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‘Where to draw the line’? Keynes versus Hayek on

Knowledge, ethics and economics
Anna Carabelli & Nicolò De Vecchi
Published online: 28 Jul 2006.

To cite this article: Anna Carabelli & Nicolò De Vecchi (1999) ‘Where to draw the line’? Keynes versus Hayek on
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 The EuropeanJournal of the History ofEconomic Thought 6:2 271-296 Summer 1999

'Where to draw the line'?Keynes versus Hayek

on knowledge, ethics and economics*

Anna Carabelli and Nicol6 De kcchi

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Introduction
Contrasts between Hayek and Keynes on specific areas of economic theory
are well known. However, both authors focused their thinking on problems
of knowledge, uncertainty and time in economics. Furthermore, they each
made similar claims concerning the role of econometrics and mathematics
in economics, and criticized neoclassical economics in such terms that they
often find themselves on the same side against the mainsueam.
From the end of the Second World War, Hayek vigorously opposed the
political ideas and economic proposals of the so-called 'Keynesians',
occasionally distinguishing them from Keynes himself but always holding
him responsible for Aeir views. 'Keynesians' initially held sway over Hayek,
but in the last twenty years the situation has been reversed.
Hayek has been associated with the revival of liberal themes such as the
defence of the role of the market against economic intervention and
welfare state, and the defence of the role of the individual against statism.
Criticism of intervention has been grounded on the Hayekian theory of
fragmented and limited knowledge, and on the positive role Hayek gives to
rules in guiding individuals and public institutions in situation of uncer-
tainty.
In our opinion Hayekian criticism of intervention is valid against 'Key-
nesian~',but must be re-examined if moved against Keynes. Actually Keynes
not only defends economic intervention from a standpoint which is totally
different from the 'Keynesian*one, but shares with Hayek the same liberal

Address for correspondence Anna Carabelli, University of Piemonte

Orientale, Italy, e-mail: Carabelli@msoft.it.Nicol6 De Vecchi, University of
Pawa, Italy, e-mail:ndevecclii@eco.unipv.it

0967-2567 0 1999 Routledge

 Anna Carabelli and Nicoii De Vecchi

values and gives limited knowledge the same central role as Hayek does.
This is why we think it relevant to oppose Hayek to Keynes himself.
In the paper we will show that, notwithstanding this common ground,
Hayek and Keynes take very different courses when considering the
relationship between ethics and economics (section 1). They also sharply
disagree on the contents of economics (section 2). They move from the
same awareness of the limits of knowledge, but they hold a totally different
theory of knowledge. Both think that conventions are useful guides for indi-
viduals, but Keynes adds that they may have negative social effects (sections
3 and 4). The contrasts on ethics and knowledge explain their different
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views on economic policy. In particular, Keynes's theoretical justification of

discretionary intervention is unacceptable to Hayek, and the autonomy of
judgement Keynes attributes to public institutions is against Hayek's theory
of spontaneous evolution of the rules of conduct (section 5). Thoroughly
investigation of their contrasts on ethics and knowledge represents the
novelty of our approach.
Our starting point is the only document in which Keynes engages with
Hayek's thesis on liberal society, the values which characterise it and the
role of the market. This is the letter of 28June 1944,' written to Hayek after
reading The Road to Serfdom: a book which, as Hayek (1944: v) himself
claimed, could be considered 'a political book' and 'an essay in social phil-
osophy', and which contains numerous criticisms, always indirect, of
Keynes's social philosophy and the interventionist policies it encouraged.
The letter is not an easy read, and requires some interpretation.?
Besides the evidence of the letter, additional material is to be considered
to enlighten the relationship between Hayek and Keynes. Both authors
used various sources of liberal thought in their dealing with ethics and
knowledge, but only one of these sources is actually common and relevant
to both: David Hume. Hayek refers explicitly and directly to Hume as one
of his main forerunners, while Keynes sees Hume as his main antagonist.
Hume is often hidden behind the parts of Moore's and Burke's thought
that Keynes criticized. Keynes defines Hume as 'superb' and duels all his
-
life with him, without we suggest - ever surrendering to him.= Hence, in
our opinion, the relationship of each of the two authors with Hume is the
litmus test to compare them.

1. Economic problems and moral problems

In his letter of 28 June 1944 Keynes repeatedly refers to 'moral values' and
to Hayek's 'moral position'. He states,
 . (,:
K q n a versus Hayek on knowledge, ethrcs and economics

mmallvand
, .
ohilosoohicallv I find rnvself in aereement with virtuallv the whole of (the
v

hook); and nor only agreement with it, hut in a deeply moved agcrrnurtt.
On t h e mmnl urut, I also find the 1m1 para~nphor, page 156 extnord~r~anly good
and fundamental.
(Keynes CW XXVII: 385-6, italics added)

He also expresses a desire for a society in which 'both leaders and fol-
lowers wholly share (Hayek's) own moral position'; where the 'right mural
thinking' that Hayek professes is restored and in which there is a return to
a social philosophy based on the 'proper moral values' that Hayek defends.
He adds, however, that he has the feeling that Hayek tends to confuse moral
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with economic problems: 'I accuse you of perhaps confusing a little bit the
moral and the material issues', and suggests that this is a significant differ-
ence between them on the issue of public intervention (Keynes CW XXVII:
387, italics added).
In order to clarify both the nature of Keynes's acceptance of Hayek's pro-
fessed moral values and the reasons for his final criticism, it is necessary to
compare Keynes and Hayek on the relationship between moral problems
and economic problems.

1.1. Ethics and economics in Hayek's thought

In ethics Hayek excludes the possibility of a rational discussion of ends, or
even that absolute ends can be proposed? Like Hume he makes a clear
separation between 'is' and 'ought'. Ends belong to ethics and are the
domain of passion, taste, sentiment and individual preferences. Rational
knowledge is only possible of means, and economics is the study of how,
from the actions of individuals following their own ends in conditions of
dispersed knowledge and scarcity of means, an order emerges, or rather, a
situation in which.the action of one does not induce others to modify their
plans, which, as a result, appear consistent. Morals and positive analysis are
therefore identified. In his letter Keynes criticizes this bringing together the
moralspiritual level, on the one hand, and the material-economic level, on
the other. Moreover, as we shall see, he criticizes Hayek's identification of
morals with capitalist morals and of economics with the analysis of capital-
ism.5
Hayek states that ends are subjective and individual. Each individual
within society has his own scale of values which are changeable according
to circumstances, not comparable with those of his peen and not open to
the judgement of others (Hayek 1944: 42-7). Given this new, Hayek lacks
a proper theory of duty: there are neither private nor social or public duties.
The only duty in human conduct is to 'follow nature': i.e. follow the rules,
which 'are not the conclusions of our reason' but the 'spontaneous' result
 Anna Carabelli and Nicold. De &chi

of the cultural interrelationship of individuals 'whose whole nature and

character is determined by their existence in society' (Hayek 1948: 6).
These rules are neither good nor bad in themselves and are identified with
'natural' laws. To be precise, for Hayek the implicit duty is to follow the laws
of the euolution of society, given that nature is not fixed and immutable. In
this evolutionary conception of society nature is a mixture of social, his-
torical but also biological elements, and is represented in man by habits,
experience, culture, practices and tradition (Hayek 1948: 18-19; 1973:
8-54).
For Hayek the social organism has no ends. It is not possible to perceive
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within society a 'complete ethical code', or even a common scale of values

