Thursday, December 13, 2012

Major critics of Hayekian business cycle theory after Keynes and all that...

I sure I am missing some...


I am not going in grueling detail in any of this, but I do want to make sure I hit the highest points. Any others?


  1. Not necessarily a critic, but I'd mention Lachmann for his (IIRC) 1943 piece that is basically the first rational expectations argument against it. Also, while I haven't yet read his specific commentary, Hawtrey critically remarked on Hayek's work in the late 1930s. Knight might also be worth mentioning, at least for his debates with Hayek on capital theory. And, of course, Sraffa should be added to the list, both for his direct criticism of Hayek's Prices and Production and his later criticism of Böhm-Bawerkian capital theory.

    1. "Not necessarily a critic, but I'd mention Lachmann for his (IIRC) 1943 piece that is basically the first rational expectations argument against it."

      Are you talking about this?:

      Lachmann, L. M. 1943. “The Role of Expectations in Economics as a Social Science,” Economica n.s. 10.37: 12–23.

  2. Seen this?

  3. Hicks - Later in life.
    W. Baumol - Early in his career. From what I know, the only rigorous mathematical critique of the "Ricardo Effect" - rarely noted.

  4. Thanks everyone - this is helpful.

    edarniw - I've seen the Baumol critique of the Ricardo effect before, but perhaps it's not widely remarked on. People piled on that (Baumol may indeed be the most rigorous). Hayek adjusted in response, but it doesn't come out looking very original or much like a credit expansion distortion once he makes the adjustments, IMO.

    I'm hoping to have the most comprehensive review of the empirical literature out there, a good set of cites on past critics, and some (hopefully fairly) original thoughts to add.

    1. What Hayek response are referring to? I don't think I've read a response that directly addresses Baumol. Would be interested to read it.

    2. There's a critique of the Ricardo effect in Reisman. As I've said before I think too much is made of the Ricardo effect, it's dubious and not very important.

    3. I disagree.

      1. I think it's just a restatement of the mechanics described in Prices & Production. All of the controversy may have been avoided if Hayek had never invoked the term.

      2. It's an attempt to address how a fall in nominal money expenditure on consumer goods can in fact increase "real investment".

      The latter point is especially important. I think it remains on of the most poorly understood of dynamic processes; it's also one of the most important. I think Keynes/Keynesians went terribly wrong with their proposed theory, but I don't think Hayek's rendition - while a good attmpt - was fully adequate. Completely on the right track, but plagued by the difficulty of investigating it verbally.

      IMO, to model it you really need to use a super structural framework - e.g. agent-based modelling. But then your entering a level of complexity nearing the real world, and it becomes difficult to draw many conclusions. Despite what seems to be a simple question:

      "What are the consequences of fluctuations of money expenditure on the organization of production?"

      I think it's one of the most forbidding questions, and I'm shocked by how simply most treat it.

  5. Kahn, Sraffa? Though that might fall under the category 'during Keynes'

  6. Piero Sraffa was really the first and possibly the most important:

    Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

    Sraffa, P. 1932. “A Rejoinder,” Economic Journal 42 (June): 249–251.

    1. Perhaps Robert Murphy denies it (as apparently he sees himself as a defender of the ABCT) but his work here is nothing but a critique of the classic Hayekian theory (where Hayek uses the Wicksellian natural rate of interest):

      Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.

      Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”

  7. Cottrel, Allin (1994). "Hayek's Early Cycle Theory Reconsidered".
    Kurz, Heinz D. (2000). "The Hayek-Keynes Sraffa Controversy Reconsidered".
    Lawlor, M. S. and Horn, B. (1992). "Notes on the Sraffa-Hayek Exchange".

    I'm not sure Arash Molavi Vassei has yet published his working papers, but you can find some on SSRN, along with mine.

    Burczak (2001), Davidson's Critical Review piece, and Gloria-Palermo & Palermo (2005), although targeted at Austrians, are not aimed specifically at business cycle theory.

    I cannot say I've forgotten more about this than you will ever know. But I can say I've forgotten quite a bit.

    1. I know nowt about Hayek, but Cottrell is always worth reading, so I went looking for the paper Robert Vienneau mentions (title and year slightly different so maybe an early draft). Reading it now, does seem interesting:

  8. Maybe Mises himself:

    1) For Mises “the cycle is therefore initiated by an exogenous shock: the issuing by banks of new fiduciary media… In Monetary Stabilization and Cyclical Policy (1928) as well as in
    Human Action, Mises describes the origin of expansion in similar terms.”
    “By contrast, Hayek calls for an endogenous theory of business cycles… Hayek indeed consents that the level of the rate of interest on loans needs not to be lowered by deliberate intervention from the monetary authorities”

    2) “…they do not agree concerning the forces that sustain the boom. While for Mises the lagged adjustment in the objective exchange value of money – and hence, the lagged alignment of the loan rate (or the systematic lagging of the gross market rate of interest in Mises’ latest version) – at first reinforces the tendency towards higher goods’ prices for Hayek it is the organization of credit that provides the incentive for further expansion…”

    3) “…Mises does not directly invoke the behaviour of banks in his explanation of the reversal. On one hand, Mises makes it clear that any action from the banks in order to offset the automatic rise in the loan rate of interest will be useless… This point is strengthened in Human Action, where Mises now takes into account the possibility of hyperinflation. Contrary to Mises, Hayek argues that these are technical limits to the creation of credit, so that it is the specific behaviour of banks that determines the upper turning point of the cycle… for Hayek, and in contrast to Mises, credit expansion can never lead to capital accumulation…”

    “…while Hayek’s focuses on the problem of coordination between saving and investment in an indirect exchange economy, Mises emphasizes the time element in the adjustment of markets when money interferes with real ex-changes…”

    See that on this great paper

    He may have never criticised Hayek directly because of strategic behavior: If there is only "one smart guy in the world" that accept your theory and helps you, it is improbable that you will destroy him.

    1. In Hayek's early work, he considered it a consequence of fractional reserve banking. Mises had a fairly sophisticated theory of free banking early one, and so disagreed with Hayek. I think Hayek and Mises can be reconciled here thanks to free banking.

    2. Despite the fact that I am a 100% supporter (which implies free banking), I think it is possible to do so. And it is interesting that other contemporary writers, like Nelson-Phillips-McManus, also criticizes the endogenous theory of Hayek in "defense" of Mises.

      “Hayek criticizes Mises' explanation of the origin of the new credits as emanating from this " inflationistic ideology" of the central banking system… But Hayek's claims for his "perfectly endogenous" theory are unconvincing to the writers for the very simple reason that his explanation of how the banking system creates credit (perfectly valid except for this one point) when a "certain amount of cash is newly deposited" never satisfactorily explains where the newly deposited cash comes from!”


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