FOUR

Stanley and Livingstone

Keynes and Hayek Meet for the First Time, 1928–30

Hayek’s brief journey to study economic thought in America confirmed that the home of unbridled capitalism wasn’t where the future of economics was being debated. For that, Hayek found he would have to travel to Britain. Toward that end, in 1927 he wrote to Keynes, then set about finding a way to introduce himself in person. An opportunity arose in 19281 when Hayek was invited to a meeting of the London and Cambridge Economic Service,2 founded five years earlier by Keynes as a joint venture between the London School of Economics (LSE) and Cambridge University. At the end of one of the sessions, the two men met for the first time.

The scene must have seemed comic to a bystander. Both men were over six feet tall, with Keynes having the slight edge, taking into account his stoop, which gave him a distinct advantage when browbeating an opponent. Both men sported full moustaches, with Hayek donning the sort of wire-framed spectacles that the British associated with middle-European intellectuals. Keynes wore dishevelled three-piece chalk-striped suits with a certain scruffy élan, his hands plunged into his coat pockets, while Hayek’s stiff white collar and tweed jacket buttoned tightly down the front reflected his tidy, meticulous mind.

There were other clues to their contrasting personalities. Keynes disguised the sharpness of his tongue with a mellifluous voice that tended to first charm then hypnotize his rivals, while Hayek spoke English poorly, with a strong clipped Austrian accent that even Keynes, who as a child was brought up by a string of German governesses, must have found hard to decipher. Hayek’s ultra-formality was immediately evident. “I can still see the door of my room opening to admit the tall, powerful, reserved figure which announced itself quietly and firmly as ‘Hayek,’” recalled the young professor of economics at the London School of Economics Lionel Robbins,3 of his first sight of Hayek.

Keynes and Hayek met as total strangers, though within seconds they had dispensed with formalities and were wrapped in heated debate. For Hayek the meeting was momentous, a fulfillment of a long-held ambition. For Keynes it was a routine scuffle, just another scrape with a misguided disciple of the free market. In terms of the history of economic ideas, however, it was as important as the meeting between Henry Stanley and David Livingstone. It was the first bout, albeit an exercise in shadow boxing, in a battle between titans that would last into the next century.

Hayek vividly recalled the encounter as a first taste of Keynes in unforgiving mode and as a fitting introduction to the intensity of the battle to come. “We at once had our first theoretical clash—on some issue of the effectiveness of changes in the rate of interest,” he recalled. “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.”4 From the start of their prickly friendship, which lasted until Keynes died twenty years later, Hayek sensed that Keynes, though disagreeing with his Austrian School views, was interested in what he had to say. “The moment I stood up with serious arguments, he took me seriously and ever since respected me,” remembered Hayek. “I know his general way of talking about me. ‘Of course he is crazy, but his ideas are also rather interesting.’”5

Hayek found a friend in London: Robbins, who, rare among British economists of the time, read German and had explored the works of European economists, including Mises, the Swede Knut Wicksell, and the Austrian Eugen von Böhm-Bawerk.6 Vigorous and ambitious, Robbins was elevated by the director of the LSE, William Beveridge,7 to the chair of political economy in 1929 at the age of thirty-one, becoming “the youngest Professor in the country.”8 On his appointment, Robbins determined that the LSE should counter Cambridge, the home of Marshall and Keynes, as the fount of wisdom in British economic theory by presenting the full repertoire of European thinking. Hayek, too, had high hopes. He intended to work in London for a number of years as part of a grand plan that would lead to the top.

Hayek told his wife “half jokingly”9 of his ambition to climb to the summit of Austrian society. He would first teach economics in London for a time before returning to teach in Vienna. Then, as his reputation grew, he hoped to be appointed president of the Nationalbank, the Austrian central bank. In his dotage he would return to London as Austria’s ambassador. As he recalled, with the lack of modesty and self-awareness that was key to his personality, it was “by no means an unreasonable aspiration and would have given me that sort of life on the borderline of purely academic and public work which probably, in the later part of my life, I should have found most satisfactory.”10 By becoming known in London, Hayek took the first step of his elaborate life program.