shared by the members of society. It is only possible to speak of social ends
as 'identical ends for many individuals', whose achievement better allows
everyone to pursue his own desires. These ends concern organizations with
independent decision-making powers, such as the state. But these organiz-
ations are bound by the 'rule of law', so that in any given circumstance they
will not frustrate individual decisions (Hayek 1944: 45,54-9; 1960: 148-61,
205-19; 1967: 165-6).
Therefore, for Hayek it is not possible to organise resources for specific
social ends. When, in economics or politics, measures are proposed to
pursue specific 'social ends', 'common welfare' or 'social justice', the only
result is an imposition on the competitive market of correctives or limi-
tations which undermine individual freedom. For Hayek all the terms men-
tioned above are meaningless. Common welfare might, at best, indicate a
situation in which a randomly chosen individual is given the best chance to
successfully use his knowledge for his own ends6
These ideas are based on a conviction that Hayek borrowed from Hume.
In following his own ends the individual is confronted with two 'natural'
obstacles:
... every individual's predominant concern with the needs of his own or of his
immediate associates. . .the scarcity (Hume's terml) ofmeans, i.e. the fact that 'there
is not a sufficient quantity of them to supply everyone's desires and necessities'.

It is from selfishness and natural scarcity that the social regulation of human
relationships originates (Hayek 1967: 112-13). The individual has two
fundamental requirements. To limit the possibility of abuse by one indi-
vidual of another, i.e. to support his a 'sense ofjustice' or the need 'to act
in accordance with non-articulated rules' (Hayek 1978: 81). To identify and
follow a 'procedure' which guarantees 'individual freedom under the law',
as it allows the best possible use of dispersed knowledge, allocates scarce
resources among individuals spontaneously (or rather, independently of
any specific 'design') and, as a result, cc-ordinates individual actions
 Keynes vmur Hayek on knowIcdgc, ethics and economics

towards an order. Such a procedure is competition, and the institution

which effects it is the market (Hayek 1944: 27-9; 1978: 179-90).
The market determines a system of relative prices and individual rewards
which can be called 'just', only in the sense that it is the 'impersonal' result
of the action of individuals following rules in the context of dispersed and
limited knowledge (Hayek 1944: 83; 1948: 21; 1967: 116, 166-72. 257-8;
1976: 62-74,107-32; 1978: 60-5 139-42; 1988: 73-81). So a sense ofjustice
and justice itself' develop in society along with the institution which regu-
lates economic relations between individuals.
Thus for Hayek the 'material' or economic and the ' m o d aspects of
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social relations are strictly linked. If individuals pursue their ends accord-
ing to rules, the market not only resolves the economic problem, gener-
ating and exploiting dispersed and limited knowledge, but also resolves the
moral problem, in that it is the instrument which selects and establishes the
rules: allowing those rules which have 'proved conducive to more effective
human effort' to survive. Above all, the market economy is consonant with
a free society, in that it guarantees respect for the principles Hume indi-
cated as fundamental to human society, above and before any form of
government: 'the stability of possession, of its transference by consent, and
of the performance of pr~mises'.~

1.2. Keynes on Hayek's moral position

It is reasonable to doubt that Keynes would have accepted Hayek's thesis
on rational action as action which conforms to the rules of conduct, inde-
pendently of any evaluation of specific circumstances? It would seem,
rather, that any agreement would have been limited more to the values of
liberalism (the safeguarding of individual liberty, the protection of private
property, the performance of promises) on which Hayek based The Road to
Serfdom In fact. Hayek claimed that 'the whole argument' of the book was
determined by 'certain ultimate values' and that his main objective was to
make these clear to readers (Hayek 1944: v). The historical moment, char-
acterised by authoritarian tendencies of every kind, encouraged both
Hayek and Keynes to explicitly defend such values, and, above all, to under-
line the indispensable conditions for their survival: individual responsibility
for action and the freedom to act, even against one's own interests, respect-
ing the principles in which one believes. The proposition from The Road to
Serfdom reiterated in full by Keynes is the following:
Outside the sphere of individual responsibility there is neither goodness nor badness,
neither opportunity for moral merit not the chance of proving one's conviction by
sacrificing one's desires to what one thinks right. Only where we ourselves are
 Anna CarabeIli and Nicoli De lrecchi

responsible for our own interesu and are free to sacrifice them, has our decision
moral value.
(Hayek 1944: 1567)
This convergence between Keynes and Hayek is highly significant, but it
also becomes somewhat fragile. In fact, considerable divergence emerges
as soon as the proposition is applied in the context of the thoughts of both
men.
If one were to ask Hayek to define individual responsibility, he would
reply that responsible man is he who, in every case, follows the rules of
conduct (Hayek 1960: 74-5), even when he is aware of immediate personal
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damage. He would add that such action is of itself 'good', without reference
to moral criteria outside the process of the evolution of the rules of conduct
(Hayek 1967: 90-93, 106-21). He would then go on to explain that an
example of individual irresponsibility would be anyone who questioned
action which follows the rules, since, by so doing, he would be deliberately
interfering in what is nowjust, because it has, until now, been considered
so, and limiting the spontaneous process of evolution of the rules of,
conduct. Keynes, in fact, represents such 'immoralism'.
If Keynes had been asked to define an action as responsible, he would cer-
tainly have stressed the importance of the rules of a given society but he
would just as certainly have left much space for the role of duty in relation'
to the specific circumstances in which the action takes place, and for an
individual evaluation of good and bad actions (Keynes CW XXVII: 187-8)./
As for reflection on actions which follow rules, he would have considered'
l
it a proof of responsibility and moral rightness, as it constitutes an indi-
vidual contribution to the discussion, and eventual revision, of the system
of values to which individuals usually refer in a given society. Moreover,
exceptions to rules are important for him.

1.3. The market and the defmuo

f liberal valuer
In The Road to S m f h Hayek is not only concerned to make explicit the
moral values he intends to defend, but also to demonstrate that only the
mechanisms of the market can guarantee their safety.1°
Keynes is critical of this result. Underlying his criticism, at least two con-
nected arguments can be distinguished. First, Keynes makes a different
evaluation of the ability of the market to realize and sustain the values that
Hayek sees as the linchpins of a liberal society. Keynes argues that the
defence of such values - values with which he fully agrees -will depend not
on the market but rather on a profound reform of the market. Further-
more, Keynes adds that such reform is only the end of a transitory phase:
merely a precondition to facing the 'real' moral problems, which concern
 Keynes versus Hayek on knowledge, ethics and econmnics

the achievement of good. In short, he does not agree that the market is suf-
ficient for the safeguarding of liberal values, and holds that economics and
ethics deal with problems which are different and must be kept separate.
The first aspect is considered here; the second in the next section.
From the assumption that individuals act in a condition of limited and
dispersed knowledge, Hayek is noted for giving the market an epistemic
role and concluding that it resolves, more efficiently than central planning,
the economic problem of the coordination of individual actions. It would
appear fair to say that Keynes would have accepted this fundamental and
innovative thesis, and comments made at the time of the letter to Hayek
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seem to offer confirmation:

