More Keynes vs. Hayek

by Eric Shierman

I got so many emails from readers who loved the Keynes vs. Hayek “Boom and the Bust” rap video last week, here is the sequel:

These econ talk videos come from and are produced by Russ Roberts an economist at George Mason University who also blogs on the influential Café and produces a podcast series called econtalk.

Outside the small social circles of economists, I’m not sure Hayek will become a recognizable name beyond Salma Hayek.


But he is certainly all the rage among young graduate students today. Having won the Nobel Prize in 1974, Hayek is not new, but like Ron Paul and Students for Liberty, F.A. Hayek is the fresh new face on university campuses. That is the spirit of irony in these videos. Despite the empirical confirmation of Hayek’s ideas, Keynes remains popular among politicians for the blessings he bestowed on their favorite past time: spending other people’s money.

These videos were largely inspired by the major breakthrough in macroeconomic research that has taken place in just the past five years allowing us to actually calculate the Keynesian spending multiplier rather than assume a number to plug into a model, deducing its results. If you listen closely to the lyrics of these videos, you also find in Roberts a perspective that sees the Monetarism of Milton Friedman that still dominates the academy today as merely an extension of Keynes rather than a successor. This was also the take of Nicholas Wapshott’s book Keynes Hayek: the clash that defined modern economics.


Starting in 2007 the work began to emerge of Valery Ramey of UCSD, Robert Barro of Harvard, Christina Romer, and her husband David Romer (with whom she collaborates). Probably the most comprehensive in scope is the work of Ramey. Take a look at her latest NBER paper that breaks down the role stimulus spending has in public sector job growth at the expense of the rest of the economy. The thrust of mainstream macroeconomics has climbed to the top of an Alpine mountain only to find Friedrich Hayek lounging in lederhosen yodeling from the Austrian border.

Eric Shierman lives in southwest Portland and is the author of A Brief History of Political Cultural Change, and also writes for The Oregonian’s My Oregon blog.

  • Russ Roberts is a paid shill of the Koch brothers, and the producer of these videos (Papola) has repeatedly declined to state where he got the money to make them.  (I’m guessing it was a grant).  It’s propaganda.

    • Rupert in Springfield

       What’s your point? If someone got paid to make a video then it cant be a good video? Or are you saying if someone got paid to make a video then everything in it is a lie?

      And what’s with the Koch brothers routine? Is that just something you throw out as some magical wand of invalidation?

      I’ve got news for you:

      1 – Lots of people get paid for doing something. College professors get paid to teach, I have a feeling they are not all idiots.

      2 – Saying “Koch Brothers” and expecting a big poof and any argument you don’t like to vaporize probably only works when preaching to the converted.

    • amagi

      The Koch Brothers employ 45,000 people. You ?

      • valley person

         The Koch brothers inherited an oil empire and need people to do the actual work so they can focus on getting their taxes cut. Its not like they employ people out of charity dude.

        • amagi

          Dear Valley Person,

          You would profit (!) from reading “The Road to Serfdom”,
          if you are up to it. Your comment is very silly.

          • valley person

             I’m familiar with the road to serfdom and have read enough of it to know its premise, which reality suggests is false. The US, Canada, and Western European nations have had plenty of socialism to go along with capitalism for many decades, in germany since the 1840s. This has not led to “serfdom,” but has led to prosperous nations with a decent level of economic security for those who, for whatever reason can’t make it in the marketplace.

            Some nations that went “too far” down the socialism road, like Sweden and France, were able to scale back.

            The road to serfdom is allowing a few people to become rich enough to own nearly everything and control the entire economy. That was the last time we had serfs.   

  • Bob Clark

    Intuition says we shouldn’t throw out Keynes nor ignore Hayek.  Keynes gives us at least something to preoccupy ourselves during the decade long aftermath of the inevitable Schumpeter destructive phase of a free market economy.  Keynes also includes monetary policy. 

    My sense easy money is shortening the downcycle in the aftermath of the “Great Recession.”  There may be heck to pay later because much of it is based on borrowing from other than the Federal Reserve, and so now interest rate spike risk runs significantly higher than otherwise. But we’re outperforming much of Europe currently, and probably in no small measure due to easy money policy which included bailing out banks before pension incomes supported by the likes of AIG annuities would have been toast.

    I do believe the public sector mis-uses the economic multiplier by presuming rather high numbers.  For example, Portland Public Schools (PPS) initially came out with an EcoNorthwest study showing great local economic net benefits from its proposed half billion dollar construction bond/tax measure.  But I suspect the EcoNorthwest economic multiplier assumed a stable housing market and therefore the study presumed taxpayers wouldn’t adjust upwards their savings rate in response to a property tax spike (funding the construction).  I asked for a copy of the inputs and more detail twice, but PPS never responded.  It’s kind of funny this initial economic pitch died off subsequently.  Dr. Fruits cited also a Federal Reserve study saying the property tax spike would have resulted in a noticeable increase in Portland home foreclosures.

    I don’t know. I am kind of stuck between Keynes and Hayek, believing they are idealistic as communism/socialism.  Free markets are the cocktail bringing joy but the cocktail needs a glass (government framework) to be enjoyed.

  • valley person

    There was an interesting piece on NPR this morning that looked at the response of passengers on the Titanic versus the Lusitania. On the Titanic, even though there were too few lifeboats for everyone, the evacuation was orderly and those left behind were mostly stoic about their fate. Why? Hayaek would say they should have all been looking out for their individual self interest, which could no way be accepting death. The biggest and strongest men should have pushed the women and children aside and taken the lifeboats. Didn’t happen.

    But on the Lusitania, that is basically what did happen. It was every person for themselves.

    The difference, researchers believe, is the time frame of the sinking. For the Lusitania it was 20 minutes, for the Titanic several hours. This means that in case 1, the instinct for self interest dominated most people, but in case 2 that instinct was mitigated by social order. People in a society do not just act in their own best interest 24-7. They spend a lot of time and effort acting in the interest of others, and/or tempering their own appetites so as not to be thought of as a glutton.

    Since our society is long term, we (most of us anyway) don’t let our own short term economic interest dictate our behavior.  If we actually followed Hayak, or Rand, or even Eric, we would. We would let those geezers who didn’t save enough for retirement die in their unheated slummy apartments. We would let those poor kids go hungry if their parents were too stupid or lazy or unlucky to feed them. We would let people pay for their own education. In short, we would cease to have a society. We would simply let everyone fend for themselves and hire a lot of cops to keep some semblance of order.

    Hayak’s economic model fails on 2 important fronts. One, it only respects 1/2 of human nature, the me first part. Two, it fails to consider human suffering during serious downturns. Even if a Hayek economy can be proven to be “better” than Keynes over the long term, from a total growth standpoint, if fails in other critical ways.

    Stimulus spending may or may not have this or that multiplier. But when the S. hits the fan eocnomically, people aren’t living in someones economic theory. They have bills to pay and kids to feed even after Romney has laid them off. And that is why Keynes, or the next better method, will win out during steep, long, deleveraging downturns like the one we are now in.

  • valley person

    Eric…I’d like you to read through the following and let me know your thoughts.

  • amagi

    Dear Mr. Shierman,
    I do believe that Hayek’s work, especially “The Road to Serfdom” is better
    known than you think. By the way, who is Salma ?

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