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The writers of history determine the winners of debates. Of course, they merely write history that gives them the victory by default.

BTW, is that the Bruce Caldwell who was on Fareed Zakaria’s GPS Sunday advocating higher taxes to close the federal deficit?

It should be no surprise that after reading Wapshott's shallow, error ridden and off-the-mark book on Keynes Hayek that they would have a deeply false conception of the history.

As an author of books on Keynes Tim Congdon isn't allowed that excuse.

Dishonest, incompetent, or lazy?

At some point we have to admit to ourselves that at least some number of intellectuals and professors are in some measure of mix of these things.

We've seen scientific fraud, dishonesty, laziness, group think, political behavior, incompetence, etc. in every branch of science.

Are we suppose to believe that the only fields with zero members exhibiting standard human weaknesses are those related to economic science and intellectual history?

Hayek was always big; it is economics that got small.

"Of course, the roundaboutness of production under capitalism may sometimes lead to waste, but that does not justify government inactivity."

Huh? Whoever said that government inactivity is justified by the (presumed) fact that roundaboutness under capitalism may sometimes lead to waste? What is Congdon actually referring to here?

"But the case for policy activism of some kind is fairly uncontroversial."

A well-worn rhetorical device: Dismiss dissenters as too insignificant to be noticed, much less addressed substantively.

On an even more serious note, one can detect the importance of a person's ideas not only by the explicit mention of the person's name in discussions, but also by whether the issues he raised continue to be relevant. Of course, there is a scientific judgment in this claim that not everyone will share. Partly, the phenomenon is blurred by the lack of self-consciousness and awareness of intellectual history among economists. For example, I view the continual worry by many macroeconomics that the standard aggregates may hide changes of importance as an influence of Hayek.

But the history of economic thought has been marred by contemporary agendas. I do not doubt that Austrians are guilty of some of this. But Keynes and his followers are the worst sinners -- as illustrated by the Master's admission to Roy Harrod that we have been unfair to old Pigou -- but it is necessary to get our point across.

An ends justifies the means morality is the end of all ethics -- F. A. Hayek

"But Keynes and his followers are the worst sinners -- as illustrated by the Master's admission to Roy Harrod that we have been unfair to old Pigou -- but it is necessary to get our point across."

It might be another case of, you know, an economist stepping outside his area of expertise. Congdon's commentary on the History of Economic Thought might be analogous to Stiglitz' commentary on monetary economics or something... What I mean is, he literally might not be aware of the information Boettke is referring to here.

To McKenney:

No, that was not Bruce Caldwell on CNN. It was Bruce Bartlett.

Back in the 1970s and 1980s, Barlett was a very effective popularizer of supply-side economics, and also wrote a useful work against "industrial policy" (government picking "winners" for various taxing and regulatory privilege).

Even earlier, he was a "revisionist historian" who wrote a work critical of FDR's foreign policy in the Pacific leading up to the Japanese attack on Pearl Harbor.

But in more "recent times" he has often taken positions on fiscal and related government policies that would not be considered particularly in the classical liberal/libertarian tradition.

Richard Ebeling

"Marginalize, then brutalize."

This part of the game the left has been playing for generation.

Hayek and his work have been subject to this kind of treatment for generations. Hayek could literally feel it when he visited most economic departments.

Allan Walstad hits the nail on the head. A commentator who can sum up Hayek's contribution to the monetary debate of the 30s as Congdon has done, by suggesting that Hayek was opposed to "roundabout" production as such, and that "do nothing" accurately sums up Hayek's monetary policy recommendations, either doesn't know what he's talking about, or hasn't bothered to express himself with any degree of care.

I began my studies very much in the Austrian camp. I read all the serious books, which I did not at the time understand, and then gradually moved into the secondary literature, such as Bruce Caldwell's Hayek's Challenge and Karen Vaughn's Austrian Economics in America. With that background, I then re-examined the serious works, such as Hayek and Mises, which I was now able to appreciate so much more. But, I am not quite sure how it happened, my interests began to switch, and I moved into readings of the Post Keynesian and Institutionalist schools. This literature has forever changed my mind on how I see Austrian econoimics. So, in this context, I feel compelled to cite to all the contemporary work that is critical of Hayek, and does so on a very "Keynesian" foundation. For example, I mean, what better book than Fiona Machlachlan's Keynes's Theory of Interest? Her critique of the Austrian business cycle theory and Hayek's "Ricardo Effect" are so tremedously important to this discussion. It is the perfect Austro-Keynesian book, because it attacks Hayek using Keynes's ideas. That is also why Lachmann is so interesting. He understood this. He was always an Austrian, but he understood the limits of Austrian economics, and that is because he appreciated Keynes (due, in part, to his admiration for Shackle). Or look at the more recent debates between people like Greg Hill and Steven Horwitz in the Critical Review journal. I love Dr. Horwitz, but, seriously, who can't walk away from that "debate" thinking that Greg Hill won in every way imaginable (so much so that Dr. Horwitz totally evades the most damning critiques proffered by Hill). And the list goes on and on. And so I wish Austrians would focus more on this literature, especially when they talk about the great Hayek-Keynes debate. This debate is still very much going on, and I think that Keynes is winning.

Uncertainty, liquidity preference, and systemic instability --- that is Keynes' true legacy.