Robbins, a former socialist labor organizer, was attracted to Hayek through his essay “The ‘Paradox’ of Saving,”11 which sought to disprove the direct relationship between savings and demand, the amount saved by individuals and their desire to spend on goods, postulated by the American economists Waddill Catchings and William Trufant Foster.12 The pair had, like Keynes, proposed public works to promote demand in an economy during a recession, what Hayek called “the employment function,” the direct correlation between employment and aggregate demand (the total amount of goods that customers want to buy in an economy). In their 1926 paper “The Dilemma of Thrift,”13 Foster and Catchings contended that recessions were caused by a lack of demand for goods and services resulting from too much savings. They asserted that slumps came about when individuals chose to save rather than spend, leaving unbought the additional goods produced as a result of their savings being invested in capital goods. Hence, they argued, too much saving at the top of the business cycle led to a glut of unsold goods at the bottom.

They advocated a “Federal Budget Board” to invest in public works, on borrowed money if necessary, to provoke demand, thus providing consumers with money to buy the surfeit of goods produced in a slump. Hayek bemoaned the fact that the pair had persuaded Herbert Hoover,14 President Warren G. Harding’s conservative commerce secretary, to encourage federal agencies to spend taxpayers’ money on creating jobs.15

Hayek’s “‘Paradox’ of Saving” was an attempt to put Foster and Catchings straight. He argued that the pair’s contention was based on a misconception: they had misunderstood the role capital plays in the productive process. In a real economy, savings are not available to invest in new production unless there are good reasons to believe that the new products made available by the new investment will find a ready sale. The circumstance in which consumers’ savings were invested in making unwanted goods, rather than used to buy goods, therefore did not apply.

Hayek argued that production was not a single process with a single end product and price. There were likely to be economies of scale in any production spurred by new investment that would reduce the price of goods, making them affordable, so there would be no glut. Hayek recalled that Böhm-Bawerk had shown that the stages of capital production were many and of varying length, what Böhm-Bawerk had termed “roundabout” production. Beyond factories making goods were factories making elements that were assembled to make goods, and machine tool factories that made machines that made goods, or parts of goods. At each stage of the roundabout process investors were rewarded so that, contrary to Foster and Catchings’s contention, they had enough money to pay for the goods resulting from the final stage of production.

Hayek conceded that “if administered with extraordinary caution and superhuman ability,” the plan to have a government infuse money into the system to provoke demand “could . . . perhaps, be made to prevent crises.”16 But more likely, “in the long run” such manipulation of the economy “would bring about grave disturbances and the disorganization of the economic system as a whole.”17 He concluded that “the whole expediency of such attempts to alleviate unemployment by relief works and so on is in the light of this analysis highly questionable.”18

At the time Hayek and Keynes first met and argued, “The ‘Paradox’ of Saving” was available in German only, in a small-run edition of a Viennese economics journal, and Keynes may be excused for not having read it. Even if Keynes had been given an English translation, it is not certain he would have gleaned too much from Hayek’s counterargument. Closely reasoned in dense prose, with long Germanic sentences containing subsidiary clause upon subsidiary clause, “The ‘Paradox’” is not an easy read. It contains numerous equations and charts to demonstrate that the stages of production involved in making a consumer good add incrementally to the final cost. Hayek takes for granted Böhm-Bawerk’s lessons and chides those who have not made themselves familiar with the Austrian School master’s works, even though, by Hayek’s admission, only one, the first edition of Böhm-Bawerk’s Positive Theory of Capital, was available in English, published in London forty years earlier.

