Contra Keynes and Cambridge: Essays, Correspondence

Contra Keynes and Cambridge: Essays, Correspondence

by F. A. Hayek

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In 1931, when the young F. A. Hayek challenged the economic theories of John Maynard Keynes, sixteen years his senior, and one of the world's leading economists, he sparked a spirited debate that would influence economic policy in democratic countries for decades. Their extensive exchange lasted until Keynes's death in 1946, and is reprinted in its entirety in this


In 1931, when the young F. A. Hayek challenged the economic theories of John Maynard Keynes, sixteen years his senior, and one of the world's leading economists, he sparked a spirited debate that would influence economic policy in democratic countries for decades. Their extensive exchange lasted until Keynes's death in 1946, and is reprinted in its entirety in this latest volume of The Collected Works of F. A. Hayek.

When the journal Economica published a review of Keynes's Treatise on Money by Hayek in 1931, Keynes's response consisted principlally of an attack on Hayek's own work on monetary theory, Prices and Production. Conducted almost entirely in economics journals, the battle that followed revealed two very different responses to a world in economic crisis. Keynes sought a revision of the liberal political order—arguing for greater government intervention in the hope of protecting against the painful fluctuations of the business cycle. Hayek instead warned that state involvement would cause irreparable damage to the economy.

This volume begins with Hayek's 1963 reminiscence "The Economics of the 1930s as Seen from London," which has never been published before. The articles, letters, and reviews from journals published in the 1930s are followed by Hayek's later reflections on Keynes's work and influence. The Introduction by Bruce Caldwell puts the debate in context, providing detailed information about the economists in Keynes's circle at Cambridge, their role in the acceptance of his ideas, and the ways in which theory affected policy during the interwar period.

Caldwell calls the debate between Hayek and Keynes "a battle for the minds of the rising generation of British-trained economists." There is no doubt that Keynes won the battle during his lifetime. Now, when many of Hayek's ideas have been vindicated by the collapse of collectivist economies and the revival of the free market around the world, this book clarifies Hayek's work on monetary theory—formed in heated opposition to Keynes—and illuminates his efforts to fight protectionism in an age of economic crisis.

F. A. Hayek (1899-1992), recipient of the Medal of Freedom in 1991 and co-winner of the Nobel Memorial Prize in Economics in 1974, was a pioneer in monetary theory and the principal proponent of classical liberal thought in the twentieth century. He taught at the University of London, the University of Chicago, and the University of Freiburg.

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Contra Keynes and Cambridge

Essays, Correspondence

By F. A. Hayek, Bruce Caldwell

The University of Chicago Press

Copyright © 1995 Estate of F. A. Hayek
All rights reserved.
ISBN: 978-0-226-32114-1



When I look back to the early 1930s, they appear to me much the most exciting period in the development of economic theory during this century. This is probably a highly subjective impression, determined both by my age at that time and the particular circumstances in which I was placed. Yet even when I try hard to look at the period as objectively as I can, the years between about 1931, when I went to London, and say 1936 or 1937, seem to me to mark a high point and the end of one period in the history of economic theory and the beginning of a new and very different one. And I will add at once that I am not at all sure that the change in approach which took place at the end of that period was all a gain and that we may not some day have to take up where we left off then.

Perhaps I can anticipate my main point by saying that just as it seemed that we were succeeding in establishing a unified tradition in economic theory and abolishing all separate 'schools', a new rift appeared which divided the economic theorists in different lines. I want to speak here first about the process of consolidation of which, I believe, the London School of Economics was the centre just at the time when I joined it. The strongest impression one would gain was that all the different traditions which till then had prevailed at the different centres were at last fusing into a common, internationally accepted body of economic theory. It is true that the Italian economist Maffeo Pantaleoni had claimed a good many years earlier that there were only two schools of economists, good economists and bad economists. But that was more a pious wish than a fact. The tendency towards integration which had been noticeable before the first Great War had been halted and partly reversed by that war and its aftermath. Though during the 1920s I believe in all the important centres, London, Harvard, Cambridge, Vienna, and Stockholm, and a few Italian, French, and German universities, eager young men were trying hard to find what of the work of other schools they could usefully incorporate into their local tradition, it was still a situation in which the frameworks into which these improvements were placed were determined by the different works of the great founders of the respective traditions, Marshall, Walras, and Pareto, or Menger—with perhaps Wicksell in Sweden and Taussig at Harvard already trying to provide a synthesis.

