George Selgin commented on my post, "Krugman and Macroeconomics," expressing reservations about my statement that his and Steve Horwitz's version of Austrian business cycle theory incorporates significant Keynesian elements. My belated reply, which follows, is long enough to warrant a separate post:
George, thanks so much for your comment, with which I mostly agree. I admit that many pre-Keynesian economists, Hayek, and some Monetarists all saw negative velocity shocks as one important source of depressions or recessions. But I still think it is fair to describe that view as Keynesian. After all, a Keynesian attack of "animal spirits" is nothing more nor less than a velocity shock. Indeed, I would identify this as the central proposition of Keynesian business cycle theory, although the Keynesian insistence upon referring to changes in velocity (i.e., money demand) as changes in "autonomous spending," or even worse, as a divergence between "planned saving and planned investment," often obscured this simple fact.
Three distinct positions on velocity seem to have dominated the debate after Keynes: (1) the traditional Keynesian view that autonomous falls in velocity were the only source of economic downturns because the money stock, for the most part, did not matter; (2) the orthodox Monetarist position, as exemplified by Milton Friedman, that the cyclical behavior of velocity was mainly a function of what was happening to the money stock, and that therefore, while in theory velocity shocks could cause economic fluctuations, in practice fluctuations are almost always driven by the money stock; therefore velocity...
