Thursday, December 8, 2011

Boudreaux 25% right, DeLong 75% right, Garrison 100% right on Hayek

The longer these debates go on, the more claims get made, and the more specific I have to be on what I think of peoples' arguments!

So Brad DeLong breathed new life into the Hayek argument yesterday when he wrote:

"Friedrich von Hayek is only a very minor and very unproductive figure in the work of macroeconomics. He–and Schumpeter, von Mises, and the rest of them–spent a lot of time figuring out why it might be that when you learned that you had overinvested and overborrowed, the natural and necessary thing to do was to shutter (rather than repurpose) factories and send your workers home to eat Cheetos and watch “The Real Housewives of Galt’s Gulch”."

Don Boudreaux challenged him on exactly the point that he was right about - that Hayekian macro is an over-investment theory [save your consternation until the end of the post, please]. Don writes "this interpretation of Hayek is utterly mistaken. First, Hayek’s theory of boom and bust was not one of over-investment; it was one of mal-investment." Oh if I had a nickel for every time I heard this in the blogosphere. In fact it's so common I've probably said it myself a few times. The problem is, only the last part of the sentence is right.

As Roger Garrison points out, Hayek does over an over-investment theory - in fact he offers an over-investment and a mal-investment theory. In his wonderful book Time and Money, Garrison writes:

"The Austrian theory has often been described as an over-investment theory of the business cycle. If this were the whole story, Mises-Hayek would simply be a variation of Friedman-Phelps. Defenders of the Austrian theory, including the present writer, have often argued that to categorize the Austrian theory as an over-investment theory is to miscategorize it. The Austrian theory is a malinvestment - rather than an over-investment - theory of the business cycle [yes this sounds like Boudreaux, and this is probably where Boudreaux would stop quoting... keep reading!]. It is certainly true that policy-induced malinvestment is the unique aspect of the theory. We see now, however, that while malinvestment - the misallocation of resources in the direction of stages remote from consumption - is rightly taken to be the unique and defining aspect of Austrian theory, over-investment is a critical enabling aspect of the theory. Without over-investment, the malinvestment would be as short-lived as Hicks's critical remark suggests." (p. 81)

Later in the book Garrison writes "Some periods of over-production (unsustainably high levels of both consumption goods and investment goods) is a virtual prerequisite for there being scope for malinvestment" (p. 227).

Garrison is clearly an authority on ABCT, but if you doubt him, go to the source. Hayek indeed quotes Mises on the business cycle as an over-investment phenomenon: "The first effect of the increase of productive activity, initiated by the policy of the banks to lend below the natural rate of interest is . . . to raise the prices of producers' goods while the prices of consumers' goods rise only moderately. . . But soon a reverse movement sets in: prices of consumers' goods rise and prices of producers' goods fall, i.e., the loan rate rises and approaches again the natural rate of interest" (Mises, 1912, Theories des Geldes und der Umlaufsmittel - quoted in Prices and Production).

Hayek describes the process of over-investment as a result of money creation himself on pages 55-58 or so.

Now, of course as Garrison points out what's unique about ABCT is the malinvestment story, but the whole point of why malinvestment is a problem is that a repurposing of capital is not easily made! That's why malinvestments allegedly cause so many problems! Brad DeLong is right here - Hayek said the natural and necessary thing for owners of capital to do is to lay people off. If repurposing was easy, maladjustments wouldn't be a problem and they wouldn't be an explanation for unemployment!

So how am I scoring this? ABCT is both an over-investment and a mal-investment theory, so each are worth 50% of the total score. You get half the malinvestment points for recognizing malinvestment is a problem, and half the malinvestment points for recognizing that ABCT says that because repurposing is problematic, we have unemployment. So:

- Garrison obviously gets all points - 100%

- DeLong I am being tough on so I don't get accused of favoritism. He gets all the over-investment points but only half of the malinvestment points because he doesn't explicitly highlight malinvestment as co-equal with overinvestment (but he does note the capital repurposing problems) - 75%

- Boudreaux misses all the over-investment points, gets points for recognizing malinvestment, but misses half the malinvestment points for disputing DeLong's argument about repurposing, which is the whole problem according to ABCT. There would be no "BC" in ABCT if repurposing weren't a problem! - 25%

Boudreaux might be saying that Hayek wants capital repurposed but knows that it's hard. If he's saying that he gets 50%, but he needs to clarify. If he's saying that I don't see why he's disagreeing with DeLong.


  1. While I agree with DeLong, I also consider Joseph A. Schumpeter to be hardly a marginal figure. Granted, he shared the fatalism of Friedrich A. Hayek and Ludwig von Mises, but DeLong unintentionally marginalizes Schumpeter's contributions.

    As for ABCT, I've gone over my opinion of the Austrian conception of uncertainty before, and I'm not afraid to do it again. Implicitly, the Austrian conception implies that information is so well distributed that the puzzle pieces can be perfectly arranged - when the information required for future decision-making in reality, simply isn't available.