the competitive system is, in its ideal form, the perfect mechanism for ensuring the
quickest, but at the same time the most ruthless, adjustment of supply and demand
to any change in conditions, however transitory. . . If the demand fluctuates, a diver-
gence immediately ensues between the general interest in the holding of stocks and
the course of action which is most advantageous for each competitive producer acting
independently.
(KeynesCW XXVII: 191)

while rigid central controls 'try to freeze commerce into a fixed mould'
(Keynes CW W(VII: 111).
It is, however, on the question of the relationship between the market and
the moral values of liberal society that Keynes's view differs radically from
that of Hayek
In the first place, Keynes rejects the idea that the market is the ideal
mechanism for the distribution of wealth. It is true that Hayek himself
showed there is not complete correspondence between the results obtained
by a single individual and his efforts, personal responsibility and ability, and
that everyone operating in the market is playing for survival. But these con-
siderations are merely a corrective to the basic premise that the market,
through the price mechanism, renders individual expectations and claims
on scarce resources compatible (Hayek 1967: 233; 1978: 64-5). Keynes,
emphasizes that the results of market competition are indifferent to the
nature or urgency of individual needs and depend exclusively on the power
and will of individuals to acquire the use of scarce means. In the market
individuals act in such a way that those
who move in the right direction will destroy by competition those who move in the
wrong direction . . . It is a method of bringing the most successful profit-maken to
the top by a ruthlesssuuggle for survival, which selects the most efficient by the bank-
ruptcy of the less efficient. It does not count the cost of the struggle, hut looks only
to the benefits of the final rcsult which are assumed to be permanent.
(Keynes & IX:282)

Moreover, Keynes indicates how the market mechanism induces

 Anna Carabelli and Nicol2 Dc Ecchi

individuals to value money for money's sake -along with other, concomi-
tant economic 'virtues' such as avarice, usury, anxiety about the future,
utility, the logic of means - to such a degree that, for some, the minimum
requirements for survival come under threat and enterprise itself is com-
promised as 'disappointment of reasonable business expectations, and the
impairment of efficiency and production' spreads throughout the econ-
omic system (Keynes CW IX: 291).
When the vice of money for money's sake is transformed into avirtue, the
individual is induced to profit from the instability of markets rather than
from enterprise: in other words, a situation of unstable prices is in the inter-
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est of some, with the result that the competitive system is unable to avoid
violent fluctuations in prices and break the vicious cycle between the social
consequences of such fluctuations and their growth (Keynes CW IX: 268-9,
330-1; CWXXVII: 113,132-3,139).
Keynes insisted that, in such conditions, even the maintenance of indii
vidual contracts may become unsustainable. Put another way, the market,
instead of being the only procedure able to safeguard the Humean priq-
ciples of stability of possession, its transference by consent and the p e t
formance of promises, can be transformed into a means of undermininb
respect for such principles when corrective measures are absent. Ih
Keynes's words,
nothing can preserve the integrity of contract between individuals, except a div
cretionary authority in the State to revise what has become intolerable. The pow.=+
of unintermpted w r y are too great. If the accretions of vested interest were to grow
without mitigation for many generations, half the population wouldbe no better than
slaves to the other halt Nor can the fact that in time of war it is easier for the State
to borrow than to tax. be allowed nemanenrh to enslave the taxpayer . , to the bond-
holder. Those who insist that in these matters the State is in exactly the same position
as the individual will. if thw have their wav,
,. render imnosible the continuance of an
ihdividual society, which dipends for iu existence onkoderation.
(Keynes CW IV:56)

1.4. Ethics, morals a n d economics in Kqmes's thought

Keynes does not deny that a market economy can resolve economic p r o b
lems, which for him concern, as we shall see, not so much the efficient use
of scarce resources, as the use of the resources to allow 'a decent level of
consumption for everyone' (Keynes CWXXI: 393). However, he does state
that deliberate intervention is needed to correct the ethically undesirable
results of the market. Only in this way can liberal values be safeguarded.
Throughout hi l i e Keynes had an immediate and constant interest in
political and social activities: an interest which also stems from his eariy
attention to Burke and the 'art of government'," and from his early active
 Kqrnes versus Hayek on knmuledge, ethics and econmnics

participation in the Liberal party. In M o h Civilisation, he noted that there

is, in his times, a wider contrast between public and private life than previ-
ously. He continues by a r m i n g that there are in the real world, on the
one hand, hungry men and, on the other, 'cruel and rapacious men'; both
of them are, unconsciously and unguiltily, 'in the grip' of the social and
economic mechani~m.'~
The idea of a real conflict which gives rise to irreconcilable moral dilem-
mas is the root of Keynes's concept of the 'fallacy of composition' and of
his view of a permanent conflict between individual and collective levels,
and between micro and macro dimensions, which permeates his whole
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economic theorization. This is also one of the reasons why Keynes is against
the view that the market can reconcile the conflict: indeed the market is at
its origin. Remedies to the ethically undesirable and unjust consequences
of this irreconcilable conflict cannot lie within the individual in his soli-
darity or charitable altruism. Keynes is essentially a layman in his ethical
'religion'. Somebody outside the individual has, in macroeconomic terms,
to obviate some of these consequences: government or the monetary
authorities, depending on circumstances.
Nevertheless - and this brings us to the second aspect of Keynes's criti-
cism of Hayek - the solution of economic or material problems is only the
end of a transitionary phase, and only a precondition to facing the 'real
problems' (the moral problems) concerning the 'spiritual' or intellectual
ends of man.
Keynes distinguishes between 'speculative ethics' ('one's attitude towards
oneself and the ultimate') and 'practical ethics' or 'morals' ('one's attitude
towards the outside world and the intermediate') (Keynes CW X: 436). i h e
first is the rational analysis of the ultimate aims of human action, and the
second covers politics and economics, which, being at the service of ethics,
analyse and discuss ways of building an 'ethically rational society'. Econ-
omics and politics also have ends, but they are neither absolute nor uni-
versally valid ends or objectives, attainable through means adopted
according to circumstances. Examples of such ends include monetary stab-
ility and employment, but also economic efficiency and the encouragement
of enterprise and industry. They are preconditions to the ultimate aims, in
the sense that they are necessary prerequisites for the full development of
the individual.
Speculative ethics, which is the ethics of ends and ultimate values, is
for Keynes mfionalisfic: reason can be applied to ethics in general. There-
fore, in contrast with Hume and Hayek, Keynes defends the 'belief in
the value of a true and rational analysis into moral judgments, prejudices
and motives' (Keynes MSS 1904: BurRe). In line with Moore, he maintains
that there are general and abstract moral ends which are universally and
 Anna Carabelli and Nicolo De Vecchi

intrinsicallydesirable, that is ends which ought to bepursued whatever. These

are states of mind intrinsically good or desirable in themselves: love, friend-
ship, the appreciation of beautiful objects and knowledge. However, in con-
trast with Moore, Keynes suggests mixing 'goodness' and 'happiness',
including bodily pleasures and not only Platonic love in the ultimate good,
thus moving towards an Aristotelian concept of happiness: euduimonia, the
full richness of the good life.
Further, among ultimate goods and in addition to Moore's mental states,
he suggests including 'states of affairs', thus widening the domain of ulti-
mate goods to concrete situations of fact.
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Given the existence of ultimate goods, moral duties exist in Keynes. This
is in contrast with Hayek. In the 1905 essay on Modern Civilisation he clearly
declared that duty cannot, at any rate, be only private: 'the field that is rel-
evant for any individual has grown, but the individual has not grown in pr*
portion'. Keynes includes among ultimate goods public good and socia!
justice. As a consequence the pursuit of public good and social justice is a
duty; indeed, not only and not so much a private one but a public duty f
g~vernments,'~ as we will see soon. The duty of public institutions is to intej-
vene and to effect reform of the consolidated value system of the marke't
economy.
The distance between Keynes and Hayek on the relationship between
economics and ethics would, then, appear to be wide: not only is there p
profound diKerence of opinion on the mechanism of the market and ik
ability to distribute wealth and safeguard liberal values, but Keynes's con-
ception of ethics is such as to demand that the market economy be super-
seded in order to get at real ethical problems.