Robbins had not only read Böhm-Bawerk in German but also greatly enjoyed the skill with which Hayek had argued his corner in “The ‘Paradox.’” On the strength of what he considered Hayek’s convincing demolition of the “employment function,” the concept that underpinned Keynes’s thinking, Robbins invited Hayek to give four lectures at the LSE in February 1931. Hayek was aware of why he had been invited. “[Robbins] pounced on my subject: This is the thing we need at the moment, to fight Keynes,”19 he recalled Robbins saying. “The ‘Paradox’” was translated into English and published in the May 1931 edition of Economica,20 the LSE journal that Robbins edited. By introducing Hayek into Britain, Robbins instigated the great debate between Hayek and Keynes.

The question arises why Robbins did not invite Mises to counter Keynes. Mises was more distinguished than Hayek and had already established a formidable body of work that challenged many of Keynes’s contentions. Two factors appeared to have played their part. To be effective in countering Keynes, Robbins needed someone who could be readily understood. Mises’s English was fractured and his Austrian accent was so heavy he found it hard to make himself understood. “He certainly was not at ease in French or English,” explained his biographer Jörg Guido Hülsmann. “When he gave talks in foreign languages, his wit abandoned him.”21 In contrast, Hayek’s short sojourn in New York had equipped him with rudimentary spoken English, albeit of a fractured nature.

Hayek’s comparative youth was also a contributing factor. Robbins was young and perhaps felt more comfortable working with someone of a similar age. Mises was not only older but also set in his ways. He had a well-deserved reputation for being taciturn and ill-tempered. Even his wife, Margit, could not disguise her husband’s recurring dark moods. “The one thing about [Mises] that was as astonishing as it was frightening was his temper,” she recalled. “Occasionally he showed terrible outbursts of tantrums. . . . These terrible attacks were really a sign of depression.”22 Mises was also deeply impractical. According to Margit, “He did not even know how to boil an egg.”23 So Hayek, an even-tempered and rational individual as far as Robbins could judge, seemed the ideal choice. In “The ‘Paradox,’” Hayek had a set of arguments that would immediately set him in opposition to the Keynesian infection Robbins saw spreading from Cambridge.

Between Hayek’s first meeting with Keynes in London in 1928 and his arrival to deliver his four lectures in February 1931, a cataclysmic event took place that would completely change the stakes of their impending debate. The Wall Street stock market crash of October 1929 was an unprecedented economic disaster. The scale of the horror unleashed by the subsequent collapse of the American economy was to provoke a line of practical questions to economists. What caused the crash? What lessons can be learned to prevent it from happening again? And what can be done to alleviate the misery of unemployment unleashed by the catastrophe?

It was not at all obvious at the time how far the effects of the crash would spread to the rest of the world economy or what the political ramifications of the disaster would be. In the months and years ahead, however, Keynes would find himself well placed to advance his radical views, for not only was he concerned with promoting pro-employment policies through his journalistic and political activities, but his theories appeared to provide an intellectual justification for attempting to create jobs through public works. Hayek’s rejection of Keynes’s theories, and by association his rejection of the most common prescriptions for job creation, were to seem increasingly out of touch with public sentiment as the crash turned to depression and unemployment on both sides of the Atlantic began to mount.

Keynes perhaps knew better than Hayek the personal impact of the crash, for he was a daily speculator on the commodities and currency markets. Most mornings he remained in bed until noon, giving directions to his broker on the telephone. His financial acuity ensured that his Bloomsbury friends’ meager trust funds earned enough for them to pursue their artistic endeavors without worrying about having to earn a living. Though Keynes owned no American shares, he was caught by the speed of the market collapse. The fortune he had amassed by market speculation was wiped out by the crash. (By playing the market he soon made a second fortune, as large as the first.) But if Keynes had failed to foresee the impending disaster, his theories seemed to snugly fit the new circumstances.

