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The Keynesian liquidity trap: an Austrian critique

In: What’s Wrong with Keynesian Economic Theory?

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  • Peter Boettke
  • Patrick Newman

Abstract

Our contention is that the real opponents of Keynes are the Austrians, who belong to the school of thought that best champions the theory of a self-correcting market economy. The countercyclical policies embraced by Keynesians as well as the Chicago School Monetarists are generally seen as counterproductive. In particular, this chapterprovides critiques of the liquidity trap theory from an Austrian perspective. It is argued that if prices are allowed to freely fall and are not propped up by government intervention, the liquidity trap roadblock poses no genuine threat for the free market economy. Only when prices are rigid and government intervention is pervasive does the phenomenon of a “liquidity trap” and hoarding money result in a stagnant economy.

Suggested Citation

  • Peter Boettke & Patrick Newman, 2016. "The Keynesian liquidity trap: an Austrian critique," Chapters, in: Steven Kates (ed.), What’s Wrong with Keynesian Economic Theory?, chapter 1, pages 11-25, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:16893_1
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    Economics and Finance;

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