Economists Joining The Austrian School In The Wilderness

Around 1940, the Austrian school of economics collapsed. Who did most to propagate the Austrian school in the interval between this collapse and the 1974 South Royalton conference? I'd like to formulate this question so it's clear I'm talking about generations following Ludwig Von Mises and Friedrich Hayek.

David Friedman has recently refuted some fantastic claims on behalf of Murray Rothbard. (See also Friedman on Rothbard's willingness to advocate lying.)

For me, two names pop to mind - Israel Kirzner and Ludwig Lachmann. I don't think of Murray Rothbard as somebody that academics need pay any attention to, other than historians studying the American right during the second half of the twentieth century. I think one can draw many analytical parallels between Lachmann and Robinson's views on capital. I'm also interested, with Lachmann, in G. L. S. Shackle, a Post Keynesian economist. I don't find Kirzner's views on entrepreneurship as of as much interest. I like Kirzner better on the history of the Austrian school and in his attempts to differentiate Mises from Robbins in their views on methodology. What did Rothbard contribute, other than political polemics and rants for 'zines read by only a handful of true believers? I know some will cite his books. But I don't find much in Man, Economy, and State other than repetition of Mises, including Mises' unwillingness or inability to accurately state the views of his contemporaries.

Although I am quite aware of the difficulties of this metric, I looked to see who among these three managed to publish, after the Austrian-school revival, in economic journals I find of interest and that cannot be perceived as a ghetto for the Austrian school. I have handy what purports to be a complete bibliography for Lachmann, a couple of Kirzner collections, and google searches for Rothbard. I think impressive Lachmann's 1976 survey in the Journal of Economic Literature. I expected to find Kirzner had more impressive outlets for a few of his papers. Since I note that Kirzner contributed the survey article on the Austrian school for the first edition of The New Palgrave, I suppose I should also note his New Palgrave articles on "Economic harmony" and (with Roger Garrison) on Hayek, as well as Murray Rothbard's New Plagrave articles on "Catallactics", "Frank Fetter", "Imputation", Mises, and "Time Preference". I'm not sure this evidence leads to my conclusion.

Bibliography

• Edwin G. Dolan (editor) (1976). The Foundations of Modern Austrian Economics, Sheed and Ward.
• Israel Kirzner (). "Entrepreneurship, Entitlement, and Economic Justice", Eastern Economic Journal.
• Israel Kirzner (). "Menger, Classical Liberalism, and the Austrian School of Economics", History of Political Economy.
• Israel Kirzner (1987). "The Austrian School of Economics", in The New Palgrave: Dictionary of Economics (Ed. by J. Eatwell, M. Milgate, and Peter Newman), Macmillan.
• Hansjörg Klausinger (2006). "'In the Wilderness': Emigration and the Decline of the Austrian School", History of Political Economy, V. 38, N. 4: 617-664.
• Ludwig Lachman (Mar. 1976) "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society", Journal of Economic Literature: 54-62.
• Ludwig Lachmann (1980). "Review of Hayek's Law, Legislation, and Liberty, Vol. III", Journal of Economic Literature, V. 18: 1079-1080.
• Louis M. Spadaro (1978).New Directions in Austrian Economics, Sheed Andrews and McMeel.

Murphy On Sraffa's Victory In Debates On ABCT

Robert P. Murphy has provided electronic access to his article, "Multiple Interest Rates and Austrian Business Cycle Theory". Murphy presented this paper at a Liberty Fund conference a number of years ago. (At least one other has commented on this paper. Has Murphy on his blog brought up his papers, also growing out of his PhD thesis, in the Journal of the History of Economic Thought?)

Many fanboys of so-called Austrian economics that you may meet, especially on the Internet, are ignorant of economics, including the economics of the Austrian school. For some reason, proclaiming themselves to be members of this tribe and moralizing about outsiders fills an emotional need for some. Even among academics adhering to this school, I have noticed little discussion, for example, of the distinction between Mises' Evenly Rotating Economy and Hayek's notion of plan compatibility in an intertemporal equilibrium. (I can provide caveats.)

