Where Post-Keynesians and Austrians meet on economics

I was reading Michael Hudson’s review of Australian professor Steve Keen’s book, “Can we void another financial crisis?” and part of what he wrote struck me as really Austrian. Let me explain why and why I think this matters.

First, here’s what Michael says in his review:

Keen explains why, mathematically, the Great Moderation leading up to the 2008 crash was not an anomaly, but is inherent in a basic principle: Economies can prolong the debt-financed boom and delay a crash simply by providing more and more credit, Australia-style. The effect is to make the ensuing crash worse, more long-lasting and more difficult to extricate.

Now compare this to what the most revered Austrian economist Ludwig von Mises wrote some 80 years ago:

Society is not sufficiently rich to permit the creation of new enterprises without taking anything away from other enterprises. As long as the expansion of credit is continued this will not be noticed, but this extension cannot be pushed indefinitely. For if an attempt were made to prevent the sudden halt of the upward movement (and the collapse of prices which would result) by creating more and more credit, a continuous and even more rapid increase of prices would result. But the inflation and the boom can continue smoothly only as long as the public thinks that the upward movement of prices will stop in the near future. As soon as public opinion becomes aware that there is no reason to expect an end to the inflation, and that prices will continue to rise, panic sets in.

I think the two are very similar. The first conforms to a more post-Keynesian, Minsky view of the world and the second is classic Austrian Business Cycle Theory.

Why this matters. If you look underneath the hood, in both cases – both with Minsky and with von Mises — banks are seen as the destabilising force. Minsky even says outright that “stability is destabilising”.

If von Mises is right, the Fed’s policy rate normalization will benefit the economy over the long term by redirecting more capital investment to those with the best long-term potential. But the risk is a recession as bad investments – so-called malinvestment – is found out.

If Minsky and Keen are right, then the credit releveraging since 2008 has not boosted growth robustly because debtor wages have not risen sufficiently to remove the spectre of debt distress. In that model of the economy, this releveraging is also dangerous because it will result in a another difficult unwind process once credit growth stalls.

The two analyses have great macro-level similarities. But the solutions are very different. Von Mises would ask for policy makers to do nothing except purge the malinvestment. Keen is calling for a debt jubilee.

Irrespective, both of these two economic world views suggest that so-called secular stagnation and the resulting political radicalization in Europe and the United States are here to stay.

Also see Randall Wray’s book, “Why Minsky Matters” and the Mises Institute’s “The Austrian Theory of the Trade Cycle and Other Essays“.

P.S. – I agree with Hudson: “Keen’s book should be basic reading for placing debt at the center of today’s political debate and replacing mainstream “barter” economics with a more reality-based discipline.”