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Why Didn't Hayek Review Keynes's General Theory
The conflicts between two giants of economic thought
provide an insight into Hayekian thought.
By Professor Bruce Caldwell
Two problems of historiography are highlighted in this article about F.A.
Hayek, John Maynard Keynes, and The General Theory: the sorts of questions
historians typically ask and the reliability of self-reports from major
historical figures.
Historians, of course, usually try to explain why something happened, but not
always. Occasionally the more interesting question is, why did something that
apparently should have happened, not happen? This question has captured the
attention of many historians of economic thought who typically have asked it in
the hope of solving some riddle in the past.
1. Some Background on Keynes and Hayek
Friedrich A. Hayek received degrees from the University of Vienna in 1921 and
1923, then spent about sixteen months in the United States. While there he
studied the workings of the Federal Reserve system and learned some basic
statistical smoothing techniques. In 1927 the Austrian Institute for the Study
of Business Cycles was created, and Hayek was appointed its first director. In
this capacity he travelled to London to attend a meeting of European institutes
that were gathering statistics and doing research on the trade cycle. It was
there that he first met Keynes, an encounter he would recall in a paper
published in 1966:
I first met him in 1928 in London at some meetings of institutes of business
cycle research, and though we had at once our first strong disagreement on some
point of interest theory, we remained thereafter friends who had many interests
in common, although we rarely could agree on economics. He had a somewhat
intimidating manner in which he would try to ride roughshod over the objections
of a younger man, but if someone stood up to him he would respect him forever
after wards even if he disagreed.
Keynes by then had achieved international fame for The Economic Consequences
of the Peace, in which he offered an economic and moral appraisal of the terms
of the treaty as well as a devastating account of the political manoeuvrings he
had observed at the Paris Peace Conference. In Britain he was best known as a
commentator on current economic issues. More important for our purposes, Keynes
in the late 1920s was working on a book on theoretical economics, one that he
hoped would establish his reputation as a monetary theorist. After much delay, A
Treatise on Money was finally published on 31 October 1930.
Hayek, sixteen years Keynes's junior, was working in the same area. He had
begun his own volume on the history of monetary theory and policy of which four
chapters, covering roughly from 1650 to 1850, had been completed. In 1929 he
published another work, Geldtheorie und Konjunkturtheorie. The book contained
Hayek's version of the Austrian (or "Mises-Wicksell") theory of the
origins of the trade cycle. In the same year Hayek's critique of the
underconsumptionist theories of the American writers Waddill Catchings and
William Trufant Foster appeared in a German economics journal.
In short order Hayek's battle with Keynes began. In the August 1931 issue of
the journal Economica Hayek published the first half of a lengthy critical
review of Keynes's Treatise. One of his biographers tells us that "Keynes
was obviously very unhappy with the August part of the review, for his copy of
that issue of Economica is among the most heavily annotated of the surviving
copies of his journals, with no less than 34 pencilled marks or comments on the
26-page review". Keynes's "Reply" was published in the November
issue, before the second half of Hayek's review appeared in February 1932.
Keynes used about as much space in his reply attacking Hayek's book as he did
defending his own. As the following passage indicates, Keynes's low opinion of
Prices and Production comes across very clearly:
The book, as it stands, seems to me to be one of the most frightful muddles I
have ever read, with scarcely a sound proposition in it beginning with page 45
[Hayek provided historical background up to page 45; after that came his
theoretical model], and yet it remains a book of some interest, which is likely
to leave its mark on the mind of the reader. It is an extraordinary example of
how, starting with a mistake, a remorseless logician can end up in bedlam.
The dispute on the pages of Economica generated a correspondence between
Hayek and Keynes: they ultimately exchanged twelve letters between 10 December
1931 and 29 March 1932. Piero Sraffa's harsh review of Prices and Production in
the March 1932 issue of the Economic Journal, and the comment and reply that
followed in June, must also be considered as part of this ongoing contest
between rival theories of the workings of a monetary economy.
