By Arnold Kling
About four years ago, I described myself as an Austro-Keynesian. Recently, I have been asked about that concept.
One way to put it is that I accept and reject some major tenets of each camp.
From the Keynes camp, I accept the view that financial market psychology is variable (animal spirits and all that) and that market economies are unstable. I am comfortable with a Minsky-Kindleberger view. Thus, I reject what I see as the common Austrian view that the only source of instability in the economy is central bank money-printing.
From the Austrian camp, I accept the view that there is not much that government can do about downturns. I view a downturn as a sudden, widespread realization that certain patterns of specialization and trade are unsustainable. We just have to wait for entrepreneurs to sort things out. Thus, I reject the Keynesian view that deficit spending by the government provides a cure for unemployment. Another way of describing what I have in common with Austrians is that I do not subscribe to the aggregate demand/aggregate supply paradigm,
Because I do not subscribe to AS-AD, I am skeptical of the monetarist (or basic macro textbook) view that a downturn is almost entirely due to a misalignment between the supply of money and nominal wages. Similarly, I am skeptical of the “New Keynesian” view that a downturn is almost entirely due to a misalignment between the money supply and aggregate prices.