MR. KOJO NNAMDIJoseph Schumpeter died in 1950. Friedrich Hayek died in 1992. But the free market ideas of these Austrian economists are alive and well on the American campaign trail. When Mitt Romney defends his business career in private equity, buying and reorganizing failing companies, he invoked Schumpeter and the power of creative destruction within capitalism. When Ron Paul delivers broad sides against the Federal Reserve and stimulus spending, he sings the praises of Hayek and other economists commonly known as the Austrian School.

MR. RON PAULI'm waiting for the day when we can say we're all Austrians now.

NNAMDIThat was Ron Paul after his third place finish in the Iowa caucuses. But what exactly does he mean when he says, we're all Austrians now? Who were these Austrian economists? And what kinds of insights can they offer to our current economic challenges? Joining us in studio to explain all of this is Russell Roberts. Russ Roberts is a professor of economics and distinguished scholar at the Mercatus Center at George Mason University.

NNAMDIHe hosts a weekly podcast called EconTalk. He produced a series of online hip-hop videos, imagining a rapping duo between Friedrich Hayek and John Maynard Keynes. Russ Roberts, thank you so much for joining us. Good to see you.

PROF. RUSSELL ROBERTSGreat to be with you, Kojo.

NNAMDIOn the surface at least, it seems a bit strange. Republicans routinely accuse Democrats of trying to create a European-style economy and system of governance while singing the praises of the unique American form of capitalism. But they have also been directly and indirectly invoking a bunch of Austrian economic thinkers. Who was the Austrian School?

ROBERTSThe Austrian School goes back to the late 19th century, comes up through the middle of the 20th and much of it -- some of its important parts ended up in America or England, actually, in the middle and last parts of the 20th century.

ROBERTSThe Austrian School was a set of economic views that were -- I would emphasize their trust in the dynamism of capitalism, skepticism about the ability of the government to run and steer the economy from the top down, a distrust of aggregation, talking about the economy as a single unit and ignoring the individual pieces and how they interact, and also a skepticism about the Federal Reserve and its ability to effectively control interest rates of the money supply to keep things healthy.

ROBERTSAnd it had different heydays, different successful moments, the Austrian School, and lots of periods of quiet. We are in probably the most popular time for Austrian economics and these ideas. Certainly in my lifetime, I'm probably going back decades.

NNAMDI800-433-8850 is the number to call if you'd like to join this conversation. You can also go to our website, kojoshow.org. Send us a tweet, @kojoshow, or email to kojo@wamu.org. What relevance do long-dead economists have for our current economic debates? Do they provide a compelling explanation of our current economic woes? Call us, 800-433-8850. Russ, in the aftermath of the Great Depression, the ideas of British economist John Maynard Keynes literally formed the foundation for European and American macroeconomic policy.

NNAMDIHayek is commonly seen as the great philosophical rival to Keynes. But it was a very one-sided rivalry, wasn't it?

ROBERTSWell, the Great Depression was a huge tumultuous event obviously for people's lives and for, less importantly, academic economists. John Maynard Keynes' book on the general -- called "The General Theory of Income and Employment" came out in 1936 and was seen as the new bible of how to run the economy and how to deal with these kind of depressions. There was a lot of response to it.

ROBERTSIn the Austrian School, F.A. Hayek thought he was going to respond to it, didn't respond very much, ended up writing a book in 1941 that didn't have much of an impression. Joseph Schumpeter tried to respond to it. Ironically, their political economy, less work about the economy's workings and more about the interaction between politics and economics -- their two great political economy works had a much more lasting influence.

ROBERTS"Capitalism, Socialism and Democracy," which is Schumpeter's most well-known book now, part two about whether capitalism can survive is still very readable and entertaining. Hayek's "Road to Serfdom," 1945, is -- was a warning shot about the dangers of government getting too large and is still interesting reading. Ironically, "The General Theory" of Keynes, which is still invoked as a explanation for what government wanted to do, is an unreadable book by modern human being or even an economist.

ROBERTSIt's almost impossible to read now, and it was hard to read then. But certainly Keynes, with that book, made a huge splash, and his ideas dominated the intellectual landscape in economics despite those two attempts by Schumpeter and Hayek. And, really, it wasn't until Milton Friedman in the '60s started to dent it that people started to become skeptical about whether Keynes was right or not.

