Reconciling Keynes and Hayek within the simple Keynesian cross model
The Keynesian cross model is, of course, a highly simplified abstraction of Keynes's work. Even so, it is not hard to add Hayek to the model, and thus to illustrate how their work is complementary, rather than contradictory. Although highly simplified, of course, we can instruct undergrads as follows: Keynes was theorizing about the portion of the cross below where the aggregate demand line crosses the income equals output line, i.e. where savings exceeds intended investment. Hayek was theorizing about the portion of the cross above that equilibrium point, where intended investment exceeds savings. This is exactly the point made in the Shackle quote offered a few weeks ago on this blog. And, of course, the first region is characterized by the money rate of interest being above the Wicksellian natural rate, while the second region is characterized by the money rate being below the natural rate. And note: Both the Keynesian story and the Hayekian story rely upon disequilibrium i...