3. The Anatomy of an Economic Crisis: Money, Prices, and Economic Order

Keynes both praises and acknowledges his debt to Malthus, not only in his General Theory, but also in an earlier essay ([1933] 1972) entitled “Thomas Robert Malthus: The First of the Cambridge Economists.” Reprinted in The Collected Writings of John Maynard Keynes, Vol. 10. London: Macmillan for the Royal Economic Society, 71–103.

See John Hick’s (1967, 203) description of the intellectual drama: “When the definitive history of economic analysis during the nineteen thirties comes to be written, a leading character in the drama (it was quite a drama) will be Professor Hayek … there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes. Which was right, Keynes or Hayek?”

See, for example, George Akerlof and Robert Shiller (2009) Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism. There is a lot to learn, I would argue, from comparing the argument in this work of Akerlof and Shiller with Keynes’s own argument laid out in his essay “The End of Laissez Faire” (1926), which challenges the rationality postulate, the role of the price system, and thus ultimately, the “invisible hand” theory.

See, for example, Buchanan and Wagner (1977, 79–94). In this section, Buchanan and Wagner discuss the “Harvey Road Presuppositions,” which are the presumptions in Keynes’s models. They argue that Keynes envisioned policies to be implemented by a small, enlightened, and intellectual government—a “benevolent despot.” In doing so, Keynes did not consider the potential of governments to be influenced by special interest groups or the formation of coalitions within the government or a host of other considerations that reflect the complexities of real-world politics.

Though Abba Lerner in correspondence with Laurence Moss in the 1970s adamantly rejected that the differences between Keynes and Hayek could be addressed as a difference between short run and long run, he argued instead that Hayek’s theory of unemployment and his rejection of macroeconomic thinking did not permit such an easy reconciliation. See Lerner Papers Box 3, letter dated July 31, 1978.

Stringham et al. (2008) respond to this paper by providing contrary evidence and concluding that the optimal policy is actually self-regulation.

This follows the Ricardian equivalence argument: Consumers are forward-looking and have realistic expectations about the government’s budget constraints and their future tax payments when making choices about their current consumption.

I am not considering the cases where a distrusting government is coupled with either an insincere or incapable government because that was already ruled out in the previous cases with a trusting citizenry—that the combination of either an insincere or incapable government cannot lead to successful Keynesian policies.

Results testing whether Ricardian Equivalence holds in practice are mixed. Some find that Ricardian Equivalence does hold; see, for example: Barro (1979), Aschauer (1985), Kormendi and Meguire (1990). Others reject Ricardian Equivalence: Feldstein (1982) and Graham (1993).

Take, for example, what biographer R. F. Harrod said about Keynes: “We have seen that he [Keynes] was strongly imbued with what I have called the presuppositions of Harvey Road. One of these presuppositions may perhaps be summarized in the idea that the government of Britain was and could continue to be in the hands of an intellectual aristocracy using the method of persuasion” (as quoted in Buchanan and Wagner 1977, 80, Fn. 1). And, on reflecting why it may be the case that Keynes did not see the dilemma between his policies and the problems of democracies, Harrod says: “It may be that the presuppositions of Harvey Road were so much of a second nature to Keynes that he did not give this dilemma the full consideration which it deserves” (as quoted in Buchanan and Wagner 1977, 81). Economists in the twentieth century were heavily influenced by and trained in the Keynesian tradition—thus perhaps reflecting similar “Harvey Road Presuppositions.”

See, for example, Cowen’s post, “Were the Bailouts a Good Idea?” on Marginal Revolution, August 25, 2009.

See https://​www.​barrons.​com/​articles/​SB90373891569801​1000.

It is important to note that competition in currency, as Hayek understood it, differs in important ways from what modern scholars refer to as “free banking” (Selgin 2014; White 1999).

See http://​hayek.​ufm.​edu/​index.​php?​title=​Axel_​Leijonhufvud_​Part_​II. See also Jordan, Jerry L. (2014). “Hayek on Sensible Monetary Policy.” https://​www.​aier.​org/​article/​sound-money-project/​hayek-sensible-monetary-policy.