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Walras' law and the IS–LM model: a tale of progress and regress

Knowledge, Truth and the History of Economic Thought

Hansjörg Klausinger

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Hansjörg Klausinger

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Hansjörg Klausinger

During the 1930s, for a short time Friedrich August Hayek was regarded as the main antagonist of John Maynard Keynes as a theorist of money and the cycle. After sketching the overlapping parts of their biographies and their personal relationship, this chapter focuses on their mutually hostile reviews from the 1930s and on their opposing explanations of economic crises. In particular, although starting from the common ground of a Wicksellian approach, Hayek and Keynes differed in many respects: on structural versus aggregate explanations of the cycle, saving or spending as the way out of the crisis, or on the role ascribed to money wage cuts. In general terms, the vital difference was in economic philosophy, that is, about the belief that cleverly construed economic policies may improve upon the homeostatic properties of the market system or not.