No sooner had he published his Tract on Monetary Reform in 1924 than he began writing A Treatise on Money. It was to be an epic venture. The Economic Consequences of the Peace took weeks to write; A Treatise took six years and two months, partly because he was distracted by British political controversies, such as his efforts on behalf of the Liberals in the general election of 1929, partly by his involvement in the affairs of King’s College, and partly by the myriad other activities that claimed his attention. From 1925 on, his life became even more complicated when, after living half of his life as a homosexual, he married Lydia Lopokova, a boyish ballerina in Sergei Diaghilev’s Ballets Russes, who was nine years his junior.

Keynes’s marriage to Lydia upset the Bloomsburys, particularly the Woolfs, who thought her skittish mind and hilarious malaproprisms made her an unsuitable partner for their cerebral and homosexual friend. But Lydia was no beard; Keynes had fallen head over heels in love. He continued dividing his time between Cambridge, London, and his farmhouse at Tilton24 in the Sussex Downs, where Lydia mostly lived. He wrote long letters to her most days, leaving a rich cache of intimate, unabashed, and sexually explicit correspondence25 that was matched by the couple’s passionate, adventurous, and uninhibited love life. The couple dearly hoped to have children, though after a while it became clear that Lydia was infertile. To save his wife embarrassment, Keynes held himself responsible and hid his disappointment behind black humor. Eventually ennobled as “Lord Keynes of Tilton,” he used to refer to himself as “Barren Keynes.”

Despite the many diversions, Keynes was determined to consolidate his most recent thoughts. But spreading the writing of A Treatise over nearly seven years took its toll on the coherence of the final work. He repeatedly revised the manuscript to account for his ever-changing thoughts, and more than once he abandoned whole chapters in the light of new inspiration. As late as August 1929, with publication set for the fall of 1930, Keynes wrote to his publisher, Daniel Macmillan, “I am ashamed to say that after I had got more than 440 pages into paged revise I had to come to the conclusion that certain chapters must be drastically rewritten, and the whole very considerably rearranged.”26

As a result the book is a complex interweaving of disparate ideas into a not entirely convincing whole. “The book could not give a whole picture of his thought, but only a cross-section of it,”27 observed Keynes’s friend and biographer Roy Harrod. On the eve of publication, Keynes wrote to his parents, “Artistically it is a failure—I have changed my mind too much during the course of writing it for it to be a proper unity.”28 In the preface, Keynes acknowledged that “it represents a collection of material rather than a finished work.”29 Notwithstanding his reservations, A Treatise was published, in two large volumes, in December 1930.

One of the book’s central themes, and one he believed added a novel dimension to the way an economy should be understood, was to draw a clear distinction between savings and investment (or capital outlay). Up to that point economists had assumed that over time savings and investment were of equal value. But Keynes suggested that because one group of people saved and quite another invested, an imbalance tended to occur. When the amount invested was larger than the amount saved, the result was a boom accompanied by price inflation. Conversely, when savings ran ahead of investment, a state of depression occurred, accompanied by deflation and unemployment. He reasoned that total income in an economy stemmed from the sale of both consumer goods and capital goods. If there were no savings and total income was instead spent on consumer goods, the price of those goods would sharply rise and there would be a boom. Conversely, if all income were saved, the price of consumer goods would fall and industries would fail.

The corollary of Keynes’s argument had important implications for the attempt to manage the business cycle, for Keynes argued that if his contentions were correct, price inflation could be curtailed by increasing savings and a depression might be cured by increasing investment. Keynes suggested that the cause of the alternate booms and busts of the business cycle was the action of the banks, which also held the cure. “It is the machinery of banking which makes this [imbalance] possible,”30 Keynes wrote, for banks created credit irrespective of a community’s desire or ability to save. Banks did not base lending decisions on the level of savings they had in their coffers; “their main criterion of how much to lend is a totally different one,—namely the proportion of their cash reserves to their money liabilities.”31 The level of savings and investment could be brought into line if a central bank were to carefully control the amount of credit it offered. The result would be stable prices. Like Wicksell, Keynes differentiated between a “natural rate of interest,” in which savings and investment were the same and prices remained stable, and a “market rate of interest,” what the banks charged for their own ends.32

