Why the Keynes-Hayek Clash Endures

By Samuel Gregg

This article appears in the Winter 2025 issue of the Coolidge Review. Request a free copy of a future print issue.

Contra Keynes and Cambridge: Essays, Correspondence, vol. 9, The Collected Works of F. A. Hayek

Edited by Bruce Caldwell (University of Chicago Press, 1995)

In the perpetual struggle between free marketers and interventionists, the figures of the economists F. A. Hayek and John Maynard Keynes loom large. Whenever a major economic downturn occurs, policymakers and commentators turn to these two thinkers’ writings to explain the problem and how to address it.

After the 2008 economic crisis, for example, a video depicting a rap battle between Hayek and Keynes drew millions of views online. The following year, author and journalist Nicholas Wapshott published the book Keynes Hayek: The Clash That Defined Modern Economics.

The two economists did indeed clash. They engaged in a rigorous, even brutal, debate that played out in the pages of the academic journal Economica beginning in late 1931, and continued in private correspondence.

“FRIGHTFUL MUDDLE”

By the time Keynes published A Treatise on Money in 1930, he was an established albeit unconventional economic authority. Hayek, sixteen years younger, was a very new professor at the London School of Economics when he reviewed the Treatise for Economica in 1931.

In simplified terms, Keynes’s book challenged the classical position that savings were a guaranteed basis for investment. Enterprise, Keynes stressed, was also needed. This, however, depended on factors like the prospects for profit or a fall in interest rates. Without such encouragement, enterprise would not act, and there would be insufficient spending on investment relative to the savings rate. The end result was intractable high unemployment.

It followed, Keynes contended, that escaping an economic slump meant discouraging savings and boosting investment. Monetary policy should therefore involve keeping interest rates at levels that encourage the scale of investment necessary to maintain full employment.

At the time, the world was enduring a pronounced economic slump: the Great Depression. Keynes’s ideas therefore could have profound consequences in the real world. Hayek acknowledged this point when he wrote, “It is difficult to suppress some concern as regards the immediate effect which [the Treatise’s] publication in its present form may have on the development of monetary theory.”

Hayek disputed Keynes’s account of the workings of the savings-investments relationship. Another problem with the Treatise, Hayek stated, was its inadequate appreciation of capital theory—something essential for any study of money and a topic to which the Austrian school of economics had devoted considerable attention. Above all, Hayek’s skepticism about governments’ ability to manage the business cycle proved integral to his critique. Hayek especially questioned the ability of monetary authorities to manage interest rates with the precision required by Keynes’s theory.

Although Hayek wrote that the Treatise was “undeniably in so many ways a magnificent performance,” his review was, in his own words, “almost exclusively critical.” Hayek concluded that the real problem was that “Mr. Keynes has made it so extraordinarily hard really to follow his reasoning.” The author, he said, placed “countless obstacles” in “the way of a full understanding of his ideas.”

Keynes responded forcibly in the pages of Economica. He began by defending his positions but switched to a scathing review of Hayek’s own recent book, Prices and Production. Keynes called Hayek’s work “one of the most frightful muddles I have ever read.” Prices and Production was, he wrote, “an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam.”

Economica published the second half of Hayek’s Treatise review in February 1932. Hayek did not match Keynes’s invective, but he concluded that Keynes’s “neglect of the more fundamental ‘real’ phenomena has prevented him from reaching a satisfactory explanation of the more deep-seated causes of depression.”

Beneath the surface of economic fights between Keynes and Hayek lay questions about freedom and reason.

“I NO LONGER BELIEVE ALL THAT”

The back and forth between the two men petered out by March 1932. Nevertheless, the debate would have significant implications for the future of economic theory, not to mention Keynes’s and Hayek’s lives.

At the time, this would not have been obvious. Thanks, however, to Contra Keynes and Cambridge: Essays, Correspondence, these developments become much more comprehensible. In this book, Bruce Caldwell, the distinguished historian of economic thought and biographer of Hayek, collects articles and correspondence by Keynes and Hayek (plus one essay by Keynes’s student Piero Sraffa) and historically situates them in the wider struggle about ideas.

As the book forms part of the Collected Works of F. A. Hayek, most of the texts are authored by Hayek. Yet we do not get a one-sided account of the debate. Instead, we see the highly charged conflicts of the 1930s driving academic discourse about economic theory. Keynes and Hayek sought to diagnose the challenges associated with the Depression and discussed what, if anything, governments should do about them.

The materials also underscore several paradoxes. One is Keynes’s dissatisfaction with his own book’s argument. In one letter, Keynes informed Hayek, “I am trying to reshape and improve my central position, and that is probably a better way to spend one’s time than in controversy.”

Hayek had anticipated this dissatisfaction. Near the start of his initial Economica review, he wrote, “The Treatise proves to be so obviously—and, I think, admittedly— the expression of a transitory phase in a process of rapid intellectual development that its appearance cannot be said to have that definitive significance which at one time was expected of it.”

Some of Keynes’s reshaping appeared in The General Theory of Employment, Interest, and Money (1936)—a book that, for better or worse, changed the entire trajectory of economics.

One puzzle explored in Contra Keynes and Cambridge is why Hayek never reviewed the General Theory. Hayek stated that he was reluctant to invest time in evaluating the text given Keynes’s notorious propensity to change his mind. According to Hayek, when the second part of his Treatise review appeared, Keynes told him, “Oh, never mind; I no longer believe all that.”

On other occasions, Hayek mentioned that he had tired of controversy by 1936. Assailing the General Theory, he added, would have required fitting himself up for a major methodological dispute with Keynes—specifically, Keynes’s effort to think in terms of major aggregates about phenomena like employment. Hayek considered this to be the weakest part of Keynes’s theory. Aggregates, Hayek thought, disguised what was happening at the level of prices and thus distorted our understanding of economic activity.

In any case, not reviewing the General Theory was a mistake on Hayek’s part. The title signaled the bigger project that Keynes had in mind and the sheer scale of its inherent challenge to classical economics and free markets.

THE DEBATE Continues

Yet we also know that by the mid-1930s, Hayek saw even bigger questions beneath the surface of his economic fights with Keynes. One was the future of liberalism. Another involved the nature and limits of reason.

Wrestling with those issues explains why Hayek moved from writing The Pure Theory of Capital (1941)—which, I can attest, is an extremely difficult technical text—to publishing his highly readable Road to Serfdom three years later. In the latter, Hayek turned his attention to some of the philosophical and political questions that had preoccupied Keynes and that underlay many of the twists and turns in Keynes’s economic thought from the 1920s onward.

From this standpoint, the writings contained in Contra Keynes and Cambridge remind us that debates about economic theory have consequences that reach well beyond economic policy. Keynes and Hayek certainly understood that. This may be the most important reason why both economists remain significant reference points today.

Samuel Gregg is the Friedrich Hayek Chair in Economics and Economic History at the American Institute for Economic Research. He is the author of seventeen books, including, most recently, The Next American Economy: Nation, State, and Markets in an Uncertain World. Gregg previously reviewed The Political Economy of Juan de Mariana for the Coolidge Review.

This article appears in the Winter 2025 issue of the Coolidge Review. Request a free copy of a future print issue.