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Hayek was interested in Keynes as a fellow bibliophile and amateur historian of ideas -- and as a brilliant conversationalist and conception explicator with a foot in many different worlds.

Hayek liked to learn about things from other people via discussion and oral presentation. Few people had more to talk about or could talk so well as Keynes and Schumpeter.

As an economist, Hayek seemed really not that much interest in Keynes -- and indeed expresses an ever expanding lack of respect for Keynes as an economist (Hayek repeatedly emphasizes that Keynes knew little economics, and and that Keynes knew almost nothing from the scientific and intellectual world of the whole of the 19th century, outside of Marshall's _Principles_).

To the extend Hayek was interested in Keynes as an economist, it was because of Keynes' status, and his ability hide ancient fallacies in new clothing. Eventually, this last talent pushed Hayek to the point were he lost any serious interest in Keynes, other than as a foil for explicating and overcoming scientific error in economics.

Read book IV of Hayek's _The Pure Theory of Capital_ for a sense of the depth of Hayek's disdain for what he identified as the completely absurd assumptions at the heart of Keynes' economics.

Reading the Hayek-Keynes texts and correspondence, and then looking at what each did after that, it becomes clear that Hayek had a greater influence on Keynes than Keynes ever had on Hayek.

But for all that, Hayek continued to have a hero-worship relationship with Keynes, do simply to Keynes' _Consequences of Peace_ essay, an essay making arguments that do not stand the test of critical analysis or time, as has been explained by Niall Ferguson. Indeed, Ferguson makes a strong case for believing Keynes' essay made things worse by psychologically undermining the British, while falsely boosting the self-delusion and victim mentality of the Germans, undermining German capacity to get their fiscal house in order -- See Niall Ferguson, _The Pity of War_.

To my mind, if you want to know how Keynes thought about the market order, the following quote from the mid-1920s gives a good flavor:

"The truth is that we stand mid-way between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is 'fair' and 'reasonable' as between classes. The other theory -- the theory of the economic juggernaut -- is that wages should be settled by economic pressure, otherwise called 'hard facts,' and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the change in consequences of the journey to individual groups."

(Quoted in, D. E. Moggridge, "Maynard Keynes: An Economist's Biography" [London/New York: Routledge, 1992] p. 433)

I would ask, would you give a passing grade to any student taking an introductory or intermediary microeconomics class who argued such a view of how the market economy operates on, say, a final exam?

The "hard facts" people are those who suggest that balance and coordination require that each adapt and adjust his activities in the social system of division of labor to the interdependent actions of others.

That prices are tending to inform people what it is others are willing and interested in purchasing and what a person's market worth may be in alternative uses to which his labor services might be applied.

And that dis-coordination, imbalance, and distortion to the smooth working of the system "as a whole" can only result if more and more "individual groups" insist upon prices or wages inconsistent with (at least the tendency toward) "equilibrium" in the market.

But for Keynes the open, competitive market process was all a cruel "juggernaut," which should be replaced with wages and prices representing "fairness" between social "classes."

To my mind, such a view is the essence of either the non-economist, or the anti-economist.

But that is John Maynard Keynes' conception of the "bad" free market vs. the "good" interventionist system.

Sorry, Maynard you get a failing grade.

Richard Ebeling

I'm very sympathetic to Pete's argument here, having recently re-read parts of the GT for a paper I'm presenting next week at APEE. That paper is "Contrasting Concepts of Capital: Yet Another Look at the Hayek-Keynes Debate." I just uploaded it to SSRN here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1801532 .

I would just say that those who deny that Keynes denied the efficacy of the price system etc should re-read the GT. In many, though not all, places it really is the most radical and crude version of Keynesianism.

Excellent paper, Steve.

You are getting at the guts of it like no discussion I've come across before -- as surprising as that may sound.

I can't recommend the article enough to anyone interested in the economics of Hayek or Keynes.

In two places in his _General Theory_ Keynes pretends to refute the basic logic of Bohm-Bawerk's insight about the relation between time preference and production expansion.

This to my mind is a rather basic cognitive failure on Keynes' part -- a ground-floor failure to understand the economic way of thinking in the most important area of economics, production.

But in you paper, Steve, unless I missed it, you don't directly address this topic.

