Lord Skidelsky on Hayek versus Keynes

Just something to add to my references if I ever manage to publish my critique of Austrian Business Cycle theory:

"The Achilles heel in Hayek’s position was that his remedy of Nature's cure was politically unacceptable. But it was also analytically incoherent, as Piero Sraffa pointed out, in a devastating review of Price and Production in 1932. Sraffa singled out for attack Hayek's claim that a structure of production built on credit was less stable than one built on voluntary saving. Credit creation, he argued, produced an increased flow of voluntary saving on the part of those who received credit facilities. So there would never be a shortage of voluntary saving. Thus Hayek's account of the genesis of the slump collapses. Admittedly, Sraffa's argument is incomplete, since, like Keynes at the time, he assumed full employment, and thought of credit creation as redistributing income from wage earners to entrepreneurs. But this was Hayek's line, too. Sraffa was accepting Hayek’s assumption, and making a nonsense of it." -- Robert Skidelsky, "Interpreting the Great Depression: Hayek versus Keynes", prepared for the INET Conference, Cambridge University, 8-11 April 2010

Silly People Carrying Signs

On 15 April, I went to laugh at a local "Tea Party" rally.

Figure 1: Stupid and Proud of It

Figure 2: I'd Rather Discuss Marxism with My Dining Room Table

Figure 3: Against the War

Reasons To Be Cheerful

I look at the speakers (here and here)at the Institute for New Economic Thinking conference that just concluded at King's College, Cambridge. And I see a number of economists I consider heterodox: Sheila Dow, John Eatwell, Duncan Foley, James Galbraith, Tony Lawson, and Philip Mirowski. (You can download selected papers at those sites.)

Not that this addresses Benjamin's worries about whether the institutional structure that George Soros seems to to be setting up will be as open to new ideas and pluralism as it might be.

Eruption of Discussion on Austrian School Economics

• Martin Wolf, of the Financial Times asks whether Austrian economists have a superior understanding of financial crises. (Having him ask this on April Fools Day doesn't help my case that Austrian Business Cycle Theory is still worth refuting.)
• Paul Krugman answers and clarifies.
• Brad DeLong answers. (I don't like that Brad makes Austrian school economics to be almost solely a matter of policy advocacy with little supposed analytical content behind it. That may be how Ron Paul and random internet-based commentators put it, but something different can be found in old literature.)
• Tyler Cowen comments. (I think the point is to throw out ABCT.)
• What do you think of this old post from Peter Boetke? Does he get at a fundamental weakness of mainstream price theory in lacking any convincing dynamics?

Deluded With A Myth

"Nothing is more likely than that the verbal expression of the result of a mathematical proof is calculated to delude us with a myth." -- Ludwig Wittgenstein, Remarks on the Foundations of Mathematics (1978) Part III., 26.

"Justin Fox sums up the overwhelming majority of economics papers in one sentence:

'The basic form of an academic economics paper is a couple of comprehensible paragraphs at the beginning and a couple of comprehensible paragraphs at the end, with a bunch of really-hard-to-follow math or statistical analysis in the middle.'

What he doesn't (need to) mention is the way that journalists, myself included, read economics papers: we generally have no ability or inclination to try to understand the details of the formulae and regression analyses, so we confine ourselves to reading the stuff in English, and work on the general assumption that the mathematics is reasonably solid." -- Felix Salmon

The problem isn't that one has no good basis for thinking this assumption true. Rather, the problem is that lots of evidence indicates this assumption is false.

For example, macroeconomists will claim to be presenting models with microfoundations, and thus invulnerable to the Lucas critique. Typical assumptions in such models included the existence of only one good and of a representative agent. The one good serves as both a means of production and a consumption good. The agent decides how much of the good in each period to allocate to consumption and to the accumulation of capital. The Cambridge Capital Controversy and the Sonnenschein-Mantel-Debreu results show this approach lacks microfoundations.

Some economists might say this is old news. For example, they might point to models supposedly with heterogeneous capital goods. But some of these lauded models use the quantities of the capital goods, as measured in numeraire units, as arguments in production functions. Economists who model "heterogeneous" capital in this way typically seem to be ignorant of the impact of price Wicksell effects.

Further, Philip Mirowski has shown that economists fail to investigate the conservation laws built into their equations.

As with economists themselves, journalists covering developments in academic economics vary in their understanding of the theoretical issues embodied in the math. Chris Hayes made quite a splash with his Nation article a couple years ago on heterodox economics. John Cassidy examines, for example, the impact of the Sonnenschein-Mantel-Debreu results, on general equilibrium theory, in his book, How Markets Fail: The Logic of Economic Calamities. (I haven't read Justin Fox's book.)