Keynes and Hayek: some common elements in business cycle theory
Keynes and Hayek are usually perceived in the history of economic thought as
intellectual rivals. Although it is true that in terms of policy recommendations, they have
not always seen eye to eye, there are numerous theoretical elements that the two economists
tend to share. This is especially true if one follows Axel Leijonhufvud (1976) in considering
that Keynes’s fundamental theoretical work is the Treatise and not the General Theory. In the early 1930s, following the works of Wicksell (1989), both explained business cycles
as caused by a discrepancy between savings and investment. They considered that in the
modern economy the interest rate cannot speedily adjust these two magnitudes. To a certain
extent, Keynes and Hayek even agreed on the dynamic sequence of prices in a “normal”
depression. By the time the General Theory came out, liquidity preference obscured most
of the commonalities between the two economists. Although Hayek introduced liquidity
preference as a short run friction in his 1941 Pure Theory of Capital, he could not accept
it as a fundamental determinant of the interest rate. However, in the 1970s Hayek began to
believe that “normal” Hayekian crises could further degenerate into Keynesian depressions.
By focusing on Keynes’s theoretical development prior to the elaboration of the General
Theory in parallel with Hayek’s evolution throughout his life, we argue that a selective
reading of their works could lead to a theoretical model in which Keynesian and Hayekian
scenarios are specific cases of a more general theory.
JEL Classification: B13; B22; E12; E20; E32; E43.
Keywords: J. M. Keynes F. A. Hayek the Wicksell connection market interest rate expectations economic cycle theory liquidity preference disequilibrium theory