The Budget Battle: WWHD? (What Would Hayek Do?) AK? (And Keynes?)

BY Paul Solman  April 29, 2011 at 3:23 PM EDT

Cut taxes? Hike them? Cut government? Save the safety net? These economic questions are dominating debate in DC. So we thought we’d consult two of the greatest economists of all time: What would YOU do about today’s budget deficit?

Friedrich August Hayek and John Maynard Keynes were 20th century economists with opposite views of the role of government in the economy. To oversimplify drastically, Hayek believed in the power of the market – not the government – to make the most efficient choices in the long run. He argued that “central planning,” popular during the 1930s and ’40s, so strengthened the state that it put a society on “the road to serfdom,” the name of a book he wrote in 1945. Hayek has become the economic hero of free marketeers and libertarians in the decades since and won the Nobel Prize in economics in 1974.

Keynes died before the Nobel Prize in economics was inaugurated. Perhaps the best-known economist of his era — from World War I through WWII — he argued that government played a vital role in any economy, and that it needed to be especially active in times of crisis and contraction. Full employment was his overriding goal and thus he advocated government spending to keep an economy going when consumers and businesses pulled back and caused a recession — or worse. To the objection that consumers and businesses would spend again and, in the long run, lead the economy to recover, Keynes famously wrote, back in the 1920s: “The long run is a misleading guide to current affairs. In the long run we are all dead.”

Since Keynes and Hayek have both proved the accuracy of this observation, we were forced to ask stand-ins to put words in their masters’ mouths, answering our main question: How might the great intellectual rivals have addressed today’s economic problems?

George Mason University economics professor Hayek vs. Keynes Rap Anthem“ and the follow-up “Fight of the Century: Keynes vs. Hayek Round Two” In 2009, we previewed the making of the first video, and Roberts’ interpretation of Hayek, a year into the economic crisis. He blogs at Cafe Hayek.

We’ll feature our Keynes impersonator in the next post.

Making Sen$e: What did Hayek believe about the role of government?

Roberts: In his 1974 Nobel Prize lecture, he said (and I’m paraphrasing),”I prefer imperfect knowledge that is true, to perfect knowledge that is false.” Having perfect knowledge is impossible. As he got older, Hayek became increasingly skeptical of formal models to measure the impact of any of a particular project or program on the economy. So he was very skeptical of macroeconomic predictions.

Hayek was not an anarchist- he didn’t believe there should be zero government. But he was also not a conservative. He was a classical liberal- he believed in personal freedom and responsibility. This idea that we’d need to increase the budget by $1 billion to “stimulate the economy”, he would view with extreme skepticism. So he was very skeptical of macroeconomic predictions. He believed in the importance of bottom-up, emergent actions of individuals: planning for the future should be done by individuals, not by someone at the top.

He didn’t believe that anyone can steer the economy. Hayek would also be skeptical of the idea that we’d need to keep spending to prop our economy up and to keep our economy going. He’d want to let entrepreneurs and individuals make decisions based on the knowledge available to them, rather than a top-down approach [by the government] that tries to micro-manage at a macro level.

He was skeptical of the idea that the Federal Reserve, through manipulating interest rates, could create prosperity or improve the economy. Hayek would argue in fact the Fed is a major reason we’re in the mess we’re in.

Making Sen$e: What would Hayek do about the fiscal crisis if he were in government today?

Roberts: He’d resign! Maintain his integrity!

Joking aside, it’s hard to say. My intuition is he wouldn’t favor federal government spending currently being close to 25 percent of our economy as it is today. He wouldn’t be happy with the 18 or 20 percent it was at a few years ago, either. Still too big. I think Hayek would support real cuts, not the fake cuts being talked about now. Hayek would argue that the scope of what the government is involved in is too expansive and hard to justify.

I suspect he would favor a reduction in the overall size of government, and have government more involved in its core activities rather than the expansive activities it’s involved in now. Subsidizing rich farmers, bailing out losers, trying to decide what kind of jobs will be the jobs of the next decade- he would be against all those things. And, he was also very aware of the temptation of power and the centralization of power in the hands of the few.

Making Sen$e: Would he support the “>White House budget plan instead?

Roberts: Hayek would be even less happy with the Obama budget than he would with the Ryan Plan. Both plans have government doing too many things best left to us to do privately on our own with our own knowledge and with power decentralized rather than more concentrated.

Making Sen$e: Would Hayek vote to raise the debt ceiling?

Roberts: That’s a tactical question. He would certainly say we’ve borrowed enough and we should start spending less. But I don’t know what he would do about the debt limit- he wasn’t a politician and this is a political problem at this point.

Making Sen$e: Is the current political climate, especially around the budget debate, a representation of the ideals of Hayek on the right and Keynes on the left?

Roberts: The Tea Party is friendly to Hayek, but I don’t know if Hayek would be friendly with them. The Tea Party is a loose agglomeration of dissatisfied people. Certainly, what I (as myself, not as a Hayek persona) find fascinating about the debate is there is a group of people in America who say smaller government and less spending is bad. Another group says bigger and more [spending] is bad. And I think a lot of people are ill-informed, both on the left and the right, about what the government is doing, to be blunt.

But people do have trouble processing the numbers. We as people have trouble processing that information. Here’s an example- say we cut $580 billion out of the budget over the next 10 years. Wow, that really sounds like that’s a lot of money!! The CBO projects the federal government will spend $43 trillion over the next ten years. So a cut of $580 billion over ten years isn’t really a very big number.

This entry is cross-posted with Paul Solman’s Making Sense page.