Beginning probably sometime in the spring of 1932 Keynes began to revise his
theory. One historian argues that although by his Easter term lectures (in April
and May 1932) Keynes was still using the analytical tools of the Treatise, the
voice of The General Theory had finally begun to emerge. The process whose
ultimate conclusion was the publication of Keynes's masterwork in February 1936
has become one of the most studied episodes in the history of economics, partly
because of its intrinsic interest, and partly because of the abundance of
materials that has survived, including Keynes's own notes, draft tables of
contents, correspondence, the notes of students, and related publications. As a
biographer has noted, "Although scholars will always hope for more, it is
probably the case that with the General Theory they have the most voluminous
record surrounding the creation of any classic work in economics".
Hayek was also busy. But he did not prepare a review of The General Theory.
Why not?
2. Is It Reasonable to Expect that Hayek Would Have Reviewed The
General Theory?
There are a number of reasons why it is reasonable to expect that Hayek would
have reviewed The General Theory. First, one of the principal reasons that Hayek
initially came to England from Austria was, one commentator has put it, "to
provide a counter-attraction to Keynes"
In an interview a half century later Hayek recounted the event and how
serendipitous it had all seemed. (Recall that he had just completed n four
chapters of a history of monetary theory, which is why he could produce such an
original lecture.)
When I gave in Vienna my initial lectures as Privatdozent, I chose for my
subject this kind of underconsumption theory which had then become acute in
England. And Robbins could read German. That's an almost unique feature, an
English professor who could read German literature - that's good luck, that be
pounced on my subject: This is the thing we need at the moment, to fight Keynes.
So I was called in for this purpose, produced of course a lecture which was
original, which suggested more knowledge of the history of English theory than
anybody else. Was sympathetically received by Robbins, who had been influenced
by the Austrian school. We at once understood each other. This combination of
accidents led to my appointment in London. It was luck from beginning to end.
It is also significant that Hayek had successfully challenged Keynes. As
previously noted, the rivalry between the two was established early on. It is
arguable that Hayek had the better part of the initial encounter. Both of their
theories built on a framework that had been created by the Swedish economist
Knut Wicksell. Wicksell's work was well known within the Austrian tradition. His
first book, published in 1893, was an attempt to integrate the Austrian theory
of capital with marginal productivity theory, all within a general equilibrium
framework. Only after having tried to provide such "microfoundations"
did Wicksell turn to a discussion of a monetary economy in Interest and Prices.
In the Treatise Keynes completely ignored Wicksell's earlier contribution,
borrowing only from Interest and Prices. Not surprisingly, Hayek in his review
targeted the absence of a capital-theoretic foundation in Keynes's book. In his
reply Keynes more or less granted Hayek's point. This was probably why he felt
it necessary to take the extraordinary step of hatcheting Hayek's Prices and
Production in his reply. It was as if Keynes were saying, "Well, yes, my
theory has its problems, but they are nothing compared to those in Hayek's
work."
This is not to say that Hayek won their rencontre outright. Because it had
capital-theoretic foundations, Hayek's theory appeared the more well developed
and consistent of the two. But his framework was unfamiliar to his English
readers, and many observers still found it hard to judge between them. All that
was clear was that a contentious dispute had started. John Hicks, writing during
the heyday of the Keynesian revolution, recalled it this way: "It is hardly
remembered that there was a time when the new theories of Hayek were the
principal rival of the new theories of Keynes. Which was right, Keynes or
Hayek?".
Despite Hayek's early successes, for a variety of reasons the tide had begun
to turn in Keynes's favor by the middle of the decade. Hayek himself became
engaged on a number of new fronts. The exchange between Hayek and Sraffa that
began with Sraffa's review of Prices and Production was, if anything, even more
obscure than the earlier one between Hayek and Keynes, but few could mistake
Sraffa's scathing tone. In 1933 Frank Knight began his assault on Austrian
capital theory which Hayek was to answer in 1936. The year before he had been
busy editing two essays to be contributed to Collectivist Economic Planning, a
volume that set off the British version of the socialist calculation debate.
These new battles not only dissipated Hayek's strength, they suggested to the
neutral observer that very few economists outside of the LSE (and indeed, not
even all of those who were within it) agreed with Hayek's ideas.
