July 26th saw one of the most eagerly anticipated economic events of recent years. At the London School of Economics (former employer of Friedrich von Hayek), Professor George Selgin and Dr. Jamie Whyte for the Hayekians and Professor Lord Skidelsky and Duncan Weldon for the Keynesians gathered in front of a packed lecture hall to debate Keynes vs. Hayek. Two other lecture halls were required for the overspill. The debate will be broadcast on BBC Radio Four on August 3rd.
In front of a boisterous crowd, Hayek won fairly easily. Skidelsky’s haughty style contrasted with Selgin’s bullishness and the perennial Keynesian failure to look at the origins of the bust won over nobody in an admittedly partisan crowd. But even an hour of discussion left a few things hanging.
One questioner asked whether the Chinese stimulus package had been so much more successful than America’s because the totalitarianism of China allowed the government to direct the spending more effectively than in the US with its dispersed government.
To my great surprise this question was largely ignored by the Hayekians and waved through by the Keynesians, Skidelsky murmuring his approval for the proposition. I was surprised this question generated so little comment because it proves one of Hayek’s key propositions, namely that economic control goes hand in hand with political and social control.
To Hayek there was no such thing as ‘the economy’, as some separate area of human activity which can be tweaked and tinkered with. The economy is, instead, the whole arena of what Hayek’s mentor called Human Action. Or as Ronald Reagan put it, “a government can’t control the economy without controlling people”
We see this with Mussolini’s declaration that “Fascism entirely agrees with Mr. Maynard Keynes” or with the fascistic Blue Eagle which represented the National Industrial Recovery Act of Roosevelt’s New Deal. The effectiveness of China’s Keynesian stimulus came at the price of Tiananmen Square.
One of Skidelsky’s repeated attacks on Hayek was that while he had plenty to say about how we got into the bust he had nothing to say about how we get out of it. Selgin dealt with this very well, but there is another point: if a doctor has no idea why your foot is hurting, would you blithely accept his prescription that it needs to be sawn off?
Whereas Austrian economics is famous for its theory of business cycles, with unsustainable booms leading to busts in which bad investments are liquidated, Keynesian theory is silent about the business cycle. All we get is the concept of “animal spirits”, which simply states that at some point for some reason business people suddenly decide en masse to stop investing, and boom turns to bust. As an explanation for why an economy hits the skids, animal spirits is up there with “in the long run we are all dead” — a typical Keynesian shrug of the shoulders.
And it doesn’t even fit the current slump. The economy hit the skids, as Austrian theory always suggested it would, when the Federal Reserve raised interest rates to stifle the inflation caused by the unsustainable credit expansion of the boom period. Many investments that were viable in an environment of easy credit were sustainable no longer. Animal spirits played no part in this. If Keynes was wrong about the diagnosis, why should we place any faith in his prescription?
Mellon and liquidation
This led inevitably to the introduction of a quote attributed to Andrew Mellon, Secretary of the Treasury under President Hoover when the Wall Street Crash hit:
liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…it will purge the rottenness out of the system
There are two grounds on which to question this. First, this quote comes from Hoover’s memoirs and Hoover was the original executor of Keynesian stimulus.
Second, what actually is wrong with it? Look back at the recent boom. In Britain, the US, Ireland, Spain and elsewhere, we had rocketing house prices based on low interest rates. Lots of house building got under way to cash in, and lots of people were drawn into the construction industry.
Now, if we have too many houses as a result of the boom’s over-investment, we do not need new houses built. It follows that we also need fewer people building them. Elements of the construction industry, in other words, will be liquidated just as Mellon said.
They have to be. Consider the alternative: construction workers are laid off in large numbers and a movement begins to ‘do something’. All that can be done is either monetary or fiscal action directed to keeping these workers building houses we do not need. Anything else is Mellon’s liquidation.
Keynes famously said that unemployment could be solved
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again
His modern day disciples, it seems, think that we can build a prosperous economy around the building of houses no one will ever live in.
I have to give Weldon some credit. For anyone even vaguely involved in the economic policy making of the last government to show his face in public takes real nerve. He was rewarded with a titter from the smattering of Keynesians when he quoted with approval the words of Larry Summers, who described the coalition’s belief that spending cuts are necessary for recovery as “oxymoronic”. Weldon suggested that Summers could have dispensed with the ‘oxy’.
This is, of course, the same Larry Summers who said of the recent Japanese tsunami
It may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength
Perhaps Weldon could find an adjective for this?
It is quite a bizarre argument that a man can destroy his house in year one, rebuild it in year two, and at the end of that second year pat himself on the back for increasing his GDP by the cost of his new house. But then you are through the looking glass with Keynesianism. The doctrine holds, after all, that the more you spend the richer you get. Predictably it wasn’t an argument which impressed the tough crowd at the LSE.