Jonathan discusses why The General Theory was so successful here. As I understand him, he's saying that it was successful because it adequately critiqued what Jonathan calls "Marshallian" economics. Keynes was fond of Marshall, and so I think you'll be more likely to find Keynesians call it "Classical" economics. One of Jonathan's points seems to be that the Austrians never were Marshallians and this became especially clear only after Keynes successfully displaced Marshallian economics.
Towards the end he talks about what Austrians ought to do to assert their "supremacy". My position, of course, is that they have no such "supremacy", so they ought to be strategic. There are good ideas that Austrians can contribute. ABCT, I think, has a lot of potential in the mainstream as one of many macroeconomic mechanisms worthy of study. Believe it or not, I'm actually warming to Austrian views on inter-subjective utility comparisons. My position used to be that making these inter-subjective comparisons was a justifiable modeling assumption that didn't do all that much harm. After all - we're really mostly dealing with marginal utility, so Austrian hand-wringing about whether total utility comparisons can be made always seemed beside the point. Lately, though, I've been so frustrated with implicit conflations of clearing markets and "ideal" outcomes that I'm beginning to wonder whether the whole welfare economics outlook that people carry over from micro is doing more harm than good.
Regardless, the point is Austrians have good things to bring to the conversation and I support that enthusiastically. I don't agree that they have anything that would displace the Keynesian paradigm that we're in. Some day I'm sure the paradigm will shift, and I hope I'm not so old and crusty at that point that I miss it. I don't think the Austrians will bring that about.
Ultimately, Jonathan rejects this line that Keynes succeeded because he was good for politicians. That demonstrates a great deal of wisdom on his part.
Friday, July 22, 2011
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I'm doing a bit more research, with the intent on writing a full-scale article on the subject. Not that this will be done any time soon.
ReplyDeleteIn case you were wondering, Bob Murphy is doing Keynes tremendous justice in our class (more than I likely would were I teaching him) and it's helping me soften up to him.
ReplyDeleteDid you see when I kinda sorta endorsed your LP interest rate theory?
After all - we're really mostly dealing with marginal utility, so Austrian hand-wringing about whether total utility comparisons can be made always seemed beside the point.
Just to clarify, Austrians don't (to my knowledge) make total utility comparisons. That idea should have been shunted out by the 20th century. What we do argue is that you can't make interpersonal comparisons of marginal utility - just what you said. It's a simple epistemological deduction that we simply can't say for certain who benefited more from trade, who loses most from government intervention. This goes all the way back to Robbins in the 30s when he was debating Keynesians.
I'm beginning to wonder whether the whole welfare economics outlook that people carry over from micro is doing more harm than good.
Rothbard is very famous for his work on welfare economics. You might want to check it out.
"ABCT, I think, has a lot of potential in the mainstream as one of many macroeconomic mechanisms worthy of study."
ReplyDeleteI dont see why at all: in the Hayekian versions ABCT is dependent on the unique natural interest rate concept, an untenable and non-existent fantasy idea in any growing economy, whether a barter one or a money-using one.
Curiously, even Murphy admits how flawed and untenable is the unique natural interest rate concept:
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
Despite what he saysm once it falls, there is not much left of ABCT, and it is certianly no threat to Keynesian economics.
"Keynes was fond of Marshall, and so I think you'll be more likely to find Keynesians call it "Classical" economics. One of Jonathan's points seems to be that the Austrians never were Marshallians and this became especially clear only after Keynes successfully displaced Marshallian economics."
ReplyDeleteAustrian economics in practice holds the same flawed axioms as Marshallian or Walrasian neoclassical theory:
(1) the ergodic axiom
(2) the gross substitution axiom.
This comes out in Paul Davidson's review of Gerald P. O’Driscoll and Mario J. Rizzo's The Economics of Time and Ignorance:
Paul Davidson, “The Economics of Ignorance or Ignorance of Economics?,” Critical Review (1989) 3.3/4: 467–487.
The radical subjectivist wing of the Austrians has some sensible things to say. E.g.,:
"Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials. During the war the situation was exactly the opposite, but precisely for this reason the same recipes, but with opposite sign, applied. With millions of men and women in the armed forces everything, not merely labour, was scarce and any reduction in demand anywhere welcome."