2. Natural scarcity, artificial scarcity

In discussing the relationship between economics and ethics, we have
observed that Keynes and Hayek did not agree on the contents of econ-
omics. Both T h e h a d to Serfdom and Keynes' letter deal with the p r ~ b l e m . ' ~
It is a confrontation between the economics of scarcity and that of abun-
dance, with Keynes, at least at the theoretical level, being responsible for
the latter (Hayek 1995: 74-120). In fact, his thesis is that the satisfaction of
the material needs of individuals could be resolved if individuals themselves
could be persuaded to modify their use of resources. Such resources would
then be seen not to be scarce but, rather, potentially sufficient to guaran-
tee everyone a decent level of consumption. Hayek defined this as 'wishful
belief' and 'irresponsible talk' (Hayek 1944. 7%, 150; 1941: 393).
Keynes revealed a structural gap between the material results of production
 Kqrnes versus flayek on knowkdff, ethics and economics

and the potential of available natural and human resources. An inversion

of the relationship between saving and investment is the theoretical
premise which supports the contention that attempts to influence invest-
ment decisions and increase the propensity to consume allow theuse of
hitherto unused resources, eliminate waste and create an abundance which
was not possible on account of specific consumption and savings patterns
and a specific preference for liquidity. Keynes added that in a market
economy scarcity is essentially a scarcity of capital: purely artificial in that,
as opposed to natural resources, the use of capital does not result in 'a
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genuine sacrifice which could only be called forth by the offer of a reward
in the shape of interest' (Keynes CW VII: 376). So, it is possible to reduce
the cost of capital (by a reduction of the money rate of interest) to
extremely low levels and encourage investment in order to realise of the
full potential of the economic system.
From Hayek's point of view, there are at least three reasons to vigorously
contest Keynes's thesis.
First of all, Keynes subverts the significance of the economic problem.
Hayek, true to the economics of scarcity, holds to the view that 'ultimately
. . . it is the rate of saving which sets the limits of the amount of investment
that can be successfully carried through' (Hayek 1941: 393, italics added;
1988: 57). The debate at the beginning of the 1930s on the rate of interest
and the nature of capital offers sufficient arguments for an analysis of this
aspect of the confrontation.
Second, Keynes's economy of abundance has moral repercussions that
Hayek cannot accept. In fact, for Keynes, the artificial scarcity of capital is
a reflection in economic terms of the fact that in a market economy the
motivation of money for money's sake has, over time, reached a particularly
high level in the scale of values. The avoidance of scarcity, through the use
of available but unused resources, is therefore connected to a progressive
elimination of the money-motive towards those moral values which Hayek
himself professed and defended. This is where the moral transformation,
that Keynes held to be essential before facing man's 'real' problem, or the
problem of 'good', reappears.
When the accumulation of wealth is no longer of high social importance, there will
be changes in the code of morals. We shall be able to rid ourselves of many of the
pseudcwnoral principles which have hag-ridden us for two hundred years, by which
we have exalted some of the most distasteful of human qualities into the position of
the highest virtues. We shall be able to afford to dare to assess the moneymotive at
its true value.
(Keynes CW IX: 929)

These propositions are in stark contrast to Hayek's view of the moral

problem. In fact, they presuppose the possibility of a rational discussion of
 Anna Carabelli and Nicok? Dc Vecchi

ends, exclude the abstract and formal character of the mles of conduct and
reject the idea of the market as a procedure for the selection of the rule$
of conduct within the process.
But Hayek sees in the economics of abundance an element of subversion
of liberal thought which is even more dangerous. It implies that the indi-
vidual possesses substantial freedom, which may become incompatible with
'freedom under the law'. Keynes expects that everyone should be guaran-
teed not only freedom, in the sense of protection from the arbitrary will of
others, but also the freedom from necessity, or, rather, from limits which,
in different ways, restrict the possibility of individual choice of ends. Being
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free now means having the power to use the necessary means to satisfy such
material needs as a given society holds to be primary, and to consider endd,
above all non-material ends, which were previously unknown.
As will be seen, Hayek makes some concessions on public intervention,
for example, to ensure a minimum standard of living or to overcome excep
tional circumstances for which individual means are clearly inadequate. Wk
need to look at what this means, but, for the ume being, it is possible to
state that Hayek perceived exactly what was behind Keynes's proposition.
With the economics of abundance, Keynes is not only asking for a willing-
ness - which Hayek is prepared to concede - to ensure a minimum stad-
dard of living. He wants, above all, to create conditions which liberate the
-
individual from the wony of obtaining his-strictly material ends, in order
to allow him to pursue such 'real' ends as will permit him to express authen-
tic human qualities. Hayek does not accept this aim, and not so much for
its utopian overtones as because Keynes attempts to impose a scale of ends
which characterizes man's humanity (Hayek 1988: 58), while in Hayek's
view, this is @nab own scale which he is trying to impose on others,
demonstrating, not only a presumptuous confidence in his own intellectual
superiority, but also a contempt for the cardinal principle of liberalism: the
right of the individual to pursue exclusively his own ends (Hayek 1944: 11,
18-20,44,1960: 12; 1978: 132-1; 1988: 62.4).