    Austrian mal-investments wouldn't happen if the weight of evidence happened to be unity. (Or if you want to interpret that mathematically, w = 1.)

  2. It's interesting the different approaches to uncertainty.

    Keynesians focus on intertemporal uncertainty (dark forces of time and ignorance), Austrians focus a lot on contemporaneous uncertainty (uses of knowledge in society).

    This is just a big, bird's eye view that obviously is limited - so nobody should get too up in arms over it. But I think that's often why people talk past each other on this and why they make ridiculous accusations about the other side making assumptions about knowledge. the other side thinking

  3. You could also make the argument that Austrians talk about uncertainty but don't properly absorb its implications, Daniel. Keynes has a weight of evidence concept found in his Treatise on Probability that his disciples have yet to take advantage of.

  4. Interestingly, in Richard Ebeling's review of Garrison's book "Time and Money" both of these controversies are mentioned.

    Daniel, if you're interested in the "overinvestment" debate read the paragraph starting "And this brings us to Garrison’s explanation of the workings of the Austrian theory of the business cycle." to the end.

    In my opinion real-world cycles involve over-investment. However, I don't think over-investment is strictly necessary, in that I follow Ebeling and his interpretation of Hayek. Though I don't agree with everything he says.

    Blue Aurora, if you're interested in the uncertainty debate read from the start until just after the part I mentioned to Daniel. I'm sure you'll find plenty to disagree with in Ebeling's view, but I think it's interesting, especially on the Mises-Lachmann exchange from the 40s.

  5. Current: Thanks. Speaking of Roger Garrison's book, Dr. Brady has written a review of it before...

  6. My focus was on the fact that DeLong got the basic economics wrong. Which I think matters more. I agree that malinvestment essentially means overinvestment in a particular area. But it is not overinvestment across the board. To say "overinvestment" implies it is across the board, while "malinvestment" implies overinvestment in a particular area.

  7. I'm not seeing how he got the economics wrong, Troy. Overinvestment implies there is more investment than there should be. This is Hayek's position. Malinvestment implies that the structure of that investment is wrong. This is also Hayek's position.

    Where is the issue?

    I think you're fishing for something to be mad at DeLong about, or else I'm not understanding your argument. DeLong is not one to get basic economics wrong very often.

  8. DK-I think a lot of the confusion about "over-investment" arises from individually different interpretations about it's exact definition. In fact, I'm not exactly sure what Garrison means by over-investment in the quote you posted - I'll have to go and take a look.

    It's probably pertinent to point out that Mises spends a good two pages in HA (trade-cycle chapter-556-557) addressing accusations that the "austrian" theory is an over-investment theory. One of his main points is that, properly understood, the theory is really more of an "over-consumption" theory. The bust is a consequence of the fact that the rate of present consumption renders previous investment unprofitable - it is "too high" relative to the pattern of investment. I think this point is especially hard for people not familiar with Austrian literature to grasp - a lot of people generally think of consumption and investment as compliments, where as ascribing to the theory that they're substitutes is paramount to ABCT.

    Back to the "mal" vs. "over" distinction, Mises provides a nice simple example - although it seems you're pretty clear on the distinction.

    So if you a have master builder that constructs a plan for a house on the basis of reports about resources from an assistant - reports that are substantially biased - then that plan is going to be super inconsistent with what he can actually get done. If he lays the foundation and some bricks, only to discover he's got barely anything left, it would be kind of silly to characterize this as "over-investment" (at least from how I interpret the term). The builder has allocated those resources into a pattern that is inconsistent with not only his own plan, but the plan he would of developed had he known the actual amount of resources at his disposal. To my mind, "over-investment" would be the builder acquiring resources in excess of what he needs to carry out his plans - about as far from the Austrian story as you can get. In any case, I think you'd have to agree that a lot of the confusion stems from the semantics involved.

    BA-I have no idea how you've come up with the "implicit" consequences of the ways Austrians treat uncertainty. The idea that the "puzzle pieces can be perfectly arranged" is so at odds with the theory developed by Hayek and Mises, that I'm curious to hear what your reasoning is. In fact, this kind of belief would seem to make it difficult for their to be such a thing as a business cycle, except for the RBC variety.

  9. My reasoning is in line with that of Lord Keynes of "Social Democracy for the 21st Century".

  10. Jonathan M.F. CatalánDecember 8, 2011 at 12:05 PM

    Blue Aurora,

    I'm not sure how you derive your conclusions on the Austrian conception of uncertainty and how there must be perfect knowledge for the Austrian business cycle to be possible. If you are even a little bit familiar with Austrian literature you know that all of what you claim is absolutely untrue.

    Brady is equally incorrect when describing Hayek's views on uncertainty. Hayek never argues that prices convey all knowledge; they convey some knowledge. That is, prices are incomplete substitutes of subjective knowledge, which would otherwise be completely unknowable. Brady's rendition seems to be based on what one would get from Stiglitz' erroneous interpretation of Hayek.

