Good Thoughts from Peter Boettke

Facts and Other Stubborn Things got mentioned by Peter Boettke at Coordination Problem recently, discussing my post on the potential for a Keynesian-Austrian synthesis. I'm grateful that Boettke was so gracious, given the tone I can take when I talk about the Austrian School sometimes. I suppose the moral of the story is, if you're less shrill than Krugman, you get somewhat of a pass. In seriousness, though, Boettke offers a very thoughtful point:

"To me the issue is that what Austrians and Keynesians share is neither methodology nor analytic, but instead the recognition of the complex problem situation within which individuals find themselves in making their economic decisions. The "dark forces of time and ignorance" ensnare us, but the guiding role of relative prices and the discipline of profit and loss (and other institutions that undergird the market economy) work to coordinate economic plans and realize the mutual gains of trade and social cooperation under the division of labor. Coordination problems result when the price signals of the market get distorted and the discipline of profit and loss get softened by government actions. As Roger Garrison has situated the Austrian theory, when money is viewed as a tight joint (as in the New Classical theory) there are no macroeconomic problems, and when money is viewed as a broken joint (as in the Keynesian theory) there is no market solution to the problems of business cycles. But in the Austrian theory, money is viewed as a loose joint, and thus disturbances in a nominal variable can have real effects."

I think this frames it very well. I would push back a little on his loose vs. broken joint point. Lawrence Klein once wrote:

"It is wrong to think that Keynes’ system fails if it cannot predict pessimistic results. The pessimism is not inherent in this system; instead the determinants behind the system make it operate either pessimistically or optimistically, depending on the current state of affairs in economic and non-economic life."

The point is, Keynes's liquidity preference theory provided him with a great deal of flexibility in his models. This is what really justified calling it a "general" theory, because he could specify cases in which monetary policy held no power at all, and cases in which money worked as you'd expect it to in a classical system. So in that sense, I think Boettke is wrong to pigeonhole Keynes. But his review of the outlook and the problems that the two schools are grappling with is prescient.

That said, commenter Rafe Champion raises another good point:

"Trying to make a big deal out of agreement between Austrians and Keynesians on the problem of uncertainty is a no brainer because everything depends on where you go from that point."

Of course, there's nothing particularly insightful about that. The question for me isn't "where does the somewhat common Keynesian and Austrian starting point leave us?" - the question for me is "does where they go from that point really conflict so much that it can't be integrated? Do they both have good ideas on 'where to go from there' that aren't contradictory, just different?". My standard line on Austrian Business Cycle Theory is that it is "necessary but not sufficient". I buy almost every word of what you would think of as traditional Austrian business cycle theory. I simply don't think it fully explains the dynamics that contribute to downturns, and I think there are many downturns it doesn't help explain at all. But it is exactly on target, when it's applicable. I don't see why ABCT can't be used by a Keynesian.