Saturday, December 10, 2011

Arnold Kling does a good job wrapping up the recent Keynes v. Hayek arguments (mostly)

He writes of Warsh:

"I think he genuinely believes that modern mainstream macroeconomics has ignored Hayek, and if you want to debate that as a factual issue, I think I would rather argue on Warsh's side [me too, obviously - I've been taking this to be a debate about the factual issue, after all].

My problem with framing things as Keynes vs. Hayek or what have you is that it turns what should be an argument over an ideas into an ad hominem. Also, energy that might otherwise go into arguing the merits of idea X instead goes into arguing over whether idea X is what Keynes or Hayek really meant."

I agree with this last sentiment too. And not only does it turn it into an ad hominem but it presupposes that the two men are incompatible which is a really bad way to approach them. This is the Russ Roberts/John Papola "bottom up/top down", "steer markets/set them free" mentality. It's not healthy. I think part of the reason we get into "whether idea X is what Keynes or Hayek really meant" is that a lot of people in this debate our interested in intellectual history. So for us, whether they really meant it matters - not as an alternative to the idea itself but in addition to the idea itself.

But we're never entirely free from these tendencies. I was surprised after all that to see this at the end of Kling's post: "Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models." I did a double-take when I read that. Normally when we repeat over and over again that information problems are real and we need to take them into account and people don't always have the information they need we get dismissed as being obsessed with market failure as excuses for guv'ment to come in!!! Now we're the ones that assume managers have complete information and control??? Kling here is describing how he came to appreciate Austrian economics. If I had to put a name on worrying about this sort of problem I would call it "information economics" and I would associate it with Joseph Stiglitz, not the Austrian school.

Anyway - like Kling said - focus on the ideas! But then Arnold, if you want us to do that, don't make me do double takes like this again by artificially pitting mainstream economists and Austrian economists against each other when they appreciate the same point!!!


  1. As a related note, I think Robert Vienneau did the best job of wrapping this up:

    I actually do place significance on what these thinkers 'really meant'. In the case of Keynes, what has always forced me to ally with his ideas is the fact that his policies precipitated the post-WW2 boom.

    With Hayek, he is actually fairly inconsistent and to be honest I'm not 100% sure what his policy prescriptions would be.

  2. I'm going to repeat myself on what I said of the Hayek/Keynes conflict at Social Democracy for the 21st Century:

    " the Keynes versus Hayek debate really all that new? See this review by Dr. Brady that suggests one dimension of the Keynes vs. Hayek debate is foreshadowed by another debate dating from the Enlightenment.

    And here's another working paper by Dr. Brady that discusses two of the aforementioned Enlightenment economists. "

  3. W.r.t. information economics, with the contributions of Akerlof, Stigler et al, I think most Austrians would recognize them as a step back towards the right track. But they did not precede the analysis of the Austrians in this problem, nor in their recognition of the problems in standard general equilibrium theory (see Hayek's excellent article, "The Meaning of Competition" for instance, or Mises excellent discussions in Human Action on the subject along Knightian lines). You are correct in the sense that the mainstream has decided to recognise the contributions of the former group more, probably because of the fact that one is able to conduct modelling exercises with them.

    Moreover, as Anderson argues do not represent a flaw but an inherent feature of markets to which market actors continually strive in their actions to find solutions too. For this reason they would also reject the interventionist conclusions w.r.t. solutions to asymmetric information put forward by authors like Stiglitz. See here:

    Regards, from a sometimes intrigued reader of your blog.

  4. Anon I think what puts me off Austrians is that they say things like 'we start from a point of no equilibrium, limited information, etc.' then come to almost rhe exact same policy conclusions as neoclassical free marketeers!

    Don't get me wrong, there are both public and private solutions to information asymmetry (and Akerlof discusses both in his paper). But it seems all Austrian discussion has a preordained conclusion of 'government bad'.

  5. re: "(and Akerlof discusses both in his paper)"

    Few things get me madder than an Austrian discussing the Akerlof paper.

    I have had several distinct incidents of people telling me that it's all about how government should intervene which is absurd because government has the same information limitations as private citizens and this point is completely lost on "mainstream" economist.

    If you ever hear an Austrian say anything like that, you can pretty much bet they've never read the paper. There are public and private solutions and there is a very clear, and very prominent (I believe on the first page) recognition that government will face the same information problems.

    You see this with Stiglitz too. Peter Boettke will insist to you that Stiglitz thinks property rights don't matter. It's simply not true. What Stiglitz says is that property rights will not do much for a society in transition if market institutions aren't also in place. And in Russia (what he was talking about), he was right.

    Do not try to learn mainstream economics - particularly anything touching on market failure or information theory - from an Austrian. Learn it yourself.

  6. If someone tries to make Keynes and Hayek into a clash of the titans - don't listen to them. They're distorting things.

    If someone tries to make Coase and Pigou into a clash of the titans - don't listen to them either. Same problem.

    Economics is not a morality play. It's also not a clash of the titans.

  7. Daniel: Was that in response to my post?

  8. I was quoting unlearningecon. I mention Coase vs. Pigou because on these "market failure" questions it's always framed as a Coase vs. Pigou issues. I personally get a lot from both Coase and Pigou. If you think my position is just that of Pigous, excluding Coase, then of course I appear to be highly inadequate.

    The problem is - this is rarely the case. Science is cumulative. Almost everyone who thinks about these things seriously is deeply influenced by both Coase and Pigou. And yet for some reason some people like to pretend there's a fight going on.

    That's not to say there aren't fights, of course.

    As for your post and Brady, I'm not sure I entirely agree with him, although I'd need to look at his correspondence more and I'd need to know more about Smith v. Bentham (which I have to take his word on). Keynes talked a lot about tax structures that would increase the marginal propensity to consume. Indeed in his later years it was the logic behind what was known as the "Keynes plan" that inspired a lot of what the "fiscalists" (as Brady calls them) had to say about tax policy and demand management.

    I think a better thing to say is not that Keynes didn't go for demand management or tax policy or fiscal policy - what Keynes doubted was the success of "fine tuning". For Keynes, an equilibrium below full employment and an end to the business cycle were two fairly different propositions. He actually didn't have much to say about "the trade cycle" (ie - the business cycle) which is what a lot of fiscal policy is discussed in relation to.

    I'm not sure whether I entirely agree with Keynes on this. Friedman's "plucking model" forces me to think that the business cycle and a below-full-employment equilibrium are not necessarily as distinct as Keynes might have thought.

    I should probably procure a copy of vol. 27 of the Collected Works. Allan Meltzer refers to it a lot too.

  9. Drat - $250 on Amazon. I knew it would be expensive, but that's quite a price tag for one volume.

  10. I suppose the next best thing would be to borrow a copy of Volume XXVII of CWJMK from American University. XD


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