NNAMDIWell, Keynes may have been difficult to read, but you have hip-hop. You produced a series of hip-hop videos that imagined how these men would debate our current economic problems. Let's take a listen.

NNAMDIYou're still nodding to it. You still like it.

ROBERTSI've heard it more than a few times. I created those, by the way, with John Papola, a filmmaker who knows a lot of economics and a lot of Austrian economics. So it's been a wonderful collaboration.

NNAMDIIt's gotten over a million hits, it's my understanding. Where'd the idea come from?

ROBERTSJohn and I wanted to do something about this intellectual debate between Keynes and Hayek and the direction of the economy. And we started off with -- we thought we'd do a parody of "Staying Alive" 'cause we thought that was kind of the Keynesian motto. He's always -- comes back. It doesn't matter how many times you put him down. He comes back. He's very popular, and so we thought we'd do something about that. We ended up writing our own song, and really was a great deal of fun.

NNAMDIWell, since it was so much fun, let's go for round two because here are Keynes and Hayek debating the merits of stimulus and whether war spending can boost the economy.

NNAMDIRuss Roberts, what is this debate all about?

ROBERTSWell, I believe, and I -- this is really -- it's not a very pleasant thought, but I believe there's a lot of ideology under our differences about economic policy, a lot of philosophy and not so much science. And so when we debate about these things, we are going to make it -- we don't want to say it's about philosophy. We want to pretend we're putting on our science hats, and so we're going to bring in data. We're going to do regression analysis, econometrics, and we're going to tell stories.

ROBERTSAnd one of the stories we tell on both sides of this debate is whether World War II -- what ended the Great Depression. And so the Keynesians used to say it was the New Deal. That story wasn't so plausible after a while, so he said it wasn't the New Deal. It was the wartime spending. And those of us who are skeptical about Keynes, our response is, well, wartime spending is good for people who make bombs and airplanes, but it's not so good for the rest of the economy. There's no multiplier.

ROBERTSAnd at the end of the war, when American government spending collapsed after World War II ended, Keynesians said we're going to have another depression, and we didn't -- did pretty well. So that very casual empirical story's what we're talking about there, still debated. It's only been 80 years, you know? Give us 75 years. Give us another 150. We'll figure it out.

NNAMDIIn case you're just joining us, we're talking with Russell Roberts. He's a professor of economics and distinguished scholar at the Mercatus Center at George Mason University. He co-produced a series of online hip-hop videos imagining a rapping duo between Friedrich Hayek and John Maynard Keynes. He is also the host of a weekly podcasts called "EconTalk." If you'd like to join the conversation, 800-433-8850.

NNAMDIHave you read the work of the Austrian economist of the rival school associated with the British economist John Milton Keynes? Call us, 800-433-8850. We'll start with John in Burke, Va. John, you're on the air. Go ahead, please.

JOHNHi, Kojo. Hi, professor. I also -- I really appreciate Cafe Hayek, and that's at the top of my bookmarks on my computer. For Prof. Roberts, I'd like to ask if he thinks that "The Road to Serfdom" was the most influential of the writings out of the Austrian school. And if so, or in any event, what influence did "The Road to Serfdom" have in the post-war era economically? Thank you.

NNAMDIAnd, of course, Cafe Hayek is your blog.

ROBERTSYes, much appreciate the reference. Glad it's at the top of your list. "The Road to Serfdom" is the book of Hayek that everyone has heard of if they've heard of anything of his. It's not my favorite book of his. It's pretty dry. It refers to a time that's not as relevant as...

NNAMDIYou say both that and Keynes' "General Theory of Employment" show signs of aging.

ROBERTSYeah. Well, two different times. Although Adam Smith, who wrote in the 18th century, is still delightful to read, there have been a couple of decent stylists in the economics profession. But they are few and far between. So "The Road to Serfdom" is not a vivacious book in style. But his more interesting book to me is actually "The Fatal Conceit." It's shorter and, I think, deeper.

