Wicksell-Keynes-Hayek

"Hayek and Keynes could be said to have merely been theorizing on opposite sides of the same Wicksellian coin." -- Goodspeed, Rethinking the Keynesian Revolution, p. 119

I had been groping towards this conclusion myself: Keynes is concerned with what happens when the money rate of interest is above the natural rate, and Hayek with what happens when it is below the natural rate.

8 comments:

  1. While Hayek definitely had interest rates at the heart of his theory I'm not convinced about Keynes.

    While he clearly felt that in a recession lowering interest rates would increase investment and reduce unemployment I do not see that interest rates were central to his views as to how the economy gets into recession in the first place. He seems to focus more on factors (other than the rate of interest) that affect investment decisions (animal spirits and so on) and how that affects employment levels.

    Plus did he not favor fiscal policy over monetary policy in a deep depression ?

    (BTW: I haven't read the book and that may well spell out the reasons why interest rates are more central to Keynes than I am thinking).


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    1. rob, I recommend reading the book! Goodspeed makes a prety good case that a divergejnce in interest rates is just how the recession starts for Keynes. I am no Keynes expert, but Goodspeed seems to know of what he speaks.

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    2. What do "animal spirits" do? When they become pessimistic, they *depress the natural interest rate*. And Keynes attempts to show why the money rate does not track the natural rate, and how that leads to quantity adjustments, etc.

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    3. I need to read the book.

      But I thought Keynes viewed animal spirits as affecting MEC but having little effect on interest rates that were determined independently by liquidity preference.

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    4. OK. Scrub that last comment. I see now that animal spirits may indeed affect the "natural rate" (that Keynes presumably shows could be different from the market rate that is controlled by liquidity preference.)

      And interestingly that seems very relevant to the ongoing discussion on Straffa...

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    5. That's right, rob: for Keynes, depressed animal spirits push down the natural rate, while the money rate stays high.

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  2. I think the idea is partly true, but something about doesn't sit right. Keynes rejected the concept of a natural rate of interest, and he certainly didn't care about a money rate of interest being lower or higher than the putative natural rate. The relevant relationship is between the rate of interest and the marginal efficiency of capital. So, while I think there is a grain of truth, I think looking at this isn't faithful to the way Keynes was actually looking at it. Now, this doesn't matter if you're interpreting Keynes within your own framework. But, in the context of the history of thought, I'm a little wary.

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    1. "Keynes rejected the concept of a natural rate of interest"

      Not according to Goodspeed he didn't: and Goodspeed has pretty extensive documentation for his claim. I'm not saying you are wrong, just that you might want to read this guy.

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