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Transcription of interview with Nicholas Wapshott on November 12, 2012.
Douglas Goldstein, CFP®, Financial Planner & Investment Advisor
Nicholas Wapshott is an author and journalist and he recently came up with a book called
Keynes Hayek: The Clash That Defined Modern Economics. He is also the former New York
Bureau chief of the Times of London.
Douglas Goldstein, financial planner & investment advisor, interviewed Wapshott on Arutz Sheva
Radio.
Douglas Goldstein: You’ve written this book about Keynes and Hayek. Give us a brief description
of what the difference is?
Nicholas Wapshott: They were two men who lived in the first part of the 20th century. They
were both economists of slightly different sort. John Maynard Keynes turned out to be
a great genius and he was born as a mathematician really but he became an economist and he transformed
the economics trade to profession and the discipline altogether. Before then, economics
was a basic almost like a business understanding of what happened when money is spent and he
transformed it into a really sophisticated discipline with many different moving parts.
The old Marshallian as it was called old-fashioned economics was transformed in 1936 by his great
general theory.
Friedrich Hayek came from a different tradition. He came from the Austrian school which keeps
himself much low into the ground. He is much more interested in microeconomics that is
in individual transaction out of the macroeconomics which is to look at the whole of the economic
activity as if from up above as a whole. He contested John Maynard Keynes’ version of
events presently into London in order to argue the toss with John Maynard Keynes and Keynes
being sort of person he was, instead of just dismissing him, took him pretty seriously
and they ended up having a wonderful scrap which went on for the rest of their lives
which
was about 60 years.
Keynes was inspired by the experience of Britain in 1920s when there was mass unemployment.
This was the decade before the great oppression with widespread unemployment throughout the
world. In Britain, the Bank of England pegged the Pound of Sterling at a wrong rate to too
higher rate which made the exports very expensive and a lot of people were out of employment
for no reason of their own. There was nothing wrong with them, there weren’t lazy, there
weren’t unskilled and they were just structurally unemployed and this deeply offended Keynes
who thought it was a waste of their lives. He was very compassionate though and he set
about trying to work out what could be done. He said in the end of the day only a government
was large enough to both lend money to people but also to spend if it have to and it was
really in trying to explore the ways of curing unemployment that lead him to find intellectual
justification for intervention in the economy by government. Friedrich Hayek really just
put down a flat no saying if you start tinkering with the stuff, it will go terribly long very
fast.
Douglas Goldstein: How of these two schools of thought play themselves out in each country?
Nicholas Wapshott: In turns out to be this great debate between Keynes and Hayek is the
dividing line roughly between left and right when it comes to non-social policies. In terms
of economic policies, the left on the whole believes that the government first of all
has a duty to help its citizens if things are going wrong and if economy is in trouble,
they feel that it has a duty trying to fix it if it can. What Keynes did was to provide
the logic to say, “Yes, indeed you can, once more it will work.” The Hayekians that
is the conservatives mostly and libertarians even more so would say the best thing to do
is to leave the free market to cure itself. Eventually, it will all come out in the wash,
the markets will clear and when you have a government interfering in the running of the
economy just like the government interfering in anything else, you want to keep the government
out of your lives if you can and therefore even if Keynes in his indeed work, we’d
rather do without it.
Douglas Goldstein: What would Hayek for example say about the ever increasing debt that the
United States has where it would seem that by borrowing money and then spending it vigorously,
that’s helping to give people a sense of security currently although it seems no long
term the US is going to have to deal with that debt, maybe you can look at how both
sides would see that?
Nicholas Wapshott: I think they’re both on the same page when it came to debt. The
thing about Keynes was that he said there are three ways really that you can intervene
in the market. You can make interest rates very cheap for as long as possible which will
encourage people to invest in new plant and employ people. You should cut taxation, never
mind that you might go into debt in the short run. In fact, a government is not going to
ever default on its debt that’s of course before we came to Greece maybe, but that’s
not going to happen, so never mind that you go into debt in order to cut taxation and
that will put money to people’s pockets. The third way and the last resort, the government
should spend on infrastructure projects, things that will be needed when the economy get back
to boom times. Things like good roads, good railways, education, workforce properly so
that they can take advantage of more expensive production methods and so on, but you said
if you do that at the bottom of the business cycle when people are being thrown out and
business are going fast, the important thing is at the top of the market when everybody
is not back in employment, in order to head off inflation, you should start paying off
the debt by taxing the people again and getting that money back.
The problem with Keynesianism in practice is that it was applied by politicians and
politicians find that the business cycle and the electoral cycle got out of sink and there
are very few politicians who are courageous enough to actually pay off the debt, will
run an election with looming. But Hayek was very simple and that is you never went into
debt in any circumstances although it’s not considered a conservative notion that
you should cut taxation at least in America, coming taxes is considered entirely
a conservative notion, it is Keynesian.
Douglas Goldstein: In the future based on what’s going on today in the United States,
what sort of prosperity can we hope for in terms of the way that the government is managing
the money according to either one of the two economists?