Throughout A Treatise, Keynes assumed that a state of equilibrium would be reached where savings and investment were equal and prices were stable, whatever the interest rate set by the central bank, and at that time there would be full employment. His view was that “monetary theory, when all is said and done, is little more than a vast elaboration of the truth that ‘it all comes out in the wash.’”33

Keynes also returned to the thorny problem of fixed exchange rates and the role they played in promoting the booms and busts of the business cycle. He suggested that as long as the gold standard persisted, central banks would not be able to manage credit so that savings and investment were kept equal, as they would instead be using interest rate policy to maintain the currency at the fixed rate. He had fought fiercely to deter the British government from pegging the pound sterling at the prewar rate of $4.86. Once that battle was lost, however, Keynes readjusted his thoughts to accommodate the new conditions and concluded that there was some virtue in harnessing all currencies to a single common measure, such as gold, once the turbulence in the world economy caused by World War I had passed.

In A Treatise he went one stage further, proposing the formation of a new mechanism to link currencies together, a “Supra-national Central Bank,” a notion that would come to fruition in the Bretton Woods fixed-currency exchange agreement of 1944. Instead of fixing currencies to the price of gold, which Keynes argued was in reality little more than fixing them to the dollar, he proposed in A Treatise that it would be more equitable if currencies were aligned to a basket of sixty key internationally traded commodities and allowed to float annually up to 2 percent either side of their pegged value. Even then he predicted that some countries would find it difficult to stick to their new fixed parity if their populations were suffering from “severe unemployment.”34 In this “special case,” he argued, “it is not sufficient for the Central Authority to stand ready to lend. . . . [T]he Government must itself promote a programme of domestic investment [public works].”35

It was the ideas on display in A Treatise that Keynes channeled into Liberal policy ahead of the general election of June 1929. And it was in his political utterances at that time that the clearest picture of what would become the “Keynesian Revolution” can be seen taking shape. The Liberals had put their faith in the wily Welshman Lloyd George, whose cynical behavior at the Paris peace talks had appalled Keynes. But Keynes reluctantly concluded that Lloyd George was the Liberals’ best hope, and he threw his weight behind formulating economic policies with which to entice the electorate, chief among them a pledge to put the country back to work. By the year of the election, 1929, unemployment in Britain had reached 1.34 million. At least one in ten Britons had been out of work for more than eight years, except for during a short period of recovery in 1924.

In March 1928, Keynes unveiled his new ideas at the National Liberal Federation. “Let us be up and doing, using our idle resources to increase our wealth. With men and plant unemployed, it is ridiculous to say that we cannot afford new developments. It is precisely with these plants and these men that we shall afford them,”36 he said. In July, Keynes wrote a powerful plea for the job-creating policies he fashioned for Lloyd George. “When we have unemployed men and unemployed plant and more savings than we are using at home, it is utterly imbecile to say that we cannot afford these things. For it is with the unemployed men and the unemployed plant, and with nothing else, that these things are done,”37 he wrote.

The following March, Keynes ridiculed the Treasury for suggesting that nothing could be done to cure unemployment. “They have believed that, if people can be induced to save as much as possible, and if steps are then taken to prevent anything being done with these savings, the rate of interest will fall,” he wrote. “Indeed, if all forms of capital enterprise were to be rendered illegal, the rate of interest would sink towards zero—while the rate of unemployment would mount towards heaven.”38 As he would argue in A Treatise, by being tied to an inappropriate dollar/sterling price since 1925, Britain had become a “special case” where the full employment equilibrium remained elusive. Only public works, Keynes argued, could jolt the sluggish economy back to life. In the pamphlet “Can Lloyd George Do It?” Keynes put his contention simply: “There is work to do; there are men to do it. Why not bring them together?”39

