An Austro-Keynesian?

I received an e-mail a couple days ago, which I will reproduce some of it here. It is part of an email conversation I have been having for a while now with a PhD student that thinks of himself/herself as an Austrian. He/She has requested to remain anonymous:

Isaac, I have come to the conclusion that you are the combination of Austrian and Keynesian thought. You’ve said before that you approve of Keynesian stimulus in slumps, you question the validity of Say’s law, you don’t agree with loanable funds theory, etc. And your justifications for not believing in these primarily come from Keynesian resources. Nevertheless, you still defend the basic core of Austrian economics, which deals with the emphasis of human action. To a certain extent, you agree with praxeology, you claim that economic theory as a whole must be described through acknowledging the actions of people. In other words, “microfoundations play a key role” as you have stated before in our email conversation…

Your radical subjectivist idol seems to be [Ludwig] Lachmann, and you assume that everything you approve of, Lachmann would too, but I dont think this is quite right. If anything, you are more of the Shackleian radical subjectivist, who is seen as a person who uses ‘austrian’ premises to keynesian conclusions. In other words, you are setting up to be the modern day Austro-Keynesian.

I think the PhD student has some fair points. I do agree that I partially assume that Lachmann would approve what I advocate. I would state this differently though, rather, I assume to be consistent with a Lachmannian framework to where I draw my conclusions. For example, my advocacy of endogenous money did not really come from reading Keynesian resources, it came from reading Lachmann’s (1937) “Uncertainty and Liquidity Preferences,” in which the article considers money’s function as one that has ‘debt discharging’ which is the main difference of money and a commodity in modern capitalistic systems (Lachmann 1937: 305). Lachmann also goes on to say that money is also legal tender and can explain the process through logical deduction by making the reader aware of “what money does and what only money can do” (Lachmann 1937: 307). Lachmann seems to be the only Austrian to endorse this claim on money, thus when I do try to justify endogenous money and legal tender, I have to by default use Keynesian articles, for they have expanded this concept, while the modern Austrians still hold on to a commodity-money relationship, who oppose legal tender laws. So yes, while I use Keynesian articles to justify my point, I still think it is consistent with the Lachmannian framework.

Another key article of Lachmann’s (2005) article “Speculative Markets and Economic Complexity,” in which it shows the instability that capitalistic market systems has. He urges to make the distinction between ‘ordinary markets’ (which is a generalized form of the typical supply-demand market analysis, ie. the discovery process) and financial markets (specifically speculative markets), which are different since expectations seems to make this market more acceptable to instability (Lachmann 2005: 264; 267). Indeed talking about speculation and financial markets makes stability theories like Say’s Law and loanable funds questionable. Certainty, (Post) Keynesians see it this way and have furthered the literature on it, which Austrians have not really done so, since they faithfully hold onto the loanable funds theory, probably in fear that if they reject loanable funds, their Austrian Business Cycle (ABCT)  is also worth throwing out

I admit that Lachmann was not too clear on his thoughts on the Austrian Business cycle. It is generally known though that he thought the theory lacked a role of expectations and, according to Lewin in one of our email conversations, it was “too mechanical.” Also with conversation with Lewin, we discussed whether Lachmann would approve of the loanable funds theory, Lewin said he probably would have while I took the opposing view. But after our online talk, I realized if Lachmann himself did not agree with me of his position (assuming that he supported loanable funds theory of course. As Lewin said at the end of the discussion, this is something that we will never know), who cares? I am only concerned with using the Lachmannian framework and expanding on it. So a better discussion would have been if my positions are consistent with the Lachmannian framework. In order to conclude from my interpretation of the Lachmannian framework that ABCT is questionable, I must show a connection how the lack of expectations might lead to at least being skeptical of the ABCT (and at most, completely rejecting it). And I could do this very easily by pointing to Lachmann’s (2005) article “John Maynard Keynes: A view from the Austrian Window” in which he makes that controversial statement that Keynes was more committed to subjectivism that the Austrians (Lachmann 2005: 187)! Keynes’s psychological law to his view of expectations (thus making markets instable) all contribute to Keynes as a subjectivist. But the simple fact of expectations making markets unstable is something that the ABCT lacks due to its appeal on loanable funds (Ertürk 2006). Also, it not like the Austrians haven’t heard of this reasoning, they just refuse to accept it. I would look at the G. Hill (1996a; 1996b; 1998) and the S. Horwitz (1996; 1998) debate for an example.