The London School of Economics had then just gone through its first change of the faculty. Most of the men who had formed its first faculty on its foundation thirty-five years earlier had recently either died or retired and been replaced by a much younger group. Some of the older men like Graham Wallas, and more rarely since he lived at Oxford, Edwin Cannan, still appeared in the Common Room, and that famous book collector, Foxwell, was at least still active from his Cambridge retreat. Above all, the two founders of the school, Sidney and Beatrice Webb, were still very much in evidence. A recent publication of the documents concerning the foundation of the School by its present [1963] director has made it clear to what extent indeed it had been the personal creation of Sidney Webb. Though Beatrice was in many ways the more colourful personality and we know so much more about her than about him, I for my part have no doubt that he was the solid mind of the famous combination, a master of marshalling facts, of organization and of tactics. He did profoundly believe that an impartial study of social phenomena would inevitably lead to a rational reorganization of society on socialist lines and that therefore any contribution to the better understanding of the life of society was also a step towards socialism. He did believe that the main need was a greater knowledge of facts and he was not really interested in theory. But in creating the School he simply went out to get the best men in their field who were available so long as they had shown some realistic sense, irrespective of political opinion. And one curious result of this was that, so far as economics was concerned (as distinguished from politics, sociology, and similar subjects) the London School of Economics had become one of the very few centres of teaching in which the tradition of classical liberalism was carried on. This was almost entirely due to one man, who was at the same time one of the greatest students of classical economic theory and one of the shrewdest interpreters of the facts of current economic life, who in his sound, hard common sense had few peers, Edwin Cannan.

At the time Cannan and his generation departed from the school and had to be replaced, the guiding figure was however no longer Sidney Webb but the fourth of the succeeding directors he had chosen for it, Sir William (later Lord) Beveridge. Since his works also have left their mark on the economic thinking of our time, I must say some words about him. What is significant in the present connection is mainly that his great gifts did not include an understanding of economics. He possessed an exceptional power of lucid and persuasive exposition and when writing from the briefs of one of the able young men he knew so well to choose, he would be extraordinarily effective. He would have made a great barrister or a great journalist (the two professions in which he had started) and his gift in delineating great plans for development have greatly assisted the school with the big foundations. But his temperament was not that of a scientist, and quick as he was to grasp a particular point when explained to him, he had really little conception what economic theory was about. I do not think that he ever saw that the inflation about which he complained so much during his last years was an inevitable consequence of a policy of full employment as he had defined it, i.e., a policy aiming at a state in which there were more jobs offered than demanded.

Still, it was under his directorship that the London School of Economics became in the 1930s perhaps the most lively centre of economic discussion. On Cannan's retirement in 1926, his chair had for one year been filled by Allyn A. Young, a subtle thinker of whom great things were expected but who left little published work when he died suddenly soon after his return to the United States. Some years earlier the second chair, in money and banking, had already been filled, after Foxwell's retirement, by T. E. Gregory, who combined with a rare knowledge of monetary and banking history and organization great familiarity with the continental literature in the field. He had then recently struggled with Keynes on the Macmillan Committee and I believe the most valuable descriptive and historical parts of the report of that committee are mainly due to him, though he did not prevail over Keynes in the policy recommendations. Like Cannan he was a convinced liberal. Indeed, the only socialist among the economists at the London School of Economics at that time had been Hugh Dalton, mainly known for his work on public finance, who during the 1920s had been one of the most influential figures but who left academic work for politics just about the time I went to London.

