The Battle of the Letters: Keynes v Hayek 1932, Skidelsky v Besley 2010

We are delighted to bring you a great letter exchange from history where in public debate Keynes traded economic blows with Hayek over causes and solutions to the Great Depression in the letter columns of The Times. A mirror image of this debate, sadly still raging some 80 years later, took place in the letter columns of the Financial Times and the Sunday Times between the fantastic biographer of Keynes, Lord Skidelsky and Prof Tim Besley of the LSE.

Why have we not learned anything? Why does this debate continue today? Who if anyone “won” and who “lost.”

Is this spectacular video summary of the older debate still relevant today?

Readers what do you have to say on the matter?

The Times, Monday, October 17, 1932 (p13)


Sir, —On October 10 you gave prominence in your columns to a letter inviting
the opinion of economists on the problem of private spending. There are a
large number of economists in this country, and nobody can claim to speak
for all of them. The signatories of this letter have, however, in various
capacities, devoted many years to the consideration of economic problems. We
do not think that many of our colleagues would disagree with what we are
about to say.

In the period of the War it was a patriotic duty for private citizens to cut
their expenditure on the purchase of consumable goods and services to the
limit of their power. Some sorts of private economy were, indeed, more in
the national interest than others. But, in some degree, all sorts of economy
set free resources — man-power, machine-power, shipping-power— for use by
the Government directly or indirectly in the conduct of the War. Private
economy implied the handing over of these resources for a vital national
purpose. At the present time, the conditions are entirely different. If a
person with an income of £1,000, the whole of which he would normally spend,
decides instead to save £500 of it, the labour and capital that he sets free
are not passed over to an insatiable war machine. Nor is there any assurance
that they will find their way into investment in new capital construction by
public or private concerns. In certain cases, of course, they will do this.
A landowner who spends £500 less than usual in festivities and devotes the
£500 to building a barn or a cottage, or a business man who stints himself
of luxuries so that he can put new machinery into his mill, is simply
transferring productive resources from one use to another. But, when a man
economizes in consumption, and lets the fruit of his economy pile up in bank
balances or even in the purchase of existing securities, the released real
resources do not find a new home waiting for them. In the present conditions
their entry into investment is blocked by lack of confidence. Moreover,
private economy intensifies the block. For it further discourages all those
forms of investment — factories, machinery, and so on— whose ultimate
purpose is to make consumption goods. Consequently, in present conditions,
private economy does not transfer from consumption to investment part of an
unchanged national real income. On the contrary, it cuts down the national
income by nearly as much as it cuts down consumption. Instead of enabling
labour-power, machine-power, and shipping-power to be turned to a different
and more important use, it throws them into idleness.

Conduct in the matter of economy, as of most other things, is governed by a
complex of motives. Some people, no doubt, are stinting their consumption
because their incomes have diminished and they cannot spend so much as
usual; others because their incomes are expected to diminish and they dare
not do so. What it is in any individual’s private interest to do and what
weight he ought to assign to that private interest as against the public
interest, when the two conflict, it is not for us to judge. But one thing
is, in our opinion, clear. The public interest in present conditions does
not point towards private economy; to spend less money than we should like
to do is not patriotic.

Moreover, what is true of individuals acting singly is equally true of
groups of individuals acting through local authorities. If the citizens of a
town wish to build a swimming-bath, or a library, or a museum, they will
not, by refraining from doing this, promote a wider national interest. They
will be “martyrs by mistake” and, in their martyrdom, will be injuring
others as well as themselves. Through their misdirected good will the
mounting wave of unemployment will be lifted still higher.

We are your obedient servants,

D. H. MACGREGOR (Professor of Political Economy in the University of
A. C. PIGOU (Professor of Political Economy in the University of Cambridge),

The reply was published two days later:

The Times, Wednesday, October 19, 1932 (p10)


Sir,— The question whether to save or whether to spend, which has been
raised in your columns, is not unambiguous. It involves three separate
issues:—(1) Whether to use money or whether to hoard it; (2) whether
to spend money or whether to invest it; (3) whether Government
investment is on all fours with investment by private individuals.
While we do not wish to over-stress the nature of our differences with
those of our professional colleagues who have already written to you
on these subjects, yet on certain points that difference is
sufficiently great to make the expression of an alternative view

(1) On the first issue—whether to use one’s money or whether to hoard
it—there is no important difference between us. It is agreed that
hoarding money, whether in cash or in idle balances, is deflationary
in its effects. No one thinks that deflation is in itself desirable.