Nicholas Wapshott: I don’t think there’s any doubt that the American economy will recover
slowly but surely and they recover faster or slower depending exactly what policies
are there, but the American economy in itself is dynamic and will always increase in its
productivity at least in the medium term. I’m not talking about far, I’m not talking
50 years, hens when all sorts of demographic changes and the rise of China and India and
so on, but within the next 10 years, the American economy would do very well. In fact, the American
economy right now is hauling the rest of the world after what was a very deep recession,
the worse we know and the worse than the days of the early 1930s. That is evident I think
in the way for instance the Europeans who are taking a very Hayekian view and battening
down the hatches and getting all the debt repay, they are in recession. Britain which
has taken a semi-Hayekian approach to its debt and paying on the debt so they are not
actually contributing at all and the American economy is still obviously slowing coming
out of its own recession. If the Europeans which makes a different tact and the British
would say take a different tact and those are two very large trading groups then the
American economy would recover much faster.
Douglas Goldstein: If the Europeans are paying down their debts, it sounds like a responsible
thing to do meaning in the short term, there’s going to be a lot of austerity that people
have to deal with but ultimately won’t that make them healthier economy?
Nicholas Wapshott: There’s a wall of difference between a kitchen table economy that if in
trouble times if someone might lose their job or is not entirely sure how long their
job will continue, it’s not the time to go and take out the large mortgage, not the
time to go on an expensive foreign holidays, not the time to go using your credit card
every weekend to blowing it on [inaudible 00:10:21]. That’s true but for a national
economy it’s not the case.
We’re not first of all taking about austerity for the short term. The Germans and French
who lead the European Union are imposing upon Greece, Spain, Italy, and Portugal Island.
We’re talking about 10 years worth of austerity. In Greece right now, one in three people is
already in the low the poverty line. This is storing up enormous trouble because already
general strikes, public disorder, violence on the street, it’s a common place in Athens
and in Madrid too. In Madrid, at the moment, one in four Spaniards is already out of work
before they’ve even started cutting public spending. One in two that is half of the population
of people under the age of 25 in Spain is already out of work. To give them no prospect
of working in the next 10 years is also storing up trouble. The last thing you want is sophisticated
nations like Spain, France, Italy, it may not reach Germany but all countries as big
as that, as important as that having permanent social descent because people are not working
as they should be working.
Yes, it sounds a great idea, it sounds responsible to pay down the debt, but it also sounds thoroughly
irresponsible to cause so much human misery when you can see on the streets of these countries
already before any of these comes to taking place. The people are beyond their tolerance,
beyond boiling point unless the Europeans actually readdressed exactly how to cope with
the Eurozone problems. We’re going to have social disorder on a horribly large scale
and the last time we saw that back in the 1930s, it lead to some of the most vicious,
disgusting and poisonous regimes that the world has ever seen.
Douglas Goldstein: In the past, you’ve also written about Margaret Thatcher, Britain’s
first woman prime minister. She was known for some of the more strong-armed economic
decisions of a government. She denationalized many industries and she destabilized the power
of the trade unions. How do you think that she today would deal with the European economic
crisis?
Nicholas Wapshott: Just like the Europeans altogether, she [kept out] of the Euro and
she was absolutely the right choice. Whatever else people might think about Mrs. Thatcher,
she got back absolutely right and thank goodness that the Brits are not involved in the Euro
otherwise they’d be on the same sort of mess that the rest of the Europeans were in.
She did not believe in debt. She was Hayekian by the way. She read a lot of Friedrich Hayek
and this is the thing that brought her close to Ronald Reagan. He’d also read a lot of
Friedrich Hayek and they agreed that actually you should be sort of physically condiment
as possible, you should pay your debts off as quickly as possible. She worked actually
with her father in a corner shop so she understood small retail business and exactly what you
have to do to match these things up and that inspired her.
It’s not entirely appropriate I think though to look at the whole of the economy and that’s
not the best way to understand the way an economy works and it’s not probably the
best way to deal with economy. She was dealing with very specific things. She had a mixed
economy where really just due to lethargy, due to lack of clear thinking also to things
that are being taken into public ownership, the bad reasons because of the war or whatever
was still in public hands. It’s unbelievable today to imagine the telephone companies,
the railways, and road freight transport were all held by public companies. She just cleared
a lot. She had a sort of fire sale. She just cleared everything out and put it back in
the hands of the private companies and that sort of strapped up undoubtedly the way those
industries work, but it sort of inspired the rest of British industry to be far more entrepreneurial,
to be far sharper so actually, however, again she wasn’t very popular at the end but every
Briton should be grateful to her because she actually did proper spring cleaning of the
British economy and she put it back on its feet.
Douglas Goldstein: How can people follow your work?
Nicholas Wapshott: The best way actually is just put my name Wapshott into Google or put
Keynes Hayek and you’ll find that in the first 10 entries, I sort of corner the marketing
Keynes Hayek so you’ll find my stuff there. I write a regular column once or twice a week
for Reuters. I write a column to the News Statesman. I have plenty of journalism on
and off air. I do have a website but if you Google me, you’ll find my site sure enough.
Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel. Securities offered
through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried
by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
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