The confrontation between John Maynard Keynes, and his Austrian born free market adversary and friend, Friedrich August von Hayek, is one of the most famous in the history of contemporary economic thought. The debate took place during the Great Depression of the 1930s about the causes and remedies of business cycle downturns in market economies.
The origins of this debate can be traced back to the book ‘Treatise on Money’ (1930) written by Keynes, a rather obscure book, that was superseded by his masterpiece ‘The General Theory of Employment, Interest, and Money’ (1936). ‘Treatise on Money’ was a difficult book to read, and this probably caused Hayek and Keynes to misunderstand each other. As Keynes and Hayek were building their economic models at the same time, their debate was very much dominated by terminological definitions. One of the main topics that Keynes and Hayek corresponded about was the definition of savings and investment, and Hayek wrote three extensive systematic reviews of ‘Treatise of Money’. In turn, Keynes wrote only one article in response accusing Hayek of misrepresentation.