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Subject Area: Political Theory

Hayek contra Keynes - Leonard P. Liggio, Literature of Liberty, Winter 1982, vol. 5, No. 4 [1982]

Edition used:

Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.

Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


Hayek contra Keynes

These general views illuminate much of the rationale of Hayek's opposition not only to Keynesian policies of macroeconomic demand management but also to Friedmanite monetarism. Of course, in the great debates of the Thirties, Hayek had argued forcefully that Keynes in no way provided a general theory of economic discoordination. Again, Hayek always argued that the policies Keynes suggested, depending as they did for their success upon institutional and psychological irrationalities which their very operation would undermine, were bound over the longer run to be self-defeating. In particular, Hayek maintained that Keynesian policies of deficit financing depended for their success upon a widespread money illusion which the policies themselves could not help but erode. Hayek's further objection to Keynesian policies is that, in part because they depend on a defective understanding of the business cycle (which is seen as expressing itself in aggregative variations in total economic activity rather than in a discoordination of relative price structures brought about by a governmental distortion of the structure of interest rates) Keynesian policy-makers, because of their holistic and aggregative bias, find it hard to avoid committing a sort of fallacy of conceptual realism: statistical artefacts or logical fictions are allowed to blot out the subtle and complex relationships which make up the real economy.

Now there is plainly much in Hayek's subtle account of the business cycle, and in his contributions to capital theory, which is difficult and disputable, and to comment on such questions is in any case beyond my expertise. Quite apart from its technical details, however, it is clear that Hayek's critique of Keynesian policies is of a piece with his emphasis on the primacy of the abstract and with his insight into the indispensability of conventions for the orderly conduct of social life. Policies of macroeconomic demand management ask more in the way of concrete knowledge of the real relationships which govern the economy than any administrator could conceivably acquire, and their operation is in the longer run self-defeating. More generally, Hayek's challenge to Keynesian theory is a demand that Keynesians specify in detail the mechanisms whereby an unhampered market could be expected to develop severe discoordination. Only if such mechanisms could be clearly described and (crucially) given a plausible historical application, would a serious challenge to Hayek's own Austrian view—in which it is governmental intervention in the economy which is principally responsible for discoordination—enter the realm of critical debate.