I have a lot to do with my day job (to the extent that I have one), and so all the thoughts I have on this post by Jonathan Catalan have not been written down yet. But it's an excellent post, and Jonathan has been doing a lot of thinking about this recently.
Briefly, the view of mine that he describes is that I think we can understand a lot of the differences between Keynes and Hayek by tracing each of them back to Wicksell. Then you see that the mechanisms they highlight are quite different, but not incompatible (and both trace back to Wicksell). There's no reason you can't have both - in fact Keynes toys with that in the GT. What is different is what they think happens with the actual rate of interest and the natural rate of interest in a depression. Keynes is more classically Wicksellian in a lot of ways (the interest rate is "too high"), but the important point is that this is where they really are different and can really be tested against each other.
Friday, August 10, 2012
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What about the role of A Treatise on Probability in Keynes's thought? Catalan thinks that Dr. Michael Emmett Brady may be wrong in emphasizing the fact that Keynes had contributed to mathematics and philosophy in the form of probability theory.
ReplyDeleteIt was obviously important for his thought. Specifically it has a lot to say about expectations about returns on investment which influence marginal efficiency of capital (which are relevant for the points I'm making about Wicksell). Other than that, is there a tie here to TP that I'm missing?
DeleteIf you read the comments section of the post on Economic Thought that you linked to, you'll realise that I was emphasizing that A Treatise on Probability was the essential difference between Hayek and Keynes. I think that Keynes's mathematical training had an influence that Hayek lacked. This isn't to say that Hayek didn't have things to contribute. I'm merely saying that the Treatise on Probability likely was an important difference.
DeleteOh I'm not sure that's the essential difference. Well put it this way - it was something Keynes contributed that Hayek didn't but I don't think there was anything incompatible about any of that I know of. It's just different things they chose to write about.
DeleteUm, that's not what I said. You said that this suggests there's a difference between Hayek and Keynes in their view on uncertainty and Hayek's mathematical abilities. I stopped responding to your comments in that thread because you obviously weren't getting what I was saying.
DeleteJonathan: Yes, I was placing uncertainty at the centre of the matter, but I wasn't saying that Hayek was incompetent because of it.
Delete... what?
DeleteYou're right, that sentence was poorly constructed.
DeleteI meant to say that Keynes and Hayek's central differences are their approaches to uncertainty. Keynes's mathematical training allowed him to provide a technical decision theory to explain and possibly deal with uncertainty. Hayek lacks a technical decision theory to deal with uncertainty. This doesn't mean that Hayek was an incompetent economist, despite not being as well-trained a mathematician as Keynes was. They both have made important contributions to economics. However, Hayek's lack of a way to deal with uncertainty is for me, the key difference. It doesn't mean that Hayek couldn't make contributions to economics: he obviously had an impact.
Keynes's training in mathematics allowed him to deal with uncertainty and explain paradoxes in what would be called Subjective Expected Utility, a mathematical brainchild of Frank P. Ramsey, Leonard J. Savage, and Bruno de Finetti. I'm not sure whether the Austrian School accepts S.E.U. decision theory as basic, though I do know that there are Austrians who reject both rational expectations and the Efficient Markets Hypothesis. I don't want to turn this into a shouting match where we talk past each other, Jonathan. It seems to me that Hayek's lack of a way to sufficiently explain uncertainty (specifically with regard to affecting trade cycles) results in this difference.
I was under the impression for some reason that you thought I was saying Hayek was incompetent or inadequate. I wasn't trying to insinuate that, Jonathan.
Blue Aurora, what was Hayek's "way to deal with uncertainty?" Or, what evidence do you have that he lacked "a way?" And, please, re-read all my comments that are relevant to this -- where did I accuse you of calling Hayek incompetent? Leave out all the irrelevant fluff in your comments, and get down to business: substantiate your claims.
DeleteHayek rarely used the term uncertainty in his writings, from what I've read of Prices and Production and Individualism and Economic Order. Keynes's way to deal with uncertainty can be found in the form of his conventional coefficient of risk and weight, something Dr. Michael Emmett Brady has written extensively on.
DeleteWhenever Hayek talks about uncertainty, he seems to say that it is in spite of uncertainty that the market economy functions. Keynes argues that it can be impaired by uncertainty and lowered into a less than optimal (i.e., non full employment) equilibrium, or an unemployment equilibrium.
"A Treatise on Probability was the essential difference between Hayek and Keynes. I think that Keynes's mathematical training had an influence that Hayek lacked."
ReplyDeleteThough I respect Blue Aurora's opinion recently I've been coming to exactly the opposite conclusion.
After sitting down and thinking about it for quite a while there are many things that can affect the size of the NGDP or RGDP aggregates, many things can affect the investment aggregate in particular. Each economist seems to zero in on one or two of them, but there are many more that we can't throw out a priori without evidence they are irrelevant.
Uncertainty is important, but it isn't the beginning and end of everything.