Friday, December 2, 2011

Seeking confirmation on an ABCT question

If all capital completely depreciated in one period, and the capital structure stayed the same, the total amount of investment in an ABCT model would just be the total area under the Hayekian triangle, right? It would take goods a certain period of time (longer than one period, in other words) to work through that production process - but that triangle represents the capital stock, so full depreciation would mean the whole triangle is invested.



  1. I'm not following your logic. Are you talking about a specific stage of production goods depreciating all at once - or the entire triangle depreciating all at once?

    And in either case, the total volume of investment is always the area under the Hayekian triangle.

  2. How can those two cases be the same?

    I'm just saying it that way because I'm interested in investment.

    Perhaps an easier way to say it is "the capital stock is the area under the triangle" - regardless of whether that capital stock is equal to investment or not. That statement is always true - that the capital stock is the area under the triangle.

    What throws me is the label "original means of production", and this understanding of "goods in process" since we have a time dimension.

    If I want to tack a Hayekian triangle onto some other model, I just want to know how to do that.

  3. Daniel, you claim to be a "fairly orthodox [Keynesian]", but sometimes I wonder if you're closer to heterodoxy than you even realize. Don't get me wrong - there's nothing wrong with exploring different schools of thought. It's just a question that bumps into my head about your position from time to time.

  4. Like Krugman and Stiglitz's? After all, Krugman has stated that he's somewhat sympathetic to Hyman Minsky, and Stiglitz isn't afraid to work with members of heterodoxy (he sits on the Board of Directors of Bard College, which runs the Levy Economics Institute). :-P

  5. Daniel,

    As far as I can tell you're right.

    As you say the capital stock is the area under the triangle. In an economy that's evenly-rotating (that is not progressing or regressing) the triangle will remain the same. Investment will be just sufficient to compensate for depreciation in each period. In a progressing economy there will be more investment than depreciation and in a regressing one vice-versa.

    Now there are problems with this, such as precisely where depreciation is put into the model. I can tell you more about those if you're interested.

  6. Daniel, I don't think it's right. You're conflating fixed and circulating capital.

    Yes, if we just focus on expenditures on things like ovens, tractor trailers, etc., then I think I agree with what you're saying.

    But e.g. in Man Economy and State, if we switch from one steady-state (my term) to another with a lower interest rate, then the investment pattern changes to be sure. But that investment includes the gross investments in buying the semi-finished products from the previous stage. In fact, in a steady state there isn't any net investment at all. I actually tell my students (when they are first encountering Rothbard's version of the Hayekian triangle) to not even think about fixed capital goods at all, but instead to imagine the investment at each stage is just buying the goods-in-process from the previous stage, and adding more doses of raw labor and raw natural resources at each subsequent stage.

    It's actually really tricky to use a Hayekian triangle analysis if you're thinking about fixed capital equipment that lasts for several periods. It's one of the weaknesses of the whole Mengerian approach.

  7. Oops on second thought Daniel, maybe it IS right, because you are effectively assuming away the existence of fixed capital goods. I.e. in your world, there aren't ovens; the bakers just buy flour and then turn it into bread each period?

    But anyway I just wanted to make sure you realized that in the standard Mengerian stage analysis, the investments at each stage include purchases of goods-in-process, what is sometimes called circulating capital.

  8. Bob,

    I'll say a few complicated things here because you'll appreciate them :) ...

    In the oldest forms of Austrian Capital theory (ie Menger and Bohm-Bawerk) there is something like fixed capital, there is circulating capital and as part of the latter there is a subsistence fund. Somewhere Hayek quotes a critic of Bohm-Bawerk saying that BB "paid far too much attention to the tree cut down for lumber and too little to the axe cutting it down". (That's an interesting remark especially since the "fixed capital" of an axe may well not last as long as the "circulating capital" of a conifer forest).

    That's interesting because of what comes next. As I understand Hayek's first attempt at the problem in his early books he's taking the view that all capital wears out over some period, so there is in effect no difference between circulating and fixed capital, just shades of grey. (Menger and BB both accepted that there really wasn't any difference too, but AFAIK they didn't alter much their overall view because of that).

    In Hayek's later attempts at the problem in "The Pure Theory of Capital" something like fixed capital makes a reappearance. But, this is in a modified form, Hayek defines periods over which things can be thought about for the purpose of solving a particular question. Then if a unit of capital is fixed for the entire period it is labelled as fixed. But, if a larger period needs to be considered then that capital may have to move over into circulating capital. Rothbard's capital theory in MES owes a lot to Hayek's in PToC.

  9. In a steady state there is no investment? There has to be - even with the circulating capital - certainly fixed capital needs to be replaced, right?

  10. Bob said there is no *net* investment. Fixed capital is replaced as it depreciates, circulating capital is replaced as it's used up.

  11. Daniel, Current has it; I said "net" investment, meaning investment above the level needed to maintain the capital structure.

    Let me come at the difference in approaches from another angle: In a Hayekian triangle approach, suppose there are no fixed capital goods (or just a small amount relative to the spending on circulating capital each period). So at the highest (farthest left) stage, the farmers pick wheat with their bare hands. Then they sell the wheat to the millers, who use rocks and their arms to grind the wheat into flour. Then they sell the flour to the bakers, who somehow use the sun to turn it into bread. Etc.

    So in that steady state, there is a lot of gross investment each period. The baker for example might spend $1000 buying flour each period, and sell the bread for $1050 to the wholesaler.

    But the way we compute the GDP statistics, consumption would be 100% of the economy. Investment would be zero.

  12. That makes sense.

    My thinking is along these lines still:

    And I'm not sure how to do it. One could simply talk about the shape of the triangle, but it would be nice to tie in the determinants of the volume of investment and actually write it out (unlike Garrison's diagramatic approach).

  13. Daniel, out of curiosity, what do you think of the Austrian conception of uncertainty in relation to Austrian Business Cycle Theory and Austrian Capital Theory? Just curious.

  14. If you mean the Higgs stuff, I don't think that really speaks to these theories. Higgs is really just tying up loose ends in these theories. If you mean the Kirzner stuff about dealing with an uncertain world again I don't think that speaks to these theories. Kirzner to me seems to dress up pretty obvious insights about entrepreneurs without making any of it that tractable (but then, I'm not Kirzner expert).

    The way I think of ABCT doesn't really involve any of these things - I'm thinking primarily of the response to fluctuation of the interest rate around some loanable-funds-market-clearing rate. One need not invoke uncertainty for that.

    Perhaps you could provide more detail on what you're thinking of?

  15. I'm thinking of the post which featured Dr. Brady's working paper critique of F.A. Hayek's "dispersal of knowledge" concept. At least to me, the Austrians seem to talk about uncertainty but fail to address or properly analyse it. Kirzner was also criticised Dr. Brady's working paper for similar reasons.

    The Austrian definition of uncertainty appears to punch a hole in ABCT and ACT, because in reality, liquidity preference occurs with a low weight of evidence.


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