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.
Larry Kudlow and the Failure of the Chicago School
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