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Austrians and Keynes Revisited


Peter Boettke highlights more nonsense from Paul Krugman. Krugman again demonstrates a complete lack of appreciation for and understanding of Hayek’s (and Mises’s) significant contributions to what is now called macroeconomics. Krugman writes re Hayek and Keynes, “back in the 30s nobody except Hayek would have considered his views a serious rival to those of Keynes.” This would be news to leftist journalist, Nicholas Wapshott, author of Keynes Hayek: The Clash that Defined Modern Economics (reviewed here). While Wapshott’s presentation of Hayek and his views is mostly a hatchet job, he does provide relatively strong evidence of an important competition between the ideas of Keynes and Hayek during the 1930s. This assessment is supported, at least for English economics, by the stature of the participants (Keynes, Hayek, Kaldor, Sraffa, Knight, and Robbins) and the reputation of the journals (Economica, Economic Journal, Econometrica, The Review of Economic Statistics) carrying the exchanges. Further evidence is provided in the correspondence between Hayek and Keynes. What is a shame now is how columnists like Krugman work so hard to discredit Hayek in order to keep these ideas from challenging the current revival of knee jerk Keynesian policy.


More relevant is the not question of the whether there was a significant debate between Hayek and Keynes in the 1930s, but the question does the economics of Keynes or Hayek-Mises contribute to our understanding of how market based capital using economy can coordinate economic activity and how it might break down. Which is a better guide to cause, policy, and prevention of economic crisis; Keynesian macro, modern macro, or a capital-structure based macro a la Hayek-Mises-Garrison? Roger Garrison provides insight as he highlights the marvel of the macro economy.

Much of my early work, especially work with Fred Glahe, was devoted to attempting to answer this question. Shorter papers were “The Use and Abuse of Equilibrium in Business Cycle Theory” and

The Keynes-Hayek Debate: Lessons for Contemporary Business Cycle Theorists with a book length attempt in 1999, The Hayek-Keynes Debate – Lessons for Current Business Cycle Research.

I recently revisited the issue in a working paper, Capital-Based Macroeconomics: Austrians, Keynes, and Keynesians, which should be forthcoming in an Oxford U press handbook.

The abstract:

The recent revival of boom-bust business cycles and the world–wide slow recovery from 2009-2012 has renewed interest in the analysis of a money-production economy developed by Keynes and capital-structure based Austrian macroeconomics developed by Hayek, Mises, Rothbard, and most recently by Garrison. Both approaches identify time, money, banking, and financial markets, interest, and investment as the major sources of coordination failure leading to recession or depression. When compared to single aggregate modern macroeconomic models, both Keynes’s and the Austrians’ model, with their lower level of aggregation, provide a better understanding of how an economy goes wrong, However, the paper argues that Keynes’s model is flawed because it lacks a capital-structure foundation. Keynesian macroeconomic policy is generally unnecessary and if applied consistently destabilizes the economy. Austrian economics and its capital-based macroeconomics provide better guidance on cause, recovery, and more importantly, prevention.

The conclusion:

The thrust of much of Hayek’s work and of work by the Austrians was to argue that Keynes analysis was flawed and his policy rather than ensuring the survival of the system would be mostly unnecessary and if applied consistently would destabilize, not stabilize the system. Keynes’s comment in the preface to the German edition of the General Theory (Collected Works vol. VII, 1973, xxvi) , “Nevertheless, the theory of output as a whole which is what the following book purports to provide, is much more easily adaptable to conditions of a totalitarian state … “, should give pause to any liberal considering adoption of the “social philosophy [and policies] towards which the general theory might lead” as a way to save a classical liberal order and market system from itself. Robert Skidelsky (Quoted in Wapshott 2011, 285), one of Keynes’s biographers, observed, Hayek was defeated by Keynes in the economic debates of the 1930s, not, I think, because Keynes ‘proved’ his points, but because, once the economy had collapsed, no one was very interested in the question of exactly what had caused it.” Maybe this time round, the interest may rightly turn to, not only after the fact policy actions, but also to cause and prevention.

John P. Cochran (1949-2015) was emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He was also a senior fellow of the Mises Institute and served on the editorial board of the Quarterly Journal of Austrian Economics.

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