    I can agree that perhaps Hayek does not take into consideration what we might call "radical ignorance" -- the unknown unknown. This is why we might have the Kirznerian entrepreneur who is a "discoverer" and then a Misesian/Rothbardian entrepreneur which focuses more on innovation and creativity. But in his discussions on knowledge Hayek is not discussing intertemporal uncertainty. Instead, he is using knowledge as a means of explaining why economies are in constant disequilibrium. Incomplete knowledge means that it is impossible for the plans of every single individual in an economy to converge. It was a criticism of neoclassical economics as a means of proving Mises and himself correct in the socialist calculation debate. Thus, assessing the complete Austrian theory of uncertainty based on a few papers by Hayek (which are actually on a different topic) seems unfair.

    I'd like to ask Daniel what Austrians, other than Hayek, "focus" on "contemporaneous uncertainty." This is also something somebody unfamiliar with the corpus of Austrian literature would say.

    Austrian business cycle theory implicitly acknowledges the role of intertemporal uncertainty. We can derive this from the fact that all production takes over time, and that there is malinvestment implies that there is severe disequilibrium. We can also derive intertemporal uncertainty from the fact that Austrians recognize the potential for entrepreneurial loss -- if all knowledge can be derived to form a perfect puzzle then there would be no such thing as loss.

    Lachmann, who respected Keynes' views on uncertainty (through his readings of Shackle) also considered Mises a theorist of "radical uncertainty." This should provide at least some direction in your research on the Austrian conceptions of uncertainty.

    In reference to "time and ignorance", which Daniel correctly ascribes to Keynes, I would also suggest Mario Rizzo's and Gerald O'Driscoll's book that goes by this title.

  11. Jonathan M.F. CatalánDecember 8, 2011 at 12:10 PM

    With regards to over-investment and malinvestment, these should not be treated as two different things within the context of ABCT. Mises spends two pages trying to differentiate between the two only because he is trying to avoid having his theory of intertemporal discoordination associated with more naive theories of over-investment (e.g. Harberler's exposition of ABCT implies that is akin to other over-investment theories).

    But, essentially, within the context of ABCT there are no differences between malinvestment and overinvestment. I think Daniel misinterprets Garrison here. Garrison's point is that in order for their to be malinvestment there must necessarily be investment over that which would be justified by the current level of consumption. So, there is over-investment, but this type of over-investment is malinvestment.

    But, calling Austrian theory one of overinvestment and then associating it with other theories of overinvestment would be wrong. I'm not sure if DeLong is able to make the same distinction, but it would be unfair to accuse him of this failure based only a blog post. But, given his other blog posts, I see no reason why DeLong would understand these nuances.

  12. Jonathan M.F. CatalánDecember 8, 2011 at 12:12 PM

    Blue Aurora,

    I would also suggesting looking at the debate between Lachmann and Kirzner on equilibrium theory. The papers are available in The Foundations of Modern Austrian Economics. If you read Lachmann, you can see the Lachmannian/Misesian concept of the entrepreneur, knowledge, action, and (dis)equilibrium over time.

  13. re: "I'd like to ask Daniel what Austrians, other than Hayek, "focus" on "contemporaneous uncertainty." This is also something somebody unfamiliar with the corpus of Austrian literature would say."

    I should imagine it's unfamiliar since I made up the term on the spot.

    I'm simply noting that when Austrians remark on a lack of knowledge, it's usually contemporaneous and the price system is (rightfully) pointed to as the solution. When Keynesians talk about a lack of knowledge, they're often talking about not knowing the future. References to interest rates equilibrating present and future consumption sound ridiculous because of course - even if one were to know the volume of future consumption, nobody knows what specifically it will be spent on. Real investors need more than "consumers want to consume in the future" - something that isn't even reliably communicated by interest rates. They need to know what they're interested in consuming. That's something interest rates don't tell you, and that's something entrepreneurs and investors need to guess at.

    All I'm saying is that Austrians and Keynesians seem to congregate their thinking around different applications of uncertainty. They worry about different problems.

    I'm just talking broadly. Like I said - don't get up in arms over it.

  14. re: "I think Daniel misinterprets Garrison here. Garrison's point is that in order for their to be malinvestment there must necessarily be investment over that which would be justified by the current level of consumption. So, there is over-investment, but this type of over-investment is malinvestment."

    I'm waiting on how I'm misinterpreting him. Isn't that what I'm saying? What makes you think I'm not saying this?

    re: "But, calling Austrian theory one of overinvestment and then associating it with other theories of overinvestment would be wrong."

    What? This is silly Jonathan. One can say "which theories rely on overinvestment?". Slot ABCT into that broad family of very different theories. Now say "which theories rely on underinvestment?". Slot Keynesianism under that. And of course, you could class Keynesianism with underconsumptionism theories too because they share the quality of looking at the problem differently than the various over-production/investment theories.

