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.