Keynes vs. Hayek (cont'd): now, in convenient letter form!

More on the on-going debate...

from Gerald O'Driscoll in the WSJ...

The debates raging over what policies will pull the U.S. economy out of its Great Recession replicate one that occurred during the Great Depression. Thanks to the efforts of Richard Ebeling, a professor of economics at Northwood University, we have compelling and concise documentary evidence. He has unearthed letters to the Times of London from the two sides that mirror today's debates.

On Oct. 17, 1932, the Times published a lengthy letter from John Maynard Keynes and five other academic economists. Keynes, et al. (Keynes for short), made the case for spending—of any kind, private or public, whether on consumption or investment.

"Private economy" was the culprit that impeded a return to prosperity....They conclude by endorsing public spending to offset unwise private thrift.

The views in this letter came to be known as Keynesian economics. Depressions are caused by a spending deficit, which can be made up by government spending. Keynesian economics (which predates Keynes) is easily identifiable in speeches given by President Obama and his economic team.

Two days later, on Oct. 19, 1932, four professors at the University of London responded to the Keynes letter, and one of the signers was Friedrich A. Hayek who more than 50 years later would win the Nobel Prize in Economics.

Hayek, et al. (Hayek for short), identified three areas of contention. First, they correctly identified Keynes's argument about the futility of savings as actually being an argument about what has classically been known as the dangers of hoarding...

Second, the London professors disputed that it mattered not the form spending took, whether on consumption or investment. They saw a "revival of investment as peculiarly desirable," as do today's proponents of supply-side economics....

Their third and greatest disagreement with Keynes was over the benefits of government spending financed by deficits. They demurred....In our contemporary context, no stimulus.

Finally, and importantly, they offered a way forward. Governments world-wide, led by the U.S. with the destructive Smoot-Hawley Tariff of 1930, had turned to protectionism and restrictions on capital flows....In short, they argued that the cure for the Great Depression was a reinvigorated international global trading system....

As New York University economist Mario Rizzo put it, "The great debate is still Keynes versus Hayek. All else is footnote." Economists have clothed the debate with ever greater mathematical complexity, but the underlying issues remain the same.

Was Keynes correct that savings become idle money and depress economic activity? Or was the Hayek view, first articulated by Adam Smith in the "Wealth of Nations" in 1776, correct?

Is all spending equally productive, or should government policies aim to stimulate private investment?...

Finally, is creating new public debt in a weakened economy the path to recovery? Or is "economy" (austerity in today's debate) and thrift the path to prosperity now, as it has usually been considered before?