Keynes and Hayek: some common elements in business cycle theory

Keynes and Hayek are usually perceived in the history of economic thought asintellectual rivals. Although it is true that in terms of policy recommendations, they havenot always seen eye to eye, there are numerous theoretical elements that the two economiststend 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 themodern economy the interest rate cannot speedily adjust these two magnitudes. To a certainextent, 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 mostof the commonalities between the two economists. Although Hayek introduced liquiditypreference as a short run friction in his 1941 Pure Theory of Capital, he could not acceptit as a fundamental determinant of the interest rate. However, in the 1970s Hayek began tobelieve that “normal” Hayekian crises could further degenerate into Keynesian depressions.By focusing on Keynes’s theoretical development prior to the elaboration of the GeneralTheory in parallel with Hayek’s evolution throughout his life, we argue that a selectivereading of their works could lead to a theoretical model in which Keynesian and Hayekianscenarios are specific cases of a more general theory. JEL Classification: B13; B22; E12; E20; E32; E43.