Modern Macroeconomics and the Austrian School

The ideas of Austrian economic school are becoming more popular. However when you look at the current debates in macroeconomics (especially the academic ones) you will barely find any place for Austrian school ideas. Although most of today academic macroeconomics can be thought of as Keynesian (Greg Mankiw thinks that the old debate between freshwater and saltwater macroeconomics is dead), and although many old ideas have been successfully used recently (like Pigou’s theory of business cycle), there hardly is any place for Austrian ideas.

To start with, PhD students receive no exposure to any Austrian ideas during the graduate school. It not as much as about a bias, as it reflects the modern focus on doing quantitative analysis. To be fair, graduate students do not read Keynes’ General Theory either, however they receive a wide exposure to his ideas, or, to be more precise, to the modern interpretation of his ideas. Greg Mankiw describes very well this situation here.

On the other hand, today economists from Austrian schools have their share of responsibility for this. They oppose any mathematical approaches to the economy based on what they think it is the key methodological approach to economics, the praxeology; see here a description.

You might think that this is enough to prevent a wider circulation of Austrian economics ideas, given the fact that modern macroeconomists have been successful in recovering the idea of “animal spirits” from Keynes or the Pigovian business cycles. However there are also other issues which create resistance by leading macroeconomists, especially the return to the gold standard and the opposition to fractional reserve banking. Krugman’s article on Austrian macroeconomics is very relevant about this.

There are however signs that this situations might change in the end. The recent paper published by Prof. Mulligan in the well ranking Journal of Economic Behavior & Organization proves that the Austrian ideas can be part of the modern macroeconomic debates. Surely, his paper does not really propose a quantitative Austrian-like model, but inspecting the mechanisms of the Austrian business cycle theory is a good starting point.

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