AUSTRIAN - Auburn Universityauburn.edu/~garriro/aenlse.pdf · oration was arranged by Toby...

IT WAS MY PRIVILEGE to be the first Hayek Visiting Fellow atthe London School of Economics. The five-week visit duringMay/June 2003 was co-sponsored by LSE and the Ludwig von MisesInstitute. It was hosted by STICERD (Suntory and Toyota Centersfor Economics and Related Disciplines), which occupies the top floorof LSE’s Lionel Robbins Building. STICERD Director Tim Besley,together with staff members Angela Swain and Kate Perry provided acomfortable office, office supplies, and essential support. The collab-oration was arranged by Toby Baxendale, an LSE alum and Londonbusinessman.

My official duties were to conduct three seminars—on successiveTuesdays (May 27, June 3, and June 10)—and to deliver LSE’s firstHayek Memorial Lecture on the evening of June 5. Stemming fromthese activities, however, were a number of other opportunities anddevelopments, including a visit to No. 10 Downing, a meeting withLord Skidelsky at Westminster’s Millbank House, an article in ama-gi, the journal of the LSE Hayek Society, an interview for Enclaveand for internet outlets, and more. Together the events of these fiveweeks were a step forward toward regaining the visibility of the Aus-trian School in an institution where the School once thrived.

LSE’S FIRST HAYEKVISITING FELLOW

Roger W. Garrison is professorof economics at Auburn Univer-sity and author of Time andMoney: The Macroeconomicsof Capital Structure (London:Routledge, 2001).

He has been a leading contribu-tor to the emerging literature onAustrian macroeconomics, thetheory of the business cycle inparticular. He is an adjunctscholar of the Mises Instituteand has written for the QuarterlyJournal of Austrian Economicsand the Review of Austrian Eco-nomics.

Many of his articles and reviewscan be read at http://www.auburn.edu/~garriro; he canbe reached via email [email protected].

PUBLISHED QUARTERLY BY THE LUDWIG VON MISES INSTITUTE

AUSTRIANECONOMICS NEWSLETTER

FALL 2003

A Report by Roger W. Garrison

LUDWIG VON MISES INSTITUTE

2 AUSTRIAN ECONOMICS NEWSLETTER

the title “F.A. Hayek as ‘Mr. Fluc-tooations’: In Defense of Hayek’s‘Technical Economics’.” Here I wasable to give play to the irreverent-yet-endearing nickname by which LSEstudents in the 1930s knew the pre-mier Austrian business-cycle theorist,while defending the theory that inrecent years has come to be dismis-sively dubbed “Hayek’s technicaleconomics.”

THREE SEMINARS

The seminars were held inSTICERD’s seminar room near thefront entrance to its fifth-flooroffices. There was no reliable way ofanticipating the number of partici-pants and their backgrounds.Accordingly, I delivered a summarystatement in my first seminar—usinga modified version of my PowerPointpresentation of capital-based macro-economics. This graphical presenta-tion draws heavily from the corechapters (Chs. 3 and 4) of my Timeand Money: The Macroeconomics ofCapital Structure (Routledge, 2001).I was aware that my late-spring visitcoincided with LSE’s annual testingperiod and hence that attendance atall extracurricular events would belimited. The group that did attend,however, was an enthusiastic one—with several participants from otherinstitutions and even from othercountries. And I couldn’t help butnotice that almost every participantcame into the seminar room carryinga copy of Time and Money. Thoughgratifying, knowing that they all hadread or were reading my book mademe wonder just what I could tellthem in the seminar.

As it turned out, the presentationwas well received, as indicated by thediscussion that followed and by thenext day’s e-mail. Hubert Strecker,who had come from the University ofCopenhagen to attend the seminar,wrote that although he had readChapters 3 and 4 of my book, theseminar gave him some new ideasabout capital-based macroeconom-ics. He returned from Copenhagenfor the second and third seminarsand visited me in my office after thefinal lecture to discuss aspects of mybook that were of special interest tohim. Mr. Strecker had chosen theAustrian theory of the business cyclefor his thesis topic.