Keynes doesn't get this basic fact of choice:

Economic agents will not extend the length of a production process unless that extension promises superior output.

This is the core logic of choice reality behind Hayek's understanding of the re-ordering problem of coordinating interwoven heterogeneous production processes across time -- the the bedrock micro of Bohm-Bawerk's "capital theory".

I'm wondering if it isn't advisable to focus more attention on the issue in your paper.

I suspect that Keynes, being a man of his time and place, used the word "juggernaut" in the older and more specific sense explained here http://en.wikipedia.org/wiki/Juggernaut and here http://en.wiktionary.org/wiki/juggernaut

Which just reinforces the notion of the GT as a work of scientism.

Niall Ferguson is not very convincing to me on undoing the validity and importance of The Economic Consequences of the Peace. Hayek had good reason to be impressed. It should also be kept in mind that Hayek and Keynes remained on friendly terms, despite their various disagreements over the years.

While one can argue that Hayek influenced Keynes, and Road to Serfdom was praised by Keynes, with this showing Keynes to have moved toward Hayek during WW II, if not directly due to Hayek,, likewise one can argue that Hayek moved more toward Keynes in areas as well, if not directly due to Keynes. I am thinking about the matter of uncertainty and how Hayek's move to considering the problem of information is a contrast with his earlier work that looks at least a bit like moving towards Keynes.

Steve - Thanks for the paper link, I'll take a look. The point you made to me the other day to this effect struck me as very odd, but it's been about five years since I've read the GT through, and I've been thinking lately I oughta reread it too.

Barkley - On Keynes and The Road to Serfdom, this is not the first time Keynes endorsed these sorts of ideas. An American Keynesian named Calvin Hoover wrote a lot about how socialist planning was no different from fascism after trips he took to the USSR. After coming back, he wasn't sure where to go with his observations and Keynes encouraged him to publish them to challenge the orthodox opinion that socialism and fascism were two fundamentally different and opposed systems. I've been meaning to write something up about this for a while - these ideas were certainly not new to Keynes, and Keynesians had been noting this before the Road to Serfdom.

Richard - I'm afraid I may be reading that paragraph somewhat out of its wider context, but that seems to be more of a social statement than a scientific statement to me.

There are interesting overlaps between Keynes and Hayek, and Keynes Chapter 12 is rich IMHO, as is his Treatise of Probability. But there is still a pretty big divide between our two heroes. Keynes was a rationalist and Hayek an anti-rationalist. I think that difference is pretty important. And Keynes's rationalism fits nicely with the progressivism Pete refers to, whereas Hayek's anti-rationalism was a non-starter for many thinkers then and now.

"The curious task of economics is to demonstrate to men how little they know about what they imagine they can design." F. A. Hayek.

Can you imagine Keynes ever uttering those words? And remember that while the "fatal conceit" was directed at socialists, "the pretense of knowledge" was directed at Keynesianism.

I also highly recommend readers to look at Milton Friedman's review essay from the JPE of Abba Lerner's The Economics of Control, where he talks explicitly about the implicit theory of public administration in Lerner's work as being problematic.

Thanks Greg. This is very much a first draft that needs to be fleshed out to be what I think it can be. We'll see what kind of feedback I get at APEE and elsewhere.


I have difficulty believing that Keynes didn't understand the most basic elements regarding inter-temporal choice.


Everytime I read this sort of "puzzle piece story," I again struck by how the result can be nothing but a continuing disaster.

Abstract away from this focus on the disequililbrium interest rate boom. Sure, the wrong interest rate will mess things up and fixing them looks difficult. But suppose "the" interest rate is right. How much more can go wrong?

You cite Lachman. Think about where Lachman too this. Lachman... Shackle... Keynes was right.... you know..

To me, I read this and see bad monetary policy was a drop in the bucket of a disaster waiting to happen.

How about this.. entrepreneurs sort through the junkpile of failed projects to see what they can contruct for the unknowable future. Oh.. but there is an excess supply of money impacting the interest rate, then there won't be a sustainable set of interlocking plans into the distant future.. OK... But how likely is that? Isn't that just one more reason why next period entrepreneurs will be sorting through a new junkpile?

