Keynes Hayek: The Clash that defined modern economics - Book Review

Keynes Hayek: The clash that defined modern economics tells the story of two rivals who have for the last century fought to define modern economics. This fight has continued long after both men's death and has taken on a renew vigor since the great recession. Most people will know that their is a divide in Macroeconomics between those who believe government can stimulate the economy into a recovery and those who believe such measures are harmful. However, the debate between Keynes and Hayek was far deeper than this. Their fight was ultimately over the legitimacy of macroeconomics. 

Many of core concepts we take for granted such as Gross Domestic Product owe their existence to John Maynard Keynes. Prior to this economics was confined to what we today would call microeconomics. The book clearly outlines the fight between a new guard of economists lead by Keynes at Cambridge (The Circus) against the skeptical economists at the London School of Economics. Many economists well known to students make Cameo appearances in this book including, Alfred Marshall, Arthur Pigou, John Hicks, Nicholas Kaldor and latter Milton Friedman. Ultimately as Hayek acknowledged, Keynes won this fight with almost all economists accepting macroeconomics. Economists including the great Milton Friedman have used macoeconomics (a top down approach) to analyse the economy. 

Where Keynes' methodology for analyzing the economy have been largely accepted and used by even those considered opponents of Keynesian economics. The measured argued for in the general theory have not received universal acceptance. To this day whether or not governments should borrow heavily to stimulate the economy remain controversial. This book gives the reader some interesting insight into the debates on both sides on this issue. 

The book continues after Keyne's death and describes the 20 year of high growth and soft recessions that followed the post war history. While finance ministers were not willing to pursue Keynes' medicine in the great depression until the second world war but the end of the war many had been covered and the tools of stimulus were readily used. This period also saw Hayek leave the London School of Economics under a cloud of scandal moving to the United States were he took a position at the University of Chicago. Though not in the school of economics who resisted attempts by the university president to place him there. 

Interestingly, despite being employed at the university of Chicago Hayek was not part of the counter revolution that lead the charge against Keynesian and the predicted the stagflation of the 1970s. Hayek eventually migrated back to Austria and only in his last years did he see his world view vindicated.

In the 1970s and 80s Margret Thatcher and Ronald Reagan came to power having been influence by Hayek's book the road to Serfdom. For the first time in the post war era there was significant reduction in the role of Government. 

In Britain in particular Keynes work had been used to justify the mixed economy. Britain far more than America or Australia had nationalised it's industries and heavily regulated those it didn't directly controlled. Thatcher came to power during the winter of discontent a time made most famous by the accumulating rubbish in London caused by council workers striking. This change from the mixed economy to the market economy was adopted by the Labour Party whom abandoned it's goal of nationalising major industries. 

Another interesting aspect to the debate covered in the book was how vicious the debates between Keynes supports and classical economists could be. People active in the blogisphere could see similarities between the debates they had then and the debates being had between Paul Krugman and Robert Lucas et. al. 

Overall I would recommend the this book for anyone wanting to learn economic history and wants to put what they learnt in economics 101 into context. For my part until very recently I was unaware of how at odds micro and macro economics are and how far we still have to go in our understanding of the economy.