Another participant, Ms. KrisztinaMajoros of the University of Miskolc(Hungary), was doing research onTibor Scitovsky, who was a studentat LSE when Hayek and Keynes (ofKing’s College, Cambridge) werevying for the attention of promisingstudents. I was able to call her atten-tion to an interview with Scitovskypublished by David Colander andHarry Landreth in their The Comingof Keynesianism to America (EdwardElgar, 1996). Scitovsky’s reaction tothe Austrian theory was typical:“Hayek was the only member of thefaculty to have an explanation for thedepression; but his two books on thebusiness cycle seemed too convolutedand confusing to carry conviction.”Scitovsky was looking for “an alto-gether new and different approach”and soon found it in Keynes’s GeneralTheory.

PRE-PUBLICITY IN AMA-GI

A few months before my May/Junevisit, I received a request for an articlefrom Shaun J. Mathew, editor-in-chief of the student-run ama-gi, thejournal of the LSE Hayek Society.Mr. Mathew emphasized the strate-gic significance of my having a piecein the spring issue of the journal,which would be in print just beforemy arrival at LSE. Though the dead-line for submission for that issue was

The group that attendedwas an enthusiasticone—withparticipantsfrom other institutions andeven from other countries.

Copyright © 2003 by the Ludwig von Mises Institute • 518 West Magnolia Avenue, Auburn, Ala. 36832-4528Phone (334) 321-2100 • Fax (334) 321-2119 • Email [email protected] • Website www.mises.org

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fast approaching, I was able to pre-pare and submit a short articleintended to anticipate the message inmy Hayek Memorial Lecture, itselfstill in the preparation stage. I chose


VOLUME 23, NO. 3 — FALL 2003 3

The Austrians have always had anuphill battle in conveying ideasabout business cycles in a frameworkthat incorporates the capital theoryof Eugen von Böhm-Bawerk. Keyne-sian theory is easier to learn andcomes with a full complement ofpolicy prescriptions to boot.

The second seminar attracted thesame group plus a few others. Theobjective in this session was to putHayek and Keynes head-to-head insuch a way that the critical differ-ences in their respective macroeco-nomic frameworks became transpar-ent. Abba Lerner, in an interviewincluded in the Colander-Landrethvolume, had pinpointed early on akey difference in terms of relativemovements of consumption andinvestment: For classical economists[including Hayek], consumptionand investment are alternative waysof allocating resources. The twomagnitudes move in opposite direc-tions under conditions of bindingresource constraints. For Keynes,resource constraints are generally notbinding and the two magnitudesmove up and down together.

In Time and Money, this contrasttakes the graphical form of move-ments along a production possibili-ties frontier (for Hayek) and move-ments away from and toward thefrontier (for Keynes). Here we have acontrast between an economy thatcan accommodate changing marketconditions and an economy that isinherently dysfunctional in the faceof any change. The analytics under-lying this contrast entail a capitalstructure whose temporal profile canbe altered (Hayek) and a capitalstructure for which only the degreeof utilization can vary (Keynes).

My two-step graphical expositionconsisted of (1) showing how theeconomy would work under therestrictive and debilitating Keynesianassumptions and then (2) relaxingthese assumptions to let the dysfunc-tional Keynesian economy morphinto a fully functional Hayekianeconomy. The intent was to makethe participants wonder why Keyneshad omitted from his theory the verymarket mechanisms that are essentialfor keeping production activities inline with consumption preferences.So presented, Hayek’s theory—withAustrian capital theory in play—does not in the least seem convo-luted, while Keynes’s theory, with nocapital theory at all, seems eviscer-ated.

The third seminar, which dealt withmonetarism and subsequent devel-opments in macroeconomics, gaveme an opportunity to respond toquestions raised in earlier sessions orsubmitted to me by e-mail. AndyDenis, a faculty member of Lon-don’s City University, had wonderedif Hayekian theory could properly beconsidered to be macroeconomics.

phenomena such as inflation, defla-tion, widespread unemployment andbusiness cycles. Keynes’s “output as awhole” and the constituent aggre-gates of consumption and invest-ment had a claim on his attentionbecause of their perverse movementsin circumstances of changing marketconditions.

For instance, an inclination on the partof income earners to save more sendsoutput and employment spiraling

Citing page 293 of Keynes’s GeneralTheory, Professor Denis asked if theAustrians reject the conception ofmacroeconomics as “the Theory ofOutput and Employment as awhole”? Here was a chance to dealwith the status of macroeconomicsin Austrian economics and to saysomething about the issue of aggrega-tion. The Austrians use the termmacroeconomics to refer to a set ofsubstantive issues—to economywide

Hayek’s theory—with Austrian

capital theoryin play—does

not seemconvoluted,

while Keynes’stheory seems

eviscerated.



