This is from Hayek on Monday Conference in 1976 where he discusses the failures of Keynesian economics. But I must confess that if Hayek thinks of public spending as “a simple monetary device”, then he has characterised Keynesian economics in a way that no one will recognise, including me.
MOORE: In your Nobel Memorial lecture, why did you say, speaking of economists, ‘we have made a mess of things’. Now can I ask you this, why have economists made a mess of things? Why have they? Are they blind or are they …
HAYEK: No, it was the seduction of a very impressive and ingenious man, John Maynard Keynes, who persuaded economists that there was a simple way of permanent[ly] securing full employment. He was wrong but he was exceedingly persuasive, and he had gained the support of probably 95% of the current international economists. I have been arguing against the ever since.
I have been arguing with him when he was still alive, but there was no chance of getting a hearing so long as it seemed plausible that by a simple monetary device you could assure full employment. And that monetary device was in fact of such a nature that in the short run you could do it, that in fact at the same time you created distortions of the structure of the economy which in the long run was bound to bring about unemployment, a thing which a few of us had pointed out.
What seemed to be in contradiction was the actual experience — currently it worked beautifully — that we have been predicting you will have to pay for this in the future, people just wouldn’t listen to you. Well what we have predicted [h]as come to be very true. We found out that the Keynesian method of creating employment by accelerating inflation works only for a limited period and creates a condition for the following unemployment and that is the state of disillusionment in which we are now.
A great many economists feel that what they have — I mean the economists who have been trained between the middle 30s and the present, are now finding out that they have been taught a wrong doctrine.
It was 95% then and it’s 95% now, but if the other 5% thinks we are dealing with a small monetary device and not something larger and more insidious then there really is nowhere to begin the process of reversal.
As for the “simple monetary device”, it seems to me that he may have explained it later:
The basic problem is that with a new Keynesian economics they’ve given a charter to the trade unions to ask as much as they want and imposed the duty on monetary authorities to offset this by providing enough money.
There are many ways to buy off a majority of the population with higher money wages only one of them. His characterisation of the processes involved may have worked for the time and been suitable for a television audience but does not penetrate far enough to explain the nature of the problem.
[My thanks to Rafe for the link.]