Reflections on the Pure Theory of Money of Mr. J.M. Keynes
Introduction by Joseph T. Salerno:
Friedrich A. Hayek was only thirty-two years old when he published this two-part article in Economica, at the time, the world’s leading English-language economics journal. The article is a review essay of John Maynard Keynes’s two-volume book, A Treatise on Money, published the previous year. Keynes, a generation senior to Hayek, was at the time the leading economist of the British Cambridge School and had already achieved world renown as a public intellectual. Keynes worked hard and long on his treatise, having written the first page six years before it was published. Keynes clearly intended the work to be his magnum opus, a dazzling leap forward in the theory of money based on “a novel means of approach to the fundamental problems of monetary theory.”
But Keynes’s reach was much, much longer than his grasp given his parochial and stunted training in economic theory — one course in economics and the study of Alfred Marshall’s clunky and disjointed textbook. Keynes’s Treatise never stood a chance. For the brilliant and courageous young Hayek was waiting, having already fully absorbed and integrated in his own work Mises’s monetary and business cycle theories, Böhm-Bawerkian-Wicksellian capital theory, and the general analytical approach of the broad Austrian school from Menger onward that maintained an unwavering focus on the interrelationship among all economic phenomena.
Hayek’s article is a positive thrill to read. Hayek relentlessly scrutinizes and exposes the weak and patchwork structure of Keynes’s theoretical arguments and then dismantles it brick by brick, leaving nothing standing. Keynes’s reaction reveals just how deeply Hayek’s review cut as well as Keynes’s cavalier attitude toward intellectual pursuits. Keynes’s reply to the first part of Hayek’s article, which dealt with the first, purely theoretical volume of the Treatise, was not properly a reply at all but a critique of Hayek’s book Prices and Production. Upon publication six months later of the second part of Hayek’s article, which focused on the second, applied volume of the Treatise and in which Hayek was a bit more complimentary, Keynes remarked to Hayek, “Oh never mind, I no longer believe all that.”
Yet Keynes was not done. A month later, Keynes, as chief editor of the Economic Journal published a nasty review of Hayek’s Prices and Production written by one of Keynes’s more uncomprehending and rabid disciples, Piero Sraffa. Keynes’s fellow Cambridge economist, Arthur C. Pigou, was aghast at this behavior. Without naming names, Pigou wrote, “A year or two ago, after the publication of an important book, there appeared an elaborate and careful critique of a number of passages in it. The author’s answer was, not to rebut the criticism, but to attack with violence another book, which the critic had himself written several years before. Body-line bowling. The methods of the duello. That kind of thing is surely a mistake.”
Keynes’s response to his painstaking review of the Treatise was very discouraging for Hayek. In later years, Hayek often said that the reason he did not undertake a similar review of Keynes’s later and more influential General Theory was because Keynes so easily changed his mind and that he could not be sure that Keynes would have not done so again, once more rendering Hayek’s efforts for naught. Whether a scholarly review by Hayek of such a shrewdly designed tract for the times like the General Theory would have altered the course of economic theory and policy is problematic in any case.
The article you are about to read demonstrates that Hayek was a formidable economic disputant even at a relatively young age. But it also signifies a broader point about Hayek’s early work that has been sorely neglected by the continuing outpouring of works from the cottage industry of Hayek commentators, interpreters, and biographers. Hayek’s amazing burst of creativity from the late 1920s through the late 1930s was a product of his participation in the great theoretical controversies of the time. His opponents were some of the great (and not so great) figures in interwar economics: Keynes, W.T. Foster and W. Catchings, Ralph Hawtrey, Irving Fisher, Frank Knight, Josef Schumpeter, Gustav Cassel, Alvin Hansen, A.C. Pigou, Arthur Spiethoff to name a few.
Perhaps the greatest economic controversialist of the twentieth century by the age of forty, Hayek took on all comers without fear or favor and in a series of brilliant books and articles, notably Monetary Theory and the Trade Cycle, Prices and Production, Monetary Nationalism and International Stability, “The Paradox of Saving,” “The Mythology of Capital,” and the present article he had synthesized and elaborated the first positive statement of modern Austrian “macroeconomics.”
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