Keynes and Hayek are often described as being at opposite poles of the economic spectrum. As this awesome historical rap battle puts it, Keynes wants to steer markets, Hayek wants to set them free. Nicholas Wapshott’s recent book is even titled Keynes Hayek: The Clash that Defined Modern Economics. But how far apart were Keynes and Hayek? On some issues, not that far at all. In part, our mistaken impression comes from misremembering Keynes as much more of a government interventionist than he was, and for forgetting that Hayek did indeed have some pragmatic impulses.

One clear sign of their agreement comes from Keynes’ comments on Hayek’s influential political tract The Road to Serfdom. Keynes wrote: “In my opinion it is a grand book… Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.” Keynes disagreed with some of the practical bits, but in his heart, he was a committed economic liberal. He believed in the need for a middle path that acknowledged the potential for markets (more specifically, for integrated economies) to fail to use resources efficiently, but his goal was always to tamper with the market and its price-setting mechanism as little as possible – to preserve capitalism by socializing only the bits most prone to break down, and by targeting aggregates rather than engaging in industrial planning of the kind embodied in, say, the first era of the New Deal.

Another, less well-known story, comes from Hayek’s comments on Keynes’ influential tract, How to Pay for the War.[1] In that tract, Keynes argues that the UK government should finance World War II through a system of compulsory saving, in order to avoid dramatic inflation and the need for wage and price controls as much as possible. Keynes explicitly argued for a reduction in real wages, to prevent overstimulating the economy. Here, we see the logical possibility embedded in the General Theory to run “both ways” (stimulate a recession, tamp down a boom) on full display – something some later Keynesians, and many critics of Keynes, seem to ignore. Keynes’ and Hayek’s correspondence about the pamphlet after its publication in early 1940 is revealing, and I quote it here in almost full:

Keynes to Hayek, February 27, 1940:
I enclose a copy of my pamphlet. You will see that I have bagged your idea about a post-war capital levy. I have mentioned the source of the idea in the acknowledgments on the last page.

Yours sincerely,
JMK

So, note, Hayek is thanked in the acknowledgments of the pamphlet!

Hayek to Keynes, March 3, 1940:
Many thanks for sending me your pamphlet. I have now read it carefully and still find myself in practically complete agreement in so far as policy during the war is concerned. Is it reassuring to know that we agree so completely on the economics of scarcity, even if we differ on when it applies.

I have been thinking for some time what could be done to make the unanimity of economists on this point clearer to the general public than seems yet to be the case. I am not clear how far any sort of public pronouncement by groups of economists would do any good – and in any case I am not the right person to organize such a move. But I wanted to say that if at any time you feel that some such support would be desirable I shall be glad to sign or to write anything that might be of use. As I seem to be regarded as representing the extreme opposite of your views, this might be not entirely without use in demonstrating the unanimity of expert opinion.

Yours sincerely,
F. A. Hayek.

So here, Hayek agrees with Keynes completely – although adding the caveat that he does not agree with Keynes always – and goes so far as to offer to use his status as Keynes’ polar opposite to add strength to the proposal. Finally:

Keynes to Hayek, March 6, 1940:
I am extremely glad that we should find ourselves in so much agreement on the practical issue. I think it might be very helpful indeed to have some pronouncement by economists that here for once is something about which different schools agree.

I don’t have much else to say. I don’t want to over-exaggerate their similarities in the same way that we so often over-exaggerate their differences. But it is fascinating to see them speak highly of each other, and of each others’ very public-facing work. Keynes + Hayek, not (always) Keynes vs. Hayek.

[1] These letters are in the John Maynard Keynes Papers held at King’s College, Cambridge. JMK/HP [How to Pay for the War]/2.