It’s Not Just Keynesians vs. Austrians

The complexities of the modern debate defy old categorizations

I am a huge fan of the Hayek-Keynes rap videos and the work of my friends John Papola and Russ Roberts more generally. I use the videos in class all the time to great effect. One of the biggest disappointments of my career is that I had a conflict that I could not change when John asked me to play Mises in the second video. Every academic should have a role in a rap video on their CV!

Many young people seem to think that modern economics can be divided into two camps: Austrians and Keynesians.It’s a video so of course it cannot capture the whole reality. Unfortunately, I do think the videos have had one absolutely unintended negative consequence with respect to how some young people understand economics. In a variety of places online and in person, many young people seem to think that modern economics can be divided into two camps: Austrians and Keynesians.

In the worst version of this mistake, that dividing line is taken to be the degree to which any economist comes to conclusions that support free markets. In other words, anyone who supports free markets must be an Austrian and any economist who supports (any? some?) degree of state intervention must be a Keynesian.

Both this simple dualism and the explanation of the difference being a belief in markets are gravely mistaken and will quickly seen as such by anyone who knows even a little about modern economics. As a result, those who make this error will find their substantive arguments, as right as they may be, dismissed by their more knowledgeable audience members.

The Debate of the Century

It’s true that in the 1930s the Austrian theory of the business cycle, given voice by Hayek in the videos, was perhaps the most accepted explanation of depressions. It’s also true that Keynes’s work became the major challenger to that theory and did, in fact, defeat it by the time World War II was over. The videos are correct, historically, that the battle was Hayek/Austrians vs. Keynes. And they are also correct, though to a lesser degree, that the major battle over the Great Recession and financial crisis was between broadly Hayekian and broadly Keynesian narratives.

However, that more public battle over the Great Recession does not define modern economics. Keynesianism is a school of thought within macroeconomics. An economist who describes herself as a “Keynesian” of any sort is staking out her theory of the macroeconomy. That label has no necessary implication about how she might see a whole bunch of interesting microeconomic questions.

The label “Keynesian” should be applied only to one’s approach to macroeconomics.It’s not a logical contradiction to think, for example, that recessions are caused by insufficient investment due to entrepreneurial expectations and best cured by deficit spending (two broadly Keynesian views) and believe, generally, that government intervention into particular markets is a bad idea, or that the minimum wage causes unemployment. In fact, I would suggest that this combination describes a number of economists.

The point is that the label “Keynesian” should be applied only to one’s approach to macroeconomics. It has no necessary implications about a whole variety of other issues. To treat “Keynesian” as the same as “rejects the market” is very much over-simplified.

Many Schools

Even within macroeconomics, there are a whole variety of approaches other than “Austrian” and “Keynesian.” Since Keynesianism triumphed in the 1940s, we have seen the subsequent development of Monetarism and New Classical economics, as well as the more recent Real Business Cycle theory.

There are several varieties of Keynesianism, and self-described Austrians disagree over a variety of issues with respect to money, macroeconomics, and business cycles.Modern macroeconomics is focused on so-called DSGE (dynamic stochastic general equilibrium) models, which are complex mathematical models of the economy that can be based on a variety of schools of thought, including Keynesianism but also others like Real Business Cycle theory as well.

It’s also worth noting that each of these schools of thought are not monolithic. There are several varieties of Keynesianism, and self-described Austrians disagree over a variety of issues with respect to money, macroeconomics, and business cycles.

Finally, the division between Austrian and Keynesian does not map precisely on to “free market” versus “interventionist.” As I noted earlier, one can be a Keynesian on macroeconomics and be pretty free market on the microeconomy.

In addition, there are other non-Austrian schools of thought that tend to be very supportive of markets. Chicago school economists and New Institutionalist economists would be examples of this. As the economist Bryan Caplan, among others, demonstrates, you don’t have to be an Austrian to be a strong libertarian. Just because an economist doesn’t adopt the Austrian theory of the business cycle or doesn’t know the Austrian criticism of socialism, doesn’t mean they aren’t strongly supportive of markets.

There’s a lot of good economics out there that isn’t strictly Austrian, and there’s a lot of bad economics that isn’t strictly Keynesian. The more people who have a better grasp of all of these nuances, the more legitimacy their ideas will have in the eyes of skeptics.

It’s a Good Start, But...

To be clear, I’m not blaming Papola and Roberts for this consequence of their videos. The videos are exceptional teaching tools and have done a great deal of good in exposing new people to important ideas in economics. I simply wish more young people would use them as a launching pad for learning more deeply about modern economics and appreciating its complexity and nuances.

The late economist Paul Heyne once said of introductory economics that if professors teach it like it’s the first economics course students will take, it will be their last. But if they teach it like the last course students will take, it will be their first. In the spirit of Heyne, the Hayek-Keynes videos should be like a good introductory course – the first stop on a long journey of economic education, not the last.

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