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Interpreting the Great Depression: Hayek versus Keynes

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This is not intended to be a purely historical paper. I am interested in the light the Keynesian and Hayekian interpretations of the Great Depression throw on the causes of the Great Recession of 2007-9 and in the policy relevance of the two positions to the management of today’s globalizing economy.

In my recent book, Keynes-The Return of the Master, I committed myself to the view that the present crisis was at root not a failure of character or competence but a failure of ideas, and quoted Keynes to the effect that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly supposed. Indeed, the world is ruled by little else’. So any enquiry into policy failures –assuming that these were at least partly responsible for the two crisis –inevitably turns into an enquiry into the ideas in the policy-makers’ minds, which are in turn, at least partly, the product of the economic models in the economists’ heads.