Here is short extract from an interesting piece from the NYT blog entitled “Austerity Could Again Sow Seeds of Extremism in Europe”
In the autumn of 1931, Keynes was confronted by a bold and articulate foe, Friedrich Hayek, a young Viennese economist summoned by the London School of Economics to counter the potent ideas emanating from Keynes. Hayek was a member of the hard-headed Austrian School led by Ludwig von Mises, who argued that the market was self-correcting and that any interference by governments would end in disaster.
In broken English backed by intricate triangular diagrams, Hayek described why he believed that any attempt to trick the market into creating jobs would prove futile. Factories that expanded with cheap money may for a while take on extra workers to meet the artificial demand, he said, but unless the cheap rate continued indefinitely, plants would close and the new jobs would be lost.
Before long, Keynes and Hayek set out on an intellectual duel that came to define the debate still raging today about whether governments should intervene in the economy. At first through learned journals, then in private letters, the two men thrust and parried. Hayek came out punching, setting off a caustic, vituperative, unforgiving scrap in which Keynes, 16 years older than Hayek, felt he was not being treated ‘‘with that measure of ‘good will’ which an author is entitled to expect of a reader.’’
The dispute was so venomous that older hands rushed to pry the dueling dons apart. Arthur Pigou, a renowned professor of economics at Cambridge, scolded them for employing ‘‘the method of the duello’’ and clawing at each other ‘‘in the manner of Kilkenny cats.’’
The piece by Nicholas Wapshott, author of ‘‘Keynes Hayek: The Clash That Defined Modern Economics’’ concludes:
In this rematch of Keynes and Hayek, Hayek is at the moment in the ascendant. Europe has set out upon a decade of painful austerity, promising to slowly repay debt and force swollen governments to shrink. In the United States, all the Republican candidates back Hayek’s message of fiscal rectitude and smaller government. So has Hayek won the 80-year-long contest?
It’s too early to tell. There is a significant political price to pay for reducing the size of the state and paying off public borrowing. Economic growth slows and already high unemployment increases. Disillusionment with the political leaders who preside over such a mess may drive the voters to the extremes. In Europe in particular, these are treacherous times.
Read the whole thing.