(2) On the question of whether to spend or whether to invest our
position is different from that of the signatories of the letter which
appeared in your columns on Monday. They appear to hold that it is a
matter of indifference as regards the prospects of revival whether
money is spent on consumption or on real investment. We, on the
contrary, believe that one of the main difficulties of the world
to-day is a deficiency of investment—a depression of the industries
making for capital extension, &c., rather than of the industries
making directly for consumption. Hence we regard a revival of
investment as particularly desirable. The signatories of the letter
referred to, however, appear to deprecate the purchase of existing
securities on the ground that there is no guarantee that money will
find its way into real investment. We cannot endorse this view. Under
modern conditions the security markets are an indispensable part of
the mechanism of investment. A rise in the value of old securities is
an indispensable preliminary to the flotation of new issues. The
existence of a lag between the revival in old securities and revival
elsewhere is not questioned. But we should regard it as little short
of a disaster if the public should infer from what has been said that
the purchase of existing securities and the placing of deposits in
building societies, &c., were at the present time contrary to public
interest or that the sale of securities or the withdrawal of such
deposits would assist the coming of recovery. It is perilous in the
extreme to say anything which may still further weaken the habit of
private saving.

But it is perhaps on the third question—the question whether this is
an appropriate time for State and municipal authorities to extend
their expenditure—that our differences with the signatories of the
letter is most acute. On this point we find ourselves in agreement
with your leading article on Monday. We are of the opinion that many
of the troubles of the world at the present time are due to imprudent
borrowing and spending on the part of the public authorities. We do
not desire to see a renewal of such practices. At best they mortgage
the Budgets of the future, and they tend to drive up the rate of
interest—a process which is surely particularly undesirable at this
juncture when the revival of the supply of capital to private industry
is an admittedly urgent necessity. The depression has abundantly shown
that the existence of public debt on a large scale imposes frictions
and obstacles to readjustment very much greater than the frictions and
obstacles imposed by the existence of private debt. Hence we cannot
agree with the signatories of the letter that this is a time for new
municipal swimming baths, &c., merely because people “feel they want”
such amenities.

If the Government wish to help revival, the right way for them to
proceed is, not expenditure, but to abolish those restrictions on
trade and the free movement of capital (including restrictions on new
issues) which are at present impeding even the beginning of recovery.

We are, Sir, your obedient servants,

T.E. GREGORY, Cassel Professor of Economics,
F. A. VON HAYEK, Tooke Professor of Economic Science and Statistics,
ARNOLD PLANT, Cassel Professor of Commerce,
LIONEL ROBBINS, Professor of Economics

University of London, Oct. 18

Almost eight decades later, the debate over public spending continues:

The Sunday Times, February 14, 2010


IT IS now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.

In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.

In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.

In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report.

The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery. However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.

The bulk of this fiscal consolidation should be borne by reductions in government spending, but that process should be mindful of its impact on society’s more vulnerable groups. Tax increases should be broad-based and minimise damaging increases in marginal tax rates on employment and investment.

In order to restore trust in the fiscal framework, the government should also introduce more independence into the generation of fiscal forecasts and the scrutiny of the government’s performance against its stated fiscal goals.

Tim Besley, Sir Howard Davies, Charles Goodhart, Albert Marcet, Christopher Pissarides and Danny Quah, London School of Economics;
Meghnad Desai and Andrew Turnbull, House of Lords;
Orazio Attanasio and Costas Meghir, University College London;
Sir John Vickers, Oxford University;
John Muellbauer, Nuffield College, Oxford;
David Newbery and Hashem Pesaran, Cambridge University;
Ken Rogoff, Harvard University;
Thomas Sargent, New York University;
Anne Sibert, Birkbeck College, University of London;
Michael Wickens, University of York and Cardiff Business School;
Roger Bootle, Capital Economics;
Bridget Rosewell, GLA and Volterra Consulting

The advocates of continued borrow-and-spend replied in the FT:

The Financial Times, Thursday, February 18, 2010


Sir, In their letter to The Sunday Times of February 14, Professor Tim Besley and 19 co-signatories called for an accelerated programme of fiscal consolidation. We believe they are wrong.

