Clash of the Economic Titans

We have now explored the seminal works of Keynes, Friedman and Hayek – the titans of 20^th century economics. The question is, who will remain fashionable well into the 21^st century? While they each identify a set of similar economic problems and market failures, many of them stemming from the Great Depression, their theories for suggested government action (or inaction) to remedy these issues are all quite distinct, and each has had their heyday. Currently, it seems that we employ a nuanced approach that takes into account elements of all three approaches, even though each economist most likely believes that his theory can only be truly realized when applied exclusively and wholeheartedly.

Friedman was originally a Keynesian and sharply changed course (though he ended up closer to Keynes in some sense, envisioning a significant role for government remedying of the business cycle via manipulation of the money supply). Hayek never bought into what he saw as the irresponsible excesses of Keynesian economics, waiting out this fashionable theory to step into the limelight later on.

Hayek’s approach is tied to human nature. Insights from modern fields like behavioral economics are favorable to many of Hayek’s insights about the complexity and irrationality of human behavior. His approach is simple in some ways, yet nuanced. He envisions a carefully crafted rule of law and reverence for competition that guides human exchange to prosperity. So long as these are expertly designed and maintained, he argues, we will avoid the evils of socialism and maximize benefits from voluntary exchange. He is careful to clarify that he does not propose laissez-faire economics, rather he envisions a role of government that ensures an environment that elevates the plans of all of its individual economic actors, as opposed to making these subservient to a single state plan that inherently must privilege particular individuals. His account, propounded in The Road to Serfdom, really gets it right in a lot of ways, considering that his strand of Austrian economics draws upon little mathematics and data aggregation, and more on intuitive awareness of the scope and limits of human knowledge.

While Hayek has always been somewhat of a fringe character in mainstream economics, Friedman’s bold ideas of monetarism combined with the notion that economic freedom underlies political freedom gained much public attention, thanks in no small part to Reagan’s popularization and enactment of the theory in the 1980’s. As the poster child of the Chicago School, Friedman saw Keynesian economics as insufficient to deal with persistent inflation and unemployment. Friedman came out guns blazing with ideas of deregulation, privatization, and a host of neoliberal policies aimed at setting markets free from some kind of government shackles. Friedman is more extreme than Hayek in many ways, particularly in his view of the narrow view of the role for government. Though his ideas have faded somewhat in the modern era, their sentiment still remains (as well as his monetary theory), especially in regards to expanding free market systems and democracy around the world. (A comical call-out in Friedman is #6 of his list of activities which the government has no right in meddling with – “detailed regulation of banking”).

What’s clear is that the zealous proponents of all three strands of economic theories put forth by these expert economists often go too far in asserting the doctrines and dogmas of their leaders, taking their ideas to the extremes. While each of these figures has been proved wrong in a number of contexts, each was certainly right in some ways, which is why we’ve taken a hybrid approach that combines many of the insights from these legendary economists three different backgrounds. I suppose that is why these are the first three texts that we have read.