Keynes costed his employment program in the face of Conservative jeers that the money would be wasted. He argued that, on the contrary, it was by not taking action that the nation’s resources were wasted. Unemployment benefits were already costing taxpayers £50 million annually, not counting poor relief. In the previous eight years the unemployed had been paid a total of £500 million to do nothing. It was a staggering squandering of resources. Such a vast sum could have built a million new homes, or renewed a third of Britain’s roads, or provided every third family with a free car, or could have set up a trust fund large enough to allow free entry to movie theaters for everyone in Britain until the end of time.40 “But this is not nearly all the waste,” he wrote. “There is the far greater loss to the unemployed themselves, represented by the differences between the dole and a full working wage, and by the loss of strength and morale. There is the loss in profits to employers and in taxation to the Chancellor of the Exchequer. There is the invaluable loss of retarding for a decade the economic progress of the whole country.”41

The program he was proposing would cost £100 million a year. The Conservatives claimed this would produce only two thousand new jobs a year, but, Keynes argued, they were ignoring not only the savings in unemployment pay and foreign borrowing but also what he would come to term the “multiplier effect”: every job created by the government would add a further job to supply that new worker with goods. “The greater trade activity would make for further trade activity; for the forces of prosperity, like those of a trade depression, work with a cumulative effect,”42 he declared.

As election day approached, Keynes believed the Liberals would win. But it was not to be. Although the Conservatives won the most votes, taking 38 percent, winning 260 seats, the vagaries of the electoral system ensured that Labour won most seats in the new House of Commons, 287, with a slightly smaller proportion of the votes, 37 percent. The Liberals, winning 23 percent of the vote, could muster only 59 members. Although deprived of an overall majority, Ramsay MacDonald formed a minority government, depending for survival in a vote of confidence on Liberal support. Keynes was in great demand from the new government and was appointed, in the month following the Wall Street crash, to the Macmillan Committee on Finance and Industry to examine the relationship between the banking sector and the wider economy.

This marked the end of Keynes’s long dalliance with the Liberals. Keynes, ever the pragmatist, now directed his energies toward persuading the new government to accept his prescriptions. MacDonald invited him to lunch three times between November and December 1929 to ask for advice, and appointed Keynes to his Economic Advisory Council. But it soon dawned on Keynes that the timorous MacDonald, for all his radical credentials, was no progressive and in many respects was far less “socialist” than he was.

Keynes provided the Macmillan Committee with a bravura per-formance at which he expostulated at length, and with extraordinary eloquence, his complex theories in language the layman could understand. The chairman, Lord Macmillan, a passionless judge, was so enamored with Keynes’s hypnotic daily lectures that he told him, “We hardly notice the lapse of time when you are speaking.”43 For those who find the ideas in A Treatise hard to grasp, Keynes’s exposition of them in plain language makes for hugely enjoyable reading, not least when he explains the effects of a disparity between savings and investment by invoking the workings of an imaginary banana republic.44 Along with the principles established in A Trea-tise, Keynes described his views on a number of elements in the economy that would become important in advancing the Keynesian Revolution and would define the difference between his ideas and those of the Austrian School in the impending duel with Hayek.

His chief contribution to the hearings was to explain the role the bank rate, the interest rate fixed by the Bank of England, played in managing the economy. On the first day he described why the imposition of high interest rates leads to a contraction (reduction) in investment and a fall in prices, while a reduction in rates provides the circumstances for a boom. While this arrangement worked in the long term when there was a favorable trade balance and prices and costs could rise over time, it was catastrophic when a downward adjustment of costs was necessary. As Harrod explained, Keynes stressed that “it was important for [the committee] to understand that the mechanism on which we had come to place our exclusive reliance could only produce a downward adjustment through severe unemployment leading to cuts in money wages.”45

Keynes declared that savings and investment were out of kilter, and acknowledged that monetary pressures, in the form of high interest rates leading to an increase in the cost of borrowing to businesses, could only put downward pressure on profits and costs, such as wages. The result was unemployment. One problem in Britain in the 1920s, however, was that because of collective bargaining by trade unions, wages were “sticky” and could not be easily cut. In fact, because of a reduction in the length of the working week and the maintenance of wages due to trade union demands, wages had actually increased. Keynes warned the committee that “there has never been in modern or ancient history a community that has been prepared to accept without immense struggle a reduction in the general level of money income.”46