Meanwhile, Keynes's star continued to rise. He was frequently in the public
eye, offering policy advice, delivering speeches, and writing articles. Keynes
also made it clear that he was developing (with the help of a bevy of brilliant
disciples at Cambridge) a new theory of aggregate income, one that would correct
the deficiencies in his earlier work. All of this created a general anticipation
for The General Theory. And it wasn't just Keynes's own self-promotion; members
of the Cambridge Circus were doing their able best to change the minds of any
recalcitrant Hayekian devotees. Abba Lerner, Nicholas Kaldor, and G. L. S.
Shackle were among the more prominent of their new recruits.
All of this suggests that the stakes had increased by 1936. Hayek had
experienced an early victory, but, having been challenged simultaneously from a
number of directions, he was losing ground fast. A critical review of his chief
rival's new theory never could have been more important. Instead, no response
came; at least, not until much later, in 1963, when Hayek first publicly stated
his regret at not having reviewed Keynes's book: "I have to the present day
not quite got over a feeling that I had then shirked what should have been a
plain duty".
Hayek not only shirked a duty, he missed a golden opportunity. Why?
3. Hayek's Explanation(s) of Why There Was No Review
To summarize, Hayek did not write a review of The General Theory the
following reasons:
1. He thought, based on his experience with the review of the Treatise, that
Keynes would change his mind again. (Mentioned five times, but de-emphasized in
the last two accounts.)
2. He thought, because The General Theory was "a tract for the
times," that Keynes would change his mind again. (Mentioned once, in 1966.)
3. He had the vague feeling that a proper critique would require him to
challenge Keynes's entire macroeconomic approach. (Men four times; cited as the
"decisive" reason in 1966, but de in the last two accounts.)
4. He was "tired of controversy." (Mentioned once, in 1963.)
5. He was then engaged in preparing a model, one with its own improved
capital-theoretic foundations, which he hoped would soon be available as an
alternative to Keynes's model. (Emphasized in the last two accounts.)
6. The alternative model never was put forward. By the time The Pure Theory
of Capital came out Hayek and Keynes were fighting on the same side against
wartime inflation, so Hayek didn't want to weaken his influence. (Emphasized in
the last two accounts.)
7. Finally, Hayek held back criticism at war's end because he had hopes that
Keynes would come out against the policies of his followers. But Keynes died
before this happened. (Their final conversation; first mentioned in 1952,
repeated in the 1980s.)
Note that the last two reasons explain why Hayek did not attack Keynes during
the war years. If we restrict ourselves to the reasons why no review was written
in the 1930s, only statements 1 through 5 are germane.
4. Some Problems with Hayek's Explanation(s)
Hayek's explanations are not unambiguous, and indeed, there are good reasons
to treat his stories with some skepticism. Hayek didn't start writing about the
question of the review until the halcyon days of the Keynesian movement. Given
this timing, and the fact that he was completely opposed to the Keynesian
approach, his statements about it must be considered with caution.
Next, Hayek's story changes rather substantially through time. He emphasizes
two reasons in 1966 and calls the second of these (his vague feeling of unease
about macroeconomics) "decisive" This seems clear enough, but in the
1980s both major reasons are downgraded, the two that were mentioned in passing
(Hayek's "tiredness of controversy" and Keynes's book being a
"tract for the times") are wholly ignored, and two new reasons are
offered as most important. Which accounts are we to believe?
5. A Proposed Interpretation
Some might want to throw out all the information Hayek provided and just
leave the riddle of the review unsolved. I will nevertheless propose here an
interpretation. Under the circumstances, it would be disingenuous to say
anything more than that I think that this account sense of the evidence. My
approach will be to try to assess the veracity of the various reasons that Hayek
has offered.
Before doing so, however, we will first examine a simple, even obvious,
explanation, one that Hayek himself never offered, but which occurred to several
early readers of this paper: maybe no one asked him to do a review! There is no
evidence that Hayek was asked by any of the major journals to do a review. We do
know that Keynes sent him an advance copy of the book. Hayek sent back a letter
of thanks in early February, noting that he was puzzled by some parts and
troubled by others, and concluding, "If my present doubts remain I shall
probably ask for your hospitality for some notes on particular points in the E.J.".
