The debate between Friedrich Hayek and John Maynard Keynes over the nature and future of economics, spanned momentous times such as the Great Depression and the age of dictators, and it continues today posthumously in the discussion of how best to nurse back to health a wounded world economy.
Keynes, the optimist, believed that solutions to unemployment could always be found and it was the government’s duty to implement them. Hayek, the pessimist, was always explaining why government attempts to fix the economy were pointless, as well as fraught with unintended consequences. Keynes was a man of action, not willing to sit quietly and wait for the market to work its magic. He was concerned about the short term pain of unemployment because, as he famously said, “in the long run we are all dead.” Hayek, on the other hand thought that there was no easy way out of a slump and that artificially lowering interest rates or increasing public spending, would eventually lead to inflation. True, in the long run we might all be dead but Hayek had personally witnessed hyperinflation in his native Vienna and that was enough for him. Keynes genuinely believed that his new big picture, top down, economic tools had made traditional remedies for unemployment such as “hard work, endurance, frugality, improved business methods, more cautious banking, and, above all, the avoidance of devices”, redundant. Hayek, on the other hand, thought that the economy as a whole could only be understood by considering the interaction of individuals in the marketplace.
I don’t wish to minimize the genuine differences between these two giants of economic thought but re-reading some of their debates, I now recognize, as a parent, some adult/child interactions in their dialogue, that I had overlooked years ago. For example, why do parents worry about their children eating too many sweet things while children (and sometimes visiting friends or relatives) defend the practice? Children and relatives are usually just thinking about the one occasion they witness and the minimal harm that will be caused by that extra candy or piece of cake. Parents have a longer time horizon. They know how many sweet things children ate in the past and they have a good idea how many sweet things they are likely to eat in the future. Parents are trying to establish good, healthy eating habits for the long term whereas children want instant gratification now. A child may be correct in arguing that the marginal harm of an extra candy is bordering on zero but the parent is really concerned about the cumulative harm of all the candies the child is likely to eat. It is difficult for parents to be firm in their resolve when faced with crestfallen faces and perhaps an imminent tantrum, just like it is difficult for politicians to do nothing when faced with angry voters demanding that something be done – anything. Yes, I know that the pain of the unemployed cannot be compared with the pain of a child denied a candy. But, the point of the comparison is to demonstrate that it is only the initial pain (whether of unemployment or unfulfilled desire) that can be seen, the future pain from inflation or, from the effects of obesity, cannot be seen, although the harm will be real enough. Children can get away with unhealthy eating for a long time but sooner or later reality catches up with them. Similarly, economies can be badly managed for a long time but sooner or later the piper has to be paid. Acting like an adult is frequently not fun, and often very difficult, but it is the right thing to do.
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” John Maynard Keynes