    ABCT is one of many over-investment theories. Either explain how it's not or accept that they can be grouped. Don't accept that we are talking about over-investment here and then reject the groupings that follow naturally from that.

    re: "But, given his other blog posts, I see no reason why DeLong would understand these nuances."

    Most ridiculous thing I've read today (and I've been reading Marx all morning!!!)

  15. Jonathan M.F. CatalánDecember 8, 2011 at 12:42 PM


    To Austrians, all action is intertemporal, thus all uncertainty is intertemporal. The passage of time per action will depend on the action, but given that Austrians believe that production necessarily takes over time -- and that as time preferences lower the structure of production will extend (i.e. total production time will increase) -- then any uncertainty that takes place between the final stages of production and the final stage of production (consumption) must be dramatically intertemporal.

    So, I see absolutely no evidence in support of your assertion that, "when Austrians remark on a lack of knowledge, it's usually contemporaneous and the price system is (rightfully) pointed to as the solution."

    In fact, all evidence argues otherwise.

    Austrians don't argue that entrepreneurs will know what current savings will be spent on in the future. Nor do entrepreneurs know when in the future these savings will be spent. This all presents an element of uncertainty. The pricing process is not a means of completely uncovering that uncertainty. What the pricing process is and the market institutions revolved around it (for example, the banking system do is a method of helping the entrepreneur sift through this uncertainty by providing partial knowledge substitutes, allowing market agents to coordinate with some degree of efficiency. It does not mean to suggest that any coordination would be perfect -- in fact, Austrians explicitly argue against concepts like perfect knowledge and optimality. There can be no optimality in a system in constant disequilibrium.

    The reason I "get up in arms about it" is because your conception of Austrian uncertainty is completely wrong. If that's your "generalization" then I shudder to think what your more nuanced interpretations may look like.

    Now, moving on to ABCT. I don't think you're saying that at all. You are "scoring" different commentators on whether they mention both "malinvestment" and "overinvestment", with some absurd scoring tactic which gives DeLong "75 percent" and Boudreaux "25 percent." But, Boudreaux deserves a higher score than DeLong, because at least Boudreaux understands the distinction between the Austrian theory of overinvestment (i.e. malinvestment) and other theories of over-investment. That DeLong doesn't understand the nuances of ABCT is apparent in his lumping together of Schumpeter, Hayek, and Mises. Schumpeter did not share ABCT with the other two listed economists.

    You cannot "slot" ABCT with other theories of over-investment, because other theories of over-investment are completely different. This is why Mises spent so much time emphasizing malinvestment; he did not want ABCT to be associated with these other theories, because they were not similar on any level.

    Finally, DeLong has consistently misinterpreted Austrian literature. He simply does not understand the context it is written in (the market process). DeLong does not have a nuanced or advanced understanding of the Austrian body of theory. None of his blog posts suggest that he does -- in fact, they all suggest otherwise. You are giving DeLong more credit than he deserves.

    This does not make him a bad economist. It just makes him a bad spokesperson for Austrian theory.

    I don't expect you to agree with me here, because you have consistently missed the mark in your assessment of DeLong's understanding of Austrian theory (e.g. DeLong's discussion point of Mises' views on money).

  16. OK Jonathan, forget I said it. You're making a much bigger deal of this than I intended. It was not intended to be a criticism. Different people have gravitate towards different sorts of problems.

    re: "But, Boudreaux deserves a higher score than DeLong, because at least Boudreaux understands the distinction between the Austrian theory of overinvestment (i.e. malinvestment) and other theories of over-investment."

    What the hell are you talking about Jonathan? Don doesn't even acknowledge it is an overinvestment theory! And DeLong has contrasted ABCT with other overinvestment theories like Marx's before. The whole reason why he talks about repurposing when discussing Hayek but not Marx is PRECISELY BECAUSE DeLong understands the different nature of these theories. You are really scraping bottom here, Jonathan.

    re: "You cannot "slot" ABCT with other theories of over-investment, because other theories of over-investment are completely different"

    This discussion is getting beyond stupid Jonathan. Of course you can. Taxonomies are always useful. You don't think Keynes and the mercantilists are completely different? They are. But it still makes sense to class them together.

  17. Jonathan M.F. CatalánDecember 8, 2011 at 1:20 PM


    DeLong explicitly writes that Hayek's theory is not about repurposing. He doesn't make that distinction. DeLong is trying to discredit Hayek by making it seem as if what Hayek is arguing for is just liquidation, but with no consequent restructuring of capital. He completely leaves that part out of his rendition, because he doesn't recognize the concept of "malinvestment" and the possibility that "malinvested" assets can be re-invested elsewhere. This part of the Austrian theory is not told by DeLong.

    Regarding classification, I'm not sure what's getting stupid. You write, "Taxanomies are always useful." This doesn't say anything useful itself, it's an assertion that you fail to apply to the discussion at hand. Some people like to compare Keynes with the mercantilists because the notice similarities between arguments. These attempts at associating Keynes and the mercantilists may be right or may be wrong, I'm not arguing either way. What I'm saying is that if the theories are similar then the classification makes sense.

