The fight of the century redux: Murphy vs. Smith

Exciting news from

The great debate between Keynesians and Austrians enters the digital age with the Mises Academy’s first ever online formal debate, between economists Karl Smith and Robert P. Murphy.

Resolved: Government Spending Can Play an Important Role in Boosting Economic Growth

Smith will argue in favor of this resolution, and Murphy will argue against.

The debate will be held by Webex, and costs $20. It will take place Friday, September 2nd at 1pm UK time, but will be recorded for later viewing.

See here for more details.


Hayek vs Keynes debate rebroadcast

Back in the ’30s, at the time of the original Keynes-Hayek debate, Hayek had a solid methodological system that could explain the causes of the recession of the late ’20s and early ’30s, and it’s subsequent gyrations, up and down.

The root cause was excessive credit creation by the world’s main central banks, and their fractional reserve private sector mints, the banks. This bank credit was loaned out to businesses who bought extra kit to produce goods and services more efficiently. The boom in producer sectors bid up relative prices for their resources. Higher wages for labour meant more consumption, boosting consumer sectors. This in turn pushed up relative prices in those sectors. Competition for resources bid up prices until no one believed the prices were sustainable — pop goes the mega bubble, and boom turns to bust. This is called the Austrian Theory of the Business Cycle.

At the BBC LSE Hayek v Keynes debate, Lord Skidelsky told us that everyone knew it was excess credit that caused this boom, and that this was called the “Treasury View.”

This of course is not true; the noble Lord is misinformed. The Treasury View was advanced by members of the Chancellor’s department saying, in short, that for every increase in public expenditure advocated by Keynesian types to alleviate the Great Depression effects, there would be an equivalent reduction in private sector expenditure that would mean that the net effect in the economy is zero.

Whilst I hold that this is a valid view, it is not one that gives us the theoretical tools to understand why boom and bust happen in the first place. Mises and Hayek gave us these tools with the Austrian Theory of the Business Cycle.

Neither the Treasury View, as expounded by the likes of Ralph Hawtrey, nor the Keynesian view were based on a series of logical deductions from root causes. The best Keynes could offer as an explanation for boom and bust was “animal spirits”.  He is Theory Lite in this respect.

Unfazed by his shaky foundation, Keynes confidently prescribed how to correct an animal-spirit-induced bust.  We are told to spend when the private sector is not spending. Who does this? The government on our behalf.  The Treasury View makes clear that it’s futile to tax the private sector in order to spend, so we have the cries from modern day Keynesians to carry on borrowing and spending in order to force a correction . If you haven’t got the correction you desire, you have not borrowed enough! So say the likes of Krugman and Skidelsky, drunk on the intoxicating work of Keynes.

The faulty logic than runs underneath this way of thinking is called the “Circular Flow of Income.” This is now bread and butter in any economics text book. One person’s income, when spent on goods and services, becomes another person’s income. Cut one and you cut all. Therefore, a series of cuts or austerity measures is exactly what you should not be doing at a time of bust; you need to keep everyone’s income up.

Hayek held that relative prices and income where what mattered, not gross aggregates . If a man has an income of £100 and costs of £90, we can say he has a profit of £10. Then recession hits and he has an income of £85 and still costs of £90, so he is sunk by £5. Thus the aim of the man in question, with income of £85 is to get his costs down to under £75 and restore his profitability. As this is done, the foundations for recovery are laid. Even better, if he can get costs to £74, on lower income and a lower costs base, he is in fact more profitable than in the glorious boom times!

In the 5 mins each speaker had in this debate to present their case, some of this came across and some of it did not. Jamie Whyte and George Selgin did a fantastic job at putting forward the case for Hayek. Skidelsky sadly did not represent Keynes very truthfully, for the reasons I have outlined above. Selgin picked him up on various other errors and misrepresentations.

This debate is very relevant for today as no doubt we will be told the current market corrections are “Animal Spirits”, and that the answer is further government intervention.

The BBC tell us the debate had over 1 million listeners and was in their top 5 podcasts. In all my years studying at the LSE and as a donor to it, I have never seen three lecture theatres full of public and students alike. Not even for visiting Heads of State!

This is the debate of our times.

I am delighted to say that the program will be re-run, and they expect another 1.5 millions viewers.  Our friend at the Mises Institute, Stephan Kinsella, has blogged all the details here. If you want to educate yourself a little more on these matters, or even if you think you are very familiar with all of the issues, the debate is definitely worth a listen.  If you can’t wait for the next BBC broadcast, you can find it online as an MP3.

Since the original broadcast, the debate has continued online.  On the 3rd of August, PrimeEconomics published a list of eight alleged fallacies in the Keynes/Hayek debate, drawing a number of responses, including some from George Selgin.  On the same day, Selgin posted his own account of the debate at  More recently, on the 18th of August, Selgin took up Skidelsky’s suggestion that “no government has ever achieved a speedy recovery from a recession by clamping down on its spending or reducing its indebtedness”, citing the US recovery from a deep recession in 1920.  The following day, Skidelsky published his account of the Keynes-Hayek rematch at Project Syndicate, declaring

Except to Hayekian fanatics, it seems obvious that the coordinated global stimulus of 2009 stopped the slide into another Great Depression.

