Austrian economists and Keynesian economics

This afternoon I present my paper on “Classical Economic Theory and Supply Side Economics”. My focus, however, is about an issue that I think of as extremely important, have raised it often but never really received an answer that satisfies. And the issue is why do Austrian economists virtually never take on Keynesian economics. This was as much as admitted by Israel Kirzner in his brilliant biography of Ludwig von Mises (ISI Books, 2001: 160).

Ludwig von Mises adopted a vigorously dissenting stance towards this Keynesian economics. Although he rarely offered frontal rebuttal to Keynesian theory, his contributions to the topic dealt with in this chapter constituted a well-developed (if implicit) basis for his rejection of Keynesianism.

My argument is that it is only classical economists who had crafted their theories to deal with Keynes since it was they who had fought off Malthus and demand deficiency during the general glut debates of the 1820s. In contrast, Austrian theory had been designed to refute Marxists and socialists of all varieties but also was itself constructed on a demand-side focus based on marginal utility. And while Marxism and socialism have not gone away, the crucial battles in our own economies at this time deal with the Keynesian theory of deficient aggregate demand and the role of public spending to increase the level of employment and production. Keynesian theory has been a failure since the start, but in my view you have to go back to the classicals to understand why. The moderator will be the great Austrian economist, Steve Horwitz, so it should be a very interesting session. I am looking forward to.

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10 Responses to Austrian economists and Keynesian economics

  1. danger mouse says:

    All the best!

  2. Tel says:

    In terms of rebuttal of Keynes, it’s hard to beat Henry Hazlitt who went through it with a fine tooth comb and tore it apart at every level, discovering astounding details of wrongness.

    In contrast, Austrian theory had been designed to refute Marxists and socialists of all varieties but also was itself constructed on a demand-side focus based on marginal utility.

    By my understanding, Austrian theory does not accept the concept of Aggregate Demand as particularly meaningful. It might have some use in the form of per-capita GDP if you want to use it as a rough comparative metric, but you should never forget the fundamental flaws: [1] you cannot really sum up individual preferences in a cardinal manner, it isn’t mathematically defined, [2] the structure of the economy does change over time, meaning that Aggregate Demand is no longer comparable to what it once might have been. Thus GDP is one of those ad-hoc heuristics, that does sort of work, except when it doesn’t.

    The Austrians do accept that money printing and injection of new money will have an effect on individual demand, and thus it will have some overall effect on the economy as a whole. The ABCT argues that this type of demand is a bad thing, because it encourages malinvestment, and because it ultimately must be temporary (as Japan has discovered). At some stage, the artificial demand creation will come to an end, and the malinvestment must be liquidated. Say’s Law will assert itself.

    The Austrians generally also agree with the idea of a Cantillon Effect, where the money injection tends to be available more to some people than to others, thus the prices of some goods rises more than other goods (possibly like Sydney housing for example, or in the USA the student loan money injection has caused a disproportionate rise in the price of college fees, etc) which further encourages malinvestment. Prices are important, they provide valuable information to both producers and consumers, if prices are interfered with, then people’s behaviour will be influenced and the outcome will be worse than without the interference.

  3. rich says:

    Overton windows- basically statists control it through the education system so, instead of trying to refute arguments, they rely on character assassination to avoid those arguments from being heard

    That’s because Keynesian Economics is useful for those pushing state intervention, not realising that it is the very seed of their doom and malinvestment. It measures the quantity of investment, not its quality

  4. Old School Conservative says:

    Go well Steve.

  5. Old School Conservative says:

    Oh and don’t forget to start with the old joke:
    If you lay all the economists in the world end to end, you still never reach a conclusion.

  6. Steve, there are too many schools busy trying to refute each others ideas. However, here in the Real World, people are being hurt by the fact that no one will offer up the argument “Keynes has been refuted in the annals of history and the marketplace.”
    Keynes does not work.
    Work on that, for Christs sake.
    All else is ephemeral.

  7. tbh says:

    Tel is on the money for mine, Hazlitt’s rebuttal of Keynesian and leftist economic theory has yet to be beaten, especially in terms of how well he stated the case in layman’s terms. His short book on economic is one of the best ever written IMHO.

  8. sdfc says:

    Hazlitt’s book contained a lot of whinging about language from what I remember.

    What was his rebuttal of Keynes’ theory of the incentive to invest again? I forget.

    GDP is merely income, production and expenditure.

  9. Greg Byrne says:

    At the risk of being howelled down I could say that Keynes broke the depression but others say that it was the war that broke the depression.

    Gough Whitalm created a lot of unemployment but Malcolm Fraser could not get rid of it. It wasn’t until John Howard brought in “Work Choices” that we seen any impact on unemployment. Perhaps it is time to deify John Howard? He did do the job. “Work Choices” did create two million new jobs. The Fair Work Act did modify it but the Fair Work Act was not as bad as what preceded “Work Choices”.
    Hitler got rid of unemployment via the Autobahns and armamaent factories so he succeeded. Perhaps we should deify him?

  10. Rafe says:

    The Austrians have problems with acceptance in the profession because the militant followers of von Mises insist on a philosophical/metdodological position of strong apriorism which is regarded as absurd by the “Scientists” of the mainstream. That enables the orthodox to ignore the Austrians even when they are correct for example insisting on the “mixed bag” of capital which the Keynesians have to depict as homogeneous.

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