In the early 1930s, John Maynard Keynes in Cambridge and Friedrich Hayek in London fought one of the most famous intellectual battles in economics. Nearly a century later, their heirs are still at it: Post-Keynesians argue for active government management of demand, while Austrian economists warn that intervention distorts the price signals markets depend on.
Both schools sit outside the neoclassical mainstream, which makes them two of the best-known heterodox economics traditions. They're usually treated as opposites, and in policy they often are. But underneath, they share some surprising common ground.
The Austrian School in Brief
The Austrian school began in Vienna with Carl Menger's Principles of Economics (1871), one of the founding works of the "marginal revolution." It was developed by Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich Hayek, who shared the 1974 Nobel Prize in economics.
Key Austrian ideas:
- Prices carry knowledge. In "The Use of Knowledge in Society" (1945), Hayek argued that the information needed to run an economy is scattered among millions of people, and that market prices pull it together in a way no planner could.
- The economic calculation problem. Mises argued in 1920 that without market prices for capital goods, a socialist planner couldn't rationally allocate resources.
- Entrepreneurship and discovery. Markets are a process of trial, error, and discovery, not a static equilibrium.
- Austrian business cycle theory. When central banks push interest rates below their "natural" level, they encourage investments that can't be sustained, leading to a boom followed by a bust.
- Spontaneous order. Many useful institutions, from language to money to common law, emerge from human action without being designed.
The Post-Keynesian School in Brief
Post-Keynesian economics builds on Keynes's General Theory as developed by Joan Robinson, Michał Kalecki, Nicholas Kaldor, and Hyman Minsky.
Key Post-Keynesian ideas:
- Fundamental uncertainty. The future can't be reduced to calculable probabilities, so investment depends on confidence and convention.
- Effective demand. Spending determines output and employment; economies can stay stuck below full employment.
- Endogenous money. Banks create money when they lend, and central banks set interest rates rather than the money supply.
- Financial instability. Following Minsky, long periods of stability encourage the risky borrowing that causes crises.
Where They Clash
| Austrian | Post-Keynesian | |
|---|---|---|
| Cause of recessions | Credit booms from artificially low interest rates create unsustainable investment | Collapses in demand and confidence, often after financial fragility builds up |
| Remedy | Let the bust clear out bad investments; avoid stimulus | Use fiscal and monetary policy to restore demand |
| Role of government | Minimal; intervention distorts prices | Active; markets don't self-correct reliably |
| Money | Favor sound money; many favor gold or free banking | Money is a creature of the state and the banking system; manage it for full employment |
| Inequality | Mostly a consequence of market outcomes and intervention | A cause of weak demand and instability |
Where They Agree (More Than You'd Think)
This is where the comparison gets interesting. Austrians and Post-Keynesians agree on several points where both differ from the mainstream:
- Real uncertainty. Both reject the idea that people can know the probabilities of future events. Hayek emphasized dispersed, local knowledge; Keynes emphasized an unknowable future. The economist G. L. S. Shackle drew on both.
- Time matters. Both see the economy as a process unfolding in historical time, not a system resting at equilibrium.
- Money isn't neutral. Both argue that money and credit change what the real economy does, which the mainstream long downplayed.
- Skepticism of heavy formalism. Both traditions are wary of mathematical models that assume away the very things they think matter most.
- Credit-driven cycles. Both see booms and busts as arising from the credit system itself. They simply disagree about why, and what to do about it.
Which Is Right?
Each school has had moments of vindication. Austrians point to the 2000s housing bubble as a credit-fueled boom of exactly the kind their theory describes. Post-Keynesians point to the same crisis as a textbook Minsky moment, and to the slow recoveries that followed austerity. The most useful thing you can do is understand both well enough to make each one's best case, then test them against the evidence.
That kind of side-by-side study is what pluralist economics is for, and it's hard to find in most programs, which teach neither school in depth.
Study Both at Elton
Elton University's heterodox economics master's lets you study the Austrian and Post-Keynesian traditions, along with mainstream economics and any other school you choose, 1-on-1 with professors who know each from the inside. There is no party line: you'll read Hayek and Keynes in their own words, weigh their arguments against the evidence, and reach your own conclusions.
Want to study economics without a party line? Talk to an admissions officer or explore Elton's economics program. Elton University is a 501(c)(3) nonprofit university — EIN 86-2426898.
Sources
- Hayek, F. A. (1945). The use of knowledge in society. American Economic Review, 35(4), 519–530.
- Keynes, J. M. (1937). The general theory of employment. Quarterly Journal of Economics, 51(2), 209–223.
- Shackle, G. L. S. (1972). Epistemics and Economics. Cambridge University Press.
- Wapshott, N. (2011). Keynes Hayek: The Clash That Defined Modern Economics. W. W. Norton.