Oct. 10 (Bloomberg) -- By the early 1940s, the Keynesian Revolution in America was in full swing. Fast-moving events in Germany obliged Franklin D. Roosevelt to spend on the vast scale that John Maynard Keynes prescribed. Despite the president’s assurances during the 1940 presidential campaign -- “I have said this before, but I shall say it again and again and again: Your boys are not going to be sent into foreign wars” -- he ordered a gargantuan rearmament program. In 1940, the annual defense expenditure was $2.2 billion; the following year it reached a sizzling $13.7 billion.
“If expenditure on armaments really does cure unemployment, a grand experiment has begun,” Keynes declared in 1939. “We may learn a trick or two which will come in useful when the day of peace comes.”
The multiplier effect of so much public money being pumped into the American economy caused gross domestic product to jump by about $25 billion, with arms and other defense spending accounting for 46 percent of the increase. Even so, employment wasn’t restored to the pre-Roosevelt recession level until 1941, the year America was attacked by the Japanese at Pearl Harbor. “We saw the war as a justification of the Keynesian theory, the Keynesian doctrine, and the Keynesian recommendation,” John Kenneth Galbraith recalled.
Friedrich Hayek, meanwhile, set out on his pessimistic masterwork, “The Road to Serfdom.” As his biographer Alan Ebenstein observed, the book revolutionized Hayek’s life. Before its publication, he was an unknown professor of economics. A year after it was published, he was famous around the world. Not bad for a book that Hayek, with rare modesty, believed only a few hundred would read.
The principal targets of “The Road to Serfdom” are what Hayek deemed the twin evils of socialism and fascism, though he felt obliged to soften his criticisms of communism and allude more to the dangers of Nazism because at the time of writing Josef Stalin’s Soviet Union was allied to Britain and America. He said the common perception that the extremes of Left and Right were polar opposites was a misapprehension because both -- by replacing market forces with state planning -- assaulted individual liberties. He reiterated his belief that as economic planners can’t know the will of others, they end up acting like despots.
Preconditions for Totalitarianism
Hayek feared that when World War II was won, the Allied victors might conclude that wartime economic management would speed a more prosperous, more just postwar society. Such policies, he warned, invited the preconditions for totalitarianism and might cause history to repeat itself.
“We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past,” he wrote. “It is Germany whose fate we are in some danger of repeating.”
Classical economists and conservatives don’t fare much better than socialists and communists in Hayek’s stark analysis. He condemns the “wooden” advocates of free-market solutions, while rejecting conservatism, a devotion to existing institutions. “Though a necessary element in any stable society, [conservatism] is not a social program,” he wrote. “In its paternalistic, nationalistic and power-adoring tendencies, it is often closer to socialism than true liberalism; and with its traditionalistic, anti-intellectual, and often mystical propensities it will never . . . appeal to the young and all those others who believe that some changes are desirable if this world is to become a better place.”
By coincidence, Keynes read “The Road to Serfdom” in June 1944, while he was sailing across the Atlantic en route to Bretton Woods in New Hampshire to preside over the negotiations for the international currency mechanism that took the hotel’s name. Plainly relaxed after his sea crossing, Keynes dropped a line to his old rival from the Claridge Hotel in Atlantic City, New Jersey.
“The voyage has given me the chance to read your book properly,” he wrote. “In my opinion it is a grand book. We all have the greatest reason to be grateful to you for saying so well what needs so much to be said. You will not expect me to accept quite all the economic dicta in it. But morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.”
Role for Planning
Hayek conceded in “The Road to Serfdom” that in the case of tackling chronic unemployment, planning might play its part and that the right form of planning might not lead to oppression. As he later expressed it, “So far as government plans for competition or steps in where competition cannot possibly do the job, there is no objection.” He also believed that the state may have a moral duty to step in and that was admissible so long as the spirit of free enterprise was not compromised.
“There can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody,” he wrote. “Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance -- where, in short, we deal with genuinely insurable risks -- the case for the state’s helping to organize a comprehensive system of social insurance is very strong.”
(Nicholas Wapshott, a former senior editor at the Times of London and the New York Sun, is the author of “Ronald Reagan and Margaret Thatcher: A Political Marriage.” This is the third in a four-part series excerpted from his new book, “Keynes Hayek: The Clash that Defined Modern Economics,” to be published Oct. 11 by W.W. Norton. See Part 1 and Part 2.)
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