L. M. Lachmann, 1973. Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences, Institute of Economic Affairs. p. 50.
But how many Austrians have you ever seen willing to admit that Keynesian stimulus would have worked in the depression?
Mostly they just foam at the mouth and descend into irrationality and bile at the mention of Keynes's name.
So long as their isn't so much noise in interest rates that they don't perfectly cancel them out, I don't see why the mechanism driving ABCT requires a unique interest rate, LK.
ReplyDelete"I don't see why the mechanism driving ABCT requires a unique interest rate, LK.
ReplyDeleteThen why do virtually all of the Austrian versions of ABCT go on and on ad nauseum about a unique natural rate? Can you point me to an exposition of ABCT that totally dispenses with the unique natural rate concept?
Murphy thinks he can, but hasn't even done so:
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
Also, Ludwig Lachmann, Joseph Schumpeter and Israel M. Kirzner did not think ABCT can be used to explain all business cycles. Lachmann thinks it was a theory of the "strong boom".
Yet turn to today's Austrians and all they do is try and explain ALL cycles ever seen in history in terms of ABCT.
Another flaw of ABCT is the assumption of scarce resources because the economy is supposed to be at full employment; a natural rate is supposed to signal how scare resources are because the natural rate is a real rate. Any such unqiue "natural" rate does not exist, however.
Any any time most capitalist economies have idle resources and unemployment, and are open to international trade. These cycle effects don't occur when resources are mostly available, and not scarce. And when a great deal of credit goes to consumers the whole theory collapses.
Hayek at the end of his life struggles with how his theory is basically irrelevant:
http://socialdemocracy21stcentury.blogspot.com/2011/06/hayek-on-flaws-and-irrelevance-of-his.html
Then why do virtually all of the Austrian versions of ABCT go on and on ad nauseum about a unique natural rate?
ReplyDeleteBecause it was the Austrians, following Wicksell, who understood that the interest rate was not purely a monetary phenomenon and had real factors influencing it (the "unique (sic)" rate was simply one in equilibrium).
Also, Ludwig Lachmann, Joseph Schumpeter and Israel M. Kirzner did not think ABCT can be used to explain all business cycles.
Lachmann is not representative of the corpus of the Austrian school. Lachmann breaks with Misesian Austrianism along with Shackle later. Schumpeter was never an Austrian. And we've already been over Kirzner's position (you're misunderstanding his argument).
Yet turn to today's Austrians and all they do is try and explain ALL cycles ever seen in history in terms of ABCT.
Yawn.. okay. Let me put it this way. Just to make it clear once and for all.
ABCT is a sufficient, but not necessary condition for a "business cycle." There CAN BE other causes for a "downturn" (a vague and unhelpful phrase) including hyperinflation, a rapid increase in the demand for money, war, earthquakes, disease, a change of government, etc etc. All of these can interrupt production and lead to a downturn. ABCT is a "If A, then B" argument. IF you engage in credit expansion, THEN the consequences follow.
You use the words "cycle" so loosely I don't know if you're talking about a credit cycle (which ABCT does explain) or any conceivable downturn.
Another flaw of ABCT is the assumption of scarce resources because the economy is supposed to be at full employment
You really are imitating your mentor well if you think our argument rests on the "special" case of full employment. It doesn't and it never has. The consequences of capital elongation and discoordination appear even in less than full employment.
Any such unqiue "natural" rate does not exist, however.
Keynes was fond of such ipse dixits as well. Care to offer any proof of your claim that the interest rate is a purely monetary phenomenon? Or are we supposed to rely on your say so?
Any any time most capitalist economies have idle resources and unemployment, and are open to international trade. These cycle effects don't occur when resources are mostly available, and not scarce.
Again... if A then B. If there's no credit expansion.. there's no ABCT. And where there is credit expansion, the consequences of ABCT will follow. I'm beginning to think you really don't understand either the process of deduction or the nuances of the Austrian position.
Not only do you disagree with Mises and Hayek, but Wicksell and basically anything pre-Keynes.
And when a great deal of credit goes to consumers the whole theory collapses.
