SALAHUDDIN

Book Review

I take a keen interest in the debates between the free-market zealots and the supporters of planned economies. I am personally not a proponent of free-market systems, especially in developing economies with weak institutional setups. I believe that developing economies, like Pakistan, should focus on establishing a domestic-oriented developmental policy, not necessarily based on trade liberalization. A mix of targeted protection and open trade, constantly adjusting to their needs and capabilities, would be the best way for developing economies. I recently came across this book which further invoked my interest in the debate between the two divisions. Here is my take on the book.

The Clash That Defined Modern Economics by Wapshott is an account of one of the most important debates in modern economics. The Great Depression of the 1930s triggered a crucial discussion among economists to explain the roots and remedies of the business cycle. At the forefront of this economic debate were John Maynard Keynes and Friedrich August von Hayek. The confrontation between the two, which has been skilfully documented by Wapshott, led to some of the most important developments in modern economic thinking.

At the center of this debate was the role of government and individual liberties in the market. Keynes advocated government spending to boost the economy during recessions, and his main concern was to deal with the mass unemployment that followed. He advocated for lower taxes, interest rate cuts, and increased public spending to stimulate aggregate demand in the economy. His central idea was that public spending would help reduce unemployment and increase consumer spending, which in turn would boost the economy. Keynes argued that government must actively intervene through fiscal and monetary measures in the short term to increase spending. His ‘demand-side’ economic theory has been the basis for much of the national-scale spending in the US. For example, in the wake of the Coronavirus pandemic and the resulting economic slump, the US spent billions of dollars of federal funding to stimulate the economy and provide relief to those affected. The idea is that short-term government spending will keep unemployment down and help recover the economy.

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”

Hayek, on the other hand, supported a free market where the government played a limited role and where most services, such as education and transportation, were privatized. He believed that markets are highly organic and, therefore, should be allowed to function on their own. Focusing mostly on the Austrian theory of business cycles, Hayek believed in the efficiency of free markets driven by a price system. His main concern was that if the government attempts to boost the economy by artificially pumping money into the markets then that would lead to uncontrolled inflation. Through his ideas, he established himself as a ‘libertarian’ and free-market ideologue. He argued that, if the government attempts to reduce unemployment by increasing spending, then the result would be increased inflation which would erode the value of the currency and thus, make the government intervention ineffective. The current rise in inflation in the US and other economies provides some credibility to Hayek’s ideas. While the stimulus spending to mitigate the effects of the Coronavirus pandemic has provided relief to millions of people, it might have also contributed to the rise in prices. In fact, one of the key challenges faced by the current US president is to keep inflation in check. Many economists are arguing that the current inflation is transitory and is a result of supply-chain bottlenecks as opposed to stimulus spending. Only time will tell who was more right.

"The argument for liberty is not an argument against organization, which is one of the most powerful tools human reason can employ, but an argument against all exclusive, privileged, monopolistic organization, against the use of coercion to prevent others from doing better.

As Wapshott points out in his book, Keynes and Hayek disagreed greatly during the 1930s and triggered a heated debate concerning peaks and troughs of the business cycle. At one point, Keynes stopped responding to Hayek’s criticism and instead focused on refining his theories. After the Great Depression and the two World Wars, Keynes concerned himself with the “application of economics as a means of improving the lives of others”. Hayek distanced himself from politics and was mostly consumed by economic theory for its own sake. While Keynes remained a well-renowned figure throughout his career, Hayek’s prominence came after he was awarded the Nobel Prize in Economic Sciences in 1974. Keynes had cemented his position in the economic world with the publication of his book ‘The General Theory’, which became the basis for many modern economic concepts including the distinction between micro and macroeconomics. Hayek, on the other hand, published his book ‘The Road to Serfdom’ in 1944 in which he gave stark warnings about the dangers of government control and central economic planning.

Overall, the book is well constructed and does a good job of highlighting the relevance of the debate between Keynes and Hayek in the 21st century. However, sometimes it’s difficult to follow certain concepts such as ‘forced savings’. Wapshott’s emphasis on certain ideas such as aggregate demand seems to be repetitive. Also, it seems like he has not given enough credit to Hayek and has depicted him as a man not concerned with human welfare but with the natural workings of the economy. Hayek is depicted as a man who has embarked on a journey to build a utopian world where free markets do their magic. For the most part, it feels like Hayek is against public spending entirely. Only in the last chapter does Wapshott mention that Hayek “advocated mandatory universal healthcare and unemployment insurance”.

Keynes has been portrayed as more of a practical man concerned with the tangible mechanisms of the economy. At one point Wapshott writes that Keynes, “rather than burying himself in abstruse theories channeled his energies toward practical remedies”. From the very beginning of the book, Keynes is depicted as a man concerned with the alleviation of human suffering, and the moral responsibility of governments to provide employment opportunities. Wapshot gives too much credit to Keynesian theories for the economic prosperity during the 1950s and 60s. The Keynesian remedies eventually led to ‘stagflation’, high inflation coupled with high unemployment, which was previously considered impossible. While the period from 1980 till 2008 is considered to be the period of liberalization and free economy, Wapshott does not do a good job in explaining the liberal market policies that were pursued during this time. While he credits the age of Keynesianism with “unrivaled prosperity”, he sees the period from 1980 to 2008 as a lesson from free-market systems. However, in the end, Wapshott does not provide an answer as to who was right. He seems to be leaning more towards Keynes but admits that “it was hardly a decisive victory”. As Hayek’s biographer Robert Skidelsky pointed out; while Keynes won the debates of the 1930s, Hayek was eventually able to prove his point.

In conclusion, I enjoyed reading the book and was fascinated by how the decades-old debates are still relevant today. The book has further strengthened my belief that neither free markets nor planned economies are the best economic systems. But a hybrid of the two will work best. Markets are not a natural phenomenon and must be guided to make them work best for everyone. Governments must actively guide the economy but must be careful about the size and timing of intervention.