Having just read Congdon's review of Wapshott's book, may I suggest that Congdon misses a lot more than what has already been observed by other comments, above.

For example, Congdon says that:

"Hayek surrendered to Keynes and the Keynesians on money and macroeconomics, and from the mid-1940s rebuilt his reputation by magnificent contributions to political philosophy and the philosophy of law. These contributions have only a tenuous relationship with Austrian capital theory and theorizing about roundabout production methods. Wapshott should not pretend that there was some sort of continuity between Hayek’s early work on money and his later work on the philosophy of the State, or that the 1931 debate had a special role in initiating later arguments."

In fact, Hayek never "surrendered" to Keynes on money and macroeconomics. Indeed, the last part of "The Pure Theory of Capital" is Hayek's belated and brief attempt to respond to Keynes' "economics of the short-run," after restating what he considered to be a refined formulation of Austrian capital theory.

Hayek short essays in the late 1940s and 1950s on monetary and inflationary issues of the day, which are included in the revised edition of "Tiger by the Tail," show him continuing to emphasize the micro distortions and malinvestments induced by misguided monetary policy, in contrast to the then dominant Keynesian "aggregate" approach.

Any careful interpretive reading of Hayek's body of work (such as Dr. O'Driscoll's "Economics as a Coordination Problem" or Dr. Caldwell's "The Hayek Challenge") shows that Hayek's focus on the processes of coordination and mis-coordination of market activities related to money in the economy, his 1933 lecture on trends in economic thinking, and his writings on economic calculation under socialism were all intellectual "stepping-stones" to his later broader writings on political and social philosophy.

And that, in particular, his analysis of how the price system can be misdirected from its "spontaneous" coordination of the temporal structure of production can be seen as him dealing problems and questions that led to the wider issues, in later decades, on the institutions and policies consistent with the functioning of a free society.

Indeed, in his preface to Dr. O'Driscoll's book Hayek said that after reading "Economics as a Coordination Problem" he saw more clearly in his own mind how the problems that he grappled with on money and the business cycle in the 1930s were links in the chain of ideas that led to his later, and broader discussions of social order without design.

Tim Congdon's interpretation of Hayek is, unfortunately, as flawed as Wapshott's.

Richard Ebeling

austrian way, do you remember any of these arguments, can you summarize them?

"Fiona Machlachlan's Keynes's Theory of Interest? Her critique of the Austrian business cycle theory and Hayek's "Ricardo Effect" are so tremedously important to this discussion. It is the perfect Austro-Keynesian book, because it attacks Hayek using Keynes's ideas."

I've read Machlachlan's book, but don't remember it well, and it's currently in storage.

Hayek himself had a liquidity preference theory as part of his account of money, the interest rate, and the trade cycle, but I don't remember if Machlachlan acknowledges or covers that part of Hayek, although her book as I remember it is mostly a defense of Keynes version of a liquidity preference theory.

Richard -- it turns out that Hayek was more right then he knew or than is even documents so excellently by O'Driscoll. For example, I've discovered that Hayek's first explicit discussion of "The Knowledge Problem" comes in his 1928 essay "Intertemporal Price Equilibrium and Movements in the Value of Money" were Hayek identifies the impossibility of knowing all that is required to know whether the relations between different kinds of monies and different kinds of money substitutes are in a sustainable equilibrium.

And Hayek is explicit in saying that his turn toward writing such papers as "Economics and Knowledge" and "Scientism and the Study of Society" was inspired by his growing understanding that his differences with Keynes et al were more basic than he had previously understood, and involved _how_ to understand the explanatory strategy of economics, more than anything else. And you see Hayek directly citing "Economic and Knowledge" in the crucial opening chapters of _The Pure Theory of Capital_, which contains the core of Hayek's great re-casting of the explanatory strategy of economic science and macroeconomics.

Later papers on the nature of explanation and the explanatory role of price signals and shared rules of negative conduct were all "mopping up operations" as part of this Copernican Revolution -- and clash of paradigms -- in economic science. (See Thomas Kuhn on "mopping up operations").

Greg:

It is really a shame that Fiona Machlachlan is not more well-known. In her book, she makes two very big claims (1) the stock-flow debate destroys Austrian capital theory ; and (2) Hayek's Ricardo theory is flawed. (1) has been picked up by many Post Keynesian scholars, and can be found in the works of, e.g., Paul Davidson, Victoria Chick, and Jan Kregel. But even more telling is this: Greg Hill made this a central point in his debate with Steven Horwitz in the Critical Review journal. And Steven Horwitz did not address this point at all in the debate. I wonder why that is?

Anyway, for a summary, I have a LONG review posted here:

http://www.amazon.com/General-Interest-Routledge-Foundations-ebook/dp/B000OI0KM6/ref=sr_1_1?ie=UTF8&qid=1331180531&sr=8-1

Look for the review written by "James Mueller" -- that is my review. James Mueller is my father's name because all the books I buy on Amazon is on his account (credit card). I spend about $400 a month on books, and would be unable to purchase all these books on my own!

Enjoy.

Greg,

I would just add to your comment, that there is a clear passage in "Monetary Theory and the Trade Cycle" (German edition, 1929), on the guiding role of the price system for coordination of the market participants, which economizes on what the actors would need to know.