The collapse comes precisely BECAUSE consumers are demanding credit. The credit structure gets pulled in both directions and factor prices skyrocket. Are you sure you didn't just read Krugman's Slate article??
"It doesn't and it never has. The consequences of capital elongation and discoordination appear even in less than full employment."
ReplyDeleteReferences?
"The collapse comes precisely BECAUSE consumers are demanding credit."
What collapse? The type imagined in Hayekian ABCT? Don't make me laugh.
As Rothbard admits:
To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur. (Rothbard 2004 [1962]: 995–996).
Hayek:
"You see, that’s another point where I thought too much in what was true under prewar conditions, when all credit expansion, or nearly all, went into private investment, into a combination of industrial capital. Since then, so much of the credit expansion has gone to where government directed it that the misdirection may no longer be overinvestment in industrial capital, but may take any number of forms. You must really study it separately for each particular phase and situation. The typical trade cycle no longer exists, I believe. But you get very similar phenomena with all kinds of modifications."
(Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 183–186).
With different forms of credit, according to Hayek, you have alleged "misdirection" in new forms, so it's obvious that a quite different theory is required from the endless rubbish derived from Hayekian forms of ABCT that Austrians are constantly flogging like a dead horse.
If you're saying the credit cycles to consumers cause "malinvestment" in the form of asset bubbles, and knock on effects in the real economy as the bubble collapses, Keynesians already have a far superior theory to explain that: it's called Hyman Minsky's financial instability hypothesis.
LK -
ReplyDeletere: "Also, Ludwig Lachmann, Joseph Schumpeter and Israel M. Kirzner did not think ABCT can be used to explain all business cycles."
Well certainly not. I wouldn't claim that either.
You still haven't answered my question about why it requires a single rate. Let's say multiple rates move roughly together. That sounds like it could set in motion precisely the same mechanism.
And if I were to explain that mechanism I'd just explain it in terms of one rate because nothing is lost in making that simpler exposition.
Do you have a reason to think it's illegitimate, or are you just going to cite people that talk about a "natural rate"? You're not giving me much to work with here, LK.
On Hayek - the man seems very preoccupied with developing totalizing, complete, airtight systems and when he discovers you can't really do that he gets frustrated and instead just wants to say its all complex and any attempt to understand it in a rigorous way is "scientism".
It doesn't matter to me that Hayek shot for the moon, realized he can't do that, and then threw his hands up in frustration. I think the underlying mechanism driving ABCT is a plausible one and a useful one to incorporate into our broader understanding of how the world works Andrew Young has a new article out (available online at least at RAE) providing some very convincing empirical proof.
re: "You really are imitating your mentor well if you think our argument rests on the "special" case of full employment. It doesn't and it never has. The consequences of capital elongation and discoordination appear even in less than full employment."
ReplyDeleteLet's not bring Keynes into this, Mattheus. When he talked about capital structure elongation (specifically citing Bohm-Bawerk in that case) he never said anything like "this thing can't happen below full employment". This is an LK invention.
"And where there is credit expansion, the consequences of ABCT will follow. "
ReplyDeleteThat is utter nonsense.
In Monetary Theory and the Trade Cycle (1929) [English trans. 1933 by N. Kaldor and H.M. Croome]), Hayek made it perfectly clear full employment equilibrium was his starting point:
“The purpose of the foregoing chapter was to show that only the assumption of primary monetary changes can fulfill the fundamentally necessary condition of any theoretical explanation of cyclical fluctuations—a condition not fulfilled by any theory based exclusively on “real” processes. If this is true then at the outset of theoretical exposition, those monetary processes must be recognized as decisive causes. For we can gain a theoretically unexceptionable explanation of complex phenomena only by first assuming the full activity of the elementary economic interconnections as shown by the equilibrium theory, and then introducing, consciously and successively, just those elements that are capable of relaxing these rigid interrelationships.” (Hayek 2008: 47).
