What’s Wrong with Keynesian Economic Theory?

What’s Wrong with Keynesian Economic Theory?

Edited by Steven Kates

Possibly the strangest phenomenon in all of economics is the absence of a long tradition of criticism focused on Keynesian economic theory. Keynesian demand management has been at the centre of some of the worst economic outcomes in history, from the great stagflation of the 1970s to the lost decade and more in Japan following the expenditure program of the 1990s. And once again, following the Global Financial Crisis, it is incontrovertible that no stimulus program in any part of the world has been a success, each one having been abandoned as conditions deteriorated under the weight of public sector spending. This book brings together some of the most vocal critics of Keynesian economics. Each author attempts to explain what is wrong with Keynesian theory in ways that can be understood by those seeking guidance on where to turn for a more accurate explanation of the business cycle and on what to do when recessions occur.

Chapter 1: The Keynesian liquidity trap: an Austrian critique

Peter Boettke and Patrick Newman

Subjects: economics and finance, austrian economics, history of economic thought, post-keynesian economics, teaching economics


Our contention is that the real opponents of Keynes are the Austrians, who belong to the school of thought that best champions the theory of a self-correcting market economy. The countercyclical policies embraced by Keynesians as well as the Chicago School Monetarists are generally seen as counterproductive. In particular, this chapterprovides critiques of the liquidity trap theory from an Austrian perspective. It is argued that if prices are allowed to freely fall and are not propped up by government intervention, the liquidity trap roadblock poses no genuine threat for the free market economy. Only when prices are rigid and government intervention is pervasive does the phenomenon of a “liquidity trap” and hoarding money result in a stagnant economy.