As for Keynes and his seeming craziness about zero interest... Just draw a supply of saving and demnad for investment diagram where the curves intersect at zero. But people hold money rather than investment, so the market interest rate isn't at zero. How to fix it? I think socializing investment is pretty much a nonstarter, but I don't really think this means that there is no scarcity.

Bill, read Steve's paper, and there's more than enough there to establish the unarguable reality.

I'll post the two places where Keynes shows his empty hand on my Taking Hayek Seriously blog.

But again, see Steve's paper, which has all that's needed on this matter.

Keyens simply doesn't get it -- in par because he never read it, never studies it.

It couldn't be more obvious to me thqt Keynes was purely bluffing on an matter he didn't get -- the basic logic that someone would not extend the stages of production across time unless it promised superior output simply isn't a part of Keynes mental equipment.

Were's the evidence Keynes actually read Bohm-Bawerk? There is none.

Where's the evidence Keynes read or understood any other work discussing te stages of production of Bohm-Bawerk's logic of chice across time?

What we have is stong evidence as explained by Horwitz that Keynes failed to understand this stuff if in fact there was some version of it in some German edition of Wicksell that Keynes is suppose to have opened.

Again, we have NO evidence that Keynes got this basic Bohm-Bawerk logic, and strong and varied evidence that he didn't.

If he gets it, simply show us where, Bill.

Bill writes,

"I have difficulty believing that Keynes didn't understand the most basic elements regarding inter-temporal choice."

Barkeley, several point on this.

1. Alread in his 1929. book Hayek articulats his basic 1945 point that the coordination system of the market is driven by profit and loss supignals, and the pure math of the GE construct does does capture the causal mechanism of the market -- the signaling system is the place where uncertainty and "information" are
real and causally relevant, implicitly theynate alrady present in Hayek in 1929.

2. Hayek used Knight's 1921 book -- which discusses genuine uncertqinty and the role of the entrepreneur -- as his basic micro "textbook".

3.The cognitive limitations of any deductive / closed model were internal to Hayek's macro projct -- see his 1929 book. As Hayek makes clear, what gets squeezed intomthe light by the failure of that project is the stuff that can't go into a purely formal model -- the signaling and uncertinty stuff and the non-market clearing stuff and the out of equilibrium stuff -- the stuff of monetary economics.

In other words, Hayek didn't get this stuff from Keynes.

Barkeley writes,

"likewise one can argue that Hayek moved more toward Keynes in areas as well, if not directly due to Keynes. I am thinking about the matter of uncertainty and how Hayek's move to considering the problem of information is a contrast with his earlier work that looks at least a bit like moving towards Keynes."


I think the more usual way to think of things is that capital goods are durable. You produce them now, and you get more consumer goods over time in the future. Scarcity means that more capital goods now, then fewer consumer goods now. You didn't have to know German to get that much in 1920.

On the other hand, thinking about saving and investment like you are producing general purpose machines that can be applied to any old consumer good or more of those same machines is perfectly consistent with basic choice concepts. And unrealistic. And that lack of realism can lead to problems, as was shown by discussions of "overinvestment." Why is having some extra general purpose machines a problem? Ah, but different machines are used to produce machines than consumer goods.

Anyway, if the market rate is fixed above the natural interest rate, and the price level is too high so that the real quantity of money is less than the demand to hold money, then scarcity isn't directly relevant in any context, including that regarding intertemporal coordination.

It is true that lowering the market interest to the natural interest rate allows for an expansion of the production of both consumer and capital goods.

As Peter points out in his post, Keynes does sometimes suggest this is the usual situation. That was Yeager's point in the Keynesian diversion. The classical, "equilibrium always" was Keynes' stawman. It only has come close to realization with new classical economics, the real business cycle theory, and the Rothbardians description of the true free market.

Other people had a better grasp of the problems of disequilibrium. And Keynes often does say things that suggest a secular stagnation view. The natural interest rate going to be permanetly very near zero, and contentional monetary institutions (with zero interest currency) will have trouble keeping the market interest rate that low. And so, saving can be expected to be greater than investment at full employment all the time. Possible, I guess, but not too likely.

Keynes was a protean thinker. Which Keynes, that of the Tract, the Treatise, the GT, or later?