Richard Ebeling

Is it me or do Austrian economists not spend near enough time talking about opportunity costs? Check this excellent post out and then scroll down to see my unpopular compromise. Or maybe people are just indifferent to my compromise?

http://krugman-in-wonderland.blogspot.com/2011/10/opportunity-cost-for-thee-but-not-for.html

Speaking of indifference curves...while "searching" around I was "surprised" to find this debate between Boettke and Caplan...

http://www.youtube.com/watch?v=DPm5wDjaOSk&feature=PlayList&p=A99BB35C30592B05&index=0&playnext=1

http://econlog.econlib.org/archives/2009/10/boettke-caplan.html

How come nobody brought their debate to my attention when I wrote my rambling exploration of knowledge/ignorance...conceit/humility...
http://econlog.econlib.org/archives/2011/12/an_extended_tak.html

Hoppe's criticism of Hayek is that Hayek didn't correlate knowledge with property. Ehhh...when I was researching my entry on knowledge/ignorance... my failure to find the highly relevant Caplan/Boettke video had something to do with property? Didn't it just have everything to do with my perspective being ridiculously limited? Naw...it was Google's fault for not coming up with an innovative approach to searching videos. Or your guy's fault for not appropriately tagging the video?

"The sky is blue". When I argue for pragmatarianism am I saying that the sky is blue? Can you do me a favor and have another debate with Caplan? But this time on the topic of pragmatarianism. That would really help me predict whether either of you will be the first economist to openly endorse pragmatarianism... http://pragmatarianism.blogspot.com/2012/02/economy-based-on-wife-swapping.html

Oh Richard Ebeling...did you make it down this far on my comment? If so...what are your thoughts on the allocation of resources in the non-profit sector? What happens when there's no price system to guide the coordination of market participants? (Anybody else is welcome to answer this question as well)

Matt,

I have a question for you --- who do you think published Fiona's book? That would be Routledge in the series edited by Mario Rizzo and Larry White. Who do you think was on her dissertation committee, which provided that foundation for that book? Yup that would include me, along with Rizzo and Kirzner.

I am not objecting to your highlighting Fiona's work. I think the world of her --- she is one of the most intellectually interesting individuals I ever worked with (I taught alongside of her at Manhattan College for a year). I am objecting to your claim that NOBODY knows of her work.

Furthermore, I personally do NOT think Greg Hill got the best of Horwitz because I think Greg Hill actually doesn't understand what he is talking about when it comes to the Austrian position and he only gets a caricature of New Classical macroeconomics. But keep in mind, I also don't think Srafa's critique of Hayek is as devastating as some folks repeatedly announce. In both of these cases I think the folks engage in a debate strategy (that I identified in an old CR paper from 1997) which does not directly engage the Hayekian argument.

Perhaps Steve can jump in here to defend himself, but again I think owning books, even turning the pages in books, is not the same thing as UNDERSTANDING what you are reading. And being "critical" is not the same thing as coming through critical engagement to a subtle understanding of the material.

All good points, Dr. Boettke. But let me throw this question out there: Please review this brief summary of mine on the stock-flow debate:

http://austrianomnibus.blogspot.com/2011/03/stocks-and-flows-in-response-to-grant.html

There, I have quoted passages from Maclachlan, Hill, and Chick. How does this theory NOT destroy the AUSTRIAN idea that increases in saving should send signals to entrepreneurs that their time preferences have changed such that long-term investment projects are now worthwhile? How can there be any intertemporal coordination of price when the stock-flow debate is brought to your attention?

Also, let me point out this: I don't believe Keynes's theory necessarily leads to an endorsement of government activity. Keynes does NOT equal government activism. I love Keynes, but do not believe in governmental regulation and/or spending. Perhaps that is the Hayek in me, but Shackle also believed the same thing. I remember him saying somewhere that "uncertainty is beyond the reach of legislation," or something like that. So, the debate is not so much over free markets and government regulation, but RATHER over the ability of the market to self-correct and achieve stability. A true understanding of uncertainty --- and here, you REALLY need to read Paul Davidson --- makes clear that market instability is illusory. Oh, read also Hyman Minsky on that point.

Thanks for the correction, Dr. Ebeling. That’s good to know!

Austrian wayward: “(2) Hayek's Ricardo theory is flawed.”

That’s interesting because I learned the basic theory behind it in a graduate level econ class. It’s nothing but the basic PPF trade offs between capital and labor as the costs of each change. The capital-labor PPF is standard micro today. Hayek merely uses it to show how it triggers business cycles.

Austrian wayward: “Also, let me point out this: I don't believe Keynes's theory necessarily leads to an endorsement of government activity.”

That is true if you separate Keynes’ economics from his political/social vision that he makes clear at the end of GT. But if you don’t separate them, it’s clear that Keynes intended his economics to be the means of achieving his political/social vision. He provided the tools and justification for the use of those who want the state to control the economy.

Tim Congdon makes the same mistake I see often among non-professional historians on a variety of topics. He basically takes "the past" and collapses it into itself, which is how he leaps from "Hayek's debate with Keynes wasn't relevant in the 1950s" to "Hayek's debate with Keynes wasn't relevant in the 1930s." Twenty years is actually a pretty long time, especially in modern academia, where strict, orthodox adherence to ancient, received wisdom isn't regarded as a virtue.