I was pleasedto go onrecord withthe story ofthe origins andsubsequentexhumation ofMilton Friedman’s“pluckingmodel.”

into macroeconomics at the defini-tional level.

Also, the suitability of the chosenmacroeconomic aggregates comesinto question here. Keynes operatedat a level of aggregation where hecould see a big problem (the diffi-culty of coordinating saving andinvestment) but could not see any

nonperverse market solution. As anessential stratagem for counteringKeynes, the monetarists increased thelevel of aggregation, effectively cov-ering up the problem by giving littleor no play to the constituent aggre-gates of consumption and invest-ment. Consumption (C) and invest-ment (I) were simply combined intoaggregate output (Q), which thenappears in the monetarists’ equationof exchange (MV=PQ). The absenceof capital theory in monetarist think-ing precluded any satisfactory under-standing of the issues raised byKeynes. The Austrians have alwaysinsisted on a decreased level of aggre-gation—with the investment aggre-gate made up of temporally sequencedstages of production. Their aggrega-tion scheme is more appropriate to theproblem at hand. It allows them tosee both the problem emphasized byKeynes and a nonperverse marketsolution to that problem.

AN INTERVIEW FOR ENCLAVE

Massimiliano Neri, a Ph.D. studentat the University of Madrid, con-tacted me early in my LSE visit. Anative Italian, he is now studying inMadrid under Professor Jesús Huertade Soto. His background, like mine,is in engineering. (His early aca-demic and work experiences were incomputer engineering; mine were inelectrical engineering.) By way ofintroducing himself to me, he indi-cated that he had read Time andMoney before taking any courseworkin macroeconomics and hence “with-out being conditioned by the neo-classical approach.” In my view, hisbackground, his introduction tomacroeconomics, and his academicgoals make him a virtual one-of-a-kind reader of my book. Massimiliano

downward until actual saving isbrought into balance with somegiven level of investment. The econ-omy’s one-dimensional measure ofperformance (output) is at the sametime the adjustment mechanism thatkeeps saving in line with investment.To conceive of macroeconomics asthe theory of this measure-of-per-formance-cum-adjustment-mecha-nism is virtually to build perversity

flew to London from Madrid for thefirst seminar after having madearrangements to conduct an inter-view with me during his short visit. Iwas all too happy to oblige.

We spent an hour or so in my office.Our question-and-answer session,which I very much enjoyed, was allrecorded for later transcription andediting. A week or so later Massimil-iano sent me the edited transcriptionfor further editing by me. I waspleased with the result and especiallypleased to go on record with thestory of the origins and subsequentexhumation of Milton Friedman’s“plucking model”—his graphicaldescription of movements in aggre-gate output and employment whichare supposedly telling against theAustrians.

Massimiliano is preparing the inter-view for posting in both English andItalian on two web sites; US Equity& Macro LAB and LiberanimusInstitute and is pleased to have itposted on the Mises Institute’s site aswell. An Italian translation ofselected portions of the interviewalong with Massimiliano’s account ofthe seminar series will appear inEnclave, a prominent Italian libertar-ian magazine.

LSE’S HAYEK MEMORIALLECTURE

The Big Event of the five-week visitwas the Hayek Memorial Lecture,scheduled for June 5 at 6:00 p.m. inLSE’s Old Theatre. I had drafted atext before my departure fromAuburn. Advertised as “Hayek’sContributions to Economics,” thelecture as originally conceived by mewas to survey the range of Hayek’stheorizing (about the price system,



capital and interest, and money) andthen to discuss in a little more detailhis theory of business cycles. Shortlyafter arriving at LSE, I learned thatWillem H. Buiter, of the EuropeanBank for Reconstruction and Devel-opment, was to deliver a lecturetitled “Deflation: Prevention andCure” in the Old Theatre. I attendedthat lecture—not so much to learnabout deflation as to see about thetheatre. (The “cure,” of course, wasto print lots of money.) As I hadimagined, the Old Theatre was cozyand had character. There was a highstage, a large balcony, and comfort-able seating for an audience of about400. I also noticed that there wasquality audiovisual equipment,including a very large screen withrear projection. It would be a shamenot to make some use of that.

