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Tuesday, October 11, 2011

Why Can't We Be Friends: Post-Keynesians and Austrians

I've been thinking about something lately, and it has to do with what I believe to be a significant overlap in the theories of Post-keynesian economics and Austrian economics. They both have radically different prescriptions, but their rhetoric is very similar.

Austrians blame the monopoly power of the Federal Reserve fractional system for artificially keeping interest rates low, in the presence of economic uncertainty, causing mal-investment and credit bubbles that eventually crash.

Post-Keynesians blame the failure of the private markets for engaging in increasingly speculative and illegal behaviors, in the presence of economic uncertainty, at various times, causing unsustainable investment and credit bubbles that eventually crash.

Similar talk yet all I hear from post-Keynesians is how 'off base' the Austrians are about the endogeneity of credit money. In fact though, while money creation to fund a bubble may indeed be demand driven, the fact nevertheless remains that it is the Fed that accommodates that demand to maintain an interest rate target. Post-Keynesians tend to focus their efforts at regulating the private banking practices but don't spend much time thinking about how the Fed itself may need to be regulated.

Similar talk yet all I hear from the Austrians is almost a disturbing fervor to get the government out of everything - including money. Go on the gold standard, have a 100% reserve requirement, reduce systematic risks in our financial system thereby reducing the likelihood of mal-ivestement. In fact though, the private market is at least equal to be blamed for their own 'irrationality'. The Austrians, opposite the post-Keynesians, think that all can be solved by changing the nature of the Fed (or elimination of it's power altogether).

Point is, even though the two schools blame different things or focus on what may be considered divergent prescriptions, the meat of their analysis are markedly similar. The focus on uncertainty and on credit booms and busts seem to be really two sides of a similar coin. And by the way, there is no logic that suggests both couldn't be a little bit 'correct.' After all, the private market would likely be less likely to fail if the Fed didn't accommodate its failures, but focusing just on the Fed ignores the larger systematic problem of private market failures and excessive risk taking (or perhaps perversely, the Austrian prescription ensures too little risk be taken).

Ok, so maybe friendship is too much to ask for, but Post-Keynesians and Austrians, in the interest of being true pluralists, could at least learn from each other


Nathan Tankus said...

if you look at the old post keynesian thought archives, you will see lots of disscussion of austrian thought (partially because of an invasion of austrians). see especially here: but it runs through most of the archives I've read so far. i think your point about the fed accommodating is true but misleading. the interbank lending market has been structured to function the way it does. an overall shortage of reserves would most likely lead to the abandonment of the interbank lending market in search of financial innovations that will decrease the amount of reserves needed. i don't think it would be particularly beneficial, and if anything, would be financially destructive. while we certainly share certain superficially similar interests, the fact that the austrians don't understand endogenous money is very important (don't get me wrong, the road to serfdom and individuals and economic order are on my reading list). the fact that they don't believe that anything other then individuals have agency is problematic in terms of fusing them with the more institutional parts of post keynesian thought.

Garth said...

Points are well taken Nathan. I would add thought that I always am concerned about the interplay of political belief with economic belief. I hope that the differences aren't overly-highlighted due to the vastly different political ideologies. I'd be concerned that that would shield any points of agreement that could increase our understanding of our complex financial economy.

Nathan Tankus said...

i agree with you on this. do you know about the blog creditwritedowns? it's a blog run by edward harrison who is an austrian but has come around to neo-chartalism. his writings on malinvestment are excellent. for me post keynesianism will gain more similarities with austrian economics when minsky's theories of finance are grounded in a consistent (possibly harrodian) theory of production.

Garth said...

haven't yet read that blog, no....can you provide link?

Nathan Tankus said...

and here's a post he wrote about the compatibility of chartalists and austrians

Garth said...

Thanks, I'll take a thoughtful look. I still don't agree with the Chartalist interpretation, so I will say, upon glancing, I feel his separation of all of heterodox economics (which is pretty wide) into two camps (chartalist and Austrian) is a bit wrong. For one thing, there are plenty of post-Keynesians who disagree with one or more major tennants of what I understand Chartalism to be. But, nevertheless, like I said, I'll give a good look to it.

Nathan Tankus said...

if you read in you will see that he admits to being quite reductionist for brevity, and understandability's sake. have you read david graeber's new book on debt btw?

Garth said...

I haven't ...but since you mention it I saw someone else bring this book up in another blog. Have you read it? Good recommend?

Nathan Tankus said...

I read it in 3 days in between college classes. it's a very good read. it takes on a chartalist-esque position which i think you will dislike. on the other hand it is very historical, and there will be other things i think you will gain from it.

it's a very good overview of the anthropological and historical evidence surrounding money and debt.the other factor is that he is an anarchist, so you may see how chartalism isn't just an analytical concept for politician lovers (as you've seemed to argue before).

If nothing else i think it will lead you to appreciate why chartalists hold the positions that they do.

cyrusp said...

"the fact that the austrians don't understand endogenous money is very important"

Exactly. I think it's the core failing of the Austrian school of which I was a part.

One of the masters of endogenous money theory today is Professor Steve Keen. His "Roving cavaliers of credit" article is a must read:

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