    But, Mises spent so much time disassociating himself from other over-investment theories because he did not see any similarities. He did not see a reason to classify the two within the same taxanomy.

    This is what is missing in your barrage of over-generalizations that have nothing to do with what we're discussing.

  18. Jonathan M.F. CatalánDecember 8, 2011 at 1:21 PM

    i.e. malinvestment is 75% of Austrian theory, and over-investment is 25%, because it is malinvestment which makes Austrian business cycle theory what it is.

  19. Catalan: Perhaps "perfect knowledge" was a poor choice of words. But I remain unchanged. The Austrian view of uncertainty is indeed spoken of in the context of decision-making processes in the market.

    But Brady's criticism is that Hayek's conception of it IMPLICITLY translate to a complete jigsaw puzzle. Unfortunately, the weight of evidence in the real world does not always add up to unity.

    Unfortunately, a lot of the knowledge that exists today is simply not available, or would be too difficult to gather. Somehow, I don't see partial knowledge aggregating together to form a complete jigsaw puzzle. I fail to see how a complete jigsaw puzzle can be formed, let alone a good portion of it.

    Whilst I have not read the book on the Lachmann/Kirzner debate on entrepreneurship, I will point out that Brady criticizes Kirzner in his working paper on Hayek. Austrians resign to a certain fatalism that the market process or human reason sort itself out. Brady also cites an Austrian economist named Stefan Schmitz to bolster his critique. Even Schmitz acknowledges that uncertainty may be a little problematic for Austrian trade cycle theory and Austrian capital theory!

    Dr. Brady's grasp on Keynes's approach to uncertainty is pretty good, and he has read "The Economics of Time and Ignorance".

    He has also dealt with Richard von Mises's theory of probability and Murray Rothbard's misunderstanding of "A Treatise on Probability".

  20. As somebody pointed out above we need a good definition of overinvestment here.

    What exactly is it? Is it production of investment goods in excess of what would occur if the interest rate were the neutral rate? Or, is it production of such an excess of investment goods that it isn't possible to pay workers to use them all later? Or is it something else.

    And you all really should read the Ebeling article it's very good :)

  21. Blue Aurora, Are you making the case for real business cycle theory? If not I don't understand you.

  22. Jonathan -
    Ummmm... did you read this part??? "the natural and necessary thing to do was to shutter (rather than repurpose) factories and send your workers home to eat Cheetos and watch “The Real Housewives of Galt’s Gulch""

    The whole problem is that repurposing is not always an option, so the "natural and necessary" response is to lay off workers. See the master builder. See every rendition of ABCT ever. If repurposing is feasible, changes to the structure of production IS NOT A PROBLEM. How is this not getting through???

    re: "What I'm saying is that if the theories are similar then the classification makes sense."

    And over-investment theories are similar in that they all cite over-investment.

    re: "This is what is missing in your barrage of over-generalizations that have nothing to do with what we're discussing."

    No Jonathon. Far from "missing" this I noted in my blog post that a lot of Austrians try to disassociate themselves from over-investment theories. This is for two reasons - (1.) as Garrison says, malinvestment is what makes ABCT unique, and (2.) they get nervous about who else is providing an overinvestment theory - namely Marx.

    I know damn well how Mises wanted his work to be remembered, and he did not want it associated with Marx.

    But I also know that Mises, in explaining his theory, presented a theory of overinvestment and malinvestment. I am not letting the fact that Marx makes Mises squeamish keep me from a useful taxonomy. ABCT is a part of the broader family of over-investment theories. Period.

  23. Current: No, I'm not making the case for RBCT, I'm just poking holes in the Austrian approach to uncertainty. Brady has linked his critique to ABCT and ACT, and I agree with Brady's position.

  24. Daniel, did you read my posting? Here is what I say about DeLong's comments:

    "Let's analyze this statement. First, Hayek et al did not say that the "necessary thing to do was to shutter" factories. But we should not be surprised if we find that we have less money than we thought we did that we also do not have enough money to repurpose our factory. If you find you have less money than you thought, first cut costs. That is likely going to mean cutting wages, or cutting wage earners. Once you get costs back below income, you can begin to repurpose. The fact that this is apparently completely off the radar screen for DeLong says volumes about him as an economist."

    His economics here is simply atrocious.

  25. Wait a minute here Troy. How can you say that he didn't say "the necessary thing to do was shutter factories" and then go on to say "If you find you have less money than you thought, first cut costs. That is likely going to mean cutting wages, or cutting wage earners."

    You can't have your cake and eat it too, Troy. Which is it?

    The simple observation of DeLong and myself (and Garrison) is that Hayek's theory was based on a malinvested capital structure. Repurposing that capital structure is not costless, so firms fail - factories are shuttered. That's why the capital structure is even brought up!. If we could jump from capital structure to capital structure the no one would be laid off. The whole point of ABCT is that you can't do that!!!