3. Hayek's disbelief in reason

As well as differences in ethics, differences in views of knowledge explain
the contrasts between Keynes and Hayek concerning the cardinal question
of political economy: the limits of public intervention on individual action
and the role of economic policy in general.
The 'problem of knowledge' is certainly central to their economic theory.
Let us examine Hayek first; then Keynes. Finally we will compare them on
economic intervention.
 *
K q n a versus Hayek on knowledge, ethics and economics

3.1. Knowledge, ignorance and rules

In line with Hume, who considers reason as the slave of the passions, Hayek
shows a substantial disbelief in human reason. He considers reason 'not the
judge but an instrument' and 'only one element among those which guide
us'. Better, he defines reason as a product of culture (Hayek 1967: 86-7).
Knowledge is not the product of reasoning. It is unconscious, practical
and specific (Hayek 1948: 77-91; 1967: 44, 87; 1988: 78). It is distributed
among diierent individuals. It is not rationally modifiable by argument and
cannot be increased by voluntary cooperation. Nobody can claim to be able
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to form his own personal and reasonable judgement grounded upon

specific (limited) knowledge.
As a consequence we can cope 'with our constitutional ignorance' only
by following the rules, which are the product of cultural evolution (Hayek
1976: 8). It is difficult to say whether knowledge or ignorance plays the most
important role in Hayek's theory. His stress is upon ignorance, rather than
upon knowledge:
It is the extent of our ignorance which makesit necessarythatin the use of knowledge
we should be limited and should refrain from many actions whose unpredictable con-
sequences might place us outside the order within which alone the world is tolerably
safe for us. It is only thank to such restraints that our limited knowledge of positive
facts serves us as a reliable guide in the sea of ignorance in which we move.15
Because of the ignorance of the future, the individual is unable to form an
autonomous judgement and resolves to follow rules. Rules help to survive
in society: the practical knowledge is a fundamental wealth for the indi-
vidual, as it permits him to react to new events avoiding indecision and
dilemmas (Hayek 1960: 66). Conforming to rules, and imitating others
(Hayek 1967: 46-8) also means respecting tradition, which is intended as
'the results of genetic and cultural transmission' and serves as 'adaptation
to the unknown' (Hayek 1988: 12-13,17,76).
Hayek's disbelief in reason brings a basic pessimism to the rational con-
struction of the future. As we shall see, this is even truer for government or
public institutions (Hayek 1948: 24; 1967: 56; 1988: 16).

3.2. Theory of action: ~aMm'behaviourand c o n f a i s m

The behaviour considered by Hayek is of the 'pattern' type. Single and
unique events and 'surprise' events are irrelevant. What counts is repetition
with the possibility of variation (Hayek 1967: 45). There is a strong
connection between imitative conformist behaviour and the abstract rules
of conduct. There are no exceptions to the general rules of conduct nor
must there be: the individual ought always to follow rules, even when the
 Anna Carabclli and Nicold. De Vecchi

consequences expected in the immediate future are bad for him, or when
he has good reason, motive or evidence not to believe in them (Hayek 1988:
81). That is, rules are to be followed regardless of individual consequences,
both immediate and remote. This happens because 'end states' are
unknown and unknowable. In any case the behaviour of those who do not
follow rules creates disorder.I6 Therefore the value and the goodness of an
action depends neither on its individual consequences nor on the actor's
intentions and rational motives.
Following rules is not only necessary but useful. So, we can say that Hayek
accepts swalled 'rule-utilitarianism'. This interpretation is in line with
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the distinction he draws in the history of ideas between the calculating

utilitarianism of Bentham, on the one hand, and the spontaneous utili-
tarianism of Hume, on the other (Hayek 1967: 88). In our opinion, rule-
utilitarianism represents his position quite well.
Finally, conformism and abstract rules are self-sustaining,giving rise to aq
interactive and evolutionary process. Following rules actually implies not
only self-producing and maintaining the order, but also contributing to its
evolution (Hayek 1967: 66-81; 1979: 155-76).17 In this case, we could also
speak of an evolutionary autopoiesis.

4. Keynes's belief in reason

4.1. Knowledge and i n d i u i d u a l j u ~ t

Keynes shows a non-conformist attitude to rules. Already in his early wric
ings (Ethics in Relation to Conduct, for instance)I8 he maintains that there are
neither general rules of conduct which ought to be followed uncritically at
all times, nor essentially right actions. Each situation must be judged on its
own merits and action taken consequently.
Further, Keynes maintains that a particular action may differ from the
'generality' of such actions. Against Burke, who thinks that universally valid
principles, as well as general rules, ought to be followed always, without
exception, he points out that we have to consider the specific situation and
ask ourselves when a particular case is an exceptional case. 'The individual
ability tojudge rightly in questions of both private and public action' exists,
and the reasonableness of private or public action is justified even in situ-
ations of limited knowledge.lg
In forming the probable judgement which is the basis for reasonable
action one must, first of all, distinguish between immediateand m& future.
Keynes is not paralysed by ignorance regarding the remote future. In
his view, a suitable approach is to take into account the limited knowledge
 Kqnes vmw Hayek on knowled&, ethics and economics

regarding the immediate future actually at our disposal. If the latter exists,
it is to be judged positively. Even if this knowledge is scarce, it has a posi-
tive role in the formulation of our probable judgement and in thereason-
able grounding of our probable action. The ignorance of the remote future
is not, in general, a bar to action: 'Ignorance can be no bar to the making
of a statement' (Keynes MSS 1904-6, Ethics in Relation to Conduct: 25).
For Keynes (and his declaration of immoralism in My Early Belhfs is the
best evidence) there is autonomy of individual judgement in contrast with
the conformism of moral rules and of rules of conduct, and in contrast with
the judgement manifested by the majority. If the individual has some
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known reasons (limited knowledge) at his disposal which induce him to

believe that events will go in a diierent way from that believed by current
average opinion, he should ground his judgement upon his knowledge. As
we will see, individuals ought to rely on average opinion only in cases of
total ignorance or of the incommensurability of probability.
Keynes is here in strong contrast with Hayek's view that the individual
cannot form an autonomous, genuine and reasonable judgement of con-
crete situations which involve the future, and even less so of unique and
non-repetitive events. From this point of view, Hayek's individualism would
seem less strong than Keynes's individualism or, at least less strong than is
commonly thought.

4.2. Theory of action: 'reasonableaction'and conventional expectation

The possibility of forming an individual reasonable judgement which
grounds action in conditions of limited knowledge is rooted in Keynes's
own conception of probability.
Keynes stresses that probability is the true guide of life, against the s c e p
tical attitude of Moore and Burke (and Hayek). Moore defends the Ben-
thamite calculus as a tool of practical ethics, but ends up accepting, as does
Hayek, the traditional rules of morals. Hisjustification ofthis choice is that
it is practically impossible to cany out the Benthamite calculus given our
ignorance of remote future (Moore 1903: 152). We have no reasons, n o
rational grounds, no evidence, no justification in action in these situations:
the ignorance of the far future is a real bar to action. Moore shows a
Humean disbelief in reason as concerns his theory of right conduct and
duty: his position is nothing but sceptical. Burke's attitude to action, which
Keynes analysed in 1904, is very sceptical and similar to Moore's. In the essay
on Burke, Keynes rejects Burke's pessimism and conservative approach. For
him. Burke's position depends on his Humean disbelief in reason, on his
excessive stress on the ignorance of remote future, on his unsurpassable
diiculties in the possibilities of f o r e ~ a s t i n g . ~ ~
 Anna Carabelli and NicoI6 Dc Rcchi

For Keynes, probability is the hypothesis upon which it is reasonable for

us to act (Keynes CW VIII: 339). 'It is because we do not know for certain
that we use the word at all' (KeynesEthics in Relation to Canduct). The general
principles which ~ l human e conduct are also those which rule probable
reasoning.21 These principles are logic. They belong to nondemonstrative
logic. But they also depend on directjudgements of indierence and rele-
vance and, in the end, on intuition. As probability depends on the limited
knowledge available, it is relative and varies with circumstances. The selec-
tion of evidence, the process of abstraction by which the individual extracts
the evidence he judges relevant from the total evidence available to him, is
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subjective. But probability, given the evidence, is logical and objective. For
Keynes the a prim' probabilities are not subjective judgements i la Hume,'
that is 'lively imaginations', ungrounded and irrational.
In Hayek's theory, in contrast with Keynes, probability plays no role in
guiding decision and action in conditions of limited knowledge. Hayek
seems to implicitly accept Hume's view: probability (and probable judge-
ment too) is groundless, irrational, subjective as are taste and passion. He
sometimes seems to identify probability solely with mathematical probai
bility, that is mere calculus rather than a logic of nondemonstrative reason!
ing; probability seems inevitably to fall within the sphere of Cartesian
demonstrative reason. In hi reading of Keynes, the Keynesian concept of
uncertainty ( d i e r e n t from calculable risk) plays no role.

