Volume 22, Issue 1 - Special Issue: Revisiting the Hayek-Keynes debate in light of the 2008–2010 crisis

It is argued in that paper that Hayek came out the winner in the debate opposing him to Keynes. Keynes argued in favour of specific economic policies without a prior analysis of the causes of business cycles. His discussion of economic policy is backed on an ad hoc account of cycles that would, according to him, be based on the irrationality of economic actors and the non-effectiveness of price adjustments. As a result, he says, quantities have to adjust which leads to unemployment. Hayek and the Austrians propose, by contrast, a well-articulated theory of business cycles rooted in a micro-economic approach (agents are rational, albeit badly informed). This leads them to identify the source of the cycle in monetary shocks. In our modern economies, as in the Austrian theory, economic policies conducted by the states are the main driver of the cycles. The consequences of this analysis in terms of economic policy are clear: When excessive regulation and fiscal burden cause a recession the solution must be found in tax cuts and deregulation, not in (Keynesian) monetary or fiscal policies that will do nothing but foster mal-investment.

Although Minsky’s interpretation of Keynes’s macroeconomics and essential message clashes with authoritative alternative interpretations, it has become increasingly influential during the years following the Global Financial Crisis, even in mainstream circles. This paper offers a critical evaluation of Minsky’s Financial Instability Hypothesis from the perspective of the alternative Austro-Wicksellian paradigm. Although some of the similarities and/or analogies between Minsky’s approach and that of the Austrian School suggest a more than merely superficial affinity between the two theoretical frameworks and although some scope for cross-fertilization between both approaches can be found, both theoretically and empirically, at a fundamental conceptual level both theories remain incompatible and difficult if not impossible to reconcile, in particular in terms of fundamental causality and in terms of policy conclusions and prescriptions. Despite the fact that Minsky’s policy conclusions are multifaceted and somewhat eclectic, they manifest a lack of familiarity with the conclusions of the Austrian analysis of the problems of central planning by Big Players such as Big Bank and Big Government. Both approaches also offer contrasting interpretations of the historical experience of the Global Financial Crisis.

The paper shows that the literature on broken channels (1) fails to provide an explanation of the root causes of the crisis, (2) mistakes a subjective human behavior for a mechanical failure and (3) confuses market adjustment mechanisms. From this perspective, the policy aiming to deploy unconventional monetary policies to overcome the broken channels is misguided. The paper fits broken channels into the framework of a more comprehensive theory of the business cycle and suggests a different policy recommendation.

Hayek and Keynes are usually perceived as antipodes in one of the grand macroeconomic debates of the twentieth century. But they also agreed on some basic issues of monetary theory, most notably on the harmful character of money hoarding and the desirability of a flexible money supply to offset or neutralise changes in the demand for money. In our paper we highlight some of the cultural implications of a permanent expansion of the money supply. We will focus on the specific case of credit expansion ( ex nihilo creation of money through credit) which has held centre stage of the monetary evolution of the past two hundred years and, even more specifically, on credit expansion pushed to such an extent that it entails permanent price-inflation.

Monetary and credit expansions have been the main tools used by the U.S. government and central bank to try and recover economically from the Great Recession of 2008. This paper expounds a radical criticism of these Keynesian policies, criticism developed by some contemporary economists of the Austrian School: the appropriate and fair remedy for this kind of crisis is not reflation but deflation.