You can read Selgin’s response at

Personally, I look forward to the day when Paul Krugman will come and stand on that same stage where Hayek delivered his famous Prices and Production lectures, and engage in serious debate with Austrian economists. How many lecture theatres would that fill? What global TV audience would it draw?

For those at the BBC and for those at the LSE, I think my next Distinguished Hayek Fellowship Teaching Programme event the LSE should be just this debate, and I would be happy to support and fund whatever I can. I repeat, this is the debate of our times.  Only someone of the stature of Krugman can represent Keynes, we need to move this debate up and along now.

Related articles
  • Hayek vs Keynes at the LSE – John Phelan, 27 July 2011


Engaging friends from the Balkans and Eastern Europe

This morning, I addressed on behalf of TCC twenty young people at a ‘Balkans and Eastern Europe Regional Youth Conference’, hosted in London.

Under the heading, ‘Creating a Framework for Economic Progress in Europe and Beyond’, I spoke about the Austrian School of Economics, the financial crisis and how a genuine market in banking and currencies would facilitate more robust and sustainable prosperity.

It was a fun and memorable event and I would like to take this opportunity to thank the participants for such excellent engagement: Ilir Azizolli and Ujezi Brecani from Albania; Hristo Hristov Panchugov and Veronika Dimitrova Gyurova from Bulgaria; Jasmin Spahic and Nina Mehic from Bosnia; Nikola Srebro and Jelena Elcija from Bosnia-Herzegovina; Archil Tsertsvadze and Ana Samsonia from Georgia; Hristina Runceva MP and Stojan Lazarov from Macedonia; Viorel Garaz and Ion Butmalai from Moldova; Mila Jasovic and Nikola Bajcetic from Montenegro, and; Marina Kvrzic, Nenad Todorovic, Sanja Bogosavljevic and Mihajlo Zdravkovic from Serbia.


A grand and sound marriage!

Ten years ago, I got into a lot of (understandable) trouble when in the middle of our wedding reception my wife found me giving out business cards whilst attempting a number of philosophically sound deals with some of the guests. Quite rightly, Helen pointed out that this was not the time nor the place for such ventures – after all, this was our big day!

Last weekend I attended the magnificent wedding of Shane Frith and his wonderful bride, Erica. Shane is a Kiwi who has lived in London for the best part of a decade and has made a successful career in free market think tanks. The wedding took place in Erica’s hometown of Lytham St. Annes and I was driven up there by my old friend Dr. Syed Kamall MEP. It was a grand affair and there were a number of TCC supporters present – including Syed.

Now, given my ‘machinations’ ten years ago I cannot tell you how much I – and other guests present – laughed when in walking into Shane and Erica’s wedding breakfast we found that each of the tables were named after a sound thinker including Ludwig von Mises, Fredrick Hayek and even Ayn Rand. Indeed, I sat there in heaven when in the middle of the groom’s speech, Shane managed to weave in direct praise for the Austrian school of economics!

Shane and Erica, thank you so much for such a lovely weekend. On behalf of all The Cobden Centre team we wish you every success for your future and, well, keep up the good work!


A useful nod for the Austrian school of economics?

A few days ago I represented The Cobden Centre by speaking at an International Leadership Summit in Opatija, Croatia. It was a grand affair, held in association with the Adriatic Institute for Public Policy, and involved more than fifty opinion formers.

They included an interesting and varied array of politicians such as the Czech MEP, Jan Zahradil; the British MEP, Geoffrey Van Orden; the Polish MEP, Adam Bielan; the former Bulgarian Foreign Minister, Nadezhda Neynsky; US Senator, Jeff Sessions, and; the former New Zealand Cabinet Minister, Maurice McTigue (to name but a few).

The session in which I spoke was headed ‘The Sovereign Debt Crisis and the Crisis of Sovereignty’ and my partners for the occasion were the British MEP Danniel Hannan and the former Prime Minister of Republika Srpska, Mladen Ivanić.

Now, beyond the content of our presentations and the debate that ensued, what was really interesting to me about this venture was how every time I or Dan Hannan mentioned the Austrian school of economics, a majority in the audience nodded as if in ‘knowing approval’. Clearly, a small minority of those present were familiar with Austrian school ideas but I suspect the overwhelming majority were not; yet all nodded.

To me, what is interesting about this is that if the gathered selection of people were in anyway representative of similar audiences further afield then maybe Austrian school ideas are starting to spread in such a way that even those ignorant of its details are starting to feign appreciation.

If so, then this all strikes me as being reminiscent of that time in late 1950s when across Western Europe and parts of North America it suddenly became fashionable for’ leaders’, ‘intellectuals’ and ‘opinion formers’ to ‘know’ and be able to comment on Socialism and Marxism. By the time of all the political and social upheavals of the late 1960s, few guests at any smart dinner party in London, Paris or New York wanted to admit that they knew absolutely nothing about these paradigms. So often they gave the impression that they did and in so doing aided a self-fulfilling prophecy much to the advantage of genuine and learned Marxists.