4.3. Whm are conuentions to be followed?

As for Keynes human behaviour is, in general, grounded upon somereason,
action can be considered reasonable in most cases. A 'probably right' action
(or, better, a 'reasonably right' action) depends on our actual limited know-
ledge of the future consequences.
Keynes admits that in some situations and for some events it is impossible
to form a reasonable judgement because we have no reasons at all or no
evidence available to us even for the present and for the immediate future.
In these cases conventional expectations come into play. In the case of uue
uncertainty and total ignorance of the future, no one is able to escape con-
ventions, not even professional speculators and long-term professional
investors.
So, to follow rules is also reasonable for Keynes. However, one must be
aware that these ~ l eares conventions, human artifices, devices. In contrast
with Hayek, Keynes thinks that one can play with them, influence them, so
as to reduce the social damage caused by them as far as possible; or, if
nothing better can be done, by substituting them with other less socially
harmful conventions. Given that conventions exist because of the presence
 Kqrne~vmus Hayek on knawlcdge, ethiu and economics

of uncertainty and ignorance, Keynes suggests that the acquisition of

specific knowledge should be stimulated. An increase in knowledge helps
to form 'genuine' individualjudgements; in this way uncertainty and insta-
bility decrease.

5. Economic policy: 'one of the b e s t problems in legislation'

The real distinction behveen Keynes and Hayek as concerns rules is thus
twofold:
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1 The relativity of rules, of duty, of probable judgement, and their vari-

ability to changes in circumstances are concepts present in Keynes and
totally absent in Hayek. Indeed, these aspects are rejected by Hayek as
negative characteristics of Keynes's thought: for him rules and general
laws are abstract and do not depend on circumstances.
2 While for Hayek the rules are selective,successful andjust knowledge, for
Keynes they are mere artefact, not real knowledge and indeed unjust. For
instance, they are at the origin of unemployment. They are our 'idols',
i.e. means by which we rationalize uncertainty.
In our view, these two aspects are the main standpoint for an analysis of
Keynes's and Hayek's diierent attitudes towards public intervention in a
market economy.
Keynes's motives for public intervention to correct a malfunctioning
market and the general characteristics of such intervention will be con-
sidered first. Then we will examine Hayek's objections: while conceding the
usefulness of limited intervention, he condemns Keynes's thesis as an
expression of 'constructivist rationalism', as an attempt to deliberately
modii the spontaneous process of evolution of nature and society. Finally,
we will consider the argumenfs Keynes used in his letter to try to convince
Hayek not to concentrate all his efforts on defending the market if, as he
himself claimed, his main aim was to safeguard the moral values in which
he believed.

5.1. The Keynesian 'middle way'

Keynes considers uncertainty to be one of the main causes of malfunction
in the market. Because of ignorance about the future individuals either
cannot make rational judgements on the outcome of their actions, or lack
confidence in the assessment of immediate consequences. As a result,
they take refuge in conventions. This is the root cause of both the reluc-
tance to invest (and the consequent failure of the economy to exploit the
 Anna CarabeUi and Nicoh De Vccchi

full potential of available resources) and the speculative behaviour of those

who, by dint of above average knowledge and skills, are able to exploit such
behavibur to their advantage, but withdestabi~isin~ effects on the-economy
as a whole.
Consistent with this analysis, Keynes proposed a form of intervention
which is neither an imposition on nor a substitution for the activities of the
individual. Freedom and personal initiative are never in doubt, but rather
the way in which individual action manifests itself in capitalism; not inde-
pendent judgement, but the tendency to sacrifice personal judgement to
the dictates of conventions; not the range of objectives, but the general
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adherence to values which diminish the skills and abilities of the individual
in any field; not the pursuit of private interest, but its composite negative
effect on society. Rightly, Keynes defined his market reforms as a 'middle
way' between socialism and liberalism (Keynes CW XXVII: 111,369;Skidel-
sky 1992: 219-41):
[an]economic reform by the methods of political liberalism. . . an agreement under
which the State would fill the vacant post of entrepreneur-inlhief,while not inter-
fering with the ownership or management of pa&cular businesses, or rather only
doing so on the merits of the case and not at the behest of dogma.
His main objective was a regulation of the flow of wealth determined by
the market in such a way as to reduce material waste, above all of labour.
This is clear even from the early essay on Burke, in which Keynes was already
suggesting intervention 'to influence the channels in which wealth flows or
to regulate either its management or its distribution', adding that the state
can no longer permit 'any section of its citizens to starve, if the course of
Nature left to itself will bring about that result' (Keynes MSS 1904: Burke).
Full employment then coincides with a decent standard of living for all,
and marks the end of the intermediate phase of the transformation of
society. The significance of Keynes's proposal lies in the already mentioned
connection and continuity between the reform of the market economy and
the transformation of moral values which respect individual freedom.

5.2. HayckS critique of 'inlerfmcc'

Hayek opposes Keynes's interventionism because of his disbelief in human
reason, in line with Hume and Burke.22
Reason can never set itself against culture. It can only try to reform the
established rules, when 'coercive interference' appears in the process of
cultural evolution. There is no possibility for public institutions to form a
rational judgement which guides their behaviour towards the future. Only
the market is capable of distributing limited and scattered knowledge
 Keyncr umvr Hayek on knowledge, ethics and econmnics

among individuals, and has the impersonal task of coordinating the de-
centralized decisions. The market is the broadcaster of knowledge rather
than of mere information; it is the true cognitive network among indi-
viduals (Hayek 1948: 77-106; 1978: 179-91).
The main criticism Hayek moved to Keynes's defence of public inter-
vention (what he called 'the fatal conceit') is that of inuoducing tacit
hypotheses of certainty, of unscrupulous use of Cartesian demonstrative
reason and forecasting calculus and, finally, of not being aware of the real
limits of human reason. The charge is that of 'constructivist rationalism',
i.e. that 'we have it in our power so to shape our institutions that of all poss-
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ible sets of results that which we prefer to all others will be realised'(Hayek
1967: 85).
Other criticism concerns, so to speak, the consequences of this attitude
of Keynes: a certain passion for engineering technique and scientism and,
ultimately, the defence of central planning. As we have seen, some of these
accusations made by Hayek do not apply to Keynes.23
In particular, when Hayek charged Keynes of having blind confidence in
reason and in the human capabilities of forecasting, he seems to identify
prevision and intervention in the same way as the positivists he attacks in
other parts of his work: intervention is only possible if correct forecasting
is possible; and, in his view, the latter being impossible, then it is better not
to 'interfere' with the mechanism of spontaneous orders (Hayek 1988: 84).

