Two for the money

This is an important book, as it brings together the relevant papers and correspondence in the central debate in macroeconomics between Hayek and Keynes that has spanned the major part of this century. Beginning in the 1930s, it concerned the views expressed in their major books Prices and Production and a Treatise on Money, and the difference between them about if and how the trade cycle could be controlled. Besides including Hayek's exchanges with Keynes and Sraffa, the book also includes some later assessments by Hayek of Keynes P including a review of Roy Harrod's Life of J. M. Keynes and there is an excellent introduction by the editor, Bruce Caldwell, putting all this into historical and intellectual perspective.

As Caldwell notes, both Keynes and Hayek: "observed a world gone mad. Keynes saw salvation in a thorough revision of the liberal order. Hayek saw it in the rediscovery of one. Their debate over this question continues to this day; it is perhaps the most important issue that democratic regimes, old or new, must address." Hence the continuing relevance of the question: who was right in the recondite debates, reprinted in these pages, on capital theory and the trade cycle, Hayek or Keynes and his "Cambridge circus"? Caldwell claims that neither was right in their theoretical claims about providing a general theory of the cycle, and both were right Q Keynes in the interwar period, and Hayek in the 1970s on matters of policy. I agree.

Moreover, time has treated both of these great protagonists kindly. Keynes did not live long enough to see himself repudiated by those he sought so assiduously to influence Q the British political class he had mesmerised Q while Hayek lived long enough to see himself vindicated with the same group!

While we await the third volume of Robert Skidelsky's biography of Keynes to see how historians currently sum up Keynes's legacy, on the evidence contained in these pages, any fair-minded economist must agree that, particularly taking account of Hayek's subsequent work on the role of knowledge in economics, Hayek made a more fundamental contribution. On policy, whilst a Keynesian slump is a rare occurrence, but not impossible Q as witnessed by the current debt deflation in Japan Q for the general run-of-the-mill trade cycle, surely Hayek was right in emphasising the classical liberal framework in dealing with it, to prevent the inevitable exacerbation of inflationist tendencies that misguided intervention to prevent the downside would cause in democracies. His greatest book, in my view, came well after he had ceased to look upon himself as a pure economic theorist, The Constitution of Liberty. As Hayek notes in these pages, Keynes's followers were shocked, when his Collected Works appeared, at the warm appreciation Keynes gave in private to Hayek's Road to Serfdom, the precursor to The Constitution.

If Keynes had lived as long as Hayek he would undoubtedly have used his persuasive powers to turn public opinion against his "followers", as Hayek claims (in his review of Harrod) was the gist of his last conversation with Keynes, three months before his death.

This also explains the riddle noted by Caldwell: why Hayek never reviewed the General Theory. The answer, I suspect, is that Hayek recognised that he and Keynes were on the same side P trying to save a liberal society. The real enemies were the self-professed Keynesians who saw what, from Hayek's viewpoint, was another flip-flop on Keynes's part as a way of furthering their collectivist ambitions. But this remains speculative unless the trustees who have commissioned this handsome series can perhaps persuade Keynes's biographer, Skidelsky, to turn his hand to explaining Hayek's life and works, as he has done so splendidly for Hayek's main theoretical (but not personal) adversary.

Deepak Lal is professor of international development studies, University of California, Los Angeles.