Hayek On Keynes: "Economics Was A Sideline For Him"

Tyler Durden's picture


Keynes will be remembered as "a man with a great many ideas that knew very little economics," Friedrich Hayek notes in this brief interview and when challenged on his 'parochial' knowledge of economic history he was "not sheepish in the least... he was much too self-assured." Hayek's perspective casts Keynes in a very different light than his fan's apostolic adoration might suggest, "he was utterly contemptuous of anything that had been done before." While Hayek describes Keynes as one of the most intelligent people he had known, he perhaps sums up the man's work in this brief phrase - "economics was just a side-line for him." As we note below, many describe Keynesian policy as 'dumb', however a more appropriate word would be 'foolish'.


Hayek On Keynes


Keynesian Policies: Not Dumb, Just Foolish (via the Ludwig von Mises Institute of Canada)

A lot of my Austrian friends refer to Keynesian policies as “idiotic,” “stupid,” etc., but that’s not really accurate. Indeed, the Keynesian policy prescriptions are so counterintuitive–they so defy common sense–that only very intelligent people with plenty of schooling could have the confidence to utter them with a straight face.

Rather than describing Keynesian policies as “dumb,” I think a more appropriate word is foolish, because the technical analyses of IS/LM curves, talk of the “liquidity trap” and so on, utterly ignore political realities. A great example of this is Matt Yglesias and his handling of Argentina. Back in May 2012–not that long ago, by any stretch–Yglesias held up Argentina as a model for the eurozone countries. He wrote:

Spain is in a complete economic crisis…But perhaps there is a way out, one suggested by the recent experience of Argentina, a nation that’s currently enjoying full employment. 

…[W]hen the world economy hit a snag in 2001, trouble emerged for Argentina. Unrelated hidden risks were revealed elsewhere in the global investment landscape and everywhere people got nervous. The foreign capital began to abandon Argentina, reducing investment, employment, and incomes. This in turn sharply reduced the Argentine government’s tax revenues and led to calls for sharp budgetary consolidation…Protesters and rioters took to the streets. President Fernando de la Rua’s party took a beating at the polls. Argentina defaulted on its external debt, broke the rigid linkage between the peso and the dollar, and went back to pursuing an independent monetary policy….

Default and devaluation were hardly a party. They destroyed the country’s banking system and wiped out many Argentines’ savings. But it did work. Argentina has grown rapidly in subsequent years and its unemployment rate has fallen steadily…

So Yglesias was recommending that Spain and other troubled countries ditch the euro and default on their sovereign debts, so they could free their printing press from the shackles of Brussels. The obvious Austrian (and generally free-market) response would be to warn that debasing the currency is hardly the path to prosperity, and that “solving” a crisis in this way would merely sow the seeds of a greater problem down the road. The prosperity coming from the printing press was an illusion.

Well, the economy in Argentina is now “melting down”–Yglesias’ own term. But our fearless Keynesian pundit has nothing for which to apologize. He explains in a January 2014 post:

With Argentina’s economy melting down, I’ve gotten various queries from people asking whether I regret having praised the country’s successful 2002 devaluation and default back in 2012 as an example for Spain and Greece to emulate.

The answer is: absolutely not!

Argentina is a country that has not, historically speaking, been well-governed. In fact one reason that the 2002 default was necessary was that Argentina  previously embarked on a deeply misguided currency board scheme. To say that Argentina’s 2002 default and devaluation was the right thing to do and that there are important lessons to be learned from it is not to say that all countries should always emulate Argentina in all respects.

So there you have it, folks: Countries that historically have been ill-governed should follow Argentina’s lead by defaulting on their debts and debasing their currencies, but they should stop right before the bad consequences of these actions come home to roost. Simple as pie. Sort of like giving a bottle of Jack Daniels to some frat guys and sending them to the library to study–what could possibly go wrong?

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Mon, 02/17/2014 - 18:21 | 4445896 buzzsaw99
buzzsaw99's picture

what? no mention of the imminent asian contagion? raff out roud. when zh and soros agree the end is truly nigh. lulz

Mon, 02/17/2014 - 18:31 | 4445931 knukles
Mon, 02/17/2014 - 18:51 | 4446001 Stackers
Stackers's picture

Sounds like he's describing Krugman to me.

Mon, 02/17/2014 - 19:09 | 4446026 TruthInSunshine
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Keynes actually believed (as in truly believed) that recession and high unemployment are mainly the result of insufficient spending in the private sector.

I don't believe that there's even one "credible" Keynesian who would contest that this was, indeed, a fundamental underpinning - foundation, if you will - of Keynes' collective body of economic theory.

I would argue that this is why, over time, any economic system built of a truly Keynesian foundation will inevitably collapse upon itself.

Does anyone here actually believe that government, which inevitably takes assets of the productive members of its citizenry, is more efficient at determining what the "appropriate amount" of spending in the private sector should be, and if so, does anyone here believe, as a secondary concern that government is nearly as efficient at "spending" as the private sector?