Austrian away,

I'd like to read up more on Post-Keynesian and Institutionalist schools.

Can you suggest a reading list?

John,

GLADLY! For one thing, it is important to keep in mind that Post Keynesian economics means many things to many different people. For example, at UMKC, where the Post Keynesian influence is strongest (arguably), the scholars there tend to conflate Paul Davidson's work with the scholarship associated with the ideas and work of people like Sraffa, Kalecki, Joan Robinson, etc. Personally, I don't care all that much about Sraffa and Kalecki, but you might. So, that distinction is important to keep in mind. Now, as to recommended readings, here is a list:

http://austrianomnibus.blogspot.com/2011/03/post-keynesian-economics-in-one-lesson.html

At the bottom of that post I list several readings. The two BEST books, if I had to choose two, would be these:

(1) Dudley Dillard -- The Economics of John Maynard Keynes. (If I had to teach an econ class, I would teach from this book.)
(2) Fernando Carvalho -- Mr. Keynes and the Post Keynesians. (Absolutely brilliant exposition and analysis.) And, of course, I would read all the articles published by Paul Davidson in the Journal of Post Keynesian Economics (particularly his earlier papers -- 1970-1980).

Hope that helps!

The key thing is that the Tim Congdon's, Nick Wapshott's & Brad DeLong's of the world are neither embarrassed by nor apologetic about telling a deeply false story about Hayek and his work. And they don't seek to fix it or get it right the next time when they they are made aware of the plain facts of the matter.

Which tells us a lot about what is really going on.

Thanks, Austrian Away! Much appreciated... this will keep me occupied for a while.

I remember now who you are too ;)

Are Minsky's essays on the Financial Instability Hypothesis a must-read, or do other books cover similar ground?

Is Shackle's approach to uncertainty and risk similar to that of Frank Knight's?

Among your Amazon.com reviews I spotted a review of a Karl Brunner and Meltzer book. Are you doing postgrad economics, by any chance?

Richard writes,

"I would just add to your comment, that there is a clear passage in "Monetary Theory and the Trade Cycle" (German edition, 1929), on the guiding role of the price system for coordination of the market participants, which economizes on what the actors would need to know."

Right. Hayek's first contrast between the fake world of an economist's "price theory" construct which really doesn't allow for the role of price signals, and the causal price signal role of real world prices in an imperfect/knowledge problem world can be found there.

John,

As my more recent Amazon book reviews would show, I am now pursuing the study of law. Economics is just a fond memory of mine now (Thank god I wrote all these amazon book reviews and blog posts, otherwise I would have forgotten everything I read and thought back then by now).

To answer your other questions: Minsky is very good. His basic idea comes down to this -- business cycles and recessions are not things imposed on the economy by some "external shock." Business cycles rather are ENDEMIC to the nature of capitalism itself. Capitalis is inherently unstable. His work is an attempt to illucidate that fundamental point. Of course, I find that thesis absolutely fascinating!

The differences between Shackle and Knight's conception of uncertainty could be (I suppose) a complicated topic, but uncertainty is uncertainty, and I am confident that both understood it well. Shackle is great for his prose -- his writing is VERY good and engaging. Knight, on the other hand, made the remarkable observation that PROFIT makes sense only in condititons of (radical) uncertainty. That is an important point, and one that is TOTALLY LOST on Antitrust (legal) scholars.

Best.

Hayek made this argument in 1928. And he located the problem in the banking / money / finance sector.

It ain't new.

"[Minsky's] basic idea comes down to this -- business cycles and recessions are not things imposed on the economy by some "external shock." Business cycles rather are ENDEMIC to the nature of capitalism itself. Capitalis is inherently unstable."

Most economists and economic writers are simply deeply ignorant of the history of economic science.

When I did the research for my dissertation, I combed through the journals of the 1930s -- Economica, Economic Journal. It was Hayek vs. Keynes. Hicks was a student at the time; he didn't make it up. Ditto, Lachmann.

Certainly there was agreement between them on some points. Hayek's student, Vera Smith, correctly that noted that Hayek and Keynes of the Treatise agreed on the need to move behind the quatity theory approacc with its emphasis on the price level.

In the theories of both, uncertaint plaed a huge role. But they couldn't agree on how to deal with uncertainty.

Someone writing on Wieser's monetary economics pointed out that there was a lot in common between Wieser's account of many different types of money and different types of substitutes for money, and Keynes' account of different kinds of money in his Treatise -- and Hayek's account of monetary disequilibrium often invokes the significance of the growth and contraction of different types of money and substitutes for money.

Hayek always noted how there was much for of value in Keynes' Treatise than in Keynes' "General Theory.

Jerry writes,

"Hayek and Keynes of the Treatise agreed on the need to move behind the quatity theory approacc with its emphasis on the price level."

It's curious that Keynes in his Treatise cites Mises as the source of the "savings" / "investment" distinction ....

Hayek, of course, pointed out how confused Keynes was on the whole topic.

Greg,

Recall that Keynes admitted that he only understood in German what he already knew.

So his failure to fully understand what Mises (building on Wicksell) meant by the savings and investment relationship should not be surprising. (It is even more strange since Keynes actually reviewed Mises' "The Theory of Money and Credit" shortly after it originally appeared in German before the First World War.)

