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A rather funny coincidence. I've just finished re-reading some of Rothbard articles about the socialism and he was very explicit that Hayek's sole argument was the ignorance of the planners. I must admit that this was also my impression, after reading the original arguments from Mises and Hayek.

There is no substantial difference between the Mises and Hayek arguments. The concrete knowledge of time and circumstance is dispersed among millions of transactors, and can never be concentrated in a single mind. It is Hayek's classic theoretical argument for the superioirty of markets and prices in allocating resources.

"We are often told the debate between Hayek and Keynes is the great question in political economy. But whether governments can spend their way out of recessions is just one element of the larger debate about the coordinating power of markets."

With respect to the question whether the government should use some kind of monetary and (limited) fiscal policy to end a depression, the mature Hayek came to a point of view that is essentially a kind of qualified "Keynesianism":

To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations, and not by directly stimulating particular kinds of investment or similar kinds of public expenditure which will draw labour into jobs they will expect to be permanent but which must cease as the source of the expenditure dries up.” (Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London. pp. 210–212).

“There is no doubt, and in this I agree with Milton Friedman, that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation! So, once again, a badly programmed monetary policy prolonged the depression” (Pizano, D. 2009. Conversations with Great Economists, Jorge Pinto Books Inc., New York. p. 13).

In The Road to Serfdom (1944), Hayek appears to accept the possibility of public works spending even if “in experimenting in this direction we shall have carefully to watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure” (Hayek, F. A. von. 2001 [1944]. The Road to Serfdom, Routledge, London. p. 126).

It's funny how Hayek the interventionist and public works advocate isn't mentioned in much of the Austrian invective against Keynes.

I dunno, LK, I am not sure that's an entirely fair swipe. Hayek did indeed come out with a more careful discussion of secondary depressions in the '67 Studies volume. I guess maybe it's true that Hayekians do not point to that so much, at least on the blogosphere. But I'm not sure we should. The big idea these days from more or less "Keynesian" authors is stimulus, which is not really the same thing as putting hungry people to work fixing up roads and parks. I mean, what do you mean by "stimulus"? But usually the idea today is basically big deficits. Again, that is not putting hungry workers to work. We *have* extended unemployment benefits. I support that, but I think everyone agrees that doing so has increased unemployment.

@ O'Driscoll:
"It is Hayek's classic theoretical argument for the superioirty of markets and prices in allocating resources."

Yes, I agree with that, but is it Mises' argument?

"the big idea these days from more or less "Keynesian" authors is stimulus, which is not really the same thing as putting hungry people to work fixing up roads and parks."

That is perfectly true; I don't deny it.

It is at this point that the Keynesians would reply that you should look to countries where stimulus was applied on the scale needed: e.g., South Korea, Australia, Germany, Sweden, Norway.

Take South Korea: a $25 billion stimulus package was rolled out in late 2008 and added to in 2009, coming to 2.7% of GDP.* By Q1 2009 the economy got out of recession and has had positive real GDP growth since. Unemployment is at 3.1%, and never went above 5%.

The US policy response was inadequate, because the US was one of hardest hit by recession.

*"Stimulus Packages to counter Global Eocnomic Crisis: A Review," p. 15.

The article mentions that the calculation problem applies to all government spending, not just the limiting case of socialism. He might have mentioned after citing the recent book on planning in Russia that black markets existed during Stalin's era, just as they did in North Korea under the guidance of "Dear Leader," as The Economist mentions this week in its coverage of the Hermit Kingdom.

I just scanned the Wikipedia article on the "Economic Calculation Problem" and was surprised that Rothbard's book Power and Market wasn't mentioned or even cited. Maybe it's the Rodney Dangerfield of the Austrian school and gets no respect. He has a section "Centers of Calculation Chaos" (pp. 825-36) in which he points out that the calculation problem applies to all government spending. (Only the government pays $16 for a donut :-).)
Rothbard writes: "...any government operation injects chaoos into the economy; and since all markets are intereconnected in the economy, every government activity disrupts and distorts pricing , the allocation of factors, consumption/investment ratios, etc."