ROBERTSBut "The Road to Serfdom" had an impact, and the reason it had an impact is at that time at the end of the war, the war was moving very much to the left. And England was becoming more socialist. America had obviously become more interventionist through the Roosevelt years. And the world was looking -- you know, people were trying to decide, which way should we choose as we're singing our song, more bottom-up or more top-down? And that fight continues. It always will.

ROBERTSAnd I think "The Road to Serfdom" was a rallying cry for people who were worried about the size of government and whether it would lead us down a road towards fascism or Nazism or communism, which is what had just happened. And it was embraced by a number of intellectuals. For those alive today who weren't old enough to remember, which would include me, it's hard to remember how difficult a time it was for those people who weren't socialist. It was a very out time intellectually for folks who were interested in bottom-up solutions and more economic freedom.

ROBERTSAnd it was just handful of scholars -- Hayek was one of those, Milton Friedman was another -- who were trying to keep these ideas alive, and that's really, I think, the most important aspect of "The Road to Serfdom."

NNAMDII suppose one very relevant observation from the Austrian school is, can a government ever really understand or react swiftly enough to the causes of booms and busts? And do government actions end up causing their own bubbles?

ROBERTSWell, that's going to be a debate we're not going to settle. It's going to go on. I think, just as the debate over the Great Depression has been still going, we're going to be debating about the causes and reasons for healing from this crisis. Obviously, the government, through its interest rate policies in the beginning of the 2000s, helped inflate the housing bubble. Other government policies did the same. We coddle and, I think, very unfortunately, help the financial sector in ways that are very destructive, that are not capitalism.

ROBERTSWe take out the loss part of the profit in loss equation. So I think their -- government has much to be blamed for. The question that the other side has always asked is, well, but do you think it would be better if capitalism were left more to itself? And that's the eternal debate that can't be settled and -- but it's fun to talk about.

NNAMDIWell, I think John in Kensington comes down on the Keynesian side of the discussion. John, you're on the air. Go ahead, please.

JOHNYes, Kojo. I do come down on the other side. I think that your guest is demonstrating some full blindness about the impact of the oversimplification of free market. The impact is the Great Depression that we're having now. The lack of regulation, the lack of honesty has led us to this disastrous outcome. I think that this view of -- this oversimplification of Hayek's view, this black-and-white view is similar to the idea of Social Darwinism in another era and that the truth is "The Road to Serfdom" is we're experiencing now with greater economic inequality, corporations becoming the new feudal lords and that the...

NNAMDIWell, that's about...

JOHN...idea -- OK -- that the ideas that are being proposed are leading to a new serfdom.

NNAMDIWell, that's about enough to bring it on, John. Here is Russ.

ROBERTSWell, there was some deregulation. And deregulation -- free market folks and Austrians tend to like deregulation. But I think the most -- perhaps the most useful thing we've learned from this crisis is that deregulation that coexists with bailouts is the worst of all possible worlds. We basically say to Wall Street or any part of the economy, you're free to do whatever you want, but if you fall down, we'll pick you up using other people's money. That's a disaster. So the financial sector, we have to make some decisions as a nation.

ROBERTSWe either have to turn them into a utility, which means they're highly regulated, but if -- which would be very costly. Or we have to say to them, you're really on your own. And if you make bad bets, you're going to lose all your money and go out of business. Instead, what we have done too frequently is bailed out the people who made those bad decisions, insulated them from the consequences of their actions.

ROBERTSAnd nothing could be less Austrian than that. So we've got a bad set of stuff going on there that we have to fix.

NNAMDIRon Paul is the person who openly and consistently invokes Keynes and Hayek on the campaign trail. As someone who is an admirer of the Austrian School, how would you assess Ron Paul's grasp of the Austrian School? His libertarians speak about institutions like the Fed in almost conspiratorial terms, as if there's some kind of conspiracy to undermine liberty. Do you think that's fair?

ROBERTSNo. I think that's -- well, I think that there is a part of Ron Paul's following and a part of Ron Paul that has a sinister view of the Fed. I don't accept the sinister side, but I do accept the part that it has been very harmful to many parts of the economy. Economists naturally disagree with that in general, but mainstream view is that the Fed does a great job. We had to do these things that we did. But, you know, economists are compromised in this debate. They have a chance to have power.

ROBERTSSo you can't really trust their assessment of the Fed. It's a little bit ironic. Ron Paul is has also been influenced by Ludwig von Mises, a member of the Austrian School we haven't mentioned.

