| Peter Klein |
Following the Keynesian Consensus of the 1950s and 1960s Monetarism emerged as an alternative. By the late 1970s, there were Keynesians and Rational Expectations macroeconomists. When I took graduate macro in the late 1980s, I was told there were two schools of thought: New Keynesian and New Classical. (Elwood: “What kind of music do you usually have here?” Claire: “Oh, we got both kinds. We got country and western.”)
Old-style Keynesianism made a roaring comeback in the last two years. But cracks are starting to appear in the consensus edifice. An increasing number of commentators in the popular press are voicing disappointment with the results of deficit spending and money creation (aka “quantitative easing”), the classic Keynesian policy instruments. What are they turning to instead? Not Monetarism or New Classicism, which don’t seem like viable alternatives. Surprisingly, the mainstream press is rediscovering the Austrians.
“We’re All Austrians Now,” declares CNBC, saying the Mises-Hayek theory “provides the best explanation for the business cycle we just lived through.” And pity the poor Fed: “the resurgent popularity of Austrian economics may actually be hampering the ability of the Federal Reserve to reflate the economy with low interest rate policies. Businesses, now aware of the dangers of a low inflation-sparked economic bubble, may simply be refusing to fall for the age-old boom-bust trap.” Sunday’s Newsweek noted “The Triumphant Return of Hayek,” citing “a growing backlash against the Fed’s monetary activism” and adding that Bernanke’s policy “suffers from the same fundamental flaw as Keynesianism, in that it protects inefficient players instead of injecting renewed vigor into the economy.” (Bonus quotation, via Larry White: “Keynesian theory . . . advocates a policy opposed to the interest of large investors and entrepreneurs and then, when this policy is about to be realized, holds the high liquidity preference of investors and the timidity of entrepreneurs responsible for the necessity further to increase taxation and public works.” — Otto von Mering, 1944) Even the staid Economist thinks the Austrian theory deserves more attention from policymakers.
Is there a shift in public attitude toward government management of the economy? Is the opinion-molding class changing its tune? Or are these reports anomalies? If public opinion and opinion among elites is changing, what explains the change? New evidence? Change in ideology? Self-interest?