    His economics is not atrocious. His economics is of very high quality - much higher than you or I can ever expect to achieve. I wish you all would stop saying things like this when you contradict yourselves in your own refutations!

  26. "But we should not be surprised if we find that we have less money than we thought we did that we also do not have enough money to repurpose our factory."

    Why assume this about the macroeconomy? The macroeconomy operates differently from a single factory. This is Keynes's point about the economy having "magneto trouble." I'd guess that is why it's "off the radar" for DeLong.

    He believes the economy can grow at certain trend rate without overheating and causing runaway inflation. When there is uncertainty and panic in the private market, a democratically-accountable government can step in and calm things down and keep the economy growing at trend rate. As I understand it, Hayek and Austrians don't want a democratically-accountable government stepping in and doing anything. They blame the mis-investments on the government and don't believe a democratically-elected government can fix the magneto trouble even though there have been historical examples of it doing so.

  27. Note the words used. "Necessary" means the only option. That is either wrong or a lie, since Hayek never said that. Which is it? Laying people off is another option -- which means shutting down the factory is not "necessary," just a possibility. When the malinvestments became obvious this time, some companies shut down, some were sold, some laid people off and otherwise reorganized. All of these are possibilities in Hayek's scheme. Surely you can tell the difference between shuttering a factory and laying off some of your people, but keeping it open. I would hope DeLong can. If he can't, he's a terrible economic thinker; if he can, he's misrepresenting Hayek, either by not being able to understand Hayek, or by lying. Which is it? Is he a bad economic thinker, unable to understand Hayek, or a liar?

  28. "It is "necessary" to lay people off" has at least two intelligible interpretations, Troy:

    1. It is necessary to lay some people off, or
    2. It is necessary to lay all people off

    Now come one - what exactly do you think DeLong was saying? Give me a break. You are really grasping at straws here.

    DeLong is a good economic thinker, able to understand Hayek (he's no Hayek expert, but he's better than the average person who claims the name "Austrian"), and he is not a liar.

    You seem intent on reading error into DeLong, no matter how ridiculous the argument.

  29. Can we talk about overinvestment? I want to talk about overinvestment it's a very interesting topic.

    Or are all threads here dedicated to drifting? :)

  30. I read the Ebeling article. It was interesting. Ebeling is a funny guy - he's very intelligent but he has some big blind spots that make him sound very naive when it comes to Keynesianism. I did not like the beginning at all for that reason, although it was interesting to note how well regarded Hayek was in the 1930s. I knew he was regarded as a major player, but I did not know (if Eveling's implication is accurate) that he was considered more prominent than other business cycle theorists. I'm not sure how this helps his case, of course. That means it's not as if Hayek didn't get a fair hearing (as a lot of people will contend). In fact, he had command of the stage and lost it - and he even lost some people that had previously agreed with him.

    I read it closely, skimmed the RBC section, and then read the part you suggested. One thing that's curious that Ebeling doesn't speak to is why he thinks the production structure is consistent with time preferences in the slack economy. This is something I've been raising for a while. I don't think the idea that the structure of production responds to the interest rate should be all that controversial. As I try to point out over and over again, Keynes said it was - crediting Bohm-Bawerk - in chapter 16 of the GT. It's a fairly straightforward observation. But it seems it's precisely in a slack economy that the capital structure would be the most inconsistent with time preferences, and yet Ebeling's assumption here (and Garrison's too) is always for some reason that it is most inconsistent during periods of full employment. I still don't really have an answer to why someone would think that.

  31. That's not what DeLong said. He said that Hayek

    "spent a lot of time figuring out why it might be that when you learned that you had overinvested and overborrowed, the natural and necessary thing to do was to shutter (rather than repurpose) factories and send your workers home to eat Cheetos and watch “The Real Housewives of Galt’s Gulch”."

    Hayek says nothing of the sort. So DeLong is either wrong about what Hayek says needs to take place after we have followed the recommended policies of hacks like DeLong, or DeLong is lying about Hayek's position. We have DeLong's exact words here. If Hayek never said what DeLong says he said, then DeLong is either wrong, or lying. Those are the only two choices when you say that someone said something they did not.

  32. Troy you're acting as if DeLong has said Hayek loves laying people off.

    DeLong is right about Hayek. The whole point of ABCT is that repurposing capital is not costless - the natural and necessary thing to do is lay people off in that case.

    re: "We have DeLong's exact words here."

    Yes, we do - so why are you still pushing this?

  33. At first I thought you just misunderstood Keynes - perhaps unknowingly. Now you're missing the primary point of including the capital structure in ABCT models!

    - Capital structure responds to interest rates because it's an organization of the productive process over time.

    - Capital structures can't be reformed instantaneously or costlessly, so when they are revealed to be problematic economic activity declines and people are laid off.

    - If repurposing were possible you wouldn't have to lay people off. The whole point of ABCT is recognizing that the capital structure doesn't turn on a dime. That's the whole point Troy.