I began thinking about using somephotographs of Hayek, some ofwhich I had taken in the 1970s while

Hayek was in residence at the Insti-tute for Humane Studies in MenloPark, California. A few days later Iwent to lunch with Tim Besley, TobyBaxendale, and Reggie Simpson.(Reggie, who was from LSE’s Officeof Development and Alumni Rela-tions, looked after every detail dur-ing the planning phase of the June 5events, which included not only thelecture but also a dinner in theSenior Dining Room with 16 invitedguests.) I mentioned to Toby that Ihad prepared my lecture but that Imight want to use the large screenfor photographs. Toby seemed a littlesurprised, saying that surely I woulduse the screen for the graphical treat-ment of Hayekian macroeconomics,which forms the core of my book.“That’s your contribution, isn’t it?”

I had been hesitant to incorporatethe graphical exposition into the lec-ture, thinking that the evening audi-ence might not warm up to the

Though radically changed, the lec-ture still fit the title pretty well—since most all of Hayek’s contribu-tions to economics come together inthe Mises-Hayek theory of the busi-ness cycle. I mentioned to severalpeople about how I had changed mylecture plan and was warned by a fewnot to confront this audience withgraphical analysis. But it was too late.

macro-analytics of the businesscycle. But with Toby’s encourage-ment, I scrapped most of my pre-pared lecture and began to rewritearound the graphics. I pared downmy PowerPoint file, replacing mostall of the explanatory notes withpithy Hayek quotations and para-phrasings. I added some photographsof Hayek—and of Keynes—to helpkeep the story straight. I left in thefew cameo appearances of Clinton,Bush, and Greenspan that had alwaysworked well with Auburn students.

I attendeda lecture titled

“Deflation:Prevention

and Cure” inthe Old Theatre.

The “cure,” ofcourse, wasto print lotsof money.



in a humorous way and then focusedthe audience’s attention to the dis-pute between Hayek and Keynes,quipping in a muted voice that hewould probably come down on theside of Keynes. Unknowingly, he sethimself up for a mild chiding: Iexpressed enthusiasm for beinginvited to give a lecture on LSE’s starprofessor of the 1930s and 1940sand then complained that the Direc-tor had scheduled this Hayek lectureon Keynes birthday! But I couldn’tmention that coincidence of dateswithout also mentioning that Keynesshared his birthday with none otherthan Adam Smith—which allowedme to segue back to Hayek.

The audiovisual aspects came offwithout a hitch. And the messagewas well received. It was not diffi-cult to establish that Keynes saw noway for the market to work.Increased saving would not financeincreased investment but ratherwould send the economy into reces-sion. The attempt to save would beaborted in the face of decreasingincomes. Keynes’s paradox of thrift

I had to deliver a final copy of thePowerPoint file to the audiovisualpeople several days before the lec-ture. At that point there was noscope for changes of any kind.

On the evening of June 5, I arrived atthe Old Theatre a little early to meetTony Giddens, the widely knownsociologist and the Director of LSE.He was to do the introduction. I waspleased to see that an audience wasarriving, too. Though the lecture was

well publicized, none of us had anyidea of just how many might actuallychoose to attend this first HayekMemorial Lecture. By six o’clock,the auditorium was filling up. Some300 to 350 people, it turned out,had an interest in hearing aboutHayek.

Professor Giddens was a gracioushost for the evening. In his introduc-tory remarks, he oversold the lecture

Capital theory,differential interest-rateeffects, and real, live entre-preneurs make Keynesianismmorph into Austrianism.

was a profound denial of even thepossibility that the market mightcoordinate the plans of producerswith the decisions of savers. Hayekshowed just why Keynes “saw noway”: he had no capital theory. Wehave to add Bohm-Bawerk’s capitaltheory, allow for differential interest-rate effects within the capital struc-ture, and acknowledge the existenceof real, live entrepreneurs. These arethe amendments that make Keyne-sianism morph into Austrianism.