Keynes after all was heavily influenced by the Marshallian tradition that dominated the Cambridge community of economists. And Marshall consciously rejected Austrian capital theory, especially as formulated by Bohm-Bawerk. He dismissed the Austrian conception of "higher" and "lower" order goods by asking, what is a train (a higher or lower order good) that both carries passengers on a vacation and boxcars with machinery?

Richard Ebeling

Austrian away,

Thanks. Perhaps there will be occasion to share my thoughts when I've gone through the Post-Keynesian literature.

And I wonder if you are in any way connected to this guy (his biography is pretty popular): http://www.desiringgod.org/resource-library/biographies/george-muellers-strategy-for-showing-god

lol (or would you prefer law-l?)

Anyway... best wishes in your endeavours, I certainly hope to see you around still.

Austrian Away: ["All good points, Dr. Boettke. But let me throw this question out there: Please review this brief summary of mine on the stock-flow debate:

http://austrianomnibus.blogspot.com/2011/03/stocks-and-flows-in-response-to-grant.html

There, I have quoted passages from Maclachlan, Hill, and Chick. How does this theory NOT destroy the AUSTRIAN idea that increases in saving should send signals to entrepreneurs that their time preferences have changed such that long-term investment projects are now worthwhile? How can there be any intertemporal coordination of price when the stock-flow debate is brought to your attention?"]

I ain't Boettke, but I think it's pretty obvious where the problem lies. Supposedly, the influence of speculators buying and selling existing bonds to profit on price changes overwhelms the effect of savings and capital investment on interest rates. And in the short run (it's always the short run with Keynesians, isn't it) this may be true. But speculators buy today to sell again tomorrow, and there has to be limit to the amount of cash they have stuffed in their mattresses, while the value of existing bonds is tethered, though of course not rigidly, to their principle. Thus (in the absence of central bank meddling) the influence of speculators is a kind of noise, and noise cancels out. But the rate of savings and the demand for capital are signal, and signal adds up--in this case, as savings continue to flow into the market and into capital projects. By analogy, if the water in a harbor is choppy, nevertheless the tide can be observed to go up or down.

The true signal of increased savings and the false signal of monetary expansion will both have their cumulative effect: sustainable economic growth in the former case, bubbles in the latter. Far from undermining the Austrian paradigm, speculative fluctuations if anything help to explain how things can get so far out of hand before the destructive effects of monetary expansion become clear.

Allan, all very well put. I suppose my one comment to your nice analysis would be that I don't think you should under-estimate the volatility of human expectations. Regarding financial speculation as mere (or predictable) "noise" seems to me somewhat misleading. It all comes down to "animal spirits" and "unforeseeable future events," and how they interact and re-inforce each other.

I remember reading a great paper by Hugh Townshend I believe(??). He made a great point that has always stuck with me. He said that a single dollar can cause MASSIVE INFLATION, provided it circulate fast enough, while all the money (new credit) wouldn't have any effect on the price level if people simply did not use it.

It all comes down to human behvaior in the face of ignorance. Sometimes, we fool ourselves and become optimistic. Other times we realize our fallibility and become deeply pessimistic. The market bears this all out in the financial markets.

What I don't get is...why do you guys bother debating the business cycle problem if you understand the knowledge problem? Who care if Keynes can or can't "correct" the business cycle problem if the business cycle problem is only a side effect of the knowledge problem?

What's the information disparity between 150 million taxpayers and 538 congresspeople? How can 538 congresspeople efficiently allocate public funds when they have no idea what any of our priorities are? Without knowing our priorities how can they ensure that scarce resources are put to their best possible use? Wouldn't congress misallocating a 1/4th or 1/5th of our limited resources exacerbate...if not cause...recessions or downturns?

In other words...why are you guys dancing to the beat of the opposition's drum? Am I missing something here? Can you prove to me that the knowledge problem has absolutely no bearing on the business cycle problem? If you want to deal with the knowledge problem then just advocate that taxpayers be allowed to directly allocate their taxes. Force the opposition to dance to the beat of your drum.

The author probably didn't study Hayek before making this statement:

"The truth is that Keynes overwhelmed Hayek, simply by making more interesting and relevant statements."

Today, given the state of near absolute ignorance relative to history of though, when someone says that Keynes was better/greater than his contemporaries he almost certainly didn't read anything they wrote and probably did not read Keynes either.

Keynes' confusion and scientific ignorance was more serious than that.

The fact of the logic of choice that no one would extend the length of a production process unless it promises superior output was beyond Keynes mental abilities or set of learned understandings -- he repeatedly shows a complete failure to "get it" when it comes to this most basic logical element in Bohm-Bawerk's marginal economics of choice involving production goods.

If I recall, there are at least 3 or 4 places in the _General Theory_ where Keynes displays his mental blindness or scholarly deficiency in this area.

And this failure on Keynes' part is one of the central pivots upon which the scientific difference between Hayek and Keynes turns -- Keynes depends on his mental deficiency in this areas in making his arguments against savings, for the paradox of thrift, and against Bohm-Bawerkian production theory.

Maybe I'll post some of these from Keynes later.

Richard writes,

"Keynes after all was heavily influenced by the Marshallian tradition that dominated the Cambridge community of economists. And Marshall consciously rejected Austrian capital theory, especially as formulated by Bohm-Bawerk. He dismissed the Austrian conception of "higher" and "lower" order goods by asking, what is a train (a higher or lower order good) that both carries passengers on a vacation and boxcars with machinery?"

austrian way, tell me where anything that you are talking about isn't found in Hayek (besides the stock-flow stuff, which Hayek addresses in his _Pure Theory_ and elsewhere).

And Austrian Away, I don't think you should underestimate the ability of people to plan, save, invest, produce, and thereby pursue goals in non-coercive interaction with others, in a market where price signals are not systematically distorted by political interference.

You will note that I read your quotes and substantively rebutted the purported "destruction" of Austrian ideas, to which your response was another recitation of the "animal spirits" mantra and some tangential rant about Hugh Whoever. Thank you, I rest comfortably.

Those who question the relevance of an Austrian structure of production should see Shenoy’s (last refereed journal article?) Investment Chains Through History in a 2007 Indian Journal of Economics and Business - http://mises.org/document/6300.

Abstrtact: Technology is widely seen as the key to development. But this does not explain how a
single innovative machine multiplies itself. An alternative tack: Menger’s analysis of
investment chains. Begin with first-order (consumer) goods and examine the second,
third-, and other successively higher-order goods required. The range of final goods
produced in four historical contexts (Upper Palaeolithic Europe, early modern
England, DCs in the late 20th century, Mali in the same period) are set out. In each
context, for a selected first-order good, the investment chain of successively higher order
goods is detailed. Such investment chains are most complex in DCs.

Allan,

You are right on target. The problem with the post Keynesians (and Matt) is that they stop the analysis short just when it is beginning (a point McCloskey made about Keynesians in general years ago). There are two views of the price system --- one that focuses on what the system looks like AFTER all the exchanges have been negotiated and that system has certain very defining properties. The post Keynesians look at that world, then look at the real world, and say -- "Wow, the real world is not like that world, thus the price system must be broken." Money represents a "broken joint" in the system, as Garrison has put it. The broken joint theory clearly challenges the "tight joint" theory of some neoclassical writers. But the introduction of money need to not wreck such havoc on the system. The second view of the price system, does not see the system as settled, but instead focuses on the very process by which exchanges are negotiated --- the higgling and bargaining of the market as Adam Smith said. In this world, prices and profit/loss have work to do in guiding the reconciliation process. Institutions matter; information is necessary; and both the quantity and quality of information utilized within the market have to be processed and accessed by decision makers. The price system works to overcome the solipsism of radical subjectivism and the dark forces of time and ignorance. We are not ensnared within an inescapable moras, but we do have to learn how to cope with our ignorance and the vagaries of the world within which we find ourselves striving to act effectively and coordinate our plans with those of others.

The price system is an indispensable tool, and the post Keynesian writers so enamored with (a) the pristine model of pure competition, and (b) the fragility of that model to the reality of subjectivism, ignorance and uncertainty, forgot that the real function of the price system was to provide an aid to the human mind in overcome the problems of time and ignorance.

The classic example of this confusion is Davidson's review of O'Driscoll and Rizzo, but almost any work by Davidson makes this mistake. He raises very good objections to standard general competitive equilibrium theory, but he never once really took on Hayek's work seriously.

Evening Peter,

I think you will find that the big debate was Keynes v the "Treasury View," which was advocated with full force and leadership of Ralph G Hawtrey , a mix of what would now be called monetarism and classical economics. This is if you define it as what was debated in the press, with the politicians etc.

Hayek, although he participated in the above, came like a thunderbolt to some , Robbins for example , but whose subtle thoughts and new teachings , capital structure etc, did not take hold , only for a decade or so at the LSE.

We must then remember , Hayek's work then went in a different direction post the War.


Yes, all well and good. Austrian economics is indeed THE theory of the market **PROCESS**. And a careful study of the market process does in fact help us to understand just how ignorance (market opportunity) and uncertainty is managed. But yet, in the end, despite our best efforts, we still and will forever find ourselves bumping up against the hard reality of MARKET VOLATILITY. The market, empirically, is extremely volatile.

And that, I submit, is the shortcoming of the Austrian theory of the market process. Sure, the theory helps to explain, in a very dynamic and constantly changing way, just how economic activity is coordinated. But the theory does not explain market volatility, which is an empirical fact. So, while the market does usually and over time generally work, it is forever and always liable at any minute to total and utter collapse. There is no denying that. We don't know what will happen tomorrow. And that, as Shackle said, is why businessmen always open up the morning newspaper in "sheer terror."

Now, for me personally, this sort of thing interests me. I want to know what are the sort of things that give the market its extreme volatility. That is where the Post Keynesians come in. They provide answers to these questions.

Toby,

On Ralph Hawtrey and the Treasury view, do you know what later happened?

I have read that Hawtrey's recommendations of using monetary policy to stimulate demand were adopted. From 1932, the money supply increased from 1932; from 1934, the budget deficit was reduced. It supposedly work out pretty nicely.

If that's true, then it is sad that Hawtrey is rarely mentioned today. And I'm not sure how Keynes got his laurel in Britain.

austrian away, in "primitive" times...during periods of prolonged drought...people would pray for rain and perform ritualistic sacrifices to appease the gods.