Some themes in Keynes recur. He believed market economies would experience a chronic shortage of investment. As Buchanan and Wagner have clarified, he ignored institutional complexity in esposuing policy.

On The Economic Consuquences of the Peace, I side with Hayek (and Barkley). Niall Fergusan is unreliable on any issue involving war and empire.

But of course, this isn't the issue at hand.

Jerry writes,

"Niall Fergusan is unreliable on any issue involving war and empire."

Bill, as far as I can tell you've changed the topic, and you haven't addressed the question at issue -- the fundamental logic of choice identified by Bohm-Bawerk, and Keynes' having no grasp even of the existence of this fact of choice.

As you point out, the "more usual way" of thinking about things makes is to model things to the choice situation can not even be thought.

Hayek discusses these issues at length in his _The Pure Theory of Capital_, including the durable goods issue, and the specificity issue, and the replacement issue, etc., etc.

A blog is not place to go thru all of the ins or outs of this.

Sorry, make that:

The "more usual way" of thinking about things is to model things so that the logic of the choice situation can not even be imagined, much less thought.

Roger, this language doesn't help us at all.

It was a major blunder for Hayek ever to use it.

Hayek's whole point is that "Rationalism" was in fact NOT rational, was not progressive, was not good science, was an error in every way.

Like Kuhn, Hayek was showing how "reason" in the largest sense evolves, and the institutional background which makes it possible -- same thing Mises did with his socialist calculation work. "Rational" economic calculation requires a social background of private property and freely moving money prices, etc.

Wittgenstein did the same thing -- showing the social background which made possible the "rational" manipulation of symbols and concepts in logical constructions.

Hayek's main point is that people like Neurath, Carnap, Descartes, Mach, Russell, Lange, and the rest who deceived themselves into thinking they were the most "rational" were actually the most self-deceived -- creating a FALSE "rationalism" that was an enemy of reason, rationality, and good science.

So the words knots were are dealing with hear recommend junking the whole "rationalist" / "anti-rationalist" language, which if I am not mistaken Hayek himself sometimes acknowledged.

Roger writes,

"Keynes was a rationalist and Hayek an anti-rationalist. I think that difference is pretty important. And Keynes's rationalism fits nicely with the progressivism Pete refers to, whereas Hayek's anti-rationalism was a non-starter for many thinkers then and now."

Well, what are they?

"There are interesting overlaps between Keynes and Hayek"

The literature really hasn't advanced much on this topic -- it's still rather grounded in broad generalities.

Example, is there a paper in the literature that goes into detail exploring how Keynes exploited the conceptions he derived from Hayek's letters to him in the period between the Treatise and the General Theory?

Let me suggest there is something there with structured content beyond vague generalities.

Barkeley, you've expressed an opinion, but you haven't offered an argument in the Ferguson vs Keynes debate on post war Germany.

Liaquat Ahamed in his book _The Lords of Finance_ piles on, giving additional support to the case against Keynes.

The central fact is that Germany was awash in credit money from America -- and spent money on government projects, government employees, and public utility workers like a drunken sailor.

Making payments on reparations was not a problem for Germany, as Ferguson and Ahamed explain -- and in fact they didn't do much of it.

Facts are facts.

At this point, I need persuasive facts and arguments -- an opinion without support doesn't get me anywhere.

These, as I understand them, are the simple fact on post WWI Germany.

Far more money went into Germany in loans than came out in reparations -- its not even close.

Germany spend far more on luxury government spending projects (opera houses, public swimming pools), over priced public workers, and Bismark's welfare state than they ever paid in reparations. Again, its not even close.

If these facts don't turn the tables on Keynes argument, then, what is the argument?

I was not saying H. is irrational or something. I am not so unhappy with H's lingo, but I do get the risk of misunderstanding it creates.

I tend to doubt H. got uncertainty from K. Isn't is always a Scottish Enlightenment point with Hayek? So I tend to side with Greg and against Barkley on this particular question. Is there better evidence we haven't brought out on this thread?

Let me apologize for all of the Ipad typos.

Time to give up on the on screen Ipad keyboard.