With this audience, putting theHayekian graphics through theirpaces as the story was told had theintended effects. It was easy to comedown on the side of Hayek. Theeconomy is sent into recession not bysome ill-fated attempt by workers tosave more but by an ill-advisedattempt of the central bank to stimu-late more growth than savers are will-ing to finance. Further, the centralbank’s attempts to reignite the boomafter the bust has come is more likelyto postpone a genuine recovery thanto hasten it. If Keynes won the dayagainst Hayek, it was because of the

political popularity of his policyprescriptions and not because of thecogency of his theorizing.

Brief discussions with members ofthe audience immediately after thelecture were gratifying. The variousreactions made me realize just howdiverse the audience was. One gen-tleman wanted to discuss furtherKeynes’s and Hayek’s views on inter-est-rate theory—and we did discussthat issue in a subsequent exchangeof e-mails. One woman (I regret notgetting her name) expressed greatpleasure in hearing my lecture andthen told me she was a student ofHayek and Robbins in 1947. Oneyoung Hayek enthusiast, who I laterlearned was Espen Bardsen, a Norwe-gian professional football player whoplayed 1st class football for the Lon-don team Tottenham Hotspurs (Pre-mier League) and played for hiscountry in international competition,handed me a copy of a recent FederalReserve document titled “MonetaryPolicy in a Zero-Interest-Rate Econ-omy.” It was a strategy paper thataddressed the prospects of the Fed’sadopting extraordinary means in itsefforts to stave off a deflation.

The dinner that followed in theSenior Dining Room was a memo-rable event for me. The guest listincluded Ken Minogue, LSE Profes-sor of Politics, and Razeen Sally, LSESenior Lecturer in InternationalPolitical Economy. Professor Sallyhad recently written an article forama-gi on “Hayek and the Interna-tional Order.” Ralph Raico, whowrote under Hayek at the Universityof Chicago and is now Professor ofEuropean History at the State Uni-versity of New York, had flown toLondon for the occasion. Also inattendance was Sven Folkesson, Pres-ident of the LSE Hayek Society.Tony Giddens moderated a livelydiscussion among the diners, and Iwas made to feel that Hayekian ideaswere back in the air at LSE.

A VISIT AT NO. 10 DOWNING

On the day after the Hayek Memor-ial Lecture, I received a number of e-mails, some with questions aboutHayek’s macroeconomics and somejust expressing appreciation. Mostsurprising and gratifying, however,was a message from Derek Scott,who had listened to the lecture fromthe balcony. Mr. Scott is an LSEalum and now economic advisor toTony Blair. I was unaware that hewas in the audience. He was clearlytaken by the Hayekian ideas, describ-ing the lecture as “a breath of freshair.” “I only wish that more peoplelooked at the world through similareyes,” he wrote. The Prime Minister’sadvisor inquired about further lec-tures in the same vein and about thepossibility of meeting with me at LSE.As an alternative, he invited me to paya visit to No. 10 Downing. I phonedhim immediately and arranged for ameeting on the following Thursday

security toward No. 10, we noticed arather large gathering of photogra-phers positioned just opposite thePrime Minister’s front door. Thepresence of the media remindedToby that June 12 was the day ofBlair’s cabinet “reshuffle”—whichadded a little excitement to our visitand, as things turned out, marked asignificant change in the organizationof the British government (see sidebaron page 9).

Just inside the shiny black door, wewaited for our host to come and col-lect us. He appeared shortly and led



morning. As plans developed, TobyBaxendale was included in the visit.

Toby and I arrived at the Whitehallgate to Downing Street just beforeten o’clock on the morning of June12. We were admitted through thegate and then passed through asecurity checkpoint. Walking from

I received aninvitation from

Derek Scott,LSEalum and

economicadvisor to Tony Blair.

I had said in my lecture that trying toreignite an artificial boom is not awinning strategy. The US economy isstill trying to recover from the excessesof the previous expansion. Someneeded liquidation has taken place;more liquidation is undoubtedly inorder. But the Federal Reserve’s inter-est-rate aggressiveness retards the liqui-dation process: If a business firm hasexpanded its operation or otherwise

committed capital to a venture thatin retrospect seems marginal or evensubmarginal, why should it actuallyliquidate the investment if there isthe option of carrying the investmentforward at exceedingly low interestrates? The small interest costs may bemore than offset by hopes—even byslim hopes—for improved marketconditions. Toby could easily supplya reinforcing perspective from thebusiness world: “Many businesses areoverextended and just trying to holdon.”

