From Sylvia Nasar article here: Nasar, a former New York Times economics reporter and the author of “A Beautiful Mind,”
- En route to the Bretton Woods conference, on the Queen Mary, Keynes had lounged in his deck chair devouring, among other books, “The Road to Serfdom” -- written by Friedrich Hayek at Keynes’s old college in Cambridge.
- Although just 40, Hayek too was feeling his age, and was troubled by deafness and a sense of uselessness. His emigre status had shut him out of any active role in Britain’s fight against fascism.
- During World War I, he had been a corporal in the Austro- Hungarian army and, in the cold, dark, hungry years that followed, a university student in Vienna. A moderate socialist who was repelled by his family’s enthusiasm for German imperialism and anti-Semitism, Hayek grew disillusioned with central planning when he witnessed the new Austrian state and hyperinflation destroy the middle class’s faith in democracy.
- Keynes had been Hayek’s hero since “The Economic Consequences of the Peace” was published in German in 1920. But like many young men who seek immortality in economics, Hayek launched his career by attacking the reigning king, beginning when he was an impecunious graduate student on a Rockefeller fellowship at New York University. When he met the great man in person at a conference in London, in 1927, he picked a fight about interest rates. And when he started Vienna’s first economic forecasting institute, Hayek ridiculed the confidence of Keynes and Irving Fisher that the next recession, whenever it came, would be mild, thanks to managed money and the Federal Reserve. In February 1929, in his monthly forecast newsletter, he predicted instead that the American boom would result in a crash.
Great Depression Debate
- This strategy succeeded brilliantly, snagging Hayek an invitation to Beatrice and Sidney Webb’s London School of Economics, which a group of young Turks were itching to turn into a libertarian antipode of interventionist Cambridge, where Keynes’s disciples were. With Hayek on the LSE team, young economists everywhere followed the furious debate that ensued with the passion and partisanship of soccer fans.
- As the Depression deepened, Hayek held that it was “due to monetary mismanagement and state intervention operating in a milieu in which the essential strength of capitalism had already been sapped by war and by policy.” Overinvestment during the boom -- not underinvestment, as Keynes contended -- had produced the slump. Consequently, what was needed was “time to effect a permanent cure.”
- “The creation of artificial demand,” Hayek argued, would only lead to another burst of inflation and another downturn. Like most American economists -- as well as President Herbert Hooverand his political rival, Roosevelt -- Hayek opposed going off the gold standard, and favored spending cuts and tax increases to balance the budget. Give the economy time to heal.
- When “nature’s cure” failed to end the Great Depression, Hayek’s star hurtled to earth. As Beatrice Webb wrote in her diary of Hayek and his allies in 1936, “They and their credo are sidetracked, without influence or even relevance to the present state of the world.” According to Nicholas Wapshott’s new book about the Keynes-Hayek disagreement, Hayek was so discouraged that he essentially gave up economics and turned instead to philosophy.