How to "Test" Keynes Versus Hayek

Brad DeLong highlights a paper that appears to do this. The conclusion? We had a Hayekian problem, but we've dispensed with that. Now we are having a Keynesian problem.

Anyway, this makes the point I've been repeating: Hayek and Keynes both had sensible cycle theories, and their theories are not even contradictory. There is no reason we can't have structural maladjustments and aggregate demand shortfalls at the same time, or in succession.


  1. The real issue libertarians and I guess even you have with Keynesianism is its solutions not its analysis. Of course its solutions depend on this (incomplete) analysis. However if Keynes cycle theory is true, but it ignores that Hayek's also is true then you get a problem, because Keynesians solutions start a Hayek cycle (And in turn a Keynes cycle if you so will. In a way Keynes solutions start a Keynes cycle).

    Please correct me if I am wrong. Crudely put the only thing Keynes cycle says is that people can become irrationally scared due to some trigger and stop doing business, investing, consuming etc. because they suddenly don't see what is profitable, which initially is self-enforcing. But at some point chances to make profit grow so big due to people pulling out of the markets (markets bottom out) that people start to do business again (self-correcting). That is nothing Austrians objects to, is it? They object that you cannot short cut this process by artificial demand created by CBs and governments, and they argue that this action in itself sows the seeds for a future event that triggers people to become scared again because of missing economic calculation causing malinvestments.

    So while I think Keynes cycle put this way in itself is correct it is for my point of view nothing special and can be seen in lots of real world examples. E.g. If someone has a near crash with his car, it might result in less driving or at least in more careful driving than before because he is maybe even absolutely irrationally afraid. After a while though the accident is forgotten and he starts driving just like before. Does that mean we should pump people full with drugs according to what we would call in German the “watering-can principle” (= random distribution of doses to people no matter if they are irrationally afraid or not) so that they aren’t afraid anymore?

    "Aggregate demand shortfalls" in my point of view are natural human reactions in such circumstances, and I don't see how you can prevent them from happening without causing more in the future.

    1. Interesting point. The Keynesian response is that allowing the recession causes real human misery that can be avoided. Your response is probably, "Better a little misery now than more tomorrow."

      I have no definitive opinion on who is right here.

    2. I'm not sure it's correct to say that a Keynesian solution can cause a Hayekian problem...

      ...or to put it a better way, you have to clarify what part of Hayek is "right". I think a great deal of what he has to say about the capital structure makes sense. It's consistent with what I observe about asset and labor specificity and the irreversibility of investments. It's an unassailable, straightforward neoclassical argument about the implications of the fact that the interest rate influences what we could think of as the carrying costs of intermediate goods (which are also specific rather than general). That's all wonderful stuff.

      But if Keynes is right about the causes of the crisis and the fact that the departure from the natural rate of interest occurs during the bust, and not during the boom - if he's right about that and Hayek is right about the capital structure - then Keynesian policy is exactly what you need to get back on course to maintaining a sustainable capital structure.

      Of course, if Hayek is right on the capital theory and the macroeconomics it's probably less good of an idea.

      But I think Gene has the right idea - we shouldn't look at this as an either/or. Sometimes we get either/ors, but in a lot of cases we're just describing different parts of the elephant.

    3. Yes, I don't see any reason that a Hayekian false boom could not produce a Keynesian aggregate demand shortfall in response to the spooking of the animal spirits. The key then would be to do stimulus just until the AD shortfall is corrected, and to stop before creating a new boom.

      Tricky business!

  2. Hello,

    I wish that Dr. Murphy would comment more on your strictly economic posts. For example, I was disappointed that he did not comment on your critique of Rothbard's views in M.E.S on Keynes and the multiplier. Your critique was very concrete, it was not vague, thus a nice "Scholastic" style dialogue may have been possible. Of course, I know he is very busy, but you made a very concrete attack on Rothbard's views regarding the multiplier and an intelligent response from a "Rothbardian" would have been...a step in the right direction for the cause of intellectual advancement.


    1. Come now: if you were in Bob's position, would you want to enter into direct debate with me? Do high school basketball teams challenge the Lakers?

      (I joke, of course: it is always fun teasing Bob.)


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