How Dead Is Keynes? How Alive is Hayek?

Posted by PrestoPundit on 09/26/2007

The Fed’s Frederick Mishkin lists 10 scientific principles which have transformed monetary theory in the 50 years since the alchemy of the Keynesians ruled the roost. Here they are:

1) inflation is always and everywhere a monetary phenomenon

2) price stability has important benefits

3) there is no long-run tradeoff between unemployment and inflation

4) expectations play a crucial role in the determination of inflation and in the transmission of monetary policy to the macroeconomy

5) real interest rates need to rise with higher inflation

6) monetary policy is subject to the time-inconsistency problem

7) central bank independence helps improve the efficiency of monetary policy

8) commitment to a strong nominal anchor is central to producing good monetary policy outcomes

9) financial frictions play an important role in business cycles

Note that in different forms most of these principles were part of economics science, before Keynes and the American “Keynesians” set back economic science more than a generation. Here’s a challenge. Name one “scientific principle” here which can’t be found t in some form or other in the work of Friedrich Hayek or Ludwig Mises.

And just for laughs check this out:

The push to build sound microfoundations into general equilibrium macroeconometric models is ongoing .. Building macroeconometric models thoroughly grounded on solid microfoundations, but with treatment of more sectors of the economy, will be one of the main challenges for the science of monetary policy in the future.

It looks like we still have a way to go before economic “science” reaches where Hayek was in the 1930s.


No Responses Yet to “How Dead Is Keynes? How Alive is Hayek?”

  1. Gabriel M. said

    That’s an easy challenge.

    1) Game theory and everything connected, from oligopoly to political applications.
    2) Information economics.
    3) Quantitative treatment.
    4) Axiomatization. (*)

    (*) By which I mean, of course, real axiomatization, as in formalism, not hand-waving and lip service paid to “apriorism”.

    As for microfounded, multi-sectorial models, with quantitative implications… Hayek never had these. He tried to talk his way through a scenario, maybe an interesting one, but nevertheless one reliant on effects of implausible magnitude and one incompatible with contemporary standards of exposition.

  2. Greg Ransom said

    None of these, or course, are from Mishkin. And note well — “information economics” was largely inspired by Hayek’s work, and it must be considered a bastard child, because by its very formalism it is incapable of including the most important elements of Hayek’s original work on the “knowledge problem”. Hayek, of course, was aware of game theory, and found it rather useless for the problems he saw at the center of economic science. Hayek’s early work and career involved quantitative treatments of the macroeconomy, so I don’t get that one. And finally, axiomatization in economics was a spin off of a failed program in mathematics — a program that was dead on arrive in physics. It’s hard to see how it’s contributed much to the advance of economic science in the last 50 years.

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