America’s Great Depression Quote of the Week: Hayek and Keynes in a single paragraph

My introduction to Austrian economics began over 30 years ago when my mentor Fred R. Glahe handed me a couple of pages of handwritten notes on the Hayek-Keynes debate which he had prepared for commentary at a Mont Pelerin Society meeting sometime in the late 1970s and suggested I turn the notes into a dissertation. The ultimate result was the publication (with Fred) of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research, a 200 page attempt to make Hayek-Keynes and ABCT intelligible to a traditional trained neoclassical who in the process became a self-taught Austrian. I recently revisited the debate when Chris Coyne asked me to complete a chapter (40 more pages) on Keynes and the Austrians for a forthcoming handbook on Austrian economics. Roger Garrison in Time and Money does a masterful multiple chapter comparison of Hayek-Keynes (and an excellent power point as well). More recently David Sanz Bas provides a new look at the debate in a QJAE article “Hayek’s Critique of The General Theory: A New View of the Debate between Hayek and Keynes.” Videos, “Fear the Boom and the Bust”and “Fight of the Century”, by John Papola and economist Russell Roberts  popu­larized the idea that Hayek and Keynes (and their differing views on the virtues of markets and individual planning versus government intervention and more centralized planning) are crucial for understanding the current economic stagnation and policy debates. All are useful but lengthy. For those with limited time, Rotbard, in AGD, was able to capture the essence of the debate in a single paragraph (note 1 page 37):

Hayek subjected J.M. Keynes’s early Treatise on Money (now relatively forgotten amid the glow of his later General Theory) to a sound and searching critique, much of which applies to the later volume. Thus, Hayek pointed out that Keynes simply assumed that zero aggregate profit was just sufficient to maintain capital, whereas profits in the lower stages combined with equal losses in the higher stages would reduce the capital structure; Keynes ignored the various stages of production; ignored changes in capital value and neglected the identity between entrepreneurs and capitalists; took replacement of the capital structure for granted; neglected price differentials in the stages of production as the source of interest; and did not realize that, ultimately, the question faced by businessmen is not whether to invest in consumer goods or capital goods, but whether to invest in capital goods that will yield consumer goods at a nearer or later date. In general, Hayek found Keynes ignorant of capital theory and real-interest theory, particularly that of Böhm-Bawerk, a criticism borne out in Keynes’s remarks on Mises’s theory of interest. See John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), pp. 192–93; F.A. Hayek, “Reflections on the Pure Theory of Money of Mr. J.M. Keynes,” Economica (August, 1931): 270–95; and idem, “A Rejoinder to Mr. Keynes,” Economica (November, 1931): 400–02.

If I had read that right after Fred handed me his notes, I might still be looking for a dissertation topic and world would have been spared an overpriced under read academic book.


  1. “If I had read that right after Fred handed me his notes, I might still be looking for a dissertation topic and world would have been spared an overpriced under read academic book.”

    But I would be poorer in my understanding of the debate. Too many people debate Hayek-Keynes emotionally. You and Professor Glahe argue from economic logic. I can talk much more intelligently to Keynesians after reading your book. I would recommend your book to any serious economist.

  2. Great self-effacing comment, John Cochran. It seems to me the art of reducing the complex to a few simple, succinct words is most often demonstrated by brilliant but humble souls, which by most accounts precisely describes Rothbard. Perhaps no one ever demonstrated the art so well so often as did Jesus of Nazareth in his Sermon on the Mount (Matthew, Ch. 5-7).

    One example: “Beware of false prophets, who come to you in sheep’s clothing but inwardly are ravenous wolves. You will know them by their fruits.” MT 7:15-16

    Had most economists heeded this bit of wisdom, particularly those at Cambridge, J. M. Keynes would have been drummed from the profession long before he published his GT or debated Hayek.

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