Given the uncertainty about futuremarket conditions and the com-pounding uncertainty about FederalReserve policy, business firms areunlikely to commit themselves tostill more investment projects.Keynes’s idea that businessmen don’trespond to a reduction in the inter-est rate, though not a general truth,is actually true during a period ofliquidation. Hangovers are not curedby the imbibing of more spirits.Hence, it does no good to providemore spirits at bargain-basementprices. The injections of credit by the

Federal Reserve, not surprisingly, arestimulating consumption spendinginstead of investment spending.Cheap credit in the current circum-stances also bolsters the demand forhousing, creating a bubble in realestate. Homeowners refinance theirmortgages and spend the windfalllargely on consumption goods.

(Ironically, some critics of the Mises-Hayek theory have seen this develop -ment as evidence against the Aus-trian view—since it seems to beconsumption and not long-terminvestment that’s getting a boostfrom low interest rates. Of course,the consumption binge, induced bythe Federal Reserve in vain hopes ofreigniting the boom, is neither arefutation of Hayek nor a symptomof genuine recovery.)

What struck me during the visit atNo. 10—and I hope it struck Mr.Scott, too—is that the story as toldby an academic economist and astold by a real live entrepreneur/busi-nessman were in perfect harmony.I’ve become aware over the years thatthis is a characteristic of Austrianeconomics that cannot be matchedby other schools of macroeconomicthought. Hayek’s ideas ring true inthe financial and business commu-nity in ways that the “rational expec-tations” of new classicism or the“menu costs” of new Keynesianismdo not. Credit expansion gives us anartificial boom. Rock-bottom interestrates after the bust forestall a genuinerecovery. The Federal Reserve’s near-phobic resistance to any price orwage decreases reflects its resolve notto repeat the blunders of the 1930s.But avoiding a deep depression hasgotten translated into precluding atimely correction. The Fed, in effect,



us to a spacious room on the secondfloor. There Mr. Scott served coffeeand the three of us talked for the bet-ter part of an hour. The primaryfocus was on current economic con-ditions in the US and the aggressive-ness of the Federal Reserve. The arti-ficial quality of the Fed-led boomthat characterized the late 1990s hadbeen made clear in my lecture atLSE. But what was the FederalReserve doing now? And what wouldbe the likely consequences?

Hangovers arenot cured bythe imbibingof more spirits.Hence, it doesno good toprovide morespirits atbargain-basementprices.



is trading depth for duration. Theshallow recession drags on.

We made it clear that in the finalanalysis the Austrian theory suggestsbanking reform and not just somealternative policy prescription foradjusting interest rates. The reformmeasure currently on the table inBritain would be a dramatic one.Britain could join the Eurosystem,the Bank of England relinquishingkey powers to the European CentralBank. Mr. Scott put into perspectivefor us the recent choice by Tony Blairto postpone for now making anydecision to abandon the pound forthe euro. The implications of Aus-trian theory about the advisability ofBritain’s adopting the euro are mixed.Generally, Austrian economists favorreform in the direction of decentral-ization. Clearly, expanding theEurosystem to include Britain wouldbe a move in the opposite direction.

But, Austrian economists also favorputting monetary decisions in thehands of those least likely to use it fornarrow political purposes. In recentyears, the Bank of England has con-strained itself to rule-followingbehavior—certainly more so than hasthe Federal Reserve. But in the past ithas not been above using its discre-tionary powers to serve the interestsof an incumbent administration. Noris there any firm institutional checkagainst such politicization in thefuture. It is worth pointing out thatrelinquishing control of monetarymatters to the European CentralBank would effectively eliminatepolitical business cycles—or, at least,ones with British origins. And with -out an accommodating central bank,the British treasury, like the treasuries

reform, pointed out to me byToby, is amplified by the factthat the Lord Chancellor’soffice is the oldest in theUnited Kingdom.

The Lord Chancellor is the per-son who sits as head of the leg-islative branch and the judicialbranches of the Crown. He isthe highest paid member ofthe government, even higherpaid than the Prime Minister.The only position of power hedoes not hold is that of head ofthe executive, which is held, ofcourse, by the Prime Minister.The Lord Chancellor, however,sits in the Cabinet of the Exec-utive, making for an ever-politi-cized judiciary.