NNAMDIYep.

ROBERTSAnd he has some good understanding of the fundamental economics. He's not really trying to be president. He's trying to, I think, bring these ideas out into the mainstream. And some of his ideas are good, and some of them are a little bit creepy. So, you know, the economics that he brings out, I like. The rest of the picture is not my favorite. And I'm not sure I'd like him to be the spokesperson for my intellectual beliefs. But he is getting the ideas out there.

NNAMDIYou've brought the economists out of the woodwork. We've got to take a short break. If you have already called, stay on the line. John, thank you for your call. We will get to yours. It's 800-433-8850. Or you can go to our website, kojoshow.org. Join the conversation there. We're talking about Austrian economists on the American campaign trail. I'm Kojo Nnamdi.

NNAMDIWelcome back. We're talking with Russ Roberts. He's a professor of economics and distinguished scholar at the Mercatus Center at George Mason University. He co-produced a series of online hip hop videos imagining a rapping duel between Friedrich Hayek and John Maynard Keynes. He also hosts a weekly podcast called "EconTalk." We're talking about the role of Austrian economists on the campaign trail currently in the United States and inviting your calls at 800-433-8850.

NNAMDIGo directly back to the phones. Here is Carlos in Triangle, Va. Carlos, you're on the air. Go ahead, please.

CARLOSFirst time caller. I enjoy your show. I wanted to ask, basically -- in my study in economics and everything, what data has shown that these economists' theories have been proven more correct or more accurate? And also the human aspect regarding the economics...

NNAMDIYou mean whether Keynes or Hayek turned out, in historical terms, to have been the more accurate or the more correct?

CARLOSExactly.

NNAMDIHere is Russ Roberts.

ROBERTSWhat a great question. What a great question. You know, the CBO, Congressional Budget Office, tried to estimate how many jobs were created by the stimulus. I think, in part of 2011, they said it's between 0.4 million and 2.4 million. So there is a guess that's got a range of six times the lower bound and the upper bound, not very precise. But there's a bigger problem with that guess. It wasn't looking at what actually happened. All they did was forecast what they thought was going to happen. The estimate can't be verified.

ROBERTSYou can't even figure out whether it's good -- it was a good guess or not. So when you're in that realm, you're really in the realm, I think, of what Hayek actually called scientism. He warned against the pretense of knowledge. You'd think we'd be able to measure that, assess it. We can't. We claim we can, depending on which side we're on. We'll claim that the stimulus should have been twice as big or it shouldn't have been done at all. And you ought to look at that and say, this isn't science.

ROBERTSThis is something else masquerading as science. And, to me, it's unfortunate that what people come to economists for answers about, we don't have the answers. We sometimes pretend we do. We should be more honest and more humble. So those fundamental questions are not very amenable to statistical analysis. Good question, Carlos.

NNAMDIThank you very much for your call and your question, Carlos. I'd like to talk a little bit about Joseph Schumpeter who was also a critic of Keynes but is more known for the idea of creative destruction. This has come up quite a bit as it relates to Mitt Romney and his career in private equity. What Schumpeter called creative destruction, Rick Perry and Newt Gingrich have called vulture capitalism. What do you say?

ROBERTSI think Mitt Romney is a caring human being who just wanted to create jobs and just happened to make millions of dollars along the way. You know, there is a certain repugnant repulsiveness about American politics. So Romney, who was a very successful capitalist in working for Bain Capital, he brags that he did all -- he did it just to create jobs. He's a great job creator. 'Cause that's what people are worried about. It's actually not quite true. I think he did it 'cause he wanted to make a lot of money.

ROBERTSNothing wrong with that, but I wish he could admit it with an open -- with an honest face. But, as a result of what those kind of firms do, which is sometimes to shut firms down, break them up, sometimes drive them to success and excellence, people start to wonder whether that's a good thing or not. And the idea behind -- it's a wonderful thing. The idea behind it...

NNAMDIWhat did Schumpeter have to say about creative destruction?

