Sunday, August 29, 2010

Hayek vs. Keynes

When the most recent downturn was a few month old, and it was not going to be followed by a quick rebound, interest in the theories of John Maynard Keynes and the role of stimulus started to rise.

But as the recovery has drawn out, and some would even say begin to falter; people are looking for other explanations. Among the names mentioned of late, Friederich Hayek is gaining popularity. And leading the wave is George Mason economist Dr. Peter Boettke.

There is a good introduction to Dr. Boettke and simplistic explanation of the Austrian School in yesterday's edition of The Wall Street Journal. (Subscriber content, but put the headline in your browser, I'm willing to bet you find something.)

You'll find it an interesting expose of an economist and ideas worth knowing more about. Please share your thoughts.


Ed Dolan said...

One of Hayek's ideas that seems to apply best to the present crisis is that a steady, low, rate of inflation is not necessarily a sign of a healthy economy. Instead, gradual deflation may sometimes be a better policy. When productivity is growing rapidly, as it did in the 1920s, and also the 1990s and early 2000s, the Fed has to pursue very expansionary policy with very low interest rates. If it did not do so, prices would begin to fall in line with the reduction in costs brought on by productivity improvements. The result of the ultra-low interest rates can be dangerous asset price bubbles, which trigger a crisis when they burst.

Hayek thought it would be OK to allow moderate deflation during a productivity-driven boom. That kind of productivity-driven inflation would not have the adverse consequences of the widely-feared Japanese-style deflation, which is driven more by inadequate aggregate demand than by productivity growth.

For a very brief presentation of Hayek's idea in terms of the modern textbook AS-AD model, check out this excerpt from a lecture I gave a couple years ago at the Liberal Institute in Prague:

Tim Schilling said...

Thank you, Ed. I hope my readers will take advantage of your link. I know I will.


Mayfield said...

How can you talk about the Austrian School of Economics and not mention Ludwig von Mises, Murray Rothbard, or the Mises Institute?

Peter Boetkke is arguable the second most influential Austrican Economist at George Mason, behind Walter Williams.

It was a good piece on Peter but did little to inform or enlighten people about the Austrian School.