In a letter written to John Hicks in 1967, Hayek confirms that his theory required the assumption of full employment at the beginning of the process:
Hayek to Hicks, December 2, 1967
... I accept assumption (a), full employment .... (Hayek 1999: 102).
http://socialdemocracy21stcentury.blogspot.com/2011/07/abct-and-full-employment.html
By the time of Profits, Interest and Investment (1975 [1939]), Hayek was scurrying to defend himself from charges that his theory collapses with significant idle resources and unemployment:
ReplyDelete"“As it is sometimes alleged that the ‘Austrians’ were unaware of the fact that the effect of an expansion of credit will be different according as there are unemployed resources available or not, the following passage from Professor Mises’ Geldwertstabilisierung und Konjunkturpolitik (1928, p. 49) perhaps deserves to be quoted: ‘Even on an unimpeded market there will be at times certain quantities of unsold commodities which exceed the stocks that would be held under static conditions, of unused productive plant, and of unused workmen. The increased activity will at first bring about a mobilisation of these reserves. Once they have been absorbed the increase of the means of circulation must, however, cause disturbances of a peculiar kind.’ In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems. (Hayek 1975 [1939]: 42, n. 1).
If the boom stops short of full employment, or ends soon after full employment, then no cycle effects result or mere inflationary pressures not causing some massive "malinvestment" of capital.
If resources are easily available by international trade, then no Hayekian ABC.
I look at it like this....
ReplyDeleteSuppose we have an injection of money that has not yet increase the price level.
Now, I'm running a business and I'm getting increasing profits. My expectation is that the price level will continue it's previous trend. So, when I get increasing money profits I read those as proportionally increasing real profits. This means I will be tricked, my money profits will rise and only afterwards will I find out that my real profits haven't risen.
Even if we have multiple "natural" rates of interest how can this effect be nullified? How is it that I magically plan my business properly despite being misinformed about my returns?
@ Lord Keynes
ReplyDeleteCan you point me to an exposition of ABCT that totally dispenses with the unique natural rate concept?
Is this a criticism of the Austrians or of Wicksell?
"Yet turn to today's Austrians and all they do is try and explain ALL cycles ever seen in history in terms of ABCT."
How about Horwitz and Callahan? As Mattheus points out above, most Austrians I know view ABC as constituting one type of cycle, and mostly focused on the boom phase. I personally think you need a lot of typically Keynesian and New Keynesian ideas to fully explain the bust phase. Mises/Hayek is a necessary but not sufficient explanation of business cycle phenomena. I think your statement is incorrect.
What collapse? The type imagined in Hayekian ABCT? Don't make me laugh.
When Hayek was writing consumer credit markets were far less developed than they are today. I still believe that credit expansion will be more likely to find its way to producers than consumers, but Roger Garrison refers to this as the tug of war. Have you read Garrison's book? It seems odd that you are dismissing Austrians for rehashing Hayek, whilst ignoring those Austrians who have made original contributions that build on his work.
Another flaw of ABCT is the assumption of scarce resources because the economy is supposed to be at full employment;
I think these two assumptions beed to be separated. Hayek rejected the concept of "idle resources" as post scarcity, and dispensing with the concept of scare resources dispenses with economic analysis. The opportunity cost of an unemployed worker is positive. This doesn't necessarily mean that he relied on an assumption that the economy was *at* full employment. He started his analysis with this assumption because he wanted to show how recessions can occur. It struck him as odd that Keynes would try explain the concept of a recession by assuming we were already in one. Hayek relied on the theoretical construct of equilibrium to explain disequilibrium phenomena. He was no New Classicist.
Keynesians already have a far superior theory to explain that: it's called Hyman Minsky's financial instability hypothesis.
Why view them as substitutes? Have you read Prychitko on this?
I still believe that credit expansion will be more likely to find its way to producers than consumers.
ReplyDeleteAlso, investment in ABCT should include consumer durables too, like houses and cars.
This is especially true of residential property which has a large resale market and a large rental market, making the purchase of a house very similar to a business investment decision.
Consumer loans to buy consumer durables are in most ways similar to business loans to fund investment. The only real complicating factor is loans that are used to fund consumption.
Why view them as substitutes? Have you read Prychitko on this?
Yes, Minsky may be right, markets may be endogenously self-destablising. The problem is that we can't tell because there are so many exogenous destabilising forces acting on them too. We have to disambiguate the two, and only then can we say anything conclusive about Minsky.
Minsky himself tried to evade this point by defining economics as finding the problems with market economies. He claimed that finding problems with government interventionism was outside the field.