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ECONOMICS: the AUSTRIAN SCHOOL and KEYNES (2 of 2)

John Maynard Keyes. He spoke of "animal spirits" influencing economic behavior. He read Hayek's The Road to Serfdom and told him that he liked it.

A challenge to the Austrian School of Economics came from Britain's John Maynard Keynes (1883-1946). Keynes had become establishment during the 1930s Keynes shocked economists who believed in the ability of a free market to govern itself. Keynes believed that with the layoffs and reduced consumption that came with a a business cycle downturn -- it was better to overcome the layoffs, the drop in employment and the drop in consumers buying, by a government stimulating the economy -- by governments temporarily spending more than they received in revenues (which characteristically fell during an economic downturn).

In theory, with economic recovery and budget surpluses, governments were supposed to pay back the money borrowed. Keynes would not be not at fault in his theory if politicians failed to do so.

In addition to being attacked by conservative economists, he was also attacked by Marxists for his trying to save capitalism.

Keynes distanced himself from the Marxists. In 1931 he wrote:

How can I accept the Communist doctrine, which sets up as its bible, above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values. [note] 

Friedrich von Hayek, considered by many to be a member of the Austrian School, had addressed ideas that Keynes had expressed in his work "Treatise on Money," written in 1930. Keynes read Hayek's criticism and announced that "Treatise on Money" no longer reflected his thinking. And Keynes went on to read Hayek's famous book, The Road to Serfdom. He wrote to Hayek:

In my opinion it is a grand book ... Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement. [note]

Kenneth R. Hoover, Economics as Ideology, Lanham, Maryland: Rowman & Littlefield, 2008, p. 152

Hayek continued to describe Keynesian policies as giving too much power to the state, which he saw as socialistic.