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Keynes vs. Hayek

“Economics is not an exact science.”   Ronald Reagan

Economics is not only inexact, but economic theories depend upon assumptions about what people will do under certain sets of conditions. When people do not “behave” as assumed, economic theories break down. One thing you can say with reasonable certainty, however, is that when the government interferes in the pricing mechanisms of the free marketplace, problems are bound to follow.

John Maynard Keynes (1883-1946) is indisputably the most influential economist of the 20th century. He is one of the principal founders of modern macroeconomics and a proponent of massive government spending to cure economic ills. If John Dewey is the favorite philosopher of Socialists, Keynes is by far their favorite economist. Keynes is idolized by the left because he intellectualized and gave theoretical support for the Socialist takeover of government. Since the Socialists were unable for practical reasons to follow Karl Marx and convert capitalist countries into socialist states, Keynes was the next best thing. In his magnum opus, “The General Theory of Employment, Interest, and Money” (1936), Keynes laid the foundation for macroeconomics.

If the federal government followed Keynes exactly perhaps their meddling in the private sector would be manageable. Socialists are interested in economic theory only insofar as it gives them what they want – centralized political power. Keynes legitimatized the federal government’s takeover of the States and helped foster the notion that whenever someone has a problem, the federal government is supposed to step in with a solution. This notion created a culture of dependency that has led to the development of a class of people depending on the government either for their work or their survival. This class of people is called the Socialist ”critical mass” and now helps control elections for them.

For those of you unwilling to read Keynes’ magnum opus, we will summarize it for you in Washington D.C. terms. This is not what Keynes said, but what Washington does. There is a “magic button” somewhere in Washington that, if pushed, will correct all the economic problems of the country. Just keep trying things and pushing buttons and eventually you will push the “magic button” and all your problems will go away. If you have to spend two or three trillion dollars trying buttons it is fine because eventually you will push the “magic button.” The “magic button” causes people to want to work harder, makes corporations more profitable, encourages hiring, and eliminates high interest rates and inflation. Of course no one knows which button is the magic one, so we just go ahead and push every button we see.

Keynes wrote in The Economic Consequences of the Peace: “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Winston Churchill was quoted as saying: “If you put two economists in a room you get two opinions, unless one of them is Lord Keynes, in which case you get three.”


In the 1980s the Nobel Prize committee was captured by Socialists and since that time it is no longer politically correct to award a Nobel Prize in certain categories (Peace and Economics in particular) to anyone who is not a committed Socialist. Prior to that time, however, Conservatives did win a few times including Milton Friedman in 1976 for Economics.

In 1974 the Austrian economist Friedrich August Von Hayek (1899-1992) won the Nobel Prize for Economics. He and Keynes had been battling for over 40 years and finally Hayek received his due recognition.

In the big debate (which continues to this day) over the impossibility of socialist calculation and “market socialism” in the 1930s, with Mises and Hayek on one side and Keynes, Lange, and H.D. Dickinson on the other, Hayek contributed a number of essays which refuted the socialist approach to economic planning. They are collected in his Individualism and Economic Order (1948). Hayek’s The Road to Serfdom (1944) made him world famous overnight and aroused heated discussions. In this best seller of the immediate post-war years, since translated into numerous languages, he showed that Socialism carries with it no adequate provision for the preservation of freedom.

Hayek took the elitist Socialists to task in his Nobel Prize lecture on December 11, 1974 “The pretence of knowledge.” This may be why no Conservatives win this prize anymore; the Socialists on the Committee don’t want to hear anything like this again. It almost sounded like Socrates in “The Apology”, letting them have it. A few excerpts follow.

“We have good reason to believe that unemployment indicates that the structure of relative prices and wages has been distorted (usually by monopolistic or governmental price fixing) and that to restore equality between the demand and supply of labour in all sectors changes of relative prices and some transfers of labour will be necessary.”

USFA translation: Government meddling in the pricing structure causes unemployment.

“This is particularly true of our theories accounting for the determination of the systems of relative prices and wages that will form themselves on a well functioning market. Into the determination of these prices and wages there will enter the effects of particular information possessed by every one of the participants in the market process – a sum of facts which in their totality cannot be known to the scientific observer, or to any other single brain. It is indeed the source of the superiority of the market order, and the reason why, when it is not suppressed by government, it regularly displaces other types of order … ”

USFA translation: The free market works best when left alone.

“ … the very measures which the dominant “macro-economic” theory has recommended as a remedy for unemployment, namely the increase of aggregate demand, have become a cause of a very extensive misallocation of resources which is likely to make large-scale unemployment inevitable. The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing … ”

USFA translation: Macroeconomics does not work and causes unemployment and large scale inflation. There is no “magic button”.

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