Intellectual Arbitrage: A Keynesian-Austrian Synthesis?

"Arbitrage" describes a situation where someone takes advantage of a price differential to make a profit. For example, if the same TV were selling in New York City for $200 and in Chicago for $250, and the cost per TV of transporting them between the two cities was only $10, someone could buy TVs in New York for $200, sell them in Chicago for $250, and make a $40 profit. They'd be crazy not to keep selling them this way until the price differential was eliminated. The logic of arbitrage drives the so called "law of one price" in economics and the assumption that economic profits (as opposed to accounting profits, which are somewhat different) are always driven to zero by market forces.

The concept of arbitrage is useful more broadly, of course. It's applicable in any situation where a previously unexploited differential furnishes the opportunity for considerable gain. All this is simply an introduction to a very brief thought I had this morning on a potential intellectual synthesis. Some of the greatest advances in science - particularly social science, where competing theories are more likely to coexist than in natural science - occur as a result of the synthesis of two previously competing ideas. The history of philosophy is full of such syntheses as well.

This morning, checking my blog roll, I stumbled across a post that reconfirmed earlier thoughts I've had about the prospect for a Keynesian-Austrian synthesis while listening to a Roger Garrison lecture. At the Coordination Problem blog, Peter Boettke of George Mason University wrote this of a new Hayek resource online:

"It is well worth looking through the entire site and the reading list for both economics and politics. Friedman has been pushing for the epistemic turn in economics and politics since the founding of Critical Review in the 1980s, and during that time Jeff's work with the journal has gotten major intellectual recognition twice -- during the political science perestroika dispute over rational choice theory, and during the last year over the financial crisis. In both instances, the same Hayekian insight into human ignorance was a central element in his explanation for how we need to reorient economics and politics."

If you took out "Hayekian" in that last sentence, I could have sworn this post was by Prof. Skidelsky talking about the Keynesian revolution. Human ignorance and uncertainty drives both the Keynesian system and the Austrian system, albeit in somewhat different ways. There really is considerable common ground between Keynesians and the Austrian School of economics. There are gaping chasms separating the two, as well, believe me. For all that I enjoy reading the Austrians, there is no way I could ever attend a school like George Mason. They're epistemologically out of their gourds, there are some insights I consider completely wrong, and they're a very ideological bunch generally. But there are pearls of wisdom in the Austrian School and considerable common ground that gets ignored, I think, because of their other eccentricities.

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As I alluded to, I had this reaction before listening to Garrison's macroeconomics. I think of it whenever I hear an Austrian badmouth Joe Stiglitz, because I've always thought that the work that Stiglitz won the Nobel Prize for and the work that Hayek won his Nobel for are on a very similar wavelength. The hostility just seems so wasteful to me. I had this gut reaction about the potential for intellectual arbitrage a couple months ago when Boettke renamed his blog "Coordination Problem" in the first place (I can't find the initial name... I think it was simply "Austrian Economics Blog"). I did a double take when they announced that name because so called "coordination problems" are so central to Keynesian microfoundations. Why in the world would an Austrian blog take that name? Apparently, because they think in those terms too. I was first introduced to the idea of emergent order and a self-organizing economy by uber-Keynesian Paul Krugman's book on the subject. It was only years later that I even learned that the Austrian School cares deeply about those issues as well. Cafe Hayek's subtitle references the concept of "emergence" and they regularly post on the idea. Who knew? Similarly, the phenomenon I've always called "unintended consequences" or simply "counterfactuals" is the same as a concept that the Austrians feel like they own under the moniker "seen and unseen" (from a famous Fredric Bastiat piece).

Of course not everything will be reconciled, but I think there's a huge potential for arbitrage between the Austrian School of economics and Keynesian economics that is not being exploited. Keynesians barely pay attention to the Austrian School, because for the most part they're unaware of its existence. They feel that they have bigger fish to fry (and as a practical matter, they probably do). Austrians are very aware of the existence of Keynesians, but they're absolutely committed to the idea of some mortal-foe death match between the two camps. Since Keynesians generally don't bother engaging Austrians, the Austrians have a habit of imputing ideas to Kenyesians. Of course this isn't intellectually productive at all. The highly ideologically-tinged atmosphere of the Austrian School also tends to degenerate into accusing Keynesians of being socialists. And once you're branded a socialist, the opportunity for constructive dialogue is reduced considerably as well. Readers of this blog know I think there's a lot wrong with the Austrians, and I do enjoy mocking their eccentricities. But I keep coming back to them because it's a very interesting and very different perspective that I do think has a few things to offer.

I have a few very specific ideas for how one might go about synthesizing Keynesianism and the Austrian School that I'll probably try to write up at some point over the next year. I was curious if readers knew of any previous attempts at such a project. I know John Hicks had a healthy dose of respect for the Austrians, and both Keynesians and Austrians admire Wicksell - but I'm not really aware of any previous attempt besides that. I know some history of thought people and several Austrians regularly check in on this blog, so I'm counting on you - do you know of any examples?

UPDATE: Steve Horwitz makes an important point in the comment section of Coordination Problem. It is wrong to say (as I also did above) that Hayek got the Nobel prize for his work on knowledge and information. He got the price for his work on macroeconomics and social institutions. It was the prize lecture that was the opening salvo in Hayek's valuable work on knowledge.