Maybe with the undermining of banking and monetary socialism, a similar whisper is emerging to the great benefit of Austrian ideas. In providing powerful diagnoses and explanations perhaps its ideas are now slowly starting to become fashionable even amongst elements of the so called smart set. Who knows? Only time will tell. But it is an interesting thought.


Political economy and the crisis

I had the great pleasure last night of speaking to the Economic Research Council on the subject of Political Economy and the Crisis.  I argued that:

  • Economics should become political economy, embracing the problem of knowledge in the social sciences, morality (think Adam Smith’s Theory of Moral Sentiments) and public choice theory, in particular.
  • Classical liberalism is the most robust political economy.
  • The Austrian School offers important insights, particularly into business cycles and capital theory.
  • The Austrian School predicted and intellectually survived the crisis.
  • That reality is, or should be, a challenge to the contemporary paradigm.
  • The implications for financial reform are profound.

We had a lively Q&A covering subjects from the Chinese socio-economic model to the residual role of the state.  We agreed that we must not seek a rational reconstruction of society and we left outstanding the key challenge: to determine how to reform the financial system to deliver a free-market monetary regime.

My slides are available as a PDF here. For related reading, please see our primer and this article on the need for a paradigm shift in economics.


Very impressed by the Leadership Institute

Last week, I spoke on behalf of The Cobden Centre at a very spectacular Leadership Institute event organised at Wellington College – just outside London.

The Leadership Institute is the leading activist training centre for free marketeers in the United States of America. And on this occasion, my audience was some 120 people from around the world, including so it seemed to me, many people from Spanish speaking countries.

Now, while I very much enjoyed my hour on the podium – and from all the feedback so it seems did my audience – I am constantly amazed by the achievements of this sort of enterprise. In particular, I was blown away to learn from the LI’s founder and director, Morton Blackwell, how over the years the Institute has now formally trained more than 92,000 students. That, it strikes me, is quite some record and an amazing achievement!


TCC at the Liberty League Forum

I recently spoke at a fabulous event in Birmingham organised by the Liberty League. Called the Liberty League Forum and hosted for 100 young people and students, my brief was to provide a rousing conclusion to what had clearly been a very successful three days of lectures and leadership training.

There were many things I enjoyed about this event and three are worthy of comment. First, I thought the audience was terrific. Lots of new faces, lots of people from different backgrounds and not too many young-Tory-fogey types! Second, I liked the way the audience enjoyed radical ideas and the spirit of pushing at boundaries. Academia is often too conservative and narrow these days. Too often, university reading lists fail to provide students with the rounded and challenging exposure to ideas that so many of them love. Finally, I thought the organisation was excellent. Supported by key players at the Institute of Economic Affairs, The Freedom Association and the Adam Smith Institute, I thought the range of speakers, the subjects chosen and all the underpinning logistics were excellent.

This is important because as a member of the Liberty League’s Advisory Board, my understanding is that they want to unite the young free market movement in a way that has never been achieved before. Using social media platforms, holding seminars and major conferences, they want to take the ideas of classical liberalism and liberty to a new generation. Wonderful.


Panel discussion held in Parliament on Britain’s Trillion Pound Horror Story

Over on my own website, I introduce the research showing the true scale of Britain’s liabilities and report:

As Chairman of the APPG on Economics, Money and Banking, I hosted a panel discussion on the documentary featuring film maker Martin Durkin, the Adam Smith Institute’s Dr Eamonn Butler, IEA Director General Mark Littlewood and CityAM’s Editor Allister Heath.

The discussion was dramatic:

  • Martin insisted only lower taxes would get us out of our present hole.
  • Allister described the growth of the state, the flaws in monetary policy and the regulator regime which caused the crisis, calling for lower public spending.
  • Mark said we should be “hysterical” and “apoplectic” about the state’s true liabilities before making some spectacular remarks about our democracy and the election (see from min 13 in the video below).
  • Eamonn felt things were even worse and was not sure our grandchildren would wish to pay the benefits we are awarding ourselves.

Here’s a video of the introductory remarks and the responses to the first question. Martin gets the last word on the likely public reaction to doing the right thing:

Panel discussion on Britain’s Trillion Pound Horror Story held in Parliament from Steve Baker on Vimeo.

This event was co-sponsored by the IEA, the Adam Smith Institute and The Cobden Centre.


Steve Baker speaks at the IEA on fiscal policy

Capital-based macroeconomicsOn Tuesday, I spoke at the IEA’s The State of the Economy conference, participating in a panel discussion on Fiscal Policy and Government Expenditure with Edmund Conway, Sir John Bourn, Graeme Leach and Danny Alexander MP.

In discussions about when to begin cuts, I flatly rejected Keynesianism, explaining that capital-based macroeconomics gives a quite different set of tools for thinking about the economy. This generated interest from students and professional economists present so I have updated our primer, adding The Causes of the Economic Crisis and Garrison’s macroeconomics slides.

I also recommend these articles as a quick-start to rethinking money, banking and economics:

And for a light-hearted treatment of the same concepts, here’s the Hayek vs Keynes video: