Tuesday, September 4, 2012

From the horse's mouth

Jonathan has a long discussion on Hayek and capital theory, which I think is very good, but I want to clarify (perhaps unnecessarily) one point about my earlier post. I've been reading some of Pure Theory of Capital, but it's not like this has introduced me to the Ricardo Effect and I've concluded myself that because Hayek highlighted the Ricardo Effect, Hayek thought consumption and investment move in opposite directions. What I was struck by the other day was that he just comes out and says it, without even any reference to the Ricardo Effect (I assume that is what he has in mind, but maybe not):

Starting on page 47:

"In the following list of propositions the first of each pair is intended to represent the traditional or "Anglo-American" point of view, while the second gives the contrasting "Austrian" view on the same problem:


9A. The deamnd for capital goods is asumed to vary in the same direction as the demand for consumers' goods but in an exaggerated degree.

9B. The demand for capital goods is assumed to vary in the opposite diretion from the demand for consumers' goods."

Certain modern Austrians will go nuts if you have the audacity to agree with Hayek on this point. They'll tell you you don't understand Austrian economics. I just want to clarify that it's not just me extrapolating business cycle theory from a book that wasn't primarily about businss cycle theory.


  1. Actually, most Austrians think that consumption and investment move in opposite directions. That's precisely why Mises believed, for instance, that an empirical sign that we were headed for a business cycle is that consumer prices were stable, as opposed to falling.

    1. Well we have to be careful JC. E.g. when I responded to Tyler Cowen's criticisms of ABCT for Mises.org, I was astounded that he thought we couldn't explain the housing bubble years, since there was a spike in consumption. I thought that anybody who read Human Action would know about capital consumption etc. Someone actually had to tell me privately that there were some Austrians who had argued the opposite (in decades past, not talking about the housing bubble) and that Tyler wasn't nuts for thinking this was the canonical Austrian view.

  2. Yeah this is one of the, if not the, most important distinctions between ABCT and AD theory. And it really boils down to the theory of employment. Hayek notes in "Profits, Interest, & Investment" that movement in opposite directions requires full-employment , or at least scarcity in a good proportion of factors. And he also recognizes that before the peak of the boom, you won't have full-employment, so for a while you'll get the positive relationship. But as more and more factors get pulled in, you'll eventually get a world in which "full-employment" is a good proxy. At that point the negative relationship kicks in - you're basically back in a simple Ramsey model. The Ricardo effect is a theory of how this actually plays out in terms of money prices.

  3. In some of his writing Hayek talks about investment and consumption moving in opposite directions, in other he discusses when they move in the same direction. Mises is much less interested in GDP as a measure, in much of his writings he doesn't explicitly discuss it. But, as I see it, he implies both situations investment and consumption moving in the same direction in some cases and in opposite directions in others.

    Hayek is right in that list to say that Austrians are generally concerned with the "opposite directions" case. But, the list is about general concerns (as far as I can remember) not everything. For example, I think it says that Austrians are generally concerned with circulating capital rather than fixed capital. That doesn't mean that they take no notice of fixed capital.


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