I'd argue an emphatic no to the former question, and an even more empatic no to the latter one (I don't think it can be overstated how much LESS EFFICIENT government is at spending than the private sector is).

Mon, 02/17/2014 - 19:12 | 4446043 Boris Alatovkrap
Boris Alatovkrap's picture

If Boris is meet Keynes, maybe break JMK's face. Of course, is for benefit of stimulation for local economy, nothing is personal.

Mon, 02/17/2014 - 20:32 | 4446266 0b1knob
0b1knob's picture

"a man with a great many ideas that knew very little economics"

perhaps he was also a man with a great many ideas WHO knew very little economics....

Mon, 02/17/2014 - 20:36 | 4446278 Alethian
Alethian's picture

Well done - you just corrected Hayek. Cookie?

Mon, 02/17/2014 - 21:05 | 4446358 JeffB
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Actually, I think he corrected the transcript of Hayek's interview. It sounded to me like Hayek said that Keynes "was a man with a great many ideas who knew very little economics".

Mon, 02/17/2014 - 21:30 | 4446408 National Blessing
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There's never been a good economist.  They all get it wrong.  Blockheads.

Mon, 02/17/2014 - 22:11 | 4446520 Alethian
Alethian's picture

I didn't rewatch the video, but I wouldn't be surprised if Hayek said "who". He was very particular about his English.

Mon, 02/17/2014 - 23:27 | 4446749 TruthInSunshine
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I almost wandered over to Paul "When Mars Attacks" Krugman's cult-of-personality blog to see if he dared to bother defend Yglesias's position & prognostication vis-a-vis Argentina, and if so, in what possibly tortured manner.

And then I asked myself a very simple question: "Why bother?"

I therefore saved at least 10 minutes of my life not being subjected to the abject torture that is further reading/hearing/considering anything Krugman.

Congratulations to me.

Tue, 02/18/2014 - 00:09 | 4446870 Ranger4564
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He said "who" in the video.

Mon, 02/17/2014 - 23:53 | 4446836 DanDaley
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"a man with a great many ideas that knew very little economics"

perhaps he was also a man with a great many ideas WHO knew very little economics....


"That" can be used as a relative pronoun for a person or an object, whereas "who" is used exclusively for a person. "Which" is used exclusively for non-persons. It's not that complicated.


Mon, 02/17/2014 - 20:50 | 4446268 0b1knob
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(accidental double post)

Tue, 02/18/2014 - 04:57 | 4447246 John Wilmot
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broken window fallacy meets broken face reality

Mon, 02/17/2014 - 18:59 | 4446019 Annoyingserf
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Just started 'The Road to Serfdom'.

Methinks my education is just begining....

Mon, 02/17/2014 - 20:37 | 4446284 Alethian
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Read _The Constitution of Liberty_ afterwards. And be sure to read his essays on knowledge, intellectuals, and conservatism.

Mon, 02/17/2014 - 21:05 | 4446357 Not Too Important
Not Too Important's picture

Then read 'Tragedy And Hope' and know that nothing else matters. Nothing.

Mon, 02/17/2014 - 22:16 | 4446538 Annoyingserf
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Thank you for the suggestions; both will be added to my collection for study.



Tue, 02/18/2014 - 10:20 | 4447717 limit_less
limit_less's picture

An excellent book.

Mon, 02/17/2014 - 18:28 | 4445922 Ex Cathedra
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Austrians = austerians = dead wrong.

Why are data, evidence, and reality not dreamt of in the Austrian philosophy?

Mon, 02/17/2014 - 18:31 | 4445932 THX 1178
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Data is always incomplete. Evidence is not always valid. Reality is dreamt of in Austrian economics.

Mon, 02/17/2014 - 18:40 | 4445963 Ex Cathedra
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Like the reality that their predictions have been wrong? 

Mon, 02/17/2014 - 18:46 | 4445983 THX 1178
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Peter Schiff was right. Youtube. Nuff Said.

Mon, 02/17/2014 - 19:14 | 4446051 Boris Alatovkrap
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Dear Mr. Catheter

Attendant phlebotomist is urgent call, your blood test is come back, you are full of sh¡t.



Mon, 02/17/2014 - 19:28 | 4446095 maskone909
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Lol u must work in medical boris

Mon, 02/17/2014 - 19:52 | 4446126 Boris Alatovkrap
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Boris is once work in hospital as chief assistant custodial facilitator. During tenure, Boris is form profitable program for recycle IV and catheter. Hospital is save money and patient population is drastically reduce.

Mon, 02/17/2014 - 19:39 | 4446121 Anusocracy
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Ex Cognition's problem is that he can't accept a world where people are free from his beliefs.

Mon, 02/17/2014 - 19:43 | 4446132 Boris Alatovkrap
Boris Alatovkrap's picture

You are think is maybe only single problem...? Maybe is multiplicity of compound problem, if believe Keynesian clap trap.