Thank god we don't live in "primitive" times right? In our far more civilized times...instead of praying, we vote, and instead of engaging in ritualistic sacrifice, we pay taxes. We are so much more rational...right?

Who caused the drought? What can we do to end the drought? Who caused the recession? What can we do to end the recession? If we engage in the proper ritual...and offer an appropriate sacrifice to the true god...then we can end the drought/recession.

You're right that we don't know what will happen tomorrow...but what we do know is that humans are fallible. I can't argue against involuntary sacrifice...but I can argue against putting all our eggs in one basket. Let's hedge our bets...you give your taxes to your gods and I'll give my taxes to my gods. There's no guarantee that the best god will win...but somehow I get the feeling that prosperity has something to do with a diversity of approaches...and this diversity would seem to depend on tolerance.

" an allegation unchallenged is an allegation believed."

Just a heads up for Austrians who don't think this kind of thing doesn't matter.

Or who are clueless as to why this stuff constantly happens like a never ending blizzard.

Hayek covered this territory. What part of it don't you understand.

You don't say. Maybe you really don't know it.

austrian way writes,

"I want to know what are the sort of things that give the market its extreme volatility. That is where the Post Keynesians come in."

What market is Austrian Away talking about? The stock market? Because most product markets, saving only commodities, are not very volatile at all.

If he's talking about the stock market, then I can probably add my two pennies.

J Oxman, Yes, generally, I am referring to the financial market. And that is a big point in the PK literature -- the financial market is very different from the industrial market. Austrians almost never really make much of this distinction, at least not in the way PK's do. In fact, that is a big source of the market's instability --- Ownership in stock by financial speculators knowing next to nothing about the capital industry to which they own title.

On speculation-induced volatility, anyone looking for more wild gooses to chase might have a peak at the "econophysics" literature. (That's not exactly a recommendation...)

Austrian Away,

Ah, okay. But I don't understand the last sentence. In all the research I've seen, speculators reduce market volatility. Unless they have fat fingers of course....

It is reasonable for financial markets to be more volatile than goods markets since equity prices tend to reflect news in general, and they reflect news earlier than most any other market.

One could make an Austrian exploration of financial markets, but I'm not certain why the discussion of price formation in financial markets would be materially different from price formation in other types of markets. There was a recent mises.org piece on this that I thought was quite interesting: http://mises.org/daily/5941/HighFrequency-Trading-Menger-vs-Walras

Austrian Away,

Market volatility is caused in large measure by government intervention and the uncertainty it raises. This is discussed by Robert Higgs in his idea of regime uncertainty. Market volatility in a genuinely free market (no central bank, among other instituions) would be minimized and not important for economic theory. Shackle's crack about businessmen waking up in "terror" needs to be addressed by asking: terror of what or whom? In terror of FDR trying to nationalize whole swathes of the economy and imposing a myriad of diktats and controls? In terror of Truman imposing price controls on meat, and trying to nationalize a railroad and to steal a steel firm? Of Milhous Nixon imposing wage and price controls? Of a Peanut Farmer droning on about a a national energy plan and telling Amerika about it being "the moral equivalent of war"? There's always terror emanating from Washington SC (Sin City).
Someday the Post Keynesians might even get a clue about it.

Thanks Bill, I wanted to say that but I was too shy to put my hand up in class.

what else was Hayek famous for in the 1930s?

Why did he first become famous? why was he offered a job at LSE?

why did Robbins write his 1934 book on the UK depression using ABCT?

Matt,

Would be interested in your reaction to my paper "What Happened to Efficient Markets?" published in The Independent Review in 2009 or 2010.

Pete

does the Chicago School of Economics regret that it never allowed Hayek to even teach one course there?

Bill Stepp, you put it a lot better than I could! It's "conceited" for the PKs to think that they have an answer regarding market volatility when it's impossible for anybody to truly understand exactly how much volatility is caused by congress.

When I talk about pragmatarianism people often reject it because they feel it would be "chaos". They say that there would be huge swings in the amount of funding that government organizations would receive. My response is to ask them if there are frequent swings in their core values.

The people who never let Hayek teach a course are mostly (all?) dead now.

As for Keynesianism, it has never been any mystery to me why a theory that posits that the best world is one where academic economists have a great deal of power and authority is quite popular among academic economists.

I realize this is blasphemy, but for what it's worth, I think Matt is mostly right. It often seems ideological blinders keep some Austrians from accepting the kernal of truth in post Keynesian economics, namely, its emphasis on instability and/or volatility (keeping in mind these can be two different things).

Whether there is or there isn't, let's just say, for the sake of argument, that there IS, in fact, an element of volatility in the market stemming from radical uncertainty/ignorance and the vagaries of our imaginations, and that this volatility could potentially, given the right conditions, unravel the economic system or cause some serious disruptions. Is it really nonsense, then, to want some sort of bulwark against such a possibility, i.e., government?

I'm not saying I agree with the policy conclusions of the post Keynesians, but given their worldview, I understand where they're coming from.

No one denies the existence of volatility in the market. So what? Volatility causes neither unemployment nor a reduction in living standards.
The State entity is itself a source of volatility in addition to mass murder, unemployment and other unpleasantries. It's a bulwark alright--of institutionalized crime.