Though he denied to the committee that unemployment benefits had contributed to the “stickiness” in wage rates, likening the suggestion to those who blamed the provision of hospitals for encouraging ill health, in a radio broadcast he conceded that benefits for the unemployed had indeed added to the resistance of workers to countenance a reduction in wages. “The existence of the dole undoubtedly diminishes the pressure on the individual man to accept a rate of wages or a kind of employment which is not just what he wants or what he is used to,”47 he said. Be that as it may, his suggested remedy for reducing wages to a level the country could afford was a government-administered incomes policy, what he called “an agreed reduction of the level of money incomes.” He stressed that the reduction would have to apply to all sections of the community equally, not simply wage earners in the industrial sector, and the result of the “social contract” would be a reduction in prices. Though it was “in some respects the ideal remedy,”48 he conceded that such a policy was probably impossible to implement. To increase employment he urged public spending on roads and the telephone system. The Treasury’s objection to increased government expenditure was shortsighted, he argued. “We get into a vicious circle. We do nothing because we have not the money. But it is precisely because we do not do anything that we have not the money.”49

The Treasury spokesman who testified before the committee, Sir Richard Hopkins, whom Robbins described as “diminutive in stature, with a general appearance rather like that of an extremely intelligent monkey,”50 did well to resist Keynes’s argument for public works to create jobs. He believed that unprofitable investments would undermine the attraction of foreign investments in British companies, leading also to a drifting of British capital abroad; that directing funds into certain industries would dislocate the labor market, removing workers from more productive and profitable enterprises into comparatively worthless public projects; and that there was a limited amount of capital—if the government raised capital for its programs it would deprive private industry of the capital it needed. Keynes’s response was that the reduction in unemployment payments and business losses resulting from a return to full employment would more than make up for such factors.

It was not only Keynes’s persistent demands for government intervention that offended the Treasury, the Bank of England, and those who subscribed to the ideas of the Austrian School. Just as offensive was Keynes’s assault on free trade and, after an anguished internal debate, his advocacy of import tariffs. In his Macmillan Committee evidence, Keynes rejected import duties as tantamount to taking drugs—once imposed they were hard to do without—yet, in his report to the prime minister’s Economic Advisory Council, he advocated import levies—and export credits—as the only policy palatable to the general population. Keynes was adamant, however, that Britain and the world were in such dire straits that dire measures, such as imposing trade tariffs, had to be taken. “Free traders may, consistently with their faith, regard a revenue tariff as our iron ration, which can be used once only in an emergency,” he wrote in March 1931. “The emergency has arrived.”51

Keynes’s change of heart over “revenue tariffs” was the main reason for his profound disagreement with the free-trader Robbins, whom he had personally appointed to the Economic Advisory Council’s Committee on Economic Outlook. Why Keynes offered Robbins such a position is hard to fathom as it was inevitable that they would soon disagree. Keynes’s biographer Robert Skidelsky suggests that Robbins “alone had the intellectual conviction to resist Keynes’s consensual embrace. Perhaps Keynes did not realise the strength of Robbins’s free market convictions when he suggested him; or perhaps he simply overestimated his own powers of persuasion.”52

Either way, the two men clashed in the Macmillan Committee in the most abrasive fashion. Both had quick tempers, and to the consternation of the other members, both were prepared to lose them. Until his encounter with Robbins, Keynes merely had to endure the hidebound conservatism and lack of imagination of the Treasury and Bank of England officials. With Robbins he was obliged to confront a form of nemesis, a young combatant with a brilliant mind who had ignored the radical ideas emanating from Cambridge in favor of the notions of the Austrian School. Robbins’s answer to all of Keynes’s putative remedies was to let the market run its course, however punishing it was to British industry, British employers, British enterprise, and British workers. If, as Keynes continually insisted, the British economy was in disequilibrium, then it should be allowed to right itself over time. All of Keynes’s prescriptions would merely delay the inevitable, making matters worse and perpetuating the misery. As Harrod described it, Robbins “saw in [Keynes’s tariff] proposals a turning away from the ancient traditions which made Britain great, and a devastating blow at the all-too-tender plant of internationalism. . . . He felt he must devote the whole of his strength to resisting it.”53