There is no disagreement that fiscal consolidation will be necessary to put UK public finances back on a sustainable basis. But the timing of the measures should depend on the strength of the recovery. The Treasury has committed itself to more than halving the budget deficit by 2013-14, with most of the consolidation taking place when recovery is firmly established. In urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place!

They seek to frighten us with the present level of the deficit but mention neither the automatic reduction that will be achieved as and when growth is resumed nor the effects of growth on investor confidence. How do the letter’s signatories imagine foreign creditors will react if implementing fierce spending cuts tips the economy back into recession? To ask – as they do – for independent appraisal of fiscal policy forecasts is sensible. But for the good of the British people – and for fiscal sustainability – the first priority must be to restore robust economic growth. The wealth of the nation lies in what its citizens can produce.

Lord Skidelsky, Emeritus Professor of Political Economy, University of Warwick, UK
Marcus Miller, Professor of Economics, University of Warwick, UK
David Blanchflower, Bruce V. Rauner Professor of Economics, Dartmouth College, US and University of Stirling, UK
Kern Alexander, Professor of Law and Economics, University of Zurich, Switzerland
Martyn Andrews, Professor of Econometrics, University of Manchester, UK
David Bell, Professor of Economics, University of Stirling, UK
William Brown, Montague Burton Professor of Industrial Relations, University of Cambridge, UK
Mustafa Caglayan, Professor of Economics, University of Sheffield, UK
Victoria Chick, Emeritus Professor of Economics, University College London, UK
Christopher Cramer, Professor of Economics, SOAS, London, UK
Paul De Grauwe, Professor of Economics, K. U. Leuven, Belgium
Brad DeLong, Professor of Economics, U.C. Berkeley, US
Marina Della Giusta, Senior Lecturer in Economics, University of Reading, UK
Andy Dickerson, Professor in Economics, University of Sheffield, UK
John Driffill, Professor of Economics, Birkbeck College London, UK
Ciaran Driver, Professor of Economics, Imperial College London, UK
Sheila Dow, Emeritus Professor of Economics, University of Stirling, UK
Chris Edwards, Senior Fellow, Economics, University of East Anglia, UK
Peter Elias, Professor of Economics, University of Warwick, UK
Bob Elliot, Professor of Economics, University of Aberdeen, UK
Jean-Paul Fitoussi, Professor of Economics, Sciences-po, Paris, France
Giuseppe Fontana, Professor of Monetary Economics, University of Leeds, UK
Richard Freeman, Herbert Ascherman Chair in Economics, Harvard University, US
Francis Green, Professor of Economics, University of Kent, UK
G.C. Harcourt, Emeritus Reader, University of Cambridge, and Professor Emeritus, University of Adelaide, Australia
Peter Hammond, Marie Curie Professor, Department of Economics, University of Warwick, UK
Mark Hayes, Fellow in Economics, University of Cambridge, UK
David Held, Graham Wallas Professor of Political Science, LSE, UK
Jerome de Henau, Lecturer in Economics, Open University, UK
Susan Himmelweit, Professor of Economics, Open University, UK
Geoffrey Hodgson, Research Professor of Business Studies, University of Hertfordshire, UK
Jane Humphries, Professor of Economic History, University of Oxford, UK
Grazia Ietto-Gillies, Emeritus Professor of Economics, London South Bank University, UK
George Irvin, Professor of Economics, SOAS London, UK
Geraint Johnes, Professor of Economics and Dean of Graduate Studies, Lancaster University, UK
Mary Kaldor, Professor of Global Governance, LSE, UK
Alan Kirman, Professor Emeritus Universite Paul Cezanne, Ecole des Hautes Etudes en Sciences Sociales, Institut Universitaire de France
Dennis Leech, Professor of Economics, Warwick University, UK
Robert MacCulloch, Professor of Economics, Imperial College London, UK
Stephen Machin, Professor of Economics, University College London, UK
George Magnus, Senior Economic Adviser to UBS Investment Bank
Alan Manning, Professor of Economics, LSE, UK
Ron Martin, Professor of Economic Geography, University of Cambridge, UK
Simon Mohun, Professor of Political Economy, QML, UK
Phil Murphy, Professor of Economics, University of Swansea, UK
Robin Naylor, Professor of Economics, University of Warwick, UK
Alberto Paloni, Senior Lecturer in Economics, University of Glasgow, UK
Rick van der Ploeg, Professor of Economics, University of Oxford, UK
Lord Peston, Emeritus Professor of Economics, QML, London, UK
Robert Rowthorn, Emeritus Professor of Economics, University of Cambridge, UK
Malcolm Sawyer, Professor of Economics, University of Leeds, UK
Richard Smith, Professor of Econometric Theory and Economic Statistics, University of Cambridge, UK
Frances Stewart, Professor of Development Economics, University of Oxford, UK
Joseph Stiglitz, University Professor, Columbia University, US
Andrew Trigg, Senior Lecturer in Economics, Open University, UK
John Van Reenen, Professor of Economics, LSE, UK
Roberto Veneziani, Senior Lecturer in Economics, QML, UK
John Weeks, Professor Emeritus Professor of Economics, SOAS, London, UK