I think that the main problem of the post Keynesians is that while they understand that uncertainty is the key problem of economics they failed to apply rigorously the principle of methodological individualism and hence failed to understand that the capability of dealing with uncertainty is maximized when decision making is decentralized.

Uncertainty exists only in reference to each human mind and because human minds have "bounded cognition" or "imperfect alertness". So the best way to deal with uncertainty is to share it among the maximum number of individuals.

The government, when it acts to restrict market activity, what it does is that it restrict the freedom of individuals to utilize their cognition and it is equivalent to destruction of knowledge. So government intervention increases uncertainty, not decreases it. As a general rule.

About volatility: In medieval Europe there wasn't much market volatility. That was because entrepreneurial activity was severely restricted. Liberating entrepreneurial activity means that many opportunities hitherto unnoticed now can be exploited. This liberation also increases the dynamism of markets.

The process of creative destruction that dynamic market activity engenders is not a factor that increases uncertainty. To the contrary: the great expansion in the methods of production and products available represents a decrease in the uncertainty regarding possibilities of exchange and production.

Also, some have noticed that in the 19th and early 20th centuries US business cycles were shorter than post-war US cycles. The earlier period was also the period when the US was transformed from a subsistence agricultural economy to the most complex economic system that had ever existed while the latter period was when the US's GDP in proportion of the world's decreased steadily. Perhaps the alleged benefits of intervention in decreasing the intensity of business cycles actually weren't benefits but caused by the decrease in economic dynamism of the US relative to the rest of the world.

Brad W. -- Who guards the guardian? Or in this case, where's the bulwark against the deleterious effects of the "bulwark" (government intervention)?

Allan,

That's a fair question -- one that most post Keynesians are guilty of overlooking or downplaying. You'll find no complaints from me here. I was only pointing out a particular rationale for positive government intervention for post Keynesians, et al. Once one accepts that the market can, in some cases, exhibit instability, the question then becomes whether, all things considered, it's worth it to protect the overall system.

Austrian away: “Ownership in stock by financial speculators knowing next to nothing about the capital industry to which they own title.”

Besides profits, what does an investor need to know about an industry? Investors should invest only for profits. They should never try to run a business in which they buy stock. Profits tell investors all they need to know about investing in a company.

Josh: “a theory that posits that the best world is one where academic economists have a great deal of power and authority is quite popular among academic economists.”

Exactly! That’s the answer in a nutshell!

Brad: “ Is it really nonsense, then, to want some sort of bulwark against such a possibility, i.e., government?”

For it not to be nonsense, one has to show that the government would do a better job than the market. Historical data shows that the government is a less a bulwark and more of an accomplice in creating volatility, as Bill Stepp posted.

I think it’s ridiculous to say Austrians aren’t concerned about volatility. What the heck is the business cycle theory about? Austrians haven’t written a great deal about the stock market, but maybe that’s because they felt that Machlup said it all.

Brad W--I don't think anyone denies the market exhibits instability. You'd have to be a fool to deny that. The question is what causes instability, and how it can be made worse or better.

The problem with much early 20th century thinking is that it treats government as a deus ex machina. So you get chains of argument that go, for example, along the lines of "This private entity that does X acts in a way harmful to the public because it's motivated by profit. The government is not motivated by profit. Therefore, the government should monopolize X, because it will do X in a way that benefits the public." Or you have, "This firm did X quite badly because it ignored risk. Therefore, the government should regulate risk."

So what you see in this whole stream of thought is a kind of mental blindness to questions of the government's motivations, incentives, and knowledge, and Keynes is firmly in that stream. I mean the questions aren't even asked. The Austrian critique is important here because it really drills into those questions.

The Austrian conclusion isn't that there's no such thing as instability. It's that actors in the government lack the special knowledge they would need to correct instability, and further their conceit of knowledge leads to them making things worse.

The Wall Street Journal cited an incident in the 1930s when Keynes visited a restaurant in Washington, and told his guest that he could cure unemployment by sweeping a pile of table cloths onto the floor, which he proceeded to do. That would provide work for someone just as, say, the government would do by hiring ditch diggers to dig ditches all day. Where consumer demand, investors, entrepreneurs, and investible resources fit into this I haven't a clue, as I suspect JMK didn't.

You all are conflating my views with the post Keynesians so your critiques are moot. All I said was that I understand where they're coming from. Of course government can create instability; the analysis is comparitive, as it should be. You may disagree with them, and that's fine. But the post Keynesians are not the intellectual pushovers a lot of Austrians seem to think they are.

The Wall Street Journal cited an incident in the 1930s when Keynes visited a restaurant in Washington

So what you see in this whole stream of thought is a kind of mental blindness to questions of the government's motivations

"I knew [in the mid 1930s] that there was something more fundamental than the difference [with Keynes] on [the question of the relation of employment to aggregate demand], but the concepts of this difference, between macro- and micro- theory, had then not yet become quite clear. It was only becoming aware of the fact that really [an engagement with Keynes and Cambridge macroeconomics more generally] to be discussion of the contrasts between micro- and macro- theory."
— F. A. Hayek

The online Oxford English Dictionary defines haiku here and senryu here. (The astute or anxious reader may now be wondering whether senryu are also allowed in our contest. Absolutely!)

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