5.3. Hayckk inkmention )Car competition'

Hayek's objections against economic intervention, however, are not based
on a blind prejudice against public organizations, the state in particular. As
with ~ u m d a i d ~ u r k e~, a ~ accepted
e k public bodies as indispensable to
liberal society.24In short, they serve to construct 'an appropriate legal
system, a legal system designed both to preserve competition and to make
it operate as beneficially as possible' (Hayek 1944. 28; 1960: 205-33; 1967:
121; 1973: 47; 1978: 144-5: 1979: 41-64; 1988: 6 3 4 ) .
In svictly economic terms, Hayek is not always vigorously opposed to the
organization of institutions such as money, markets and channels of infor-
mation. He made occasional concessions, even though respect for compe-
tition remains a precondition (Hayek 1944: 28; 1960: 222, 264).25He does
not even exclude intervention aimed at guaranteeing a minimum standard
of living, medical assistance or limits to working hours. However, these con-
cessions should not be seen as an acceptance of intrinsic defects in the
market, but rather as means to reduce the inevitable inequalities between
individuals: inequalities of opportunities, chances and initial'prospects
 Anna Carabclli and Nicoli Dc Vecchi

(Hayek 1944: 2%9,76-8,89-92; 1960: 2574,1967: 172,175; 1978: 141-2,

306).
There is, in fact, a basic general principle by which any intervention must
bejudged: if it is to respect and preserve competition and create 'a suitable
framework for (its) beneficial working'. An intervention may be 'for com-
petition' if it follows the same rules followed by individuals, does not inwe
duce additional limitations on individual knowledge, does not supply
monopoly services and is financed by equal contributions by all (Hayek
1944.27-31; 1967: 175; 1978: 105-18; 1994: 123). Failure to observe any of
these requirements would indicate the discretionary nature of the inter-
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vention, its arbinariness in respect to the spontaneous process of evolution

of the rules of conduct, its 'design'. Such intervention would send 'false'
signals to individuals (for example, monetary signals inconsistent with their
saving decisions), affect the use of resources and the price system deter;
mined by the market, introduce instability and encourage governments to
take further corrective measures. This opens the door to an ineluctable rise
of planned economies and authoritarian regimes.

5.4. Government of law and puernment of nm

For Hayek, Keynes's 'middle way' has all the characteristics of 'against corn/
petition' intervention. It deliberately attempts to correct the price systeni
and the distribution of property to resources which should be spon-
taneously determined by the combined action of individuals, none of whom
has the power to influence the results of the market to his own advantage.
Hayek added that this was the result of an epistemological error. From
his point of view, any intervention aimed at correcting the spontaneous
market process can be considered reasonable only if it is based on a com-
plete forecast of the future; nevertheless, in order to satisfy such a con-
dition, it is necessary to hold a presumptuous constructivist faith in the
power of reason - a presumption to which Keynes is victim (Hayek 1967:
82-95,237-47; 1988: 57,61-2).
On the other hand, as we have seen, Keynes based hi theory of action on
the assumption that the individual will always have only a limited knowledge
or be in complete ignorance about the future. On this point Keynes agrees
with Hayek. Therefore Hayek's epistemological objection would appear to
be unsubstantiated. All the same, Keynes anives at the opposite conclusion
to Hayek on the value of deliberate corrective intervention in the market.
Keynes points out that it is precisely in those cases in which the individual
is obliged to take refuge in conventions that public institutions are best
placed to decide what action to take. Not only can they control a number
of economic variables, but they can evaluate contingent circumstances at
 Keyner vmw Hayek on knmukdge, ethics and e c m i c s

precisely the times when individuals are unable to do so. Public authorities,
especially monetary, can intervene in situations which have become
blocked by ignorance about the future, and counteract conventions
imposed by the market. In this case, public opinion can be modified and a
new convention established which is less damaging to society.
It is, then, undeniable that Keynes had great faith in reason, but not in
the sense that he gives it the power to predict the future. It is also impor-
tant to underline that he was totally aware that it is necessary to satisfy a
further condition, in order to ensure that public intervention has the
desired effect. He repeatedly claimed (Keynes CW XXVII: 384,387-8) that
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those in authority must be 'clever' and 'think and feel right'.. In other
words, to have the intellectual capacity to modify existing conventions, to
experiment and persuade; to be at peace with their environment ('to be vir-
tuous') above all because they share with the community a respect for the
ultimate values of individual freedom so dear to Havek. The immediate
objection is that there is no certainty that these conditions will be in place.
Keynes knows this, but is convinced that, if these values have not been eradi-
cated by the 'virtues' of capitalism, attempts at reform are justified. The
reformer is not he who would impose hi own values on society, but he who
understands better than others the potential for change in the moral con-
ventions of society itself, and acts in order to effect such change.
Dangerousacts can be done safely in a cmnmunitywhich thinband feels rightly, which
would be the way to hell if they were executed by thoscwho think and feel wrongly.
(Keynes CW XXVII: 987-8 italics added, 197-8,259-61,954,444,446)
Even posing the problem of reform in these terms, the gap between
Keynes and Hayek remains unbridgeable. For Hayek, what is needed is a
'government of laws and not of men3(Hayek1967: 117,121): not individual
will - not even of 'right* men -can realize order, but only the slow, spon-
taneous evolution of the rules of conduct, with the unconscious agreement
of This thesis also rests on a conviction: that the rules to which indi-
viduals refer are rules which produce order, and that the process of selec-
tion will never substantially deviate from this prin~iple.~'

Condusion
We have seen that Hayek's and Keynes's approaches to public intervention
are rooted in quite different views on ethics and knowledge.
In conclusion, what comes out is that, on ethics, each of the authors ulti-
matively grounds his approach to intervention upon a main premise:
respectively, for Keynes the existence of a 'right' community, and for Hayek
 Anna Carabcffi and Nico6 De Vecchi

the existence of a system of rules 'which will produce an order' and whose
spontaneous evolution is not radically modified by design. These premises
are alternative, but, in our view, neither is fully justified.
On knowledge, both are interested in uncertainty and conventions, but
again their approaches are quite different. For Hayek, conventions safe-
guard the individual and guarantee social order: they are always to be fol-
lowed and public institutions should enforce them. For Keynes, on the
contrary, conventions play a positive role for the individual only in case of
total ignorance: the individual should follow 'reasonable' action whenever
partial knowledge is available and however limited it is. In addition, since
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conventions may have negative social consequences, public institutions

should contrast them, by moulding them. In our opinion, Keynes'q
approach to knowledge appears more convincing than Hayek's. For him
even a modest amount of limited knowledge justifies probable judgement
and action. To act, there is no need that the consequences of economij
policy are fully predictable: economic intervention by public institutions is
'probably' justified, that is 'reasonably' punuable.