If I were an Austrian grad student searching for a dissertation topic, I'd liberate a copy of Alfred Rappaport's great book, Creating Shareholder Value (2nd ed.), not for its title subject, but instead for a key building block of shareholder value, namely the concept of cash flow and the economoic calculations that underpin cash flow, such as the relationship between interest and cash flows, how cash flows are discounted to their PV, etc. This relates to a raft of Austrian themes from the calcuation problem to entrepreneurship and intertemporal economoic and financiual planning to the business cycle, and I would think to free banking.
The development of the idea of cash flow presumably would merit a chapter. John Burr Williams was one of the pioneers in his Harvard PhD dissertation (1938?), later published as a book, The Theory of Investment Value.
Mises, Hayek and their opponents in the calculation debate didn't have this concept available to them. By the time Rothbard wrote P&M it had been developed by accountants, but he didn't use it. He did discuss in a cursory way how discounting affects the allocation of resources, but there is more to be said on the topic, indeed enough to warrant a dissertation. I'd recommend that Austrian professors alert any of their interested grad students to follow this up.

I should mention that the page cite above is for the one-volume edition of Man, Economy, and State together with Power and Market, not the stand alone edition of P&M.


This issue has been discussed and debated here and at ThinkMarkets. I happen to think Barro is correct: there is no serious evidence that deficit spending is effective. I cite Barro because it is not a peculiarly Austrian argument.

Hayek's argument against stimulus is related to his argument on economic calculation. Gov't officials do not have the knowledge needed to ensure that the effects of stimulus would not cause more harm than good. That is point about misdirection of labor.

China has frequently been cited for its "stimulus" spending. Now it is paying the piper. The spending inflated a property boom that is now crashing. Capital is leaving the country. Additionally, and contrary to what you read every day, the yuan has appreciated substantially in real terms. China is becoming uncompetitive relative to its neighbors. If china goes into recession, there will be social instability.


I would say that Mises' and Hayek's arguments were complementary and certainly compatible. As I recall, Mises focused more on the pricing of capital and the impossibility of rationally allocating it without a market and prices for it. I see no conflict there.

Niko won't care, but others might. My SDAE presidential address covered this ground several years ago.

I know about the address.
I have been thinking a lot about this calculation thing lately and after a while I realized that the knowledge thing didn't convince me so much, but I still have to learn more in order to grasp the capital thing.

I don't see them as complementary, but different.

Part of the problem with the Hayek & Mises calculation argument is what to think of Hayek's papers on competition. "The Meaning of Competition" and "Competition as a Discovery Process" can be thought of as being about the problems with the models of perfect competition and monopolistic competition, or they can be thought of as broader, as concerning socialist calculation.

If you take the former position then "The Uses of Knowledge in Society" sums up Hayek's position on socialist calculation, and that position is different to Mises. I think that's Rothbard and Niko's argument. It's not unreasonable, but I think the latter viewpoint is closer to the truth. Hayek's competition papers are part of his argument on socialist calculation and "price signalling" is only a small part of the whole. (Even if you take this latter view Hayek and Mises aren't exactly the same, but they are close).

Either way, I think we can come up with much better criticisms of socialist calculation today. We restrict ourselves unduly by being too concerned with past debates.

The great thing about Keynesianism is that no matter how much stimulus there is, if the economy recovers, one can argued it worked, and if the economy continues to tank, the stimulus wasn't enough. If you believe in a particular religion, it's because you see the truth; if you do not believe in it, it's because Satan (or the equivalent) is preventing you from seeing it. Marrying someone just like your mom proves the Oedipus complex; marrying someone not at all like your mom proves the Oedipus complex. If you see the truth of Marxism, it's because you're a proletarian or sufficiently enlightened; if you don't, then you either have false consciousness or are a member of the bourgeoisie. All religious beliefs are this way.

Good points, Troy. It reminded me of Scott Sumner's definition of tight monetary policy. He rightly shows that there is no objective definition of tight or loose monetary policy, then goes on to say that the only objective definition is what happens to the economy.

In other words, if the economy is slowing then monetary policy is too tight; if it's overheating then policy is too loose. That doesn't allow for his monetary theory, ngdp targeting, to be wrong.

In 1922 Mises should have offered a third solution: allowing taxpayers to directly allocate their taxes...

Dang, pragmatarianism is a really hard sell. It's like pulling teeth trying to get you guys to set aside your preconceived notions regarding the proper scope of government.

I mean, if the private sector truly is better at supplying X...then why would taxpayers "purchase" X from the public sector?

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