Hayek’s review of the Treatise in Economica appeared technical in character, but it was politically charged…
The Theatre, LSE, c.1930. Photograph from LSE Library Collection
In London, Robbins had experienced Keynes’s less attractive side. They had both been appointed to the Macmillan Committee on Finance and Industry, which was intended to find answers to the severe economic downturn then under way. Keynes had been a free trader for most of his life, but in the crisis conditions of the early 1930s he persuaded the majority of the committee to support import tariffs. Robbins, who remained committed to free trade, insisted that he write a dissident minority opinion. According to a later account from Robbins, Keynes “then, as always, was capable of fits of almost impossible anger”. Indeed, he was “furious” with Robbins and treated him “most roughly”.
According to Nicholas Wapshott in Keynes–Hayek: The clash that defined modern economics, the Keynes–Robbins quarrel on the Macmillan Committee had far-reaching consequences. Robbins was so angry that he invited Friedrich Hayek, one of the most promising young men in the Austrian School, to give a lecture series at the LSE. The lectures were seen – by both Robbins and Hayek – as presenting a rival view to that in the Treatise on Money. The purpose of bringing Hayek from Vienna to London was that he should act, in Wapshott’s words, “like a western gunslinger” whose priority was “to target the troublesome Keynes”.
In the summer of 1931, Hayek reviewed the Treatise in Economica, the LSE’s specialist economics journal. The review was extremely critical, alleging that Keynes had been sloppy in his definition of terms, that his meaning was difficult and obscure, that his conclusions did not follow from his premisses, and that he had not read enough of the Continental literature. Implicitly, Keynes was at fault because he had not familiarized himself with the doctrines of the Austrian School, notably its recondite analysis of “roundabout” methods of production. This analysis stemmed from a branch of economics, known as “capital theory”, for which the Austrians were famous.
Hayek’s review appeared technical in character, but it was politically charged. In the Treatise, as in his subsequent and more celebrated General Theory of Employment, Interest and Money, Keynes advocated the active use of fiscal and monetary policy to regulate demand, output and employment. In fact, the key policy prescription of the Treatise was what Keynes termed “monetary policy à outrance” – and what we now call “quantitative easing” – to combat an emerging slump in the global economy. Hayek repudiated this monetary activism as inflationary. He believed that during the boom, banks had the bad habit of extending too much credit for particularly “roundabout” kinds of production. In these credit binges, some entrepreneurs made mistakes and sinned against the free market, and the State should do nothing to ease their pain.
But it was less the content of Hayek’s review that drew attention than its fiercely polemical tone.