The broad disagreement between Keynesian and Austrian economists on the subject of “liquidity traps” is discussed in this item over at The Freeman blog. It’s kind of an important question as it is fundamental to where the global economy finds itself today and whether the disease and the cure (i.e., excessive debt) can really be the same.
Under the Keynesian paradigm, if monetary authorities cannot stimulate private spending by forcing down interest rates, then the only other avenue is for the government to borrow and create new money, and spend on its own projects. If the first option does not work, the second, by definition, must.
(Murray) Rothbard (in The Great Depression) continued that the very things Keynesians claim will worsen an economic downturn – including falling wages and prices and liquidation of capital – actually are necessary to speed up the readjustment. The Austrian-Keynesian divide is fundamental on this point; Austrians not only reject the liquidity-trap paradigm, but also hold that the problem is boom-induced malinvested capital rather than idle capital.
The distinction is important because Austrians say the economy cannot recover until the malinvested capital is transferred to other uses, liquidated, or abandoned altogether. Keynesians, on the other hand, claim that if government can spend enough money, the same capital that Austrians say is malinvested will be returned to full employment.
I suppose that if you were trained as a Keynesian economist – having invested years of your life academically and then finding yourself surrounded by the same sort of thinking professionally – it’s the path of least resistance to just dismiss the Austrian viewpoint about malinvestment out of hand. But, for anyone who doesn’t have that bias already instilled, it’s hard to argue against the Austrian viewpoint since taking a contrary position would imply that what we’ve seen over the last decade was not malinvestment.