The Lord Chancellor’s office,1,400 years old and the mostpowerful constitutional posi-tion in the state, was simplyabolished on this June 12. Ithas always been assumed thatthe UK had a good separationof powers. In reality, however,the head of the judiciary andmost senior legislative officersat at the heart of governmentand in recent years was entirelya political appointee.

In one fell swoop, the PrimeMinister struck down 14 cen-turies of constitutional historyand tradition, replacing theoffice with a judiciary that sitsentirely independent of poli-tics. “Fair play Tony Blair,” Tobyopined, “a movement in theright direction for Liberty.”

COINCIDENT WITH OUR VISIT at No.10 Downing was the arrival —intheir ministerial cars—of virtuallyevery member of the govern-ment. They had come for a Cab-inet “reshuffle” meeting, duringwhich the Prime Ministerreshapes the government, hiringand firing Cabinet Ministers ashe sees fit. Streaming throughthe door immediately behind uswere the Deputy Prime Minis-ter, John Prescott; the ForeignSecretary, Jack Straw; the Chan-cellor of the Exchequer, GordonBrown; and the Lord Chancellor,Lord Irvine. Toby could easilyrecognize them all.

I remembered seeing recentcoverage in a TV news segmentof the Foreign Secretarytogether with Colin Powell, hisUS counterpart. We encoun-tered these officials and othersagain as we walked with ourhost through a ground-floorreception area on our way toour meeting room on the sec-ond floor.

Just as we were concluding ourmeeting, a staff memberappeared and announced thatthe Prime Minister would beusing the room to conduct thereshuffle. As we exited downthe stairs we observed the cabi-net ministers all lined up likeschoolboys to see head master.Later that day, we learned thatLord Irvine, The Lord Chancel-lor, was one of the casualties ofthe reshuffle and that, in fact, hiswhole office was abolished. Thehistorical significance of this

SIDEBAR: BLAIR’S CABINET RESHUFFLE

those member nations are continu-ously exposed to the potential inept-ness or miscalculation that tends tocharacterize any organization notsubject to the discipline of the mar-ketplace. In the end, this considera-tion, an implication of socialist-cal-culation debate, may be anoverriding one.

A breakfast meeting between TobyBaxendale and Derek Scott subse-quent to our June 12 meeting at No.10 and after I had departed for theUnited States evidenced a continuinginterest in Hayekian ideas and their

implications for policy prescriptionand institutional reform.

A MEETING WITHLORD SKIDELSKY ATWESTMINSTER’SMILLBANK HOUSE

Macroconomists who take their cuefrom F.A. Hayek learn early on thatthey have to come to grips with J.M.Keynes. Robert Skidelsky, Professorof Political Economy at WarwickUniversity (and currently on extendedleave), has provided a great service toAustrian-oriented macroeconomistsby bringing the original Keynes intosharp relief. His three-volume biog-raphy of Keynes is untainted by thepotted versions of Keynesianism thathave dominated the textbooks fordecades—or by the new versions thattrade on Keynes’s name withoutincorporating any of his ideas. Thereader of this biography and espe-cially of the second volume, whichdeals with the General Theory, willfeel it in his bones that Skidelsky getsKeynes straight. (We can only won-der if it helped that Skidelsky wrotethe biography while living inKeynes’s house at Tilton.)

High on my “must-do” list was ameeting with Professor Skidelsky. Iwas convinced that my own graphicalrendition of Keynes’s analyticalframework in Time and Money istruer to Keynes than is the conven-tional IS-LM model or the Aggre-gate-Supply/Aggregate-Demand con-struction. My confidence in thisjudgment was bolstered when I readthe second volume of Skidelsky’sbiography. My pictures go well withhis story.

Near the end of my stay at LSE, I e-mailed Professor Skidelsky, hoping

to make a quick trip to Cambridgefor a visit. He replied promptly andindicated that he would be spendingthe following week in London andthat he would be pleased to see me atthe Millbank House. As instructed, Iphoned his assistant and madearrangements for the visit.

Westminster’s Millbank House, anornate red-brick office building,overlooks Victoria Tower Gardens,which are adjacent to the Parliamentbuilding. I arrived there for my visitmid-morning on June 17. I wasannounced and was soon greeted inthe lobby by Lord Skidelsky. Wewalked to a nearby dining roomwhere we could have coffee and visit.Lord Skidelsky had been immersedin the study of the Russian languagebut was happy to take a break to talkmacroeconomics.