    There's a lot of material out there to read up on this if you need to, and the original rendition by Hayek which everybody thinks of is relatively short and easy to read.

  34. Daniel, I don't get why you think that Mises quote is a smoking gun piece of evidence in favor of the "overinvestment" interpretation. You aren't quoting him saying anything about overinvestment.

    Are you saying that his words are basically implying that too many resources are going into producers' goods, rather than consumers' goods?

  35. DK reads Mises in terms of the "effect", whereas Mises was speaking in terms of the "cause" (as was Hayek). Mises went to great lengths to distinguish between over-investment and malinvestment. He specifically states that it isn't over-investment that causes the boom, rather it is investment in the "wrong lines" (i.e. malinvestment).

    This can be found on page 547-563 in 'Human Action'.

  36. My wife is now home and so I am going to stop plowing through Human Action (I don't have Karl Smith's staying power). But... is it just me or does Mises seem to suggest a highly inelastic supply of capital here when he talks about employing "r+p1+p2 as if it were r+p1+p2+p3+p4".

    If people embark on r+p1+p2+p3+p4 and capital goods aren't restrictively inelastic there's going to be an overinvestment response (perhaps an actualization of r+p1+p2+p3 before a crisis). I want to finish reading it, but that's clearly what the more reasonable modern expositors like Garrison have included.

    And yes I know the whole motivating problem is the malinvestment element of it (that's what I've been trying to get across to Troy), but that doesn't mean it is in the broad class of business cycle theories that is an overinvestment theory.

    When I finish reading this, maybe I'll recant on Mises. But I usually don't have Mises in mind when I'm talking about ABCT (and I usually mention I'm thinking of Hayek/Garrison). So "Mises read sensibly" is overinvestment and malinvestment, or Hayek and Garrison is overinvestment and malinvestment. Take whichever option you want. But the only sensible thing to do in taxonomizing these theories is to class ABCT with overinvestment theories.

  37. Daniel,

    This has much to do with time, valuation, and the extent of the capital structure.

    The structure of capital doesn't necessarily change on a dime, only prices do that. Since prices are the only real objective figure of economic reckoning, it makes great sense to understand the causes of changes in prices, as well as what stages of production in which these changes are taking place.

    When I speak of price, I am not limiting it to merely the price of a specific good (as is done in a supply/demand analysis), I am speaking of all market prices (goods, services, labor, capital, interest, as well as time-discount prices such as rent and lease). Merely changing the supply of money will have profound effects on all of these, thus leading to ends that are entirely abstracted from the actual nature of the structure itself-- this is malinvestment.

    No matter what good you use as a money, if you can arbitrarily change its supply without any cost or any reflection of market realities, then this change will cause radical changes in the price structure of goods all along the production structure. This is what Mises (Hayek) are talking about with regard to "malinvestment".

    The concept of "over-investment" is an entirely subjective consideration, one that is made after the malinvestment has been shown to be a mistake.

  38. BTW, don't let my ramblings pull you away from spending time with Kate. First thing is first, second thing is second, as Gene would say. ;)

  39. I think there is tendency amongst both Austrians and non-Austrians to overcomplicate the ABCT.

    Its really very simple.

    The central bank creates money which then gets lent out through the banking system.

    This new money will eventually lead to a new equilibrium of prices and interest rates.

    However as the banks will need to lower IRs immediately to clear the new funds but other prices will take varying lengths of time to reach their new levels there will be a period of disequilibrium.

    During this period of disequilibrium there will be overinvestment as the lower interest rates will allow investments to give bigger profits than would be the case at equilibrium.

    There will also be malinvestment as the low interest rates will make products that have a higher % of interest payments in their selling price cheaper to produce than at equilibrium and again allow profits to be bigger than at equilebrium

    When prices eventually approach their new equilibrium these marginal investments and malinvestments are no longer profitable and resources devoted to them need to be reallocated, which can cause an economic bust.

    Of course things gets a bit more complicated when one considers that the injections of money are normally continued over some period of time and are not one-time events as described here, but the principal remains the same.

  40. "higher % of interest payments in their selling price"

    should have been

    "higher % of interest payments in their cost of production"

  41. liquidationist,

    That's Larry Sechrest's net present value interpretation of ABCT. I think that's a very useful way to look at things.

  42. On "overinvestment" the whole problem is what it meant by overinvestment.

    Above I asked "Is it production of investment goods in excess of what would occur if the interest rate were the neutral rate? Or, is it production of such an excess of investment goods that it isn't possible to pay workers to use them all later? Or is it something else."

    If you read through Gene Callahan's discussion of Say's law he is concerned about the latter. See:-
    (Incidentally, I pointed this out to Gene in a blog comment on one of his earlier posts on the Say/Malthus controversy before he wrote this). What most people mean by an overinvestment theory is something like this.