Notes
I
* We thank Keynes's Trustees for permission to quote from Keynes's manuscripu held
in Kina's Colleae Library, Cambridae. An earlier draft of this uauer has been
at the-annual m.eeting of th; ESHFT held ir8 Marseille. ~ ~ b1997. l Wc
u ~
are grateful to the discusvant R. Skidelsky and the nuo anonymous referees f o r useful
su&estions and criticisms. The usual di'sclaimer applies. m more extended, but less
focused, discussion of these and related issues on Hayek and Keynes can be found in
our paper contained in N. De Vecchi and M.C. Marcuzzo (eds), (1998) A dnquont
nmi & Keyw. Tcmie &U'~C~prlZ~nc, inlcr- c mn'ta, Milano: Unicopli.
1 Keynes (CW XXVII: 985-88). Keynes acknowledged the receipt of TkeRwd lo Scrfdmn
in a letter of 4 April 1944 and argued substantially in line with the later letter (see
Sheannur 1997: 72-3). There is no reulv . . from Havek, but he did comment on
Keymes's letter of 28June 1944 in 1995: 247-55. Hayek did, hrwrver, make numerous
references to Kevnes's thoueht on iswes r i w d in the iettrr: x e Havek (1941: 334-96:
1967: 89-91, 191-231: 1975: 24-6; 1978: 16, 270-300; 1988: 5 7 4 , 60-2, 6 6 7 , 76;
152-3; 1994: 97; 1995: 227-32,237-9), in addition to the 1972 recollection.
2 Many commentaton have made reference to Keynes's letter to Hayek in their work
(Gissurarson 1984, Dostaler 1990, Peacock 1991, Toye 1991) but without using it as a
starting point for a comparison of the two authors. More recently, Birner (1993),
Steele (1993), Gamble (1996: 1569) and Sheannur (1997) have briefly commented
the letter but with aims different from ours.
3 As known, in My Early Beliifr (Keynes CW X, 447-8) Keynes seems to admit the role
of vadition and to accept conformism to rules and conventions. This declaration is
not, in our view, to be read as a final surrender to Hume, as some interpretensuggest
(Andrews 1999). We maintain that there is a continuity in Keynes's approach to
economic intervention, and deny changes towards a pragmatic position.
 Keynes vmur Hayek on knowled&, ethics and economics

4 Rational discourse in morals is possible for Hayek only when it is aimed at resolving
conflicts between the rules of action which deprive the ~ l system e itself of consis-
tency, or at comparing rule systems which offer alternative routes to the same ends.
On this point see Hayek (1976: 24-30; 1978: 19; 1988: 69).
5 Hayek (1988: 6) identifies capitalism with 'extended order of human cmperation
.
.. [which] arose from unintentionally conforming to certain traditional and largely
moral practices'.
6 Hayek (1967: 163).Vanberg (1994: 254, n. 9) remarks on the ambiguous meaning of
this statement.
7 Justice is essentially a respect for the principle 'of treating all under the same ~ l e s ' .
On the meaning ofjustice in Hayek and the consequences of his rejection of political
intervention for redistribution see Plant (1994). On how Hayek's concept ofjustice
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is far from any statements relative to moral postulateg on the ethically neuual
character of the market, see Houle (1988). For a comparison between Hayek and
Hume on justice see Dun (1994). Thoroughly investigation of Hume's and Hayek's
views on ethics and knowledge can he found in Kultathas (1990).
8 Hayek (1967: 113; 1960: 158; 1978: 62,1988: 34) Hayek's reference is to D. Hume, A
Tnarisc ofHuman Natun (1739-40). book 111, part 11, section vi.
9 See section 4.
10 Kley (1994: 2648, 184-220) criticizes Hayek on this point and rejects the idea that
Hayek's defence of liberalism does not need recourse to nonnative arguments.
11 On Burke's influence on Keynes's political phylosophy see Helhum (1991),
O'Donnell (1991), Skidelsky (1991).
12 In 1906 he restates: 'l know no evidence to support this supposed coincidence of
private and universal interest' (Keynes MSS 1906: Egoism 8). The same thesis can be
found in the 1926 essay TheEnd ofLairra-Faire: 'The world is not governed from above
that private and social interest always coincide. It is not so managed here below that
in practice they coincide' (Keynes CW IX: 287).
13 Keynes is influenced by what Pocock calls the 'seventeenthlentury civic humanism'
(Helbum 1991: 34). In our opinion, there is also a direct influence of the Greek
ethical and political tradition. In the 1938 essay on My E a 3 Belicfr, Keynes points out
that social action as an end in itself and not as a mere lugubrious duty was not con-
sidered by him in his juvenile years (Keynes CW X: 445).
14 Parguez (1988) already contrasted Hayek and Keynes on this question.
15 Hayek (1978: 87-8). On this point see Bany (1978: 9).
16 For a criticism see Witt (1994).
17 See Barry (1994).
18 Among interpreters there is no agreement on the date to attribute to this essay. For
O'Donnell and Skidelsky the date is 23 January 1904, for Moggridge and Carabelli
the date is later (around 19056).
19 'Practical Ethics would concern itself with conduct; it would investigate the difficult
auestions of the orobable mounds of actions. and the curious connection between
"probable" and "ought"; and it would endeavour to formulate or rather to investigate
existing general maxims, hearing in mind their strict relativity to particular circum-
stances' (Keynes MSS 1905: Mixcllama Ethica).
20 Keynes (MSS 1904: B u h , UA/20.1.11, 21).
21 They are the principles of indifference and relevance and the inductive principles of
analogical reasoning. See Carabelli (1992).
22 For a critical comparison between Burke and Hayek see Raeder (1997).
23 But they may achlally fit Keynesians better.
 A n n a Carabeliz and Nzcoli, De Ibcchi

24 On the rules of government in Hayelr'a thought, sec Vanberg (1994: 11619,121-23,

199-207). who notices Hawk's ambiwities on this point.

. .
current interventionist superstitions, and in consequence still made various conces
sions which [he] now think[s] unwarranted' (Hayek 1944: ix). In his later writings -
Hayck strongly limits the discretionary autonomy of public institutions such as central
hanks: see in particular 1990.
26 As if he replied to Keynes's statement, Hayek (1988: 2 7 4 ) f i r m s : 'While facu alone
can never determine what is right, ill-considered notions of what is reasonable, right
and good may change the facu and the circumstances in which we live; they may
destroy, perhaps forever, not only developed individuals and buildings and art and
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cities . . . hut also traditions, institutions and interrelations without which such
creations could hardly have come into being or ever he recreated'.
27 Hayek 1973: 43-4. Some interpreters of Hayek (see for instance Barry 1978: 82;
Vanberg 1994: 77-94, 109-124) rightly pointed out that 'Hayek ultimately does not
-
succeed in ~rovidinea convincine arwment for a sDontaneous evolutionary process
v

that will tend to systematically select for "appropriate" rules and, further, that there
..
is, in fact, no reason for us to assume that any such process is at work' (Vanbere

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Abstract
Both Hayek and Keynes focused on knowledge, uncertainty and time, and
on the relationship between economics and ethics. The starting point of
the paper is the letter Keynes wrote to Hayek after reading The Road to
Serfdom Besides the evidence of this letter, particular attention has been
paid to Hume's influence on both authors. This paper aims to show that
Keynes and Hayek sharply disagreed when considering the relationship
betweeen ethics and economics and held a different theory of knowledge.
Both thought that conventions are useful guides for individuals, but Keynes
stressed their negative social effects. The contrasts on ethics and knowledge
explain their different views on economic policy.

Keywords
J. M. Keynes, F. A. von Hayek, knowledge, ethics, market, economic inter-
vention