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Handling the Crisis: A Keynesian vs. Austrian Analysis of the “Great Recession”

This paper explores the differences between the mainstream economic interventionist view associated with John Maynard Keynes and the heterodox, non-interventionist Austrian School perspective associated with Friedrich Hayek on the Great Recession of 2007-2009. The literature review compares and contrasts articles explaining each view as they attempt to solve the problem of ending the recession. The heterodox Austrian School/Hayekian view is that central banks should take a hands-off approach to recessions, whereas the mainstream neo-Keynesian view is that central banks should take a more active role through monetary easing in an attempt to end the Great Recession. These two approaches are at odds with each other, but through this thorough and robust analysis, we will understand the similarities (if any) as well as substantial differences and what they can tell us for the next recession. Also included is a section on Methodology to highlight the differences in how economists of both camps conduct their research and present their findings to argue their case. The paper uses an analytical framework to show how the Austrian/Hayekian and Keynesian approaches differ both in content and methodology. The Keynesian perspective makes use of graphs and empirical data in the primary sources referenced to prove that the federal government and the Federal Reserve should have acted more quickly to implement an interventionist economic recovery. On the other hand, the Hayekian/Austrian approach makes use of methodological individualism and praxeology as the lens with which to examine the Great Recession and to show that such economic interventionism had the opposite of the intended effect; intervention, according to the Austrians, made the crisis worse. Not only are their conclusions different, but the means by which they examine the crisis are different as well. Finally, the paper examines some areas for future research on both sides to make each case stronger. Special emphasis is placed on how to develop the arguments of these two views further with regard to future recessions, particularly of the magnitude of the 2007-8 financial crisis.