The debate between J.M. Keynes and F.A. Hayek, both living and teaching in Britain in the 1930s, was one of the great debates of the century. Sadly, the charming globetrotter Keynes had the podium and the audience, to the point of influencing policy the world over even to the present day. Meanwhile, the quiet and studious Hayek never really did gain an audience. Like his colleague and mentor Mises, Hayek wrote in scholarly journals and was heard only by those with skeptical minds, people who doubted the theoretical and policy conventions and looked beneath the surface.
In one sense, then, the debate between these two was one of the most critical for the shape of the world over the last 75 years. In another sense, however, this debate never really occurred, for the Hayekian point of view has been systematically marginalized and kept at bay by the political and economic establishment ever since Keynes was prematurely declared the victor in the late 1930s.
The beauty of new media is its capacity for showing us what we otherwise might miss. Fear the Boom and Bust, a YouTube video made by producer John Papola and economist Russ Roberts, and backed by the Mercatus Center of George Mason University, turns this advantage to the point of genius, pitting Keynes and Hayek against each other in a rap that captures a reality few have fully understood until now.
Already, the video has been viewed a half million times and has made international news. Aside from its high production values, what's remarkable about it is its theoretical accuracy and transparency. It has brought Austrian business-cycle theory from the background to the forefront of debate.
It is true that in 1974, Hayek received the Nobel Prize and thereby gained attention for work that had been long forgotten. The Nobel committee specifically cited Hayek's work on business-cycle theory. But the Hayek revival that occurred in the years following did not focus on that aspect of his work. Instead, it centered on elaborations of his evolutionary social theory, his process-based conceptions of the market order, and his studies on law.
In fact, his books and most of his articles on the business cycle had not even been reprinted since they were first issued — until last year, when the Mises Institute came out with a massive collection: Prices and Production and Other Essays (as well as Tiger by the Tail). The video, then, goes public in an accessible way with a major contribution that Hayek made to economic literature, which is essential for understanding current events.
"Aside from its high production values, what's remarkable about this video is its theoretical accuracy and transparency. It has brought Austrian business-cycle theory from the background to the forefront of debate."
As with the classical music show on public radio that takes apart a symphony to explain "why it is great," I want to explain why this video is great.
The video opens with Keynes and Hayek standing at the front desk of a hotel, both in town for the "World Economic Summit." The clerk dotes on Keynes, treating him like the star he is. Keynes arrogantly announces that he needs no agenda because he is the agenda. Meanwhile, Hayek humbly notes his presence. The person behind the desk has never heard of him. This captures the ethos of the 1930s to the present: the world-famous Keynes vs. the unknown Austrians.
It's all true to life: a number of students report having sent this video to their economics professors, who report back that before seeing this, they had never heard of Hayek.
Meanwhile, the character depiction is fantastic in this video. Keynes is popular and beloved by all, promoting a high lifestyle, parties, and living it up — the future be damned. Hayek's personality here is more intellectual, sober, and even a bit puritanical, with a focus on reality and the long-term good.
Hayek makes his way to his hotel room only to find a Keynes book in place of the Gideon Bible in the nightstand drawer. The phone rings and it is Keynes, who announces that the festivities at the Fed begin shortly. Hayek is stunned because he thought they were going to seminars and meetings.
They meet in the lobby and head out, Hayek with his subway ticket in hand. Keynes orders a stretch limousine, while Hayek shakes his head in disgust.
The theme of the party animal vs. the sober economist continues throughout the story. The terms of the argument are laid out very clearly. Hayek says business cycles are caused by "low interest rates" born of intervention, whereas Keynes wants to blame "animal spirits" loose in a market crying out for management.
Keynes then gets his turn at explaining depression. It is caused by sticky wages and can only be cured by boosting aggregate demand through government spending and the printing press. He favors public works, war, and broken windows, warns against the liquidity trap, favors deficits, brags that he has changed the economics profession, and concludes, "Say it loud, say it proud, we're all Keynesians now!" All the while, the viewer is witness to wild antics of drunken partying.
It is left to Hayek to restore reality to the discussion. He dismisses Keynes on the grounds that there is too much aggregation in his equations, which ignore human action and motivation. Hayek compares postrecession stimulus to drinking the "hair of the dog" to cure a hangover. He points out that there can be no prosperity without saving and investment, and he proceeds to school Keynes in the Austrian perspective.
He begins by changing the focus from the bust to the boom, which he regards as having planted the seeds of disaster. The boom starts with an expansion of credit. The new money is confused with real, loanable funds and is invested in new projects like housing construction.
But sufficient resources to complete these projects are lacking. They are malinvestments. The "grasping for resources reveals there's too few" and the boom turns to bust. As for the liquidity trap, that is only evidence of a broken banking system. The lesson: "You must save to invest, don't use the printing press."
This entire explanation takes place against the backdrop of Keynes trying to sleep off a hangover and then hurrying to the bathroom to throw up — the aftereffects of partying the night before.