Pete, re the paper you are doing on the factors that made Keynes so influential, have you considered Hutt's second book, "Economists and the Public" (1936) where he argued that many economists had sacrificed their intellectual integrity by supporting "politically feasible" policies instead of telling unpopular truths about policies. He repeated this message some years later in " Politically Impossible...". As far as I can make out, Economists and the Public fell stillborn from the press. He wrote "The present book has arisen out of what I originally intended to be an important side-issue in a study of a certain equalitarian and democratic ideal, namely, the competitive system. But further reflection caused the problems here dealt with to acquire major importance and demand separate treatment".

The "side-issue" that he felt obliged to address was the overwhelming opposition to free enterprise capitalism and free markets among intellectuals, politicians and other people of influence. Hutt's deliberations on the anti-free trade mentality drove him to a major survey of the nature of the social sciences and their relationship to public opinion and politics. "I have simply tried here to bring to light the causes which lead to current fallacies being so uncritically accepted".

The first chapter, on economists and rationalists, noted that so many educated people, both radical land conservative, were hostile to classical economics and its implications. He suggested that the retreat of economists into 'pure theory' may reflect their realisation that no authority is attached to their opinions on matters of policy. He then moved on to explore the ways that 'custom thought' and 'power thought' frustrate the application of 'rational thought' in the social sciences and politics. One of the many case studies and historical incidents which he described was the retreat of John Stuart Mill from laissez faire and the consequences in theory and practice due to his very considerable influence. 400 pages of dense arguments, a remarkable achievement for a scholar working in relative isolation and pursued as a sideline to his major tasks and interests as a teacher, his administrative duties as Dean of the Faculty of Commerce and his other writing and research projects.

This comes from an overview of Hutt’s career. http://www.the-rathouse.com/Revivalist4/RC_Huttachieve.html

I know I'm a little late for this party, but I would be extremely interested in anyone who has evidence that Keynes influenced Hayek in probability theory or uncertainty.

Knight was writing about risk (where a numerical probability can be assigned) and uncertainty (where it cannot) by 1921, coincidenally the year that Keynes published his tratise on probability. But as Roger suggested, it was probably common knowledge long before that (but dont ask for a p value on that).

What do you guys think of Meltzer's interpretation of Keynes?

Roger Myerson wrote a game-theoretic critique of Keynes' "Consequences of the Peace" at cheeptalk a little while back.

I was at the Liberty Fund conference in San Francisco that discussed Meltzer's manuscript and his reinterpretation of Keynes (as discussed in the Garrison article). The interpretation was so novel that we all had trouble getting our arms around it at the time.

I don't think Meltzer's view got traction. This may due to the fact that, if accepted, the interpretation would render the intellectual capital of most macro economists obsolete.


I think I made it clear that in their respective (limited) movements towards each other's views, I did not assert that either Keynes or Hayek was drawing specifically on the other. Keynes and Knight published in the same year. Given his more pro-free market focus and his emphasis on the role of the entreprenur, Knight's arguments would certainly appeal to Hayek more, although, frankly, Keynes's analysis is far subtler and more general on the matter than Knight's. Your point about Hayek knowing this stuff in 1929 is that it was "implicit" in his work from that period; it certainly was not a central focus.

I agree that Keynes never dealt particularly with complexities of intertemporal patterns of production and returns. I know nothing about whether he read or understood Bohm-Bawerk or not.

On Economic Consequences of the Peace, a crucial point is that the loans from the US came only well into the 1920s, particularly with the Dawes Plan, and were a response to the problems that Germany was having. That Ferguson would make such an argument is evidence that he is not even a good historian, much less an economic one. Keynes was right about Versailles, as many more knowledgeable than Ferguson (including Hayek) have long argued.


Please keep in mind the matter of Keynes vs "Keynesians."

"Fazzari sees the world through Keynes's analytical glasses, and he presents the arguments in a straightforward manner in this podcast. In the process we learn about a world of idle resources, about the severing of the link between money supply and the price level, about the inability of prices to guide decisions, and how individuals do not respond rationally to the incentives that they face."

Ok, so what? I remember wondering in 2009 when I listened to that podcast: What does this have to do with observational reality? Is this world of idle resources full of free lunches? I remained, after the podcast, unconvinced that pondering Keynes's free lunch world is more illuminating than reading about the alien existences of science fiction.

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