... call it "a neglected passage of the General Theory"
Yesterday I offered what I think is a fertile empirical framework for assessing ABCT. This was motivated by thinking from Mario Rizzo on how to get broader acceptance of the Austrian school. One thing I've pointed out before is that the basic dynamics of ABCT are in the General Theory in chapter 16. Of course you wouldn't want to talk about it as a passage from Keynes in actual practice, but you could discuss ABCT as it was outlined by Hayek and then say "even Keynes used some of this logic as a brief aside in his discussion of capital, but he left its implications somewhat underdeveloped".
And underdeveloped it certainly was, but here it is:
"Given the optimum amount of roundaboutness, we shall, of course, select the most efficient roundabout processes which we can find up to the required aggregate. But the optimum amount itself should be such as to provide at the appropriate dates for that part of consumers’ demand which it is desired to defer. In optimum conditions, that is to say, production should be so organised as to produce in the most efficient manner compatible with delivery at the dates at which consumers’ demand is expected to become effective. It is no use to produce for delivery at a different date from this, even though the physical output could be increased by changing the date of delivery; — except in so far as the prospect of a larger meal, so to speak, induces the consumer to anticipate or postpone the hour of dinner. If, after hearing full particulars of the meals he can get by fixing dinner at different hours, the consumer is expected to decide in favour of 8 o'clock, it is the business of the cook to provide the best dinner he can for service at that hour, irrespective of whether 7.30, 8 o'clock or 8.30 is the hour which would suit him best if time counted for nothing, one way or the other, and his only task was to produce the absolutely best dinner. In some phases of society it may be that we could get physically better dinners by dining later than we do; but it is equally conceivable in other phases that we could get better dinners by dining earlier. Our theory must, as I have said above, be applicable to both contingencies.
If the rate of interest were zero, there would be an optimum interval for any given article between the average date of input and the date of consumption, for which labour cost would be a minimum; — a shorter process of production would be less efficient technically, whilst a longer process would also be less efficient by reason of storage costs and deterioration. If, however, the rate of interest exceeds zero, a new element of cost is introduced which increases with the length of the process, so that the optimum interval will be shortened, and the current input to provide for the eventual delivery of the article will have to be curtailed until the prospective price has increased sufficiently to cover the increased cost — a cost which will be increased both by the interest charges and also by the diminished efficiency of the shorter method of production. Whilst if the rate of interest falls below zero (assuming this to be technically possible), the opposite is the case. Given the prospective consumers’ demand, current input to-day has to compete, so to speak, with the alternative of starting input at a later date; and, consequently, current input will only be worth while when the greater cheapness, by reason of greater technical efficiency or prospective price changes, of producing later on rather than now, is insufficient to offset the smaller return from negative interest. In the case of the great majority of articles it would involve great technical inefficiency to start up their input more than a very modest length of time ahead of their prospective consumption. Thus even if the rate of interest is zero, there is a strict limit to the proportion of prospective consumers’ demand which it is profitable to begin providing for in advance; and, as the rate of interest rises, the proportion of the prospective consumers’ demand for which it pays to produce to-day shrinks pari passu."
Malinvestments aren't in there, but the response of the Hayekian triangle to changes in the interest rate is. That ain't bad. So why does Keynes only spend a couple paragraphs on this? Well, he said that the time it takes to produce something is just one facet of its production, and hardly something to build a theory on. He notes that different production processes also smell bad to varying degrees, but we don't have a "smelliness theory". He didn't think it made much sense to pick out one component of economic activity and exalt it as the driver of the system. Keynes stripped the economy down to its essentials: the supply of and demand for goods, and the money used as the intermediary to make that market work. He looked at each of those components and tried to understand how each impacted output. Obviously, I think Keynes took the most fruitful route and Austrians took the less fruitful route. But I don't think the Austrian route is as unfruitful as Keynes suggested. The trade-off between time and interest driving ABCT is a macroeconomic phenomenon - it affects the entire market simultaneously. That makes it a good candidate to explain broad, economy-wide fluctuations. Regardless, the Austrian dynamics are still in Keynes.
So use that! Note that!
If Austrians keep convincing themselves that they hate Keynes and Keynesianism, they're not likely to use that. If Austrians keep telling Keynesians that the Austrian school is incompatible with Keynesianism, the mainstream is going to start to believe it. A better approach, I think, is to say: "Look we've been thinking about it from this angle that hasn't received much attention by the discipline - so we could probably strengthen our understanding of the economy by focusing more on this angle (which, of course, we are well position to provide for you). And although you might no have heard of this stuff before it's not crazy - Keynes laid out the basic dynamics in the General Theory, although he didn't follow through on it. We're here to follow through on it."
Austrian Revival Photos
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