Keynes, meanwhile, met Robbins’s free-market solutions with ridicule: “A point may come . . . if we stick to laissez-faire [the free market] long enough, when we shall grow our own vines. Provided there is a residue of British exports (e.g. peers and old masters) which America is glad to have, and we can reduce our necessary imports plus our surplus savings to equality with this residue, equilibrium will be restored.” He went on, “If you can’t grin and bear it, and are prepared to have some abandonment of laissez-faire by tariffs, import prohibitions, subsidies, government investment and deterrents to foreign lending, then you can hope to get straight sooner. . . . You may, moreover, have avoided a social catastrophe.”54 Just as appalling, from Robbins’s perspective, was that Keynes had come to the view that the best way to reduce wages was to allow prices to rise, thereby diminishing their real value.

Robbins wanted to call his friend Hayek as an expert witness to the committee, in the belief that Hayek would not buckle under the weight of Keynes’s bombardment. But Keynes rejected the idea. Robbins accepted the dismissal of his star witness with surprising good grace, but his impatience with Keynes’s lofty attitude soon came to a head. Unable to agree with the final report drawn up by Keynes and the others, Robbins demanded he be allowed to offer a dissenting minority opinion. As Robbins recalled, “Keynes, who, then as always, was capable of fits of almost ungovernable anger, was furious. . . . In his wrath he treated me very roughly.”55 Citing the opinion of the cabinet secretary, Keynes denied Robbins the right to distance himself from the rest of the committee. Precedents were summoned whereby it was deemed unconstitutional for a single individual to publish a minority report. The other members took turns to say it was bad form, not done, beyond the pale, and ungentlemanly to make such a fuss. It was not just that Robbins was creating an unnecessary precedent; “in order not to damage the chances of useful economic policies being adopted, they were prepared to minimize their disagreements.”56

But Robbins stood firm. And Keynes was obliged to dismount from his high horse. Keynes reluctantly allowed a dissenting opinion, titled “Report by Professor L. Robbins,” to be pinned to the main findings. But all of the heat and rancor of the row between Keynes and Robbins, an early skirmish in the war that Hayek was to wage, were wasted. In October 1930, MacDonald received the report, then sat on it, inertia being the better part of valor for a hidebound prime minister frozen in apprehension.

Keynes soon forgot the highly charged disagreement with Robbins. “It was not many weeks before Keynes and I were meeting again . . . as if there were nothing but intellectual differences between us,” recalled Robbins. “I never felt that he was other than a great man and one whose stature was such that idiosyncrasies of personal behavior, such as those of which I had been the victim, sank into unimportance in the general perspective of his quality and character.”57

Robbins, however, was determined to continue the debate. Now his intention of bringing Hayek from Vienna, like a western gunslinger, to target the troublesome Keynes became an urgent priority. What Robbins did not grasp was that the arrival of Hayek would play directly into the hands of William Beveridge, who held a low opinion of Keynes. Beatrice Webb, who co-founded the LSE with her husband, Sidney, had lunch with Beveridge and discovered that he “heartily dislikes Keynes and regards him as a quack in economics.”58 Like Robbins, Beveridge looked on Hayek’s impending lectures as a means to put Keynes in his place.

The stage was now set for Hayek to mount a challenge to Keynes from the security of a staff post at the LSE, so long as he acquitted himself adequately when delivering an account of the Austrian School’s theory of the business cycle in the quartet of lectures Robbins had invited him to deliver.