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7 replies on “The Battle of the Letters: Keynes v Hayek 1932, Skidelsky v Besley 2010”
  1. says: mrg

    It seems to me that the policy recommendations in the 2010 letters are much closer together than those from 1932.

    Besley says “The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery”, while Skidelsky concludes with “The wealth of the nation lies in what its citizens can *produce*”.

    To match the contrast between Keynes and Hayek I imagine you have to look to across the pond to Krugman and Schiff. It’s rare to see such diametrically opposed views expressed in mainstream British media.

    I wonder if this is just a media phenomenon, or if economists in this country have become as depressingly centrist as the politicians.

  2. says: GEOFF PAYE

    I think economists here, both academic and journalistic, ARE depressingly centre/left.
    The ONLY British work I can think of, of any recent provenance, to reflect an “Austrian” standpoint, is ALCHEMISTS OF LOSS, by Dowd and Hutchinson.
    Generally, readers who doubt the Keynesian diagnosis, let alone prognosis, are better directed to the Mises Institute, in America.

  3. Hoarding is indeed deflationary, but why is this a bad thing?

    People hoarding are producing but not spending it on consuming or investing (at present time), pgeneral rices goes down but real monetary wealth for everybody else is going up.

  4. says: Nico Torreg

    The Keynesian response treats the economy as if it was one homogenous business or sector. And as if that sector is underminding itself by not spending/investing enough. As a result the response is over simplistic and tries to get the nation to keep spending ignoring the massive debts, which as they increase, become an ever increasing burden.

    In fact the economy is a combination of different sectors which can expand and contract at different rates. If this wasnt true many economists and analysis wouldnt be so obsessed with housing.

    The housing sector has over expanded with easy credit. Money printed out of thin air, causing house price inflation. The relationship the housing and financial sectors have had with the rest of the economy has been one of greedy piglets growing fat at their brothers expense.

    Houses have been built that have not been needed and we now have enough houses to supply us for some time. To try and stimulate this industry and not let it relax is a fools errand. Surely the best thing is to let the old relationship restablish itself? Who wants to pay double for a commodity that used to cost half the price?

    We should be celebrating the falling of house prices as theyre becoming more afffordabale once again. Cars and pcs become more affordable and we celebrate it, when food, clothing and any number of objects become affordable we celebrate it. But why should we celebrate houses becoming less affordable? That just means the money we spend there we cant spend elsewhere

  5. says: Piet le Roux

    I agree with MRG above: the 2010 exchange of letters are not nearly as much in opposition as was the exchange in 1932. ’tis tragic.

    @Carlos Novais: I agree with your comments on hoarding, and spent some time rereading Hayek et al’s mentioning of it. They worded it carefully and correctly: deflation is not in itself desirable. They didn’t wish to overstate their differences with the opposing camp, so did not mention the non central point that deflation may very well be desirable from the point of view of some economic actors and is certainly not of itself undesirable.

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