Hayek, Keynes, and Modern Macroeconomics

Abstract

The Great Recession seems to be creating a change in the trend of macroeconomic thinking. Prior to the financial crisis of 2008, dynamic stochastic general equilibrium (DSGE) models dominated the macroeconomics literature without any apparent challengers on the horizon. Since then, however, we have seen an increasing interest in macroeconomic models that address the state of confidence (“animal spirits”), complexity, cognition, and radical uncertainty. Most of the renewed interest in animal spirits, complexity, cognition, and radical uncertainty has come from a more or less “Keynesian” perspective. We discuss the potential to emphasize these elements from a more “Hayekian” perspective and argue that Austrian approaches to macroeconomics along these lines are more likely to resonate with mainstream economists than in years past.

Keywords: animal spirits, cognition, complexity, Great Recession, Hayek, Keynes, radical uncertainty, state of confidence

JEL Classification: B53, E32, G12, E5, E6