1. Axel Leijonhufvud, “Keynes and the Crisis,”
The Federal Reserve System under Greenspan put this proposition to the test in the years following the dot.com crash, pursuing an extreme low interest policy. The result was more Keynesian than Monetarist and, as I have already noted, more Austrian than Keynesian: virtually no CPI inflation, but drastic asset price inflation and very serious deterioration of credit standards (p. 4).
Leijonhufvud is an incredibly interesting character. He is familiar with Austrian theory, and he was influenced by the line of Keynesian scholars (including Shackle) that focused on Keynes’ contributions to disequilibrium economics. Leijonhufvud’s most well-known work, perhaps, is that which deals with interpreting Keynes within the framework of coordination and discoordination.
H/T John Cochran.
Krugman uses it to confirm that this recession is not one characterized by structural problems.
This is why I prefer a pure Austrian story to other structural “recalculation” theories. Others envision huge shifts in the structure of production, almost like entire shifts in industrial production (between different markets). So, for instance, this recession should be typified by a shift from construction-based industries to others. But, according to the unemployment figures, this is not the case.
Austrian theory makes a much broader claim. Malinvestment is about aggregate investment; namely, aggregate investment that requires more than the actual available quantity of capital goods. This is caused by distorted profit signals, in turn caused by money injections through the loanable funds market to entrepreneurs. When the monetary injections slow or cease, prices adjust, suddenly causing profitable lines of investment to be revealed as unprofitable. The point is that the consequences can be felt by any industry, not just by certain industries. Some, true, may suffer more than others, but, in general, malinvestment is an economy-wide phenomenon.
Yes, there is a structural readjustment that follows. But, this is not a readjustment between entire industries, only. It is a more general rearrangement of the factors of production, and it is one which affects the entire economy. It also has to be considered that institutional forces (such as regulations and other sources of incentives) will affect how the structure of production changes. This is why I don’t think looking at patterns of unemployment in more “roundabout” industries, as Daniel Kuehn put it, would be a fruitful empirical verification.