Mon, 02/17/2014 - 19:25 | 4446081 Harbanger
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Speaking of Schiff, gold made some strange vertical moves today.

Mon, 02/17/2014 - 19:54 | 4446152 Boris Alatovkrap
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Odd... Boris' bowel is also make strange vertical move today.

Mon, 02/17/2014 - 20:01 | 4446171 Harbanger
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Mother in law is use too much caraway seed.

Mon, 02/17/2014 - 18:59 | 4446020 X_mloclaM
X_mloclaM's picture

Marc Faber was right on portfolio allocation over medium term in big ways, predicted crashes, ever since getting in the business ... he understands economics.

Also, here is a short list of Austrians that warned of the Housing Bubble well in advance: http://www.informationliberation.com/?id=32412

Mon, 02/17/2014 - 20:28 | 4446257 A Nanny Moose
A Nanny Moose's picture

To what predictions exactly are you referring?

Tue, 02/18/2014 - 00:29 | 4446909 ebworthen
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When the FED and the Treasury are robbing citizens blind - predictions of sanity and reality making their way back to Earth never materialize because our Ponzi is off in the ether of space.

Mon, 02/17/2014 - 18:32 | 4445935 Irene
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Probably because Austrians understand that human action can't be captured by static numbers.

Mon, 02/17/2014 - 18:39 | 4445960 Ex Cathedra
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So ignore it?

Mon, 02/17/2014 - 18:44 | 4445975 maskone909
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Keynes endorses consolidated power. Therefore will always be the tasters choice of monarchs and elites. Propaganda is a powerful thing

Mon, 02/17/2014 - 18:45 | 4445981 Ex Cathedra
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Are you capabe of representing Kynes' views?  Evidently not.

Mon, 02/17/2014 - 18:47 | 4445986 maskone909
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I dont have to. This mess we all live in represents it appropriately. How are those employment and deficit numbers coming along?

Mon, 02/17/2014 - 19:19 | 4446059 Boris Alatovkrap
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If adjust data and invert axis, graph is look very very nice, just like is village on Dnieper River.

Mon, 02/17/2014 - 19:27 | 4446090 Herd Redirectio...
Herd Redirection Committee's picture

Its the beautiful THRIVING metropolis of Potemkin!

Mon, 02/17/2014 - 19:56 | 4446163 Boris Alatovkrap
Boris Alatovkrap's picture

You are visit and witness utopian glow of harmonious living arrangement?! Yes, Potemkin is was wonderful thriving community, 8:00 to 17:00 every second day (transport bus for "resident" is not so reliable).

Tue, 02/18/2014 - 04:40 | 4447237 sylviasays
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Hayek On Keynes: "Economics was a sideline For him"


Keynes real job was producing toilet paper. 

Mon, 02/17/2014 - 18:50 | 4445998 hobopants
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"The historicist and positivist programs, Mises pointed out, were fatally flawed from the outset in their failure to appreciate the necessarily theory- laden nature of all ‘‘facts.’’ This insight is not new to Mises but was emphasized by Goethe who stated: ‘‘everything in the realm of fact is already theory’’ (1995: 307). Mises employed a version of this argument when he pointed out that empiricists are ‘‘able to believe that facts can be understood without any theory only because they failed to recognize a theory is already contained in the very linguistic terms involved in every act of thought. To apply language, with its words and concepts to anything is at the same time to approach it with theory"


Mon, 02/17/2014 - 18:59 | 4446002 lordylord
lordylord's picture

Like the way Keynesians ignore all historical evidence?  Like the way you ignore the last 100 years of economics in the US leading us to today?  Whatever happened to Keynes' prediction of a perpetual boom in the business cycle?  Foolish is the right word.  It would not be so bad if your economic theories pertained only to economics.  The problem is that your economic theories spill over to politics.  It gives tyrannical government the means to enact their atrocities.

Mon, 02/17/2014 - 19:00 | 4446023 Irene
Irene's picture

Wow, all those input-output tables etc. used by non-Austrian economists proved to be just so on the money. But I suppose if you're happy with statist, top-down management of an economy you'd be happy with that sort of thing. They do such a swell job capturing the work of worker bees.  Then again, they totally FAIL! with anything involving human ingenuity.

In a nutshell, if all you're measuring is known production capabilities, you don't need to study econ.  Okay?  Today is the same as yesterday is the same as tomorrow.  And if your economic theory can't explain starts, jumps and changes in the economy, all the math in the world ain't gonna help. 


Mon, 02/17/2014 - 19:59 | 4446169 Optimusprime
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Irene, you deserve 1000 upvotes for this--this captures what needs attention.

Mon, 02/17/2014 - 19:59 | 4446170 Optimusprime
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Irene, you deserve 1000 upvotes for this--this captures what needs attention.

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