By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)
Nicholas Wapshott (2011) “Keynes/ Hayek: The Clash That Defined Modern Economics”; Scribe Melbourne
John Mauldin and Jonathan Tepper (2011) Endgame: The Debt Supercycle and How It Changes Everything; John Wiley, New York
To borrow from David Letterman, there might be no business like show business, but there are many businesses like economics.
There is Classical Economics, Neo-Classical Economics, Keynesian Economics, Austrian Economics, Monetarist Economics etc There are also different types of economists – academic economists, professional economists (generally policymakers like central bankers), market economists. No wonder economist John Kenneth Galbraith observed that: “economics is extremely useful as a form of employment for economists”. Economics, one is tempted to add, also provides periodically useful fodder for journalists and business authors.
These two books provide interesting perspectives on the profession as much as on the subject of economics.
Journalist Nicholas Wapshott previously authored “Ronald Reagan and Margaret Thatcher: a Political Marriage”. Using the same basic conceit, he posits a conflict between the ideas of John Maynard Keynes and Frederich Hayek around the time of the Great Depression. The present demand for solutions to the Great Recession, Mr. Wapshott argues, gives this debate contemporary relevance.
Solid and engagingly written, “Keynes/ Hayek” suffers from a basic problem – the major protagonists rarely engaged with each other. Hayek’s puzzling failure to debate Keynes on the subject matter of “The General Theory” deprives the book of the central conflict and drama that the book’s subtitle claims.
Economics seeks to understand how production and financial systems work or should work. It evolved out of political science and philosophy and its social agendas and value systems. One of economic theory’s preoccupations was the business cycle, especially painful and disruptive boom and busts. Capitalism created wealth and progress but at high social cost. Classical economists tried to understand how economies periodically purged excesses in recessions.
The 1929 stock market crash was the final phase of the long boom of the jazz age. Led by the U.S., the World’s dominant economy, there were sharp increases in economic activity and the prices of stocks, commodities and other assets. Global trade collapsed. The recession progressively got worse turning into the Great Depression from which the world would not emerge until after the Second World War.
Existing economic thought dictated that the fall in values and elimination of bad loans or unsound investments would lead to recovery. It was tough love – the disease simply had to run its course.
Keynes argued for government spending to stimulate demand by supporting income and spending power. He broadened the remit of governments to manage the economy to avoid the social consequences of the Depression. Hayek was one critic. A prominent member of the Austrian School, originally founded by Carl Menger in the nineteenth century and extended by Ludwig von Mises, Hayek opposed any interference in markets. Downturns were essential to allow capitalism and markets to purge and renew themselves.
The debate was less about economics than differing political ideologies. Keynes’ views were shaped by the magnitude of the problem threatened to overwhelm societies and political systems. Hayek’s views were influenced by the epic collapse of the Austro-Hungarian in World War 1.
Successive generations have re-interpreted the writings of both men extensively. Milton Friedman, for example, admired Keynes’s economics, which his own work draws on. In contrast, Friedman found Hayek’s economics to be largely incomprehensible.
But Friedman was attracted to Hayek’s quest was idealistic renewal. Keynes’s complex bohemian life, including his bi-sexuality and acceptance of short-term political expediency, were not to everyone’s taste. Los Cee-Ca-Go Boys certainly preferred Hayek’s Central European sensibility, captured by John Kenneth Galbraith: “pessimism is a mark of superior intellect.”
Mr. Wapshott does not offer much new, which is understandable because the material has been covered before in greater detail in Robert Skidelsky’s 3 volume biography of Keynes and several biographies of Hayek. Other books on the history of economics have also covered some of the same territory.
The attempt to relate the clash to modern developments is strained. In practice, political economy is politics conducted with the language but without the substance of economics. The effort to fit modern policy into the corsets of Keynesian and Hayek-ian thinking is tricky.
Profound differences in the structure of economies and financial markets also make any comparison difficult. Commenting on State Socialism, Keynes provided a guide to the relevance of past theories: “little better than a dusty survival of a plan to meet the problems of fifty years ago, based on misunderstanding of what someone said a hundred years ago”.
John Mauldin is described as “a renowned financial expert and a multiple New York Times best selling author”. He writes an investor newsletter and is an economics commentator and investment adviser. Co-author Jonathan Tepper is founder of a macro-economic research group advising high net worth investors. They are “market economists”.
Keynes and Hayek were pre-occupied with public policy concerns. They would have agreed with Paul Samuelson: “I don’t care who writes a nation’s laws if I can write its economics textbooks.” In contrast, good market economists concentrate on assessing short-term effects of economic developments on market prices. They have no grand economic scheme. They are like David St. Hubbins in the satiric film This is Spinal Tap: “Before I met Jeanine…my life was cosmologically a shambles. I would use bit and pieces of whatever Eastern philosophy would drift through my transom.”
Less concerned with economic theory, “Endgame” tries to provide an accessible introduction to the world’s current economic plight. The central theme is that the world has too much debt and will need to reduce this debt with important effects for the global economy. The book is split into two parts – the first looks at the problems of debt and the second looks at different countries and their unique problems.
The central thesis is undeniable. Recent economic growth and the wealth created relied substantially on borrowed money. Since 2001, borrowing against the rising value of houses contributed to around half the recorded economic growth in the US. By 2008, $4 to $5 of debt was required to create $1 of growth. China now needs $6 to $8 of credit to generate $1 of growth; an increase from around $1 to $2 of credit for every $1 of growth. Global trade is built on a financing model where sellers of goods and services, such as China, Japan and Germany, indirectly finance the purchase by lending foreign exchange reserves to countries like the US.
The ability to maintain high rates of economic growth through additional debt is now questionable. Mr. Mauldin and Mr. Tepper outline how the system will adjust – they are “inflationists” (maybe) but they are also deflationists (first). Irrespective of their position on price levels, the authors are incorrigible “optimists” – there will be fabulous innovations, new markets, the population of the earth will continue to grow and the “human spirit” will triumph.
“Endgame” reads like a series of loosely linked newsletters or excerpts from speeches. The book cites extensively from the author’s collection of famous and brilliant experts (the obvious comparison is with the children of Lake Woebegone who are all above average). One Chapter, for example, restates the analysis of Carmen Reinhart and Kenneth Rogoff’s “This Time is Different”. The book features many graphs often tangentially connected with the text and argument.
Mr. Mauldin and Mr. Tepper’s work poses a fascinating question, perhaps unintentionally. What would Keynes and Hayek be doing and saying if they were alive today?
Hayek would probably be at a conservative think tank, railing about government involvement in the economy. Keynes? He would be writing newsletters and policy tracts while quietly making money through his astute investment skills. But on the big issues both would be cautious aware that “for every complex problem there is a simple solution that is wrong”.