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All posts by Dan Whalen,
Providence, RI (resume)

Friday, April 27, 2012

Keynes vs Hayek

        When an economy is stalling, what can the government do to get it running again?

        This is one of the biggest questions in economics, and it's where economics, as a discipline, is expected to demonstrate its mettle.  Its a high profile venue for economists to show their academic papers can have real world applications.

        Two of the most popular tools we have today for kickstarting an economy are supply side and demand side (usually refereed to as Keynesian) stimulus.

        In a supply side stimulus package, a government tries to encourage national production, to "boost aggregate supply."  This is typically achieved through offering tax breaks or incentives to investors.  The goal is to spurn on more production, and therefore more competition between producers, and - eventually - lower prices for all goods.

        A demand side stimulus is a government measure that "boosts aggregate demand."  The government seeks to increase the demand for products, maybe by creating subsidies, hiring some out of work people, or by investing directly in the national economy.  Basically, they advocate that the government become the nation's biggest customer.  Keynesian economists during the Depression first conceived of the stimulus plan that would became FDR's New Deal.

        Obviously, John Maynard Keynes was granddaddy of demand side stimulus planning, and he promoted it heavily throughout his career (that's why today its called "Keynesian" stimulus).  There's no one clear founder of the supply side ideal.  But during Keynes time, its major proponent was a the Austrian-Hungarian economist Freidrich Hayek.

        And they were quite the pair.  Keynes was a big high-life liver, married to a ballerina and often found carousing around town with high-society types.  Hayek was a quiet, austere guy, the quintessential stuffy professor.

        The personality clashes fueled their intellectual ones.  The two were both active lecturing, teaching and working in London for most of the 30s and 40s.  They traveled in similar social circles, ones that revolved around the London School of Economics.  They engaged in a number of public debates, and published paper that personally attacked the other guy's work.  They wrote tons of angry letters to each other, and even published "open letters" to each other in news papers and trade magazines - economics first Twitter war.

        Their debate is actually really interesting, and a lot of it was going on at a kind of philosophical level.  And it was an important one - the debate continues among economists today, and rages daily at the capitol.

       Sure, you can learn about supply side and demand side econ by scrolling though dry webpages, or flipping though any number of textbooks.  Or you can learn about it by watching a rap battle.  Seriously.

        In 2010, a TV producer from Spike and a George Mason University economics professor got two guys from the Upright Citizens Brigade to dress up as Keynes and Hayek and debate the major points of their economic theories as a rap battle.  In 2011, they made a follow up video, with the same premise (but a bigger budget).  Not making this up.

        Anyway, they're actually pretty good.  There's a lot of information packed in them, so don't worry if you have to watch them a few times.  I had watched these videos once through before I even understood everything they were saying.

        But they're very entertaining and fun to watch.  Please check them out!  It maybe your only opportunity to learn economics from a rap video!

(Little warning: Russ Roberts, the econ professor who collaborated on these videos is a supply side proponent in real-life - a Hayek disciple.  He's generally fair in the videos, but he does tend to paint Hayek's economics a tinge rosy.  So take these with a grain of salt, but only a small one.)

Fear the Boom and Bust

Fight of the Century: Keynes vs Hayek Round 2

        Russ Roberts (the economist who worked on these rap videos) also does a regular podcast where he interviews prominent economists and economic historians. If you want to know more about the real personal conflicts between Keynes and Hayek, check out his podcast interview/meandering conversation with the biographer Nicolas Wapshott, who literally wrote the book on the Keynes/Hayek debates. They were actually pretty colorful guys...its a cool story.


  1. Seems like Keynes in the videos is arguing (in general) for government intervention: both stimulus (to get spending going) and bailouts (to keep economic infrastructure in place), while Hayek is arguing for no government intervention at all. I thought both demand-side and supply-side theory argued for intervention?

    1. Nope. The supply side is not for government intervention. If you go all the way back to Adam Smith, he advocated regulations, but he was before the Keynesian - supply side dichotomy.

  2. Supply side still involves "intervention," but the intervention is usually "back off." For example, one of the most popular supply side economists of the more recent era, a guy named Arthur Laffer, used to plug tax cuts as a way of stimulating an economy (look up "the Laffer curve" for more). But your right, cutting taxes might not really feel like an "intervention" per se. But either way, in this case, its still a strategy for trying to goad along an economy.

  3. I guess my point is just this: aren't bailouts supply-side?

    1. Bailouts just mean that whatever the hell was going on, it didn't work. One could argue that the recent bailout was supply side, since it was the so called "producers" who screwed everything up, and they got th bailout money. So everybody who bore the brunt of the debacle was a capitalist that supported the socialist-style bailout of the big money factions. (I say socialist "style" because socialism isn't supposed to favor the wealthy).

  4. Huh! I'm honestly not sure. I don't think the terms supply-side or demand-side really apply to bailouts. But I'm sure that could be debated (ultimately, I think its just a question of semantics).

    But no doubt, there is something funny about those champions of the free market and capitalism ask for a bailout. A real capitalist would say "hey, my business idea failed, my strategies didn't achieve what I wanted, I should just accept the loss and learn from my mistakes!" Funny thing about economics in practice: when the going is easy, everyone's a capitalist. As soon as it gets tough, everyone's something else!