Rizzo with a Keynes and Hayek (and others) letter

Mario Rizzo reposts a fascinating pair of letters from Keynes and Pigou (and others), and Hayek and Robbins (and others) from 1932.

UPDATE: [Coordination Problem and Taking Hayek Seriously pick this up as well. The commentary on Taking Hayek Seriously is a little much (there are references to binging, spending on "any and every projects they might imagine", and similar characterizations I can't place or make sense of)... lot's of straw men without a single quote from the Cambridge letter. Coordination Problem is characteristically classier. I have my disagreements, but it is what it is.]

UPDATE 2: [It's really a shame Mario Rizzo isn't a Keynesian - he'd make a damn fine one. Oh well. In the comment section to his post he includes this source as well, highlighting how counter-cyclical spending and Keynesianism are related. Anyone who has read any economics from the 1920s knows that while there's a lot of common ground between advocates of counter-cyclical spending and Keynesianism, Keynesianism (i.e. - The General Theory and work that built on it) by no means originated it, nor was it defined by it. The paper Mario links to explains the different paths that the Chicago School and the Keynesians took from a common, initial support for counter-cyclical fiscal policy. The paper seems to focus on Keynes's thoughts on government budgeting - needless to say there are also additional theoretical departures from the early counter-cyclical spending literature that justify Keynes's practical advice on budgeting]

The Cambridge crew writes:

"when a man economizes in consumption, and lets the fruit of his economy pile up in bank balances or even in the purchase of existing securities, the released real resources to not find a new home waiting for them. In present conditions their entry into investment is blocked by lack of confidence. Moreover, private economy intensifies the block. For it further discourages all those forms of investment - factories, machinery, and so on -- whose ultimate purpose is to make consumption goods. Consequently, in present conditions, private economy dos not transfer from consumption to investment part of an unchanged national real income. On the contrary, it cuts down the national income by nearly as much as it cuts down consumption. Instead of enabling labour-power, machine-power and shipping-power to be turned to a different and more important use, it throws them into idleness."

Before this statement, they noted that frugality in World War I did not have these problems because resources were directed towards what they call "an insatiable war machine". They follow this point by highlighting that the same effective demand logic applies to government that applies to individuals.

Rizzo highlights two critiques from Hayek, Robbins et al.. The first is a critique of Keynes, Pigou et al. on their hesitation in the purchase of existing securities. The LSE crowd contends that purchase of these existing securities is necessary for the issuance of new security and investment and so is a good thing. I really agree with both Cambridge and LSE on this, and I think to a certain extent they're just talking past each other. I don't think the Cambridge letter is saying that there is anything inherently destructive about the investment in existing securities themselves. Their point is more that such investments in existing securities, as well as deposits, are symptomatic of the reduced demand for consumption and investment - and that reduced demand is problematic. I would agree with that. Robbins and Hayek seem to miss that and treat it like Keynes and Pigou are arguing that investment in existing securities is the problem in and of itself - and not a symptom of the problem. The Hayek/Robbins solution is essentially saying "let's satisfy this demand for liquidity so the economy can get back on its feet - let's buy those existing securities". To which I think the Keynesian response would be "fair enough - but there are better ways to do that than waiting for the demand for liquidity to be satisfied - particularly since we think that this liquidity preference is artificial in the first place". In other words, I think they're talking past each other on this point - which provides a marvelous precedent for the modern debate as well!

I think Rizzo fails to quote what I think is the most interesting part of the Hayek and Robbins letter. He references this point I mentioned above on existing securities, as well as an additional concern about public debt. So far that's just (1.) talking past Keynes and Pigou on securities, and (2.) a standard Reinhart-Rogoff position on being careful about public debt. Rizzo doesn't quote the part where Hayek and Robbins's Austrian bona fides really stand out. They write:

"They appear to hold that it is a matter of indifference as regards the prospects of revival whether money is spent on consumption or real investment. We, on the contrary, believe that one of the main difficulties of the world to-day is a deficiency of investment -- a depression of the industries making for capital extension, &c., rather than of the industries making directly for consumption. Hence we regard a revival of investment as peculiarly desirable."

I always find this to be an interesting point. A Keynesian generally says that the market works fine, but the level of demand is not always consistent with full employment. If we place value on full employment, we should boost demand for capital, goods, and services relative to demand for money. Keynesians value both consumption and investment, and aside from perhaps some social initiatives (i.e. - spending on the poor and/or unemployed because... well because they're poor and/or unemployed), they don't really want to dictate where it goes. More direct spending is more efficacious of course in terms of the multiplier - but they don't place a higher priority on consumption relative to investment generally. As Hayek and Robbins say "they [Keynes and Pigou] appear to hold that it is a matter of indifference... whether money is spent on consumption or real investment". Indeed they do. Here, the LSE writers are of the opinion that what you really need is more investment.

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Rizzo contends that the debate today is essentially the same, that everything ultimately boils down to a debate between Hayek and Keynes, and that everything else is a footnote. To a certain extent I agree with this - but I think he's discounting the extent to which these are differences of emphasis rather than opinion. He notes that Hayek comes out and says deflation is undesirable. I note here that they don't really disagree on the existing securities question - Hayek and Robbins confuse the fact that Keynes and Pigou are arguing that investment in existing securities is symptomatic of the problem rather than the problem itself. Hayek and Robbins also raise the Reinhart-Rogoff point about the debt - which essentially every economists agrees on, we just disagree on when it is really worrisome and when it isn't. So on all of these points, Hayek, Keynes, Robbins, and Pigou basically agree - they just place different emphases. I think the same is true today. There are lingering disagreements. They still don't see eye-to-eye on the unique importance of investments. They still don't see eye-to-eye on their theory of output. Those are very important issues. But they shouldn't obscure the fact that there is common ground. Indeed - the guy that coined that insight that all economic argument boil down to the disagreement between Keynes and Hayek (that would be J.R. Hicks) was a big fan of both Keynes and Hayek.