Wednesday, 31 October 2012

My K&H (Keynes/Hayek) mix

To the (limited) extent that I am a disciple of past intellectuals I must say that Keynes and Hayek are my favourite thinkers. This may seem odd, since they are the two “prophets” behind the current divide between left and right wing schools of economics. Am I confused or opportunistic in this eclectic position? I hope not, as I will try to show next.

Keynes and Hayek were two leading economists, which rank among other great economists like Adam Smith, Ricardo or Jevons. But they were also mathematicians, philosophers and political activists. If I were to judge them on these four fields I would say that Keynes was a better mathematician and economist while Hayek was a better philosopher and they were equally good in politics. But the reason for me being simultaneous a Keynesian and a Hayekian lies on their views on the role of the state in the economy.

They were bitterly divided on the role of the state in managing the business cycle, with Keynes in favour and Hayek against. But in my view they were both right. Keynes was right to advocate demand management during the peaks and troughs of the business cycle and Hayek was right in advocating no state intervention in the economy during normal times.

So I will follow each one of them depending on the stage in the business cycle. That is, I will be Hayekian or Keynesian as illustrated in the following diagram:

During the coloured periods I would be 100% Keynesian and 50% Hayekian and during the rest of the period I would be 100% Hayekian (I would not be 0% Hayekian during recessions because the economic stimulus must be designed without encroaching collectivist trends in the economy).

And, of course, I may be more or less sanguine in my views. For instance, conservatives may accept Keynesianism only during the pink periods in a trough but call for it during green periods in a peak, while leftists may ask for intervention during green periods in a trough but only advocate it during pink periods in a peak.

I could refine further my analysis by considering other variables (e.g. unemployment) or by replacing the long term average growth rate by other metric to define business cycle troughs and peaks. However, it would not be changing the fact that during most of the time I should be predominantly Hayekian as far as demand management is concerned.

This does not mean that on average I like more Hayek´s economic writings, on the contrary, or that I am inconsistent or opportunistic in my views; even if I fail to recognize in a timely manner that we have entered a business cycle peak or trough.

In conclusion, there is plenty of room to be more or less moderate in the relevance we give the two “prophets”, but we need to understand and follow both.

1 comment:

  1. Most economists don´t understand what you have just writen.

    The General Theory is a generalization of the credit cicles of the Austrians and of Schumpeter cicles, to include the recessions.