Monday, April 9, 2012

A few questions about Hayek and Keynes

1. Exactly why are so many Austrians so convinced Keynes botched Wicksell? I hear this all the time, but I don't know if I've ever heard why. I'm not sure they even know why I say this. The best explanation I can get isn't from any modern Austrian, but from Hayek himself who talked about how concepts of saving weren't exactly consistent between them. This is something I thought Keynes noted explicitly, so I'm not sure this amounts to him "not understanding" him. Am I missing something?

2. It will feel like we've been over this before, but why would it be wrong (or wouldn't it be wrong?) to look at employment fluctuations in more and less roundabout industries as a test of ABCT?

3. How do Austrians think about the yield spread as a predictor of recessions? For me, it seems to highlight changing subjective expectations of future profit opportunities, so it seems to have an obvious Keynesian interpretation. It's less obvious to me how Hayek especially would think about it, because he didn't talk about short and long term rates as much as Keynes did that I know of.


  1. 1. I can't really respond in any detail, because I haven't read Wicksell. I would be aware, though, of the context the word "misunderstood" is used in. For instance, Keynes disagrees with the Austrians on the nature of the bust. One could argue that he misunderstood the argument. This doesn't mean that if he understood the argument he would have agreed with it -- it just means that he didn't "get" what he was critiquing. It could be the same way one could say that Keynes "misunderstood" Say's Law.

    2. What is a roundabout industry? Do you mean industries with longer production schedules? Credit expansion doesn't necessarily lead to longer production techniques by individual firms, but rather to higher orders of production (so, new production in higher orders). This ultimately doesn't matter with regards to what you're asking, but I just want to clarify matters.

    Does ABCT imply that there will be higher unemployment in higher order stages of production? I don't really think you can make this argument, especially in an economy where there are various forces acting in different directions -- including legislative forces. How do bailouts, wage laws, and other factors influence how recessions unfold?

    Neither does ABCT suggest that malinvestment will manifest only in higher order stages of production. Malinvestment can exist anywhere, as what we're talking about is a general scarcity of capital. Businesses affected by it will be those that are run by owners who believe that the true cost of inputs is not justified by the expected proceeds from produced outputs. It may be the case that higher order industries are disproportionately affected (since the structure of production should contract), but this is a model where only ABCT is considered, and I really haven't thought about it much.

    I do think a broad empirical examination is in order, and I do think that Austrians have done very little work in this area, though.

    1. Broadly, "more roundabout" means "more capital intensive." Labor intensive industries have "short" (conceptual) paths from downstream 9resources) to "upstream" (products). Capital intensive industries require the production of capital before it's possible to get from resources to products.

    2. Doc,

      I'm not sure that definition is widely accepted anymore. Your last sentence is, of course, correct, as it is implicit in the argument that fiduciary overexpansion will lengthen the structure of production. A lengthening of the structure of production will create more stages in the structure of production, which means more stages will require capital goods input (versus the original means of production). I'm not sure this implies a dichotomy between labor and capital intensive production processes. What you're referring to is more-or-less the Ricardo effect, and the merits of Hayek's theory have been hotly disputed.

  2. 1. Wicksell hinged his work on capital theory. Keynes ignored the capital theory.

    2. "Roundabout" is hard to measure. Andy Young has recent stuff that has reasonable measurements and gets the econometrics to work.

    3. Maybe. I can't think of any work done on this.

  3. 3. Paul Cwik talks about it in his lecture on ABCT.

    around 0:27 min

  4. Thanks for all of these thoughts and links guys - sorry I haven't gotten the chance to be too involved in the comment section here or elsewhere recently. But this query is towards a specific goal, so I appreciate it.

    And Ryan - yes, Young's work is the best empirical work in my mind so far (and very similar to an approach I proposed on this blog a while back). I can't say I understand your response to 1.

    1. The "story" that is told Keynes and Wicksell was that Wicksell's entire theory was built around Austrian-ish capital theory. When Keynes said he didn't understand certain things in German in Wicksell's book, this is in reference to the capital theory part. Hayek's position was from the beginning was that Keynesian version of the Wickellian rate of interest is nonsense for this reason. Keynes's followers from the beginning attacked Hayek's theoretical arguments without addressing this issue in their own theory, as Hayek was essentially right. This was not corrected for The General Theory, either; though under the Chapter 12 Keynesian interpretation of the book (which I think is the correct one), The General Theory represented a big enough theoretical break that this probably no longer mattered.

  5. Something I'd love to see is a set of statistics for describing the existing capital stock. I know it's something much more difficult to measure than output, but I think that even doing it roughly would be very interesting.

    Another thing I'd like to see is the numbers in the total money quantity equation MV=PT (not the *output* money quantity equation MV=PY). Bank transfer agencies along with other stats would make it possible to assess this roughly. I've found in the UK the bank transfer agencies keep this information but will only release it for a very large fee.


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