I was pleasantly surprised to learnthat he had read key portions of myTime and Money. And we seemed tobe in substantial agreement aboutthe fundamental differences betweenKeynes and Hayek. Lord Skidelsky



of the other euro-using countries,would be put on a shorter leash.

The downside of Britain’s adoptingthe euro is the inherent problems ofcentralization. As is well known byseasoned Fed watchers, blunderscommitted by a central bank canhave dramatic and far-reaching con-sequences. So, while the EuropeanCentral bank is relatively well insu-lated from the narrow politicalinterests of its euro-using members,

Blunderscommitted bya central bankcan havedramatic andfar-reachingconsequences.


VOLUME 23, NO. 3 — FALL 2003 11

British Science Museum in SouthKensington to see the Phillipsmachine—a hydraulic analoguecomputer designed and built byA.W. Phillips in the late 1940s todemonstrate the economy’s (Keyne-sian) response to parametric changesand policy actions. (STICERD hadrescued this neglected Keynesian arti-fact from a basement at LSE, restoredit, and donated it to the museum inthe mid 1990s.)

I hope that in Austrian circles theyear 2003 will be remembered as the

was able to add a human touch—maybe just a good biographer’stouch—to the lingering question ofwhy Hayek didn’t review the GeneralTheory: “He just wasn’t up foranother mauling by the Keynesians.” By the time the 1936 book was inprint, Keynes’s coterie of discipleswas well formed and ready to do bat-tle with any and all nay-sayers. Thevitriolic attacks that had been pro-voked by Hayek’s earlier review essayon Keynes’s Treatise on Money wouldundoubtedly have been replayed inspades. Keynes’s far-reaching influencein both academic and political circlestogether with the politically attractivepolicy implication of his theory madethe contest between Keynes andHayek a very lopsided one.

I have always believed that under-standing Keynes’s views on theeconomy requires that we under-stand Keynes’s view of himself. Inhis biography, Lord Skidelsky foundit almost too obvious to mentionthat the title of Keynes’s book wascribbed from Einstein. Calling itThe General Theory was not intendedto suggest, as some Keynesian schol-ars would have us believe, that the

book is mostly about theory and notreally about policy. Nor did the titlesignal an abandonment of Marshal-lian partial-equilibrium analysis infavor of some Walrasian or Casseliangeneral-equilibrium analysis. Rather,it not-too- cryptically suggested justwhere the author of the General The-ory stood in relationship to all othereconomists, living and dead.

When I returned to LSE, and withour discussion of Keynes and Ein-stein still on my mind, I pulled acopy of Skidelsky’s Volume II fromthe shelf to remind myself that thesignificance of Keynes’s title wasactually well known at the time thebook came out. Skidelsky quotesfrom Cecil Pigou’s 1937 review:“Einstein actually did for Physicswhat Mr. Keynes believes himself tohave done for Economics.” Skidelskyhas provided a double service here: Along-forgotten but telling insight hasbeen revived, and the enduring valueof keeping the history of economicthought alive has once again beendemonstrated.

A FULL FIVE WEEKS

With an office on the top floor thebuilding that also housed LSE’slibrary, I was never at a loss for thingsto do—or at least for things to read.But I ventured out on the LionelRobbins Building on many occa-sions. I attended a seminar con-ducted by Geoffrey C. Harcourt, amajor player in the Cambridge Cap-ital Controversies of the 1960s. Ipaid a visit to the Institute for Eco-nomic Affairs to renew a long-stand-ing friendship with John and Chris-tine Blundell and to hear IEA’sHayek Memorial Lecture, which wasdelivered this year by Bill Emmott,editor-in-chief of The Economist .And I made a pilgrimage to the

year that Hayekian economicsreturned to LSE. Keynesianism there,like elsewhere, has become splinteredinto subschools, and mainstreammacroeconomics in general seems tohave no cutting edge. But LSE hasgood students, and it has anunequaled reputation for placinggraduates in influential positionsaround the world. Other Hayek Vis-iting Fellows in the years ahead andpossibly an ongoing Hayek programcan turn the 2003 visit into the startof something grand.

“Einstein actually did

for Physics whatMr. Keynes

believes himselfto have done

for Economics.”Cecil Pigou

AEN

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