This indicates that Hayek may initially have intended to do a review. Perhaps by
the time he got around to ask for space, the Economic Journal had already
promised the review to John Hicks, and Hayek simply decided not to pursue the
matter further.
Though it is possible to reconstruct plausible scenarios along these lines,
my inclination is to discount this as an explanation. Were this really the
reason Hayek didn't write a review, why didn't he simply say so? And the answer
is clear: Even if no one had asked him to write a review, Hayek could have done
one if he had wanted to. As Donald Moggridge has noted, "The book was
reviewed everywhere - in the daily press, the quality weeklies and monthlies,
the professional journals". There were many outlets for reviews, and
economists (Hayek among them) frequently made use of them. Hayek was not
prevented from doing a review; he decided not to do one. It is his decision that
must be explained. Let's turn to the reasons he provided.
A
Intriguingly, the part of Hayek's story that is the hardest to evaluate is
that which he repeated the most often: the "Keynes would just change his
mind again" thesis. It is certainly a plausible reason. Keynes's
quicksilver variability was well known. The public perception was not based on
his switching of theoretical frameworks when he moved from the Treatise to The
General Theory. Rather, it was due to his pragmatic (and hence often
inconsistent, given the British economic turmoil of the interwar years) approach
to policy. The most famous of his apparent flip-flops occurred in the spring of
1931. Hoping to forestall Britain's abandonment of the gold standard, Keynes
came out in support of a revenue tariff, a move that reversed his longstanding
and vocal support of free trade. When England left gold that summer, Keynes
dropped his support for the tariff. This earned him the sobriquet of "the
boneless man" in the press and led to the following wonderful twist on the
old joke about how economists never seem able to agree: "Where five
economists are gathered together there will be six conflicting opinions, and two
of them will be held by Keynes."
This, then, is the dilemma. Hayek really had experienced firsthand, and in a
not particularly pleasant episode, Keynes's propensity to change his mind. But
at the same time, to simply say that Keynes would probably just change his mind
again has the ring of a handy excuse; a reason that would be immediately
understood if given to a contemporary. Which was it: reason or excuse? Neither
can be ruled out, and indeed, it may ultimately have been both: Hayek may have
convinced even himself that Keynes's theoretical inconstancy was reason enough
not to bother with writing a review.
B
Hayek's second claim was that The General Theory was merely "a tract for
the times" that would surely soon be revised and hence not something to be
taken seriously. This claim might seem plausible to a reader in the 1930s, for
whom Keynes was known principally as a witty, caustic, and often brilliant
commentator on the current economic and political scene, the author of both The
Economic Consequences of the Peace and "The Economic Consequences of Mr.
Churchill." Such a reader might well think of The General Theory as
"Keynes's latest book," rather than as a major theoretical work.
But there are reasons to question this explanation, too. Keynes thought he
was writing, and claimed to others to be writing, a seminal work in economic
theory.
The General Theory was many things, but it can hardly be mistaken for a
policy pamphlet. If one compares it to Keynes's other writings, it is best
considered the heir of A Treatise on Money; it certainly has little in common
with any of his writings on policy. Hayek's claim might resonate with certain
readers in the 1960s, but only because at that time the "neoclassical
synthesis" view that Keynesian analysis was nothing more than "a
special case" (albeit a highly relevant one for policy) was popular.
The claim that The General Theory was "a tract for the times" is
best viewed as an accusation by Hayek rather than as a reason for his failing to
write a review. Hayek is retrospectively faulting Keynes for calling what (in
Hayek's opinion) was no more than a tract a general theory and chiding a later
generation for lionizing the perpetrator. Indeed, had Hayek actually thought
this about the book in 1936, it would have provided a perfect entrée for a
critique. One can imagine the opening sentence: "Mr. J. M. Keynes has
written a tract for the times which he, for reasons known only to God and
himself, has chosen to call a general theory ..."
C
Hayek's third reason is his vague but persistent feeling that in order to
write an adequate review he would have had to oppose the whole macroeconomic
approach. This reason was mentioned twice by Hayek in the 1960s, and the second
time he called it "decisive." On the other hand, in the 1980s he
downplayed it.
