Keynes vs Hayek

In October of 1932, in the midst of the Great Depression, John Maynard Keynes, A.C. Pigou, and other Cambridge and Oxford economists published an invited letter in The Times, in which they advocated public spending on all manner of projects in order to put people to work.

[I]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.

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.”

J.M. Keynes, A.C. Pigou and others,“Private Spending”, The Times (London), 17 October 1932, p. 13.

Two days later, Friedrich Hayek and his colleagues at the London School of Economics responded, urging fiscal restraint.

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 admitted 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, etc., merely because people “feel they want” such amenities.

F.A. Hayek, Lionel Robbins and others, “Spending and Saving”, letter to the editor, The Times (London), 19 October 1932, p. 10.

The letter from Hayek and friends could have been written today, by a deficit hawk. As NYU economist Mario Rizzo puts it, “the great debate is still Keynes versus Hayek. All else is footnote.”

HT: Mario Rizzo, via P. Krugman

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