ROBERTSWell, Schumpeter was talking about creative destruction. He was saying that the way we create prosperity in a dynamic economy is that monopolists and successful firms that grow big, they get a little bit too big. They get a little bit stodgy. They don't get as innovative. And newcomers come along that are quicker and smaller and nimbler, and they succeed. And we see this all the time in American capitalism, if we let it happen. But there are costs to that to some people. Some firms go out of business. That's the destructive part.

ROBERTSThe creative part is that, because of that destruction, new things are allowed to flourish and come into play with the resources and capital that those old firms no longer use and don't -- didn't use as well as the newcomers. And that's really -- that dynamism is at the heart of our economic system. It should be. Now, having said that, Romney is not a Schumpeterian. The private equity business is not a beautiful textbook case of this. Some of it is.

ROBERTSAnd some of it is taking advantage of tax laws, taking advantage of special provisions put in place to help them. And so I don't want to defend that business, per se, but I do want to defend the idea of letting firms go out of business when competitors come along that can do it better.

NNAMDISpeaking of Schumpeter, we got this email from Beth in D.C. "When American conservatives brought Schumpeter to the U.S. to write arguments against Medicare, Schumpeter was reluctant to come at first because he was worried about losing the Austrian national health care coverage and retirement benefits. He had to be promised, in a series of letters, that these issues would be taken care of before he agreed to come. To me, this is the perfect illustration of how this brand of economics functions. That is, it's all about those other people, not really about me."

ROBERTSI don't know about that. I don't think that's -- I don't know the details to that historical debate, historical episode, except that Schumpeter died, I think, in 1952. So I don't think it was about Medicare, per se. It could have been about some aspect of government health programming. But I don't -- I think it's important to remember that people who argue that government shouldn't do everything, if you're a skeptic about the power of government, it doesn't believe -- mean you're a social Darwinist.

ROBERTSIt doesn't mean you're an individualist who believes that it's every man or woman for themselves. It means that helping others doesn't always have to come from the top. It can come from the bottom, and we can voluntarily get together to help other people. We don't have to be forced to do it. Whether that would work well or not is an interesting question. But it -- if you're against some government program, it doesn't mean you're against helping people.

NNAMDIHere's Seth in Tenleytown, D.C. Seth, you're on the air. Go ahead, please.

SETHOh, thanks, Kojo. I just wanted to ask the guest, how are we going to reconcile on some of the difference between top-down and bottom-up and the problems, like, you know, government stepping in to catch failing businesses when we have, you know, kind of a -- between politics and business, and a lot of corporate money goes to politics, you know, either influenced politicians or the campaigns?

NNAMDIIs your perception that if we are to allow the free market to run without significant regulation that corporations should therefore not be involved in politics at all, Seth?

SETHNot necessarily that, but just when you have a lot of influence -- like an undue amount of influence from corporations coming in and sort of stifling the bottom.

NNAMDIRuss Roberts?

ROBERTSYeah. Well, the Austrian view is remembered to be pro-capitalist, not pro-business, and they're not the same thing. It's very hard for people to keep those two things straight.

NNAMDIWhat's the distinction?

ROBERTSWell, capitalism means a lot of businesses are going to fail because of creative destruction. That's part of the natural dynamic of a capitalist system if it's working right. What we do systematically, unfortunately, in the United States is we talk capitalism, but we -- we preach it, but we don't practice it very well. We take care of our political friends. So we save the auto industry. We save the financial sector.

ROBERTSYou know, the financial sector revolving door that the caller refers to, I think, is extremely insidious and very destructive. I think government is way too close to the financial sector. And one of the things that I find most alarming about the Republican field is that the two leading candidates -- Newt Gingrich and Mitt Romney -- are both stepchildren of that financial sector. They're going to get money from it and -- as does the president, and that means we're going to push this problem down the road.

ROBERTSI would love to see a candidate who honestly addresses the crony capitalism that lets Wall Street and the government scratch each other's back. I think that's the single most destructive thing going on in our country right now.

NNAMDISeth, thank you very much for your call. Back in history, in some ways, Keynes was the 20th century's economics rock star while Hayek was pretty much seen as a crank until the 1970s when he won the Nobel Prize for economics. But these debates were later picked up by Milton Friedman, John Kenneth Galbraith, among others. How much is this story about academic rivalries in the ivory tower?