This explanation, too, should probably be discounted. What is least
believable about it is Hayek's claim that he had had a vague feeling of unease
about macroeconomic approaches. There should have been nothing vague about
Hayek's reaction to an approach that employed aggregates. Opposition to the use
of aggregates is a long-standing methodological principle among Austrians. In a
work published in the 1920s on the U.S. economy, Hayek himself explicitly
criticized the notion of a general price level.
The source of the Austrian opposition is that aggregates mask the movement of
relative prices, and relative price movements are an essential component of all
Austrian theory. Changing relative prices play a key role in the Austrian theory
of the cycle, they underpin the Austrian critique of central planning, and they
are central in Hayek's own (just then developing) vision of the informational
function of market prices. Even more, in one of the few places that Hayek does
offer a criticism of Keynes's General Theory during this period, he points out
that Keynes's "economics of abundance" ignores relative price
movements.
In the 1960s Hayek had developed a deep interest in methodological work.
Furthermore, Keynesian macroeconomics was at its apex. It is understandable that
when reminiscing during this period he might link his failure to write a review
to a methodological criticism of macroeconomics. But it seems unlikely that a
"vague feeling of unease" about aggregates was a causal factor in his
decision in the 1930s.
D
We can now address together the two reasons that in my opinion make the most
sense; Hayek's own "tiredness of controversy" and the fact that he was
working on his own model. The two explanations go hand in hand.
There were at least two senses in which Hayek could have been tired. He was
doubtless both physically and mentally tired after having fought a running
battle with the likes of Keynes, Sraffa, Knight, and a disparate group of
socialist planners. But in addition, Hayek may well have been tired of what
surely must have struck him as pointless controversy. Hayek was reserved, even a
bit austere, and always the perfect gentleman; Joseph Schumpeter once chided him
for his habit of giving his opponents the benefit of the doubt. Hayek must have
been disconcerted by the debating club antics, the offhand but razor-sharp
insouciance of Keynes and his well-bred Cambridge clique.
In the last of his letters to Hayek regarding the Treatise, Keynes hinted
that he, too, might be growing weary. His last sentence read, "I am trying
to re-shape and improve my central position, and that is probably a better way
to spend one's time than in controversy". It is interesting that Hayek
chose the word "controversy," the same one used by Keynes in his
letter, in describing his reticence to do a review.
But Hayek was not just tired of controversy. Soon after he had concluded his
initial confrontation with Keynes he came to the stark realization that his own
model had some severe problems. The problems lay with the B?hm-Bawerkian notion
of an "average period of production"; that is, with the
capital-theoretic foundations of his model. This was bad news indeed. Hayek had
scored most of his points against Keynes precisely because of the absence of
such foundations in the Treatise. This had also been the one place that Keynes
had expressly admitted that Hayek was right. Were Hayek to give Keynes another
chance to reply to one of his critical reviews, it is not difficult to imagine
how Keynes might use the opportunity: "The reader will recall that
Professor Hayek earlier faulted my Treatise for its lack of capital theoretic
foundations, but what is now clear is that my book lacked, unlike his, the
pretense of a foundation ..."
Now this is not to say that Hayek accepted the criticisms of the likes of
Keynes and Knight. But he did recognize that problems existed, and he was in the
middle of an attempt to solve them. Rather than interrupt his effort in order to
spar with Keynes, he decided to continue working on his own model. He thought
(wrongly, it turned out) that he was near enough to completion that the
profession would soon have before it two models of a monetary economy, and that
his would be judged to be superior. This, in my opinion, was Hayek's reasoning,
and is the principal reason why he decided not to review The General Theory.
Before concluding, let us return to one of Hayek's earlier reasons, his
stated "vague sense of unease" about macroeconomics. Though we have
raised questions about this explanation, there were other reasons that Hayek may
have experienced some vague uneasiness in the 1930s. As I have argued elsewhere,
in the mid-1930s Hayek began questioning the ability of static equilibrium
theory to accurately portray how markets worked. The equilibrium theory of his
day assumed that agents possess full and objectively correct information, that
is, that all the necessary data is already given to them. For Hayek, this
approach ignores a fundamental question: How, in a world of dispersed and
subjectively held information, do the plans of agents ever become coordinated?
