Transcript Wapshott Interview on Keynes Hayek

Interview with Nicholas Wapshott
“Keynes Hayek: The Clash That
Defined Modern Economics”
Daryl Montgomery
March 22, 2012
Copyright 2012, All Rights Reserved
The contents of this presentation are not intended as a recommendation to buy or sell any security.
Keynes and His Most Famous Book
Summary of Keynesian Ideas
• Maximize employment in the short term (you can
live better today by borrowing against the future –
“in the long run we are all dead”, so our
grandchildren will pay).
• Didn’t worry about inflation and he thought small
amounts benefitted the economy.
• Opposed to gold standard.
• Government knows best (essentially elitist) and
should take an active role in running the economy.
• Approach is philosophical, not scientific.
Hayek and His Most Famous Book
Summary of Haykek’s Ideas
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Maximize employment in the long term.
Worried a lot about inflation.
Free Market knows best (individualistic).
Government intervention not useful.
Socialism leads to authoritarian governments.
Thought Monetary Theory had significant
limitations.
• Approach was philosophical, not scientific.
Nicholas Wapshott and His Most Famous Book
Wapshott Background
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Editor of The Times Saturday Edition
Founding Editor of The Times Magazine
North American Correspondent for The Times
Senior Editor at The Daily Beast
Thompson Reuters Columnist
Regularly appears on CNN, MSNBC, Fox News,
ABC
• Author of “Ronald Reagan and Margaret Thatcher:
a Political Marriage” and “Thatcher” (with George
Brock)
How Did the Book Come About?
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How did you get the idea for the book?
How long did it take to write?
What did you find most challenging?
What did you find most surprising?
Keynes: Economic Consequences of the Peace
• Keynes predicted burdensome WW I reparations would
lead to extremist politics and another war (he didn’t
predict they wouldn’t be repaid).
• Only around 1% of reparations were paid in 1921,
then Germany defaulted. Hyperinflation took place
because of money printing and this is what caused
political instability (Keynes claim it was a failure of
capitalism). This began the Nazi rise to power.
• Keynes stated: “There is no subtler, no surer way
means to overturning the existing basis of society than
to debauch the currency” [Note: current Fed policy]
• Hayek big fan of Keynes at this time (had 200 pay
raises in 8 months).
Hayek Comes to the UK
• UK not free market. The dole existed, strong unions
and a central bank set interest rates.
• Keynes and his Cambridge Circus: “It is by
argument, by conflict if you like that economics
makes progress.” [Not real world observation.]
• Hayek invited to LSE to give 4 lectures in 1931,
then hired by them.
• Lot’s of back and forth with Keynes until Keynes
publishes his General Theory in 1936. Hayek then
goes silent and is pushed into the background.
Keynes and the General Theory
• New Deal already underway in U.S. before it was
published (met with Roosevelt after).
• Advocates increased government spending to stimulate
economy (or same spending with lower taxes), more
consumer spending, less savings.
• Multiplier Effect means gov’t expenditures pay for
themselves (free lunch). Little attention paid to downside.
• “There is no possibility of balancing the budget except by
increasing the national income, which is the same as
increasing employment.”
• Keynes policies have been implemented globally following
WW II. Hayek warned of creeping inflation. What are the
results?
Keynes’ Policies Haven’t Created Full Employment.
Note that every time the unemployment has gotten low, a recession has followed.
Keynes’ Policies Have Led to Huge Budget Deficits
Red line General Theory, Gold line when gold standard ended.
Keynes’ Policies Have Led to Skyrocketing Federal Debt
Red line General Theory, Gold line when gold standard ended.
Keynes Policies Have Led to Chronic Inflation
Hayek Comes Back with Road to Serfdom
• Published in 1944, was a bestseller in U.S.
• Pointed out that both Nazism and Communism had roots
in central planning.
• “When economic power is centralized as an instrument
of political power it creates a degree of dependence
scarcely distinguishable from slavery.”
• Warned that “Rule of Law” must be paramount (violated
by mortgage companies and banks during Credit Crisis).
• UK had a socialist Labour government from 1945 to
1951 that nationalized many industries and created a
cradle-to-grave welfare state.
Keynes and Hayek Have Their Ups and Downs
• Hayek founded Mount Pelerin Society in 1947
(source of new Austrian School and Monetarist ideas).
• Keynes ideas unquestioned until stagflation of 1970s.
• Hayek shares Nobel Prize in Economics in 1974.
• Thatcher in UK tries to dismantle welfare state, Reagan
gives lip service to Hayek’s ideas.
• Keynesian policies reassert themselves.
• After tech collapse in 2000, gov’t stimulus of real estate
market is classic Keynesian.
• Credit Crisis response in 2008 was super Keynesian.
An Example of Fed Money Printing
U.S. Monetary Base
M1 Money Supply
What Happens When Keynesian Stimulus is Removed
Special Thanks to Nicholas
Wapshott for Appearing.
“Keynes Hayek: The Clash That
Defined Modern Economics”