So am I am Austro-Keynesian, I don’t know, I guess it depends how one defines it. I obviously have a lot of Austrian influence and a lot of Keynesian influence, but it is all consistent to the Lachmannian framework, which is the radical subjectivist Austrian view. Instead of creating new labels like Austro-Keynesian, I would just much rather be label a radical subjectivist.


Ertürk, Korkut A. 2006. Speculation, Liquidity Preferences, and Monetary Circulation. The Levy Economics Institute, Annandale-on-Hudson, NY. Online.

Hill, Greg. 1996a. The Moral Economy: Keynes’s Critique of Capitalist Justice. Critical Review 10: 411-34.

—. 1996b. Capitalism, Coordination, and Keynes: Rejoinder to Horwitz. Critical Review 10: 373-87.

—. 1998. An ultra-Keynesian strikes back: Rejoinder to Horwitz. Critical Review 12: 113-26.

Horwitz, Steve. 1996. Keynes on Capitalism:  Reply to Hill. Critical Review 10 (Summer): 353-72.

—. 1998. Keynes and Capitalism One More Time:  A Further Reply to Hill. Critical Review 12 (Winter-Spring): 95-111.

Lachmann, L.M. 1937. Uncertainty and Liquidity Preferences. Economica 4 (August): 295-308.

—. 2005. John Maynard Keynes: A view from the Austrian Window. In Expectations and the Meaning of Institutions: essays in economics by Ludwig Lachmann, edited by Don Lavoie. London and New York: Routledge.

—. 2005. Speculative Markets and Economic Complexity. In Expectations and the Meaning of Institutions: essays in economics by Ludwig Lachmann, edited by Don Lavoie. London and New York: Routledge.

16 responses to “An Austro-Keynesian?

  1. I find your writings and, more largely, radical subjectivism contain all the core concepts of post-keynesianism. So, from my keynesian point of view, i still believe RS could be a kind of bridge between austrian and keynesian streams, something from which all economics could be re-thought and re-build on concrete foundations. In other words, a real and coherent alternative of the microfonded theories that invade all the space of economics. I regret all the hardcore keynesians i know reject austrian stuff on the pretext that… it’s “austrian”, whereas they tend to find the same conclusions.

  2. a radical subjectivist is simply a keynesian in austrian clothing. its really that simple. you should really stop calling yourself austrian. of you are going to reject spontaneous order, Menger’s origins of money, the gold standard, free market economics, the ABCT, etc, and in online debates you always seem to be on the keynesian side than austrian. you minus well call yourself keynesian!

    • 1) I dont reject spontaneous order, when did I ever say that?

      2) Yes, I reject Meger’s origins of money, but you reject Menger’s monetary theory, whats your point?

      3) Umm.. yes I reject the gold standard, what does that have to do with being Austrian ?

      4) What do you mean by free market economics? I could name Austrians that probably dont fit in with your definition anyway, Menger, Wieser, Bohm Bawerk, Hans Mayer , Paul Rosenstein-Rodan, shall I list more? But this is irrelevant because I am using principles, namely subjective expectations, that the Austrian school should care about.

      5) Same thing applies to point 4 in regards to ABCT

      Seriously, your comments are getting weaker and weaker by the day.

  3. I just dont get how you can be an austrian and at least not agree on thinking that central banking is bad. I mean can you name one academic Austrian, besides Lachmann, that agrees that banking should be a government duty?