What Hayek is discussing in the video is his own theory of the structure of production. But note here that there is a structure of production working in the world of ideas too. The first pieces of the Austrian business-cycle theory were being put together 100 years ago, while Mises was working on his first book, which appeared in 1912.
Here we have the first treatise that puts together interest and production theory with the theory of money. Mises's main point is that central banking will end up causing more cycles, not fewer. Hayek followed up in the 1920s and 1930s with a series of studies on the topic. Later came Mises's own improvements in his 1949 book Human Action. Roger Garrison's studies in the 1990s provide some of the language that appears in the video. Still later, there is Jesus Huerta de Soto's book on economic cycles, which explains the role of fractional-reserve banking — a book that builds on insights from Rothbard from the 1960s.
The F.A. Hayek T-Shirt in Royal Blue
What we see in this video, then, is the culmination of many threads of thought that began a century ago. That's a long and complex production structure for ideas, but it is precisely what is necessary to build a theory of this complexity that can be reduced to a rap video anyone can view and learn from.
A hearty word of congratulations to Russ Roberts and John Papola for putting all this together and providing a fantastic example of how economics can be communicated to every person. It was Mises's own view that economics should not be relegated to the classrooms but should be part of the study of every citizen. Roberts and Papola have taken his injunction very seriously and done something wonderful for Hayek, for Austrian ideas, for economics in general, and for the intellectual progress of the world.
That's why this video is great.
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Ordinarily, I don’t think much of video on the web. Writing is usually a more concise way to get a view across. But video can be more effective if it gets past the genre of “talking heads,” in which case, one is usually better off reading a transcript. Consider the State of the Union message as an example: regardless of who is president, would you rather spend an hour on it, of five minutes? And, it would be five minutes where you are not distracted by the crowd, and can dissect things rationally. I pick reading.
There are places where video can be useful, but it has to be well thought out. I first saw the above video over at “The Big Picture,” which has enough readership to kick up a video’s viewings. I thought it was clever, representing the economist’s views in a short catchy way, and capturing their philosophies as well. The next day, I showed it to three of my boys — they thought it was interesting, and mentioned it the next night at dinner. My wife, incredulous at the idea of an economics rap video, then watched it the next night with all of the kids, while I cleaned up the dinner dishes.
Then the surprise happened. “Dad, what are animal spirits?” “Are animal spirits the bull and the bear?”
Interesting. The video prompted questions from the children for me to answer. I’ve written on Animal Spirits before, at least twice. Animal spirits attributes irrational risk taking and avoidance to businessmen, as if they are irrational animals.
I told my children that businessmen are generally rational, and they make their decisions off of their own balance sheets, and the general willingness of the market to spend, which is related to balance sheets in aggregate.
The contrasts of the video are considerable:
- Keynes is known, Hayek is unknown. Desk clerk immediately knows Keynes.
- The two men are hybrid in what they portray. To some degree they represent the schools of thought that each was a leader of, and to degree the men themselves.
- Hayek reaches into the hotel room drawer, and rather than finding the Bible, finds the General Theory. Similarly, Keynes says, “I am the agenda.” This is a statement of the dominance of Keynesian thought in modern macroeconomics. Keynes was important, but not as dominant while he lived.
- Hayek assumes they will go via the subway. Keynes hires a limo. Keynes is worldly wise, having a great time, and Hayek is uncomfortable. Keynes has alcohol; if Hayek is having alcohol, he is sipping it through a thin straw.
- Alcohol is an allusion through the whole piece. Stimulus is just more of “the hair of the dog that bit you.” The boom is a good time where we drink freely, and the bust is where we deal with our hangover. It was no surprise to see that the Bartenders were named “Ben” and “Tim” and that they were serving up alcohol for as long as the patrons would survive. Even the pyramiding of the glasses had meaning — building up to a stuporous, unsustainable level.
- Keynes holds money as he begins his rap, and throws it midway through. It is an aspect of how incentives from the government or central bank can lead behavior for a time.
- Keynes ends his rap with “We’re all Keynesians now.” Keynes himself did not live to hear that comment uttered by Friedman in the ’70s.
- Keynes and Hayek had different views on spending and savings. On spending, Keynes didn’t think what money was spent on mattered, only that it was spent. Hayek felt that intelligent spending would grow the economy more. On savings, Keynes was negative, whereas Hayek said that moderate savings were valuable, and would facilitate future investment.
- As for animal spirits, businessmen only get bold when they have sufficient free capital to act. When interest rates are artificially low some businessmen invest, trusting that good times will continue. Alas, those good times never last; avoid long commitments when times are good.
- There are liquidity traps, but they occur when banking systems are broken due to misregulation.
- “In the long run we are all dead.” Well, Keynes, way to care for our progeny. You had no kids, for a variety of reasons, but some of us care for how our children, and the nation that we love will do after we have died.
The video portrays a Goliath and David situation. Keynes is dominant, and totally assured of his position in the world. Hayek is less certain of himself, but certain in his message.
My wife and my kids have a better understanding of the current economic situation now than they did before the video came out. I am grateful that the video was made.