This video appeared recently on the Freakonomics blog, though they in turn got it from the EconStories website. Its interesting on several levels, and not just because it makes economics entertaining. Caution: technically what follows is a spoiler for the video so you may wish to watch it first!
Given one of the co-creators writes for the Cafe Hayek blog its perhaps not surprising that they portray Keynes as hitting the deck in the ring, though it seems to me that the aftermath is a more accurate description. Really neither of them win the fight, leaving both a little bemused. And that’s because neither of them ever can!
Here’s how a substantial part of the debate in the USA is framed. There is the Keynesian view – the stimulus just wasn’t big enough and the rise in unemployment could have been smaller. Then there is the Hayekian view – the stimulus had no effect and Uncle Sam could have saved a lot of money by not doing it. The thing is neither of these statements is provable, which is a pretty sorry state of affairs for a science.
But their proponents don’t see it that way. Actually neither Keynes nor Hayek would recognise these stereotypes either. It is not Keynes = big government / less markets v Hayek = free markets & small government. What we have is a simplified view, where there is no evidence that would make someone change their mind. Adam Smith started as a moral philosopher, and frankly much of the Keynes/Hayek arguments is really philosophy. Each started from a set of relevant assumptions, weighted them according to their beliefs and drew appropriate conclusions. But this careful consideration has all frequently been replaced by religion and views along the lines of ‘if you aren’t with us, you are against us’. Yet most of them fail to understand the subtleties – its not that Keynes didn’t believe in markets & Hayek did. Its what happens when markets fail that matters, and both of them understood that.
Here’s the rub. Markets fail. Actually efficient markets are pretty rare beasts, as so failures are pretty common. But all to often the government attempts to correct these are failures too. So deciding between the two can be pretty difficult. Its made worse that many situations are really a mixture of the two – a market and a government presence. Then deciding what ‘better’ means is hard. Would the crisis have been worse with Bear Stearns failing (market) or rescued (government)? What about Lehmans? Think about the Great Depression and how 80 years on there is still debate about how it could be prevented and what the best policy to come out of it is.
All this is making me feel rather down. I look at the USA policy circus at the moment and imagine that a little more thinking and lot more understanding wouldn’t go amiss. Unfortunately I don’t think we’re going to get it.