1. His model was considerably more highly aggregated than that of, say, Lawrence Klein's "Old Keynesian" models.
2. The guy seems to agree that one difference between Austrians and "Anglo-Americans" is that Austrians do not think consumption and investment demand move in the same direction over the business cycle. Mises disagreed with this. I know a lot of modern Austrians will foam at the mouth if you suggest this. But I don't think many people appreciate that Hayek thought this (at least as of 1941). They find it much easier to accuse their accusers of being idiots.
"The guy seems to agree that one difference between Austrians and "Anglo-Americans" is that Austrians do not think consumption and investment demand move in the same direction over the business cycle."
ReplyDeleteIs this a reference to Hayek’s Ricardo effect (or what Kaldor preferred to call the “Concertina-Effect”)?
There is a classic article by Kaldor debunking it:
Kaldor, N. 1942. “Professor Hayek and the Concertina-Effect,” Economica n.s. 9.36: 359–382.
Well that is how it plays out in the theory, yes, but I had in mind a list of differences where Hayek lays it out as a difference without even mentioning the Ricardo effect - he produces a list of differences between Austrian and Anglo-American economics and lists that as one of the differences.
DeleteIt's fine if people disagree with Hayek on that, but they really shouldn't accuse others of misrepresenting the Austrian school when they're simply agreeing with Hayek.
Kaldor's article is rubbish. The guy simply didn't understand Hayek. The closest piece of work to a "debunking" was by Baumol (1950): "The Income Effect, Subsitition Effect, Ricardo Effect".
DeleteEven that is incomplete. You can write a very basic model that demonstrates the principle. It's more of an empirical matter, not one of logic (whether it is applicable in the real world).
Yeah, I'm not really a fan of hayek's ricardo effect. I'm not sure if Mises agreed with it, but I know Rothbard didn't.
ReplyDeleteI haven't read The Pure Theory of Capital, but I've read a lot of Hayek's other work on the Ricardo effect. AFAIK, The Pure Theory of Capital is not a work on business cycle theory, and I'm not sure the Ricardo effect is what he necessarily has in mind when explaining the business cycle. Read, for instance, Hayek's 1932 response to Sraffa: he clearly thinks there can be an increase in consumption during the course of the boom (as new money trickles to the "original factors of production"). Wrt to the business cycle, all he's interested in his phantom profits, or the creation of profits through monetary injection which will 'suddenly' disappear if new money isn't injected.
ReplyDeleteI agree on PCT. In fact in this list he pretty much says "the last four are part of business cycle theory and not really the subject of this book".
DeleteBut it is somewhat frustrating that some Austrians act like you're foolish if you even suggest that Austrian theory implies they move in opposite directions.
Daniel,
ReplyDeleteThis isn't economics, it is b/s
There is no connection between changes in technology, raw materials, or even our sudden realization that we have problems and the economy that keeps the two in balance or in any "cycle." Downturns merely follows "shocks," of which there are many different kinds.
Take a simple thought experiment.
You publish the World Book encyclopedia. You have an old printing press, totally obsolete that runs on a steam boiler. A new electric press becomes available at a cost of $100 million. You buy it---it has nothing to do with the number of employees, borrowing the $100 million. The next day the CD rom is invented. An encyclopedia on a CD costs $5 v your $1000 product, so you are out of business and the $100 million is a total loss or write off.
We might now dip as a nation, unless the CD rom shocks lots of firms, but there are technologies or collections of technology that are shocks. A firm just released a new voice recognition program that finally works for $215 per station. It is going to end secretarial typing pools. I don't know how may jobs, but there will be no future typists jobs.
Or, you have a whole set of firms that support making car parts at a local factory. The factory is closed and the machinery moved to China, just to be nearer the Chinese market. All demand disappears (Detroit ?)
Or, as Dugger commented in the fall of 2008, the likely cause of the Lesser Depression was when all businesses came to understand the fiscal disaster of the Bush tax cuts, for thousands of firms and millions of jobs in the US are tied to a strong consuming Federal Government (and now we face automatic defense cuts).
The "business cycle" doesn't exist. What does happen is the application of herd mentality. Once knowledge is acquired, it is spread. When GE starts engaging in FAC discounting it cannot keep the secret.
There is no cycle, just thresholds of confidence.
Take our current problem of 15 million unemployed. It would cost us about $700 billions to hire all this people at Minnesota's per capita GDP of $48.6K, for a year. Since we built the Great Pyramids, always, the only question is how to finance such. We cannot finance putting 15 million people to work because no one is willing to take the risk of the write off if we fail. Those who would suffer the write off--through either or both higher taxes or inflation---have the political power to prevent us form hiring the people and putting them to work. This has nothing to do with any "business cycle" or Ricardo effect or any of the bs of Hayek or the Austrians.
Can we please move the discussion past a college dorm room?
Wow, you invest an awful lot of energy in bemoaning inherited nomenclature like "business cycle" to characterize downturns.
DeleteDaniel,
ReplyDeleteI am not just bemoaning nomenclature. I am bemoaning all the wasted time and energy spent on BS like Hayek and Libertarians, etc.
I believe I have very accurately stated the current problem.
We have 15 million people unemployed +/- As Keynes wrote, we could give them all a shovel and put them to work, tomorrow. I even estimate the costs. We won't do this because those who might have to pay the write off to the extent the investment is a bad one have the political power to stop the investment.
The point that you don't get, that Hayek never understood, but that Keynes understood was that you frame the question backwards. If someone is unemployed, that is a 100% write off. Thus, even the most minimal output obtained by putting the unemployed to work is always the best outcome for society, as a whole. In otherwords, regardless of how much mal-investment comes out of a Keynesian effort to reduce unemployment, we are always better off than if we did nothing.