The new generation which took over around 1930 were mostly former students of the School and pupils of Edwin Cannan. The first of them to be appointed to a professorship who after the departure of Allyn Young decisively shaped the development of economics was Lionel Robbins. I shall next time have to refer to those decisive contributions to the development of economics which will never find an appropriate place in the histories of the science. I believe Robbins's efforts for the consolidation and integration of economics in these years—and what I said about his in the beginning was largely his work—belongs to this class. His catholic approach and extensive knowledge of the classic and contemporary literature, English and foreign, had few equals. But his influence operated not mainly through his published work, not even his deservedly successful book on the Nature and Significance of Economic Science, a book whose profound influence on economic thinking in the English-speaking world I did not foresee, as to me it seemed largely a brilliant exposition of ideas which were largely familiar to the Austrian tradition. What I have in mind are his activities as teacher and particularly in the thankless task of editor. It is due to him that Wicksteed, then almost forgotten, became again available, that Wicksell and Mises were translated and that the work of such forgotten geniuses as Mountiford Longfield and Samuel Bailey (among many others) were made readily accessible and that, last but not least, the first six chapters of Risk, Uncertainty and Profit became the standard introduction to the current state of economic theory for the serious student.

Whatever may have been the state of affairs in the 1920s, there developed in the 1930s a strong contrast between the somewhat insular, purely Marshallian tradition of Cambridge and Oxford and the truly international synthesis of London. It is true that before the war Pigou had once reviewed one of the early books of Wicksell, and Keynes, Mises's Theory of Money. But what Keynes once said of himself, that in German he could understand only what he knew already, seems to have been true of both men. And though, of course, in Edgeworth Oxford had had one of the most erudite of economists, his influence on students was small, and after his retirement and death the teaching at Oxford seems to have become as exclusively Marshallian as at Cambridge. In a literal sense Edwin Cannan, of course, also had been somewhat insular—when in his brilliant Review of Economic Theory, the essence of the lectures he had so long given, he avails himself, as he explains, of the privilege of a reviewer to pick out what he likes, this meant in practice that he confined himself almost exclusively to English economics. But it was nevertheless a very broad base and did not have the result that only what had entered into one bible of economics was regarded as important and the reading of any other and particularly older books considered unnecessary.

The Cannan tradition, with its hard, sound common sense, its strong interest in the institutional setting of economic life, and slight contempt for all over-refinement of economic theory—a tradition whose value as a guide in all practical problems of economic policy I have come to esteem more and more highly as I grow older, was continued at the London School of Economics mainly by Arnold Plant and Frederic Benham, both of whom had joined the staff of the school shortly before me. But I myself was at first drawn mainly into the more purely theoretical discussions of which the Robbins seminar, in the conduct of which I soon joined, was the centre. Already Robbins had brought the staff of the School some exceptionally gifted young men, above all John R. Hicks and R. G. D. Allen, and raised a first crop of brilliant theorists among his own students, of whom Abba Lerner and Nicholas Kaldor are now the best known, though there were then two or three others nearly as promising. And there was a continuous flow of foreign, chiefly American, visitors and students, who greatly enriched the discussion.

That seminar was a fairly big group, some thirty or forty students and often half a dozen members of the staff participating. But it still preserved an intimate character through the informal development of a sort of front bench of the older members and more active participants in the discussion, while the newer members would at first mainly listen and gradually, on the strength of the contributions, advance to the front row—or rather to that circle of students and faculty among whom the conversation mainly took place.

The topics were, during the early 1930s, mainly problems of standard neoclassical or microeconomic theory, determined largely by current publications and aiming at the synthesis of the various still-prevailing schools. Though my own preoccupation was mainly with the problems of money and capital, my liveliest recollections are of the discussions connected with the work of John Hicks which resulted in the Hicks-Allen article on "A Reconsideration of the Theory of Value" and later Value and Capital. Hicks had come from Oxford to London as a good Marshallian, and I still remember clearly an early discussion when, curiously, I, the Austrian, tried to persuade Hicks of the merits of the indifference-curve approach of which he was so soon to become the acknowledged master. For some time, however, if I remember rightly, the theory of production concerned us even more than the theory of utility and the elaboration of all the attributes of the production function was long a favourite topic of the seminar. I have ever since retained a conviction that for teaching purposes it is really more expedient to begin not with utility but with the conditions of production, and especially to introduce indifference curves only after the student has become thoroughly familiar with the more tangible technique of isoquants.