    The other sort of "overinvestment" is investment which isn't consistent with the neutral rate of interest. Now, to most Austrian all production that is not immediately used for consumption is investment. The bun your burger comes in (and the burger) is investment until it is served to you. Now, some people like to describe the situation where too much is invested in long run projects are "overinvestment" to many of us Austrians at least it isn't it's malinvestment because those long run projects are being invested in *instead off* shorter run projects.

    Perhaps it would be useful to have a set of more precise words for this sort of thing.

  43. Current,
    Your example assumes that S=I. Austrians do not make this assumption, at least not that I am aware of. Savings is merely the deferment of consumption, whereas investment is the transfer of land and labor to the formation of capital. Obviously, you need savings in order to invest, but it should also be clear that they are not the same thing (in the Austrian perspective).

    Further, the bun in you example wouldn't be savings or investment, because its entire purpose is to be consumed.

  44. I'm not sure I'd call S=I an "assumption"... and I'm not sure all Austrians are going to agree with you on this one, Joseph (at least that first sentence).

  45. Whether other Austrians agree or not is why I said, "at least not that I am aware of". It certainly was not the impression that I got from the bigger names in the school of thought. Granted, economics isn't my primary focus of study, so I could be wrong.

  46. Yes, maybe assumption wasn't the best word in this case.

  47. Check out pages 8 and 9 here to get a better idea of why I said the above.

  48. This article by Roger Garrison is also helpful.

  49. My general opinion is that if I'm not agreeing with Garrison and Horwitz I've probably made a mistake.

    The whole S=I think depends on how you define the terms. Remember I was talking to more mainstream folks here. In mainstream econ stocks of goods that have been produced but not used are considered "investment in inventory" not "plain saving". Now, if we have plain saving then I have to say "...all production that is not immediately used for consumption is investment or plain saving." Though I don't think that today there would be much difference between the two.

    Regarding the burger bun.... Until it is consumed the burger bun is circulating capital. If we were to define output components such as consumption and investment per day then on the day the bun is baked there is an investment made. Later on when the bun is sold and eaten there is consumption. My point is that there is no hard line between investment and consumption. It depends on the time periods picked. In any problem we have to pick time periods and be rigourous about them. But, that process means that some of what is thought of a "circulating capital" becomes investment. Trees grown for wood, for example, are investment even though they will physically be consumed.

    I don't think what I'm saying is in conflict with Garrison's article on Strigl (which I've read but not recently).

  50. DeLong says Hayek says companies' only choice is to shut down. This is patently untrue. He is thus either wrong about Hayek, or lying. There are many other options, and Hayek knows that. Hayek just does not think that following the policies of people like DeLong, which got us in the mess in the first place, is the best way to get out of the mess. Hayek is far more complex an economist than DeLong believes or understands him to be.

  51. I think Troy is right that Delong doesn't understand the situation. It's not necessarily about businesses closing down whole factories. It's not about businesses as a whole being affected by roundaboutness, it's more about particular activities within them.

    It's also worth noting that it's not strictly necessary to cite the frictional cost of redeploying fixed capital. All that's needed is for some capital, be it "fixed" or "circulating" cannot be re-purposed at all.

  52. I really can't take this criticism of DeLong seriously. I don't think the understanding of Hayek turns on whether we say "factories are shuttered" or "particular activities within firms are affected".

    What would you think if some Austrian said "Keynesians think that when effective demand is weak businesses close down factories, and unemployment goes up" and I complained that that guy is either lying or has no idea what he's talking about because Keynesians have NEVER said that whole factories have to shut down.

    This is dumb - DeLong explained it just fine.

  53. I suppose ensuring the monetary policy maintains the "spending flow" (or stabilizes NGDP) is just like actively shuttering factories and sending people home to eat cherrios and watch the boob tube.


    The over-investment vs. mal-investment component of this is a side note. Hayek's policy norm is NOT what Delong is claiming here. And, more importantly, why the heck does he think politicians will know how to repurpose factories? His faith in politicians to know what to do and be incentivized to do the right thing isn't supported by reality.

    A Hayekian macro policy would stabilize NGDP and let the factory re-tooling be left to the people with the knowledge and incentives to discover how said factory can generate sustainable economic value.

  54. John when did he ever say the government would know how to repurpose or the government should repurpose factories?

    re: "A Hayekian macro policy would stabilize NGDP and let the factory re-tooling be left to the people with the knowledge and incentives to discover how said factory can generate sustainable economic value."

    The discussion has been over Hayek's contribution to macroeconomics. Hayek's contribution to macroeconomics is precisely what Brad describes - this is what he spent the 1930s working on - this is the position he put forward. If you don't believe me, then read Hayek. Later in his life, Hayek made some concessions to the opposition in terms of income stabilization. He hardly contributed to macroeconomic science on this point. It's not even a view that Hayekians universally agree with him on.

    Do you agree that there should be NGDP stabilization?

    If you do, can I take this to mean that you are now a supporter of monetary and fiscal policy?

    If not, could you explain?


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