Hayek and Keynes: From a common critique of economic method to different theories of expectations

Anna Carabelli () and Nicolo De Vecchi

Review of Political Economy, 2001, vol. 13, issue 3, 269-285

Abstract: The methodological positions of Hayek and Keynes contain striking similarities. Both authors opposed empiricist approaches to economics that assign priority to mere observation as the source of knowledge. Both emphasised intentionality, motivation and human agency. Notwithstanding this common ground, they had different conceptions of how beliefs are formed and had different explanations of thought and action in economics. Hayek grounded his explanation on an evolutionary theory of the mind, i.e. on psychological premises, whereas Keynes based his view of belief formation on probable reasoning, where probability is a logical concept. Starting from psychological premises Hayek maintained that individuals act rationally only by following rules. As a consequence, he considered conventional expectations to be the primary guide for agents in economic life. Keynes agreed that conventional expectations actually guide economic behaviour, but he maintained that they are justified only in situations of total ignorance. In conditions of limited knowledge, agents can base their action on reasonable expectations, independently of conventions. Moreover, agents—particularly those institutions responsible for economic policy—ought to shun conventional behaviour in order to counteract its negative social consequences. We argue that Keynes's theory of expectations is well grounded upon his theory of logical probability. Hence his advocacy of discretionary policy is rationally justified.

Date: 2001
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DOI: 10.1080/09538250120055140

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