I want to argue in this post that we are now well placed to go beyond – even synthesise – the over-rehearsed debate between the Keynes and Hayek. The point I want to emphasise here is that Keynes and Hayek did the best they could with the conceptual tools they had to hand… however, we can now understand both of these important economists much better through the lens of complex networks. Armed with new concepts and a more whole-system approach to understanding social systems, we can contextualise both authors and move towards a synthesis.
In my experience, “Keynes”, “Keynesian economics” and “Keynesianism” are used with several different meanings. One version is what Keynes actually said and wrote; another is the post-Keynes (including mathematical) interpretation of his work; and, third, people often use “Keynesianism” as a synonym for statist / socialism. Here I want to cut through this ambiguity and emphasise the simple point that Keynes’ key contribution to economics was his identification of a major collective action problem, namely, that economies did not necessarily gravitate to full-employment equilibrium. In this context, Keynes himself wrote that, given this collective action problem, there seemed to be a role for the state in attempting to move the economy towards full employment.
Hayek’s views of government were almost legendary and his opinions were consistent with neoclassical economics: governments ought not to have a role in the economy. In his view, left to its own devices, an economy would gravitate toward full employment. Hayek used the term “catallaxy” to represent this economic nirvana. With echoes of Adam Smith’s invisible hand, Hayek defined Catallaxy as
“the order brought about by the mutual adjustment of many individual economies in a market.”
Keynes and Hayek wrote well before the development of new fields of study, notably networks theory and Complexity science. These new fields, which we refer to as the new study of complex networks, offers a radically different – and more accurate – means of understanding systems that contain constituent parts that interact with – and adapt to – each other. This relatively new area of study (which, broadly speaking, emerged out of the computer revolution) offers an alternative way of understanding Keynes and Hayek, and it also offers a means of synthesising their two perspectives.
Interestingly, Hayek seemed to have a better intuitive grasp of complex networks than Keynes. Keynes’ reference to “animal spirits” preceded the new and important field of behavioural economics; but it was Hayek who seemed to understand better the intricacies of human nature, human interaction, and the need to build any macro “picture” from the micro level. Many social scientists that have a grasp of complex networks view Hayek as highly complementary to this new field.
However, without the framing offered by complex networks and without particular concepts readily to hand, Hayek could only go so far. Notably, I would argue that Hayek did not appreciate the nature and importance of emergence in complex networks. Emergent phenomena arise unpredictably out of the interaction of the constituent parts of a whole system, and cannot be understood through a reductionist analysis of the parts of the network. Emergence is probably the most important concept in complex networks, in part because it helps us move away from a clock-work, deterministic view of the world, in which the future ought to be predictable.
Importantly, collective action problems can emerge within complex networks, even when agents are interacting with each other in a manner that would be deemed “rational” by orthodox economists. For example, if people expected a recession, they might behave prudently and in so doing they would bring about the recession themselves. Moreover, self-organisation can also emerge within complex networks, whereby agents behave in a manner that might look like collective action, with system-wide effects. Government can and do play an important role in mitigating or “solving” (or catalysing the solution of) collective action problems.
Keynes ought to be applauded for emphasising one type of collective action problem, namely that economies could operate at below full employment. It is clearly true, empirically, that this the case: to deny it would be to deny the existence of recessions, which would be absurd. Interestingly, it is often under-appreciated that Keynes was a firm believer in free markets – he understood that market mechanisms were a vital part of a healthy economy. However, he thought it was not necessarily the case that free markets gravitated toward full employment equilibrium; believing, therefore, that there was a role for the state in mitigating or over-coming this particular actual or expected collective action problem.
Like Hayek, however, Keynes was lacking some of the intellectual technology that we have today, which could have helped him to make his case more effectively, and to demonstrate it robustly. With hindsight, a major flaw in Keynes’ work was that it lacked micro foundations (this is well-known in economics) and it was mechanistic in its nature. In Keynes’ framing, governments in effect are viewed as operating a machine through metaphorical levers and buttons, with the rest of the economy adjusting – predictably – to government actions.
I would argue that the missing micro foundations of Keynes’ work were not the simultaneous equations of neoclassical economics. Much better – and more accurate – foundations are offered by the combination of complex networks and psychology (including behavioural economics). Within this framing, collective action problems – like those illustrated by Keynes – can be much better understood (which is not the case with neoclassical economics). This framing can also help us better appreciate the limitations of government attempts to “control” the economy.
To conclude, it is clearly impossible to do justice to the brilliant work of Keynes and Hayek here, both of whom anticipated aspects of the new study of complex networks, albeit in different ways. Nor is it possible to set out in any detail the paradigm change on offer via the framing of complex networks. But I believe that this new framework offers a way of going beyond an exhausted debate: both Keynes and Hayek can be better understood through this new lens, and we can develop a paradigm that captures the strengths of both of these great thinkers.