  4. While I would welcome an Austro-Keynesian type of economics as something deeply intriguing, I suspect it is a mistake to let other people dictate how you categorise yourself.

    Lachmann’s economics is sufficiently Austrian to reject the label “Keynesian” if one really wants to.

    After all, even Hayek accepted the idea of some kind of stimulus in a depression, but did this make him a “Keyensian” in real terms? Not really.

    Your email correspondent might as well complain that Hayek was just a “Keynesian” too. Did Hayek not accept some kind of endogenous money theory as well? How would he not, when his business cycle theory says “credit money” created from nothing causes business cycles?

    • LK , I think that’s why he/she considered me more of a Shackleian radical subjectivist than a Lachmannian one. And though I may sound like an Austrian with Keynesian appeals, my point is, is that I am using the Lachmann framework as my main influence. But as I said, I much rather consider myself radical subjectivist than Austro-Keyesian

    • I do think that Isaac’s advocacy of ‘credit money’ and his views on stimulus really go beyond what the personal views of Lachmann were. As he said in this post, Lachmann’s view on economic issues are irrelevant, he is just using the framework, a framework that actually seems more consistent to what a PK advocates rather than what an Austrian would.

      Keep in mind, Lachmann liked most of what Friedman said as far as policy was concerned (Look at MI interview with Lachmann for reference), I doubt (though could be wrong) that Isaac thinks this.

  5. As if being Austro-Keynesian is a bad thing…

    I personally think that good ideas and theories come from different frameworks and methodologies, but they still have not been integrated into the coherent whole. There is yet to be the ‘Post-Keynesian synthesis’, if you will (though, not necessary ‘Post-Keynesian’ in the sense somebody like Paul Davidson would like to see 🙂 )
    I believe that some of the brightest Post-Keynesian minds are moving in this direction now: Marc Lavoie’s textbooks attempt to bring together behavioral economics, Kalecki and modern endogenous money theories, and Steve Keen uses the ideas of I. Fisher, Schumpeter and Minsky to describe the dynamics of depressions.

    Perhaps, to be an adequate successor to the neoclassical economics, the future heterodox theory will use insights from still greater range of economic schools and methodologies: something like a crazy mix of behavioral + evolutionary + institutional + agent-based + Sraffian + Keynesian + MCT + SFC?

    So, I’d like to ask a question to you, Isaac. What ideas and theories of ‘Austrian’ origin do you believe to be the most relevant and insightful for the modern economics?

    • What do you mean by Austrian concepts? Are you wanting me to list concepts that are solely taken by Austrians or concepts that the Austrians stress quite a bit? I’ll assume that you generally mean the latter.

      Capital theory is the biggest one that comes to mind. Shackle did a decent job at integrating capital theory into his thoughts. Keep in mind, Hayek already discovered that capital was immeasurable in disequilibrium decades before the whole Cambridge debates. Actually I think this idea came initially from Wicksell but the Hayek explained the concept further. And Lachmann even further especially on the topic of “technical” progress.

      Also the role of subjectivism can still be expanded, and hopefully by the Austrians. A lot of PKs think subjectivism is a metaphysical term that doesn’t mean anything, more likely that not, these are the PKs more influenced by The neo Ricardians than the ontological uncertain PKs (Shackle/ Davidson).

      Spontaneous order is a good one to explain the qualitative characteristics of the market. though most Austrians have failed to acknowledge that Menger did not view of spontaneous order as absolute. Thus, the failure to acknowledge this gives the incentive for Austrians to shout off “let the market take care of itself”. I get a lot of criticism from Austrians saying that I only point out the political differences of Menger and the modern Austrians, but this is directly related to spontaneous order.

      Also, looking at time historically instead of a physics type of view of time. American PKs do a good job at this… Thanks to Shackle.

      And I do think that neo Ricardian “growth models” need to be revised, thanks to some of Lachmann’s criticisms.

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