Hayek eventually favored replacing the equilibrium story of the workings of the
market mechanism with what Austrians now call a market process story. In the
latter, free markets are one of a number of institutions that can assist the
process of social coordination. In good Austrian style, a central informational
role in this story is assigned to freely adjusting relative prices.
This market process view provided the foundation for Hayek's critique of
central planning. But it also had consequences for his own work. In a market
process world, it might be possible to predict broad patterns of behavior, but
not the sort of precise sequence of changes in relative prices that Hayek had
outlined in Prices and Production. Hayek may have begun to recognize that the
line of thinking he was developing in the 1930s posed problems for virtually any
theoretical approach to social phenomena, including his own earlier efforts. If
so, his vague but persistent feeling of unease may have been over this, rather
than over the fact that Keynes was doing aggregate analysis.
6. Conclusion
Historical reconstructions are always provisional. Stories change as more
evidence is discovered. In constructing our narrative we have been forced to put
our trust in a famously unreliable source: the self reports of one of the
principals. What are the chances that new, more trustworthy materials might
surface in this case?
The chances are probably slight. Not much correspondence from the 1930s
remains in the Hayek archives at Stanford. In this regard, Keynes is a much more
attractive figure for historians than is Hayek. Keynes was continuously on the
move between Cambridge, London, and his vacation home at Tilton, and was an
excellent correspondent; he was always writing to whoever was left behind at the
other two places. The resulting documentary trail is massive. Hayek, on the
other hand, spent most of his nineteen years in England (with the exception of
the war period) in only one place: London. He would talk to people like Robbins
(who was both a colleague at the LSE and close neighbor in the Hampstead Garden
suburb), rather than send letters. Throughout his life Keynes never left the
Cambridge - London-Tilton axis for long, so there were fewer chances that
materials might be lost. Hayek made a number of large-scale moves - Vienna to
London in 1931; London to Cambridge and back in wartime; London to Chicago in
1950 - during which materials might easily have been lost or discarded. Finally,
few individuals could match Keynes's penchant for squirreling items away; even
as a youth he kept meticulous records.
It would be wonderful if some new stockpile of contemporaneous materials were
suddenly discovered, as happened in 1976 when a large cache of Keynes's lecture
notes and letters was found at Tilton. But even contemporaneous correspondence
is not an infallible guide to an author's motives. Obviously, one can write with
future generations in mind; or embarrassing entries can be discreetly removed,
either by figure in question, or by his heirs, or by others seeking to protect
him; or, most fundamentally, intentions can be misread. When one speculates on
motivation, there are many slips 'twixt cup and lip. Additional evidence simply
provides more material that must somehow be fit into the historian's story. At
best, it may help to eliminate certain reconstructions as implausible.
There is a final twist to our story. In the end Hayek did, in a manner of
speaking, write a review, not of The General Theory per se, but of whole
Keynesian approach. For it turns out that in most of his accounts of why he did
not review The General Theory, Hayek manages to slip in an assessment of
Keynes's contribution. One of these even contained an inside joke that Keynes
would have appreciated, even as it smarted. At one point in criticizing Keynes,
Hayek quotes the opinion of the "eminent" Victorian Leslie Stephen
(Hayek 1995, 249). Keynes famously despised the Victorian era, of course, but
much worse, Stephen was the straight-faced father of two of his compatriots in
the Bloomsbury group, Vanessa Bell and Virginia Woolf!
F. A. Hayek's formal and reserved exterior was like the skin of an onion,
hiding many layers beneath. This is a final reason why we will probably never
really know why he failed to review Keynes's General Theory.
Prof Caldwell is currently a Ludwig Lachmann Fellow at the LSE. He did his
PhD at the University of North Carolina and has been President of various
professional organizations, such as the History of Economics Society. His
research interests concern the History of Economic Thought and the Methodology
of Economics, along with an extensive study of Hayekian thought.
