Sandtner, Walter

Summary by Dr. Walter Sandtner, Vienna

The subject is not new, there were seminars, conferences and books, f.i. Nicholas Wapshott, “Keynes-Hayek-The clash that defined modern economics” (2011).
There is not only one unresolved issue, but two, maybe more. I limit myself to two unresolved issues.

Keynes (1883-1946) was a “product” of Cambridge, Hayek a “product”of Vienna.
Both were world-famous, Keynes with his “The consequences of the Peace” (1919, against the Treaty of Versailles) and his “The General Theory of Employment, Interest and Money”(1936). He was head of the British delegation at Bretton Woods (1944), where the future of the world currency, based on the gold standard, was decided. The British delegation was against the gold standard and in favour of a “managed currency”, Keynes`long-time preference, but overruled by the USA.
Hayek founded in 1927, together with Ludwig von Mises, the Austrian Institute for economic trends, in 1944 he published his “The Road to Serfdom”, which made him world-famous, and in 1960 the “Constitution of Liberty”.
Keynes was ennobled in 1942 (Lord Keynes), Hayek received in 1974 the Nobel Prize together with Gunnar Myrdal.

Hayek wrote the book in defense of freedom, as he was afraid that the UK, where he lived since 1931, might become a socialist country. He writes, p. 13: “…socialism means slavery, we have moved steadily in the direction of socialism”. Similar fears were expressed by the Viennese philosopher Karl Popper, living at the time also in the UK, in his book “The open society and its enemies” (1946) and George Orwell in his books “Animal Farm” (1946) and before all in “1984” (1949). Even in the USA such fears were present as expressed by the Austrian Harvard Prof. Joseph Schumpeter in his “The march to socialism” (1949).
Keynes expressed his view on Hayek`s book in a letter of 28 June 1944 (reproduced in Harrod`s voluminous Keynes-biography, 1951,p. 436). Keynes makes 4 points, especially on planning and government programmes: “I should say what we want is not no planning, indeed I should say that we almost certainly want more…What we need, therefore, in my opinion, is not a change in our economic programmes, but perhaps even the contrary, namely, an enlargement of them”. While Keynes` statement on planning is ambiguous (Hayek was not against the careful planning, f.ex., for the construction of an Underground, he was adamantly opposed to central state planning), Keynes` remark on the enlargement of government programmes was directly opposed to Hayek`s thinking, who favoured a strong role of the market instead of ever more government programmes. Hayek was of the opinion that a steady enlargement of government programmes would lead to an ever bigger share of the state in the GDP and in this manner pave “the road to serfdom”.
Some examples of shares of state in the GDP:
CH: 32%, DEU: 44%, Austria: 53%, FRA: 58%
Hayek certainly would have preferred the Swiss model with 32%.
This matter should be carefully considered before all by young people as your future depends on it. In deciding this first “unresolved issue” not only economic and technical aspects have to be taken into consideration, but als the mentality and psychology of a population (FRA, f.i., since Louis XIV and Colbert is accustomed to a “strong state” which only gradually can be changed).
Hayek`s warning of a “Road to Serfdom” is still valid today. But, as we see, the serfdom can not only come by economic factors, but perhaps even more by the ever present electronic control to which we are submitted.

Who has won the battle between Keynes and Hayek? (I asked the audience to vote, the result was balanced, most abstained).
In my mind the battle was won by Keynes. When, where and how did he win?
The “victory” of Keynes (who for decades was in favour of a “managed currency” and against the gold standard; in Bretton Woods he was overruled by the USA) was realized on 15 August 1971 by Pres. Nixon who abolished the gold standard and introduced a “managed currency”-system. Nixon said of himself: “Now I am a Keynesian in economics” (Wapshott, p. 242). Milton Friedman commented: “Nixon was the most socialist of the presidents of the US in the twentieth century” (Wapshott, p. 242). The result, as well known, is an incredible increase of paper money, a true paper flood, of state debts, of Central Bank bonds etc. Reagan, Thatcher and others were only small pauses in this development.
What did Keynes expect of a “managed currency”? He thought that due to such a “flexible” currency system there would be no more financial and economic crises as in 1929/30, there would be low interest rates, high investments, a high degree of employment, even full employment and last, but not least “a reduction of inequality”. Such a system would, as he writes in the “General Theory”, p. 322, “enable the so-called boom to last…thus keeping us permanently in a quasi-boom”.
When I think of these expectations of Keynes, I feel reminded of Martin Luther King`s famous sentence: “I have a dream”.
The reality since 1971 is, with the exception of low interest rates, nearly the exact opposite of Keynes` “General Theory” expectations:
– From 1945 till 1971, under the gold standard, there were practically no crises, the French speak of the “30 glorious years”. Since 1971 we have nearly uninterrupted crises, in South East Asia, in Japan, The Russian currency break-down in 1998, in Mexico, Argentina, the technological dot.com crisis in 2001, the Global Financial Crisis (GFC) in 2008 ff, the Euro Zone state debt crisis in 2013 and maybe more.
– An incredible increase of state, but also company debts.
– An incredible increase of Central Bank bonds, alone the 4 major Central Banks (US, Japan, ECB, BoE) since 2008 more than 10 Trillion $.
– Ultra low interest rates, probably beyond the expectations of Keynes.
– Mounting prices of shares and real property.
– Before all the exact opposite of Keynes` main prediction: Instead of full employment a high rate of unemployment, in the Euro Zone on average more than 8% and a youth unemployment rate in Southern European states between 20 and 45%!
– Finally instead of a lower inequality a steadily higher inequality. Keynes should have known that low interest rates are in favour of the rich, not the poor. This is clearly shown in a recent BoE working paper and in the recent book of Tucker, former Vice Governor of the BoE.
Regarding crises the “Long-Term Asset Return Study” of the Deutsche Bank, 18 Sept. 2017, p. 5, writes: “We`re quite confident that there will likely be another financial crisis/shock pretty soon with their frequency continuing to be high until we create a more stable global financial framework”.
The Deutsche Bank does not make a proposal for such “a more stable global financial framework”.
So this question is a second unresolved issue.
The “victory” of Keynes has left the world with a tremendous burden.