A lot of times Austrian economists will say that the Austrians used to be really popular and influential, but that they were eclipsed by the Keynesians in the 1930s. Then they might explain this outcome along the lines of, “The Keynesian economists told government officials exactly what they wanted to hear: spend more money to fix this depression, whereas the Austrians told them they were the problem, not the solution. So naturally, the Keynesians ended up teaching at the top rank schools (funded with tax dollars) and staffed all the important posts.”
Now usually, mainstream economists reject this type of explanation as a self-serving conspiracy theory. They will say the Austrians failed the “market test” in the academic arena. “If you Austrians had better ideas, they would have risen to the top in the peer-reviewed journals. Stop whining.”
In that context, I was very surprised to read Paul Krugman’s account of the Keynesian triumph:
If you go back to the state of American economics in the 1930s and even into the 1940s, it was not at all the model-oriented, mathematical field it later became. Institutional economics was still a powerful force, and many senior economists disliked mathematical modeling. When Paul Samuelson published Foundations of Economic Analysis in 1947, the chairman of Harvard’s economics department tried to limit the print run to 500, grudgingly accepted a run of 750, and ordered the mathematical type broken up immediately.
So why did model-oriented, math-heavy economics triumph? It wasn’t because general-equilibrium models of perfect competition had overwhelming empirical success. What happened, I’d argue, was Keynesian macroeconomics.
Think about it: In the 1930s you had a catastrophe, and if you were a public official or even just a layman looking for guidance and understanding, what did you get from institutionalists? Caricaturing, but only slightly, you got long, elliptical explanations that it all had deep historical roots and clearly there was no quick fix. Meanwhile, along came the Keynesians, who were model-oriented, and who basically said “Push this button”– increase G, and all will be well. And the experience of the wartime boom seemed to demonstrate that demand-side expansion did indeed work the way the Keynesians said it did.
Except for that last sentence–the part about Keynesianism “work”ing–Krugman’s narrative fits almost exactly the (allegedly) self-serving Austrian version.