AGD - Chapter II - Keynesian Critisisms of the Theory

Chapter II discusses the main arguments of Keynesians against the Austrian Theory. It starts with The Liquidity Trap – meaning that the preference for money/liquidity could be so high, that investment cannot be stimulated by a falling interest rate. This means an economy will not find its way out of depression by itself. The following paragraphs focus on how savings, investment and interest rates are interlinked and whether liquidity preferences or time preferences determine the rate of interest. At first this seems to be an academic discussion, but then re-think: are the Keynesian or the Austrian views more relevant in a situation of financial depression. What does really determine our interest rate at the moment? Are we in a liquidity trap? And what if there would be no forces keeping these interest rates so low? 

Carrying on with Wage Rates and Unemployment, the old discussion on price flexibility of wages, and how prices too high would lead to unsold surpluses piling up (read: unemployment) is reiterated. Rothbard states the Austrian view, that the wider the extent of rigid wages, the more likely mass employment will be. German discussion of minimum wage comes to mind. And the ideas of early 1920s are cited – American prosperity is caused by the payment of high wages, that lowering wage rates would cut purchasing power. Rothbard lists several points, why the aggregate wage must not fall even if wage rates per hour come down. In addition, he argues for a sharp decline in wage rates to be allowed, as this will shorten the adoption process and minimize harm over time. Finally the effects on total demand are discussed, making a point that even with lower wages money did not disappear, unless it is ‘hoarded’. The argument carries on, that even if we assume consumption would have been reduced by lower wages and this has let to higher savings, it would still foster a faster recovery by lower interest rates.