Adam Smith is regarded by many as being one of the earliest and most important figures in classical economics. The key belief of disciples of this school is that government regulation of markets should be minimal. Smith’s view was that individual self interest leads the markets to naturally operate in a fashion which will result in the greatest benefit for the general public and the economy as a whole. So he felt that economic policymakers should take a “laissez-faire” attitude, relying on “the invisible hand” of natural competition in the market rather than government intervention for economic order and the greatest possible prosperity for all members of a population. His 1766 magnum opus An Inquiry into the Nature and Causes of the Wealth of Nations is now regarded as one of the foremost economic publications of all time and remains a key text for students studying the origins of free market economics.
Smith continues to have a defining influence on classical economic practice right up to the present day. The US economist Alan Greenspan, best known for his role as the Chairman of the Federal Reserve Bank from 1987 to 2006, credits Wealth of Nations as being “one of the great achievements in human intellectual history”.
Hayek’s views, like those of Smith, are rooted in the classical school of economic thought. His core belief that government intervention in economic matters should be kept to a minimum follows on from the idea of the “invisible hand” developed by Smith and formed one of the central tenets of his 1944 publication The Road to Serfdom. The book developed this idea by arguing that the economic intervention advocated by socialism was flawed as central planning of an economy ultimately leads to totalitarianism. Hayek’s rejection of communist economics was to find favour with the conservative governments of the west in the 1980s and early 1990s as they sought to undermine Soviet ideology. Margaret Thatcher appointed a devout follower of Hayek, Keith Joseph, as secretary of state for trade and industry in her first cabinet in 1979.
Hayek’s theories played a key role in both US and UK politics and he remains a prominent reference in current international economic debate. Ultimately, his theories are probably more influential today than the 18th-century views of Smith, who continues to be deferred to as one of the founding fathers of economics but whose theories arguably have limited relevance to a modern day society which bears little resemblance to that of the late 1700s.
The verdict: Smith can’t hack Hayek.
Described by the Economist as “the most influential economist of the second half of the 20th century…possibly of all of it”, Milton Friedman is an undoubted heavyweight of modern economic theory and arguably the most significant classical economist of all time.
His main contribution to economic theory is his work in the area of monetarism, the analysis of the links between money supply and economic activity. In a 1963 publication, A Monetary History of the United States, he argued that the Great Depression of the 1930s had been caused by the Federal Reserve’s contraction of the money supply in the US, aggravating what had been a typical financial crisis into a major worldwide depression. His view that governments should regulate the supply of money in the economy represented a departure from mainstream classical economic theory, which advocated as little government intervention as possible, although Friedman remained a classical economist in that he believed that in general, governments should not interfere in the operation of the economy.
Like his contemporary Hayek, Friedman was to find his advice in demand from western conservative governments that came to power in the 1980s, and was appointed as an economic adviser to the US president Ronald Reagan. His lasting influence on global economics can be witnessed in the reactions of global governments and central banks to the global financial crises after 2008, with many states opting to increase the money supply within their economies as a means of stimulating growth, a policy known as quantitative easing.
He’s up, however, against the economic leviathan that is John Maynard Keynes. The weight of Keynes’ reputation is evidenced by the fact that he’s the only economist with an entire school of economic thought named after him – Keynesian economics, which emerged as the major rival to the classical economic thought in the post-war era.
Keynes was a vehement advocate of government intervention in the management of the economy. His view was a crucial influence on the economic policies of the late 1940s, when western governments invested heavily to rebuild the global economy after the second world war. This approach formed the basis of western economic policy until the end of the 1970s, a period which saw high economic growth and low unemployment across much of the developed world, to which Keynes’ theories are recognised as having made a major contribution.
During the 1980s and 1990s, however, many governments returned to a “laissez-faire” approach, but Keynesian theories experienced a major resurgence during the late 2000s when the free market policies of most western governments were blamed for the global financial crisis and rejected in favour of government bailouts and stimulus measures.
The verdict: Keynes creams Friedman.
Hayek and Keynes are regarded by many as the superstars of modern economic thought and it is fitting that these two greats meet in the final.
The battle between the two contemporaries has raged on and off over the past 75 years, having continued long after Keynes’ death in 1946. The professional duel between the two giants was arguably at its fiercest in the 1930s, when both economists were living and teaching in England and at the peak of their careers. Each used their academic publications as a means to critique the other’s work, but the rivalry was made more pronounced by the stark differences in their public personae. While Keynes courted publicity, mixing in all the “right” circles and promoting his opinions across the world, Hayek cut a much more reclusive figure and was seldom seen far from the grounds of his university.
Keynes succeeded in stealing the limelight from his rival during most of his lifetime, enjoying the favour of contemporary academics and politicians, but Hayek’s theories enjoyed a renaissance in the late 1970s. During this period that followed, many western governments abandoned the hands-on Keynesian economic management which had prevailed during the post-war era in favour of Hayek’s free market approach, which is regarded by many as having paved the way for the economic booms enjoyed by much of the developed world from the late 1980s onwards.
Several decades later, these two masters continue to divide economists, politicians and financiers. The global economic downturn experienced during the past few years has seen several U-turns in opinion as to whether the future of the global economy is best served by adopting Keynes’ big spending and bailouts interventive approach, or by cutting spending and letting the financial markets right themselves unaided as Hayek might advocate. We’re currently witnessing a retreat of the classical economic policies of the late 20th century as many western nations have come to believe a Keynesian approach is the best way out of the economic crisis which has enveloped many nations since 2008. In December of that year, the Financial Times stated that, “the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades. Yet neither path has yet to provide a definitive solution to the problem, and it may be that adopting individual elements from both economists’ approaches will prove to be the best way forward. Only time will tell.
The verdict: It’s a tie!