ROBERTSYeah, it is funny that Hayek was really -- his reputation was between -- oh, the mid-'30s until the '70s, he was -- other than "The Road to Serfdom," which, again, was a political economy book, not a work of academic economics, he was really forgotten. The Nobel Prize brought him back a little bit, but it's really the events that have changed that have brought him back, just like Keynes has come back. Keynes was, in the '80s and '90s, in disrepute in the academy. Economists didn't teach his theories very much. And all of a sudden we have a crisis, and he's back in vogue again.

ROBERTSSo I have to say that I think there's a certain cachet to invoking people with foreign accents. That's part of it, but they have deep things to say that are still worth thinking about. And some of those things -- though they weren't, as I said before, the most sprightly of writers, they were grappling with deep and difficult issues. And we're still grappling with the same issues, so we turn to them and others.

NNAMDIWell, according to The Nation magazine, the story is actually about Friedrich Hayek and the Koch brothers. We had an email from a listener who referenced the story about Schumpeter visiting the U.S. and needing to be tempted to come over by conservative philanthropists. But what -- to what extent do you see the relationship, if any, between Friedrich Hayek and the Koch brothers?

ROBERTSWell, I think the Koch brothers, like Friedrich Hayek, they're like a few other folks who were advocates for economic freedom. Again, I think it's really important to keep separate business and capitalism and deregulation and real deregulation. So you can't have deregulation of the financial sector if you don't also stop bailing them out. So, you know, right now, there's political debates about people with their money trying to influence political outcomes.

ROBERTSThose debates are going to go on for a long time. It happens on the left and the right. But Friedrich Hayek is -- he can stand on his own. He doesn't need the Koch brothers to boost him up.

NNAMDIAnd he didn't need conservative philanthropists in order to be able to spread his word?

ROBERTSWell, he -- many of us, of course, rely on voluntary contributions to get our ideas out. I think the more interesting story is that Friedrich Hayek came to the University of Arkansas in the 1950s so he could get a quick divorce. He wanted to marry his childhood sweetheart, who had also recently either lost her husband or gotten a divorce. And so he taught for a time in Fayetteville. And I find it fascinating to think of this Viennese intellectual teaching Arkansans, University of Arkansas undergrads for a semester or two so he could get a divorce and marry his childhood sweetheart.

ROBERTSThat's what brought him to America one time. I'm sure there's some money along the way, but that's part of the story.

NNAMDIHere's Steven in Washington, D.C. Steven, you're on the air. Go ahead, please.

STEVENHi. I have -- I live by the motto that timing is everything, and I think that Hayek's thoughts may well have served us well prior to the crash, but afterwards, they lead us to feudalism. And as an example, I would say neither you nor I is allowed to insure our neighbor's house to our own benefit. But that's what Goldman Sachs did. They sold fraudulent instruments to its customers on one hand and insured themselves by shorting them on the other.

STEVENAnd in a case like that, Goldman Sachs will only get bigger and bigger and more powerful and more powerful. And without regulation, we all become serfs all over again.

NNAMDIRuss Roberts?

ROBERTSWell, my argument is that the reason -- part of the reason they got so big is that they were not really allowed to fail. And they weren't allowed -- their competitors weren't allowed to fail along the way. And this goes back to the 1984 -- the bailout of the seventh largest bank in the United States, Continental Illinois and its creditors. So people who lent money to those banks didn't pay the price. I think that's a terrible system.

ROBERTSHayek, Milton Friedman, Ludwig von Mises, the great defenders of economic liberty, think it's a bad idea to bail out banks, and they're right. We've got to stop doing that. That is what allows them to grow big. They do it with borrowed money. They're able to borrow that money 'cause people think they're going to get it back anyway. If that didn't happen, it'd be a lot harder for people to make bad bets and keep making bets in the casino called crony capitalism.

ROBERTSI want to get us back to the real thing. And let's not confuse what has happened in the last 30 years in the United States with what F.A. Hayek or others would have liked.

NNAMDIRuss Roberts, thank you for joining us. Good to see you.

ROBERTSMy pleasure.

NNAMDIRussell Roberts is a professor of economics and distinguished scholar at the Mercatus Center at George Mason University. He hosts a weekly podcast called EconTalk. Thank you all for listening. I'm Kojo Nnamdi.