be avoided by governments adopting a laissez-faire monetary policy) and the Keynesian (who say that appropriate state intervention can end the boom/slump cycle), Marx held that there was no formula for steady growth without booms and slumps. For him these were endemic to capitalism, being in fact its “law of motion”.  They will keep on recurring as long as capitalism does and there is nothing governments could do to stop this.