There were, of course, also the first rumblings of the imperfect competition debate. Clapham's attack on the "empty boxes" of economic theory was in fresh memory, Sraffa had already raised the main problem, and even before Chamberlain and Joan Robinson burst upon us Harrod had made us familiar with the marginal-revenue curve. I will admit, however, that this was an excitement which I never quite shared. I had never been able to swallow the assumption of a horizontal demand curve and Wieser had already given us in his lectures a fairly detailed analysis of what he called monopoloid market positions, i.e., the forms intermediate between full competition and monopoly. The whole discussion seemed to me to arise so much out of the peculiar assumptions of the Marshallian system, his concept of "the industry" and the whole partial equilibrium approach, that I did not find it very profitable.

I did, however, at once get involved into a discussion with Keynes. I had, during the last couple of years at Vienna, been working on a large textbook on money, or rather on a somewhat over-dimensioned historical introduction to such a textbook—a book that never got finished because, just when I meant to resume work on it after the interruption caused by my move to London, the German publisher asked to be relieved from the contract because of Hitler's advent to power. It was mainly as a result of this work that I was able to write in a few weeks—I am normally a very slow worker—the little book on Prices and Production when I was asked to give some lectures at the London School of Economics early in 1931 and to undertake at this visit to review the newly published Treatise on Money for Economica.

Keynes, I should say, was then something of a hero to us Central Europeans. His Economic Consequences of the Peace had made him even more famous on the continent than in England—though Mises had shown us from the beginning that Keynes was supporting a good cause by some very bad economic argument (on international trade theory). We all read eagerly his famous contributions to the Manchester Guardian Reconstruction Supplement and my admiration for him was only enhanced by the fact that he anticipated in the Tract on Monetary Reform my first little discovery. But when I first met him, at an international conference which the London and Cambridge Economic Service had called in 1929, we at once had our first theoretical clash—on some issue of the effectiveness of changes in the rate of interest. Though in such debates Keynes would at first try ruthlessly to steam-roller an objection in a manner somewhat intimidating to a younger man, if one stood up to him on such occasions he would develop a most friendly interest even if he strongly disagreed with one's views. Our personal relations in fact always remained most cordial and I owe it to his kindness that I finally spent the war years as a member of the High Table of his College at Cambridge and came to know him fairly well. During the 1920s, however, the main occasions for discussion were the meetings of the editorial board of the London and Cambridge Economic Service, on which he, with Gerald Shove and Austin Robinson, represented Cambridge and where we would, four times a year, have long discussions of the current economic situation which, of course, usually turned upon questions of monetary policy.

I put then a lot of hard work into a detailed analysis of the theoretical structure of volume 1 of the Treatise, and Keynes replied to the first part of my review article with what was more an attack on my Prices and Production than a defence of his own position. But, although I still believe that I succeeded in demolishing his main theoretical structure, I feel now that I did not do justice to the unsystematic but highly suggestive discussion of volume 2 from which much later development sprung and which deserves to be better known than it is now. It provided in particular the suggestion for John Hicks's article on "A Suggestion for Simplifying the Theory of Money", which still seems to me, more than The General Theory, the most valuable result of the monetary discussions of the period.


Excerpted from Contra Keynes and Cambridge by F. A. Hayek, Bruce Caldwell. Copyright © 1995 Estate of F. A. Hayek. Excerpted by permission of The University of Chicago Press.
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Meet the Author

F. A. Hayek (1899-1992), recipient of the Medal of Freedom in 1991 and co-winner of the Nobel Memorial Prize in Economics in 1974, was a pioneer in monetary theory and a leading proponent of classical liberalism  in the twentieth century. He taught at the University of London, the University of Chicago, and the University of Freiburg.

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