These strictures do not apply to Murphy. He is fully aware of this distinction. And he accepts that the variation of own rates of interest among commodities outside steady states overthrows Hayek's exposition of Austrian Business Cycle Theory (ABCT) in Prices and Production. Murphy should and does acknowledge the correctness of Sraffa on this point in his debate with Hayek over ABCT.

In my critique of ABCT (on other grounds), I end up with a bibliography consisting almost exclusively of recent work by heterodox economists. Murphy's bibliography is like this, except his heterodox economists are drawn exclusively from one school.

Nevertheless, Murphy should include a selection of references from other traditions, including mainstream economics. No matter what one may think of mutualism, Kevin Carson (2004) is not a good cite for "a modern statement of classical price theory". Kurz and Salvadori (1995) is a more canonical modern statement. Debreu (1959) and Arrow & Hahn (1971) are standard references for intertemporal equilibrium. Hahn (1982) explains how own-rates of interest vary among goods in such models. Boehm (1986) strives to distinguish the mainstream concept of intertemporal equilibrium from Hayek's. Hicks (1946) and Grandmont (1977) are two canonical statements of temporary equilibrium. Samuelson (1958), Diamond (1965), Benhabib (1992 & 2008) and Geanakoplos (2008) describe Overlapping Generations (OLG) models.

Economists have established, I think, that conditions on the parameters of short-run equilibrium models (e.g., in intertemporal and temporary equilibrium models) fail to limit the dynamics of equilibrium paths in such models. I like to draw on the Cambridge Capital Controversies and on the Sonnenschein-Mantel-Debreu theorem to argue for this result.

Since the dynamics are unlimited, one should be able to construct examples in such models of cycles. Of the literature I have read, I find, perhaps because of my own limitations, too few concrete examples. It is my understanding that cycles can arise in these models, even if expectations are being fulfilled and plans continue unchanged. This may be an unduly restrictive approach to expectations, but, given the current hegemony of neoclassical economics, other approaches need an explicit motivation. Post Keynesians and, I guess, the Austrian school have such a motivation in their emphasis on historical time. But I do not see Murphy connecting up this emphasis to his story in his paper. (I need to reread his section on "Meeting Sraffa's Objection" with more attention to ensure the story is coherent.) Murphy wants agents in his story to make mistakes through responses to the monetary authority. But these are basically barter models. Introducing money into such models is challenging, and Murphy might want to examine some attempts in the literature.

I think established results should lead one to drop an insistence on methodological individualism (or microfoundations) in macroeconomic research along these lines. In any case, I fail to see what is specifically "Austrian", especially inasmuch as the Austrian school relates to the ABCT, about such a description of business cycles.

Bibliography

• Kenneth J. Arrow and Frank H. Hahn (1971). General Competitive Analysis, Holden-Day [I haven't read this].
• Jess Benhabib (editor) (1992). Cycles and Chaos in Economic Equilibrium, Princeton University Press [I haven't read this].
• Jess Benhabib (2008). "Chaotic Dynamics in Economics", in The New Palgrave Dictionary of Economics, 2nd edition. (ed. by S. N. Durlauf and L. E. Blume), Palgrave Macmillan.
• Stephan Boehm (1986). "Time and Equilibrium: Hayek's Notion of Intertemporal Equilibrium Reconsidered" in Subjectivism, Intelligibility, and Economic Unerstanding (ed. by I. M. Kirzner), New York University Press.
• Kevin A. Carson (2004). Studies in Mutualist Political Economy.
• Gerard Debreu (1959). Theory of Value: An Axiomatic Analysis of Economic Equilibrium, Yale University Press.
• Peter A. Diamond (Dec. 1965). "National Debt in a Neoclassical Growth Model", American Economic Review, V. 55, Iss. 5: 1126-1150.
• John Geanakoplos (2008). "Overlapping Generations Model of General Equilibrium", in The New Palgrave Dictionary of Economics, 2nd edition. (ed. by S. N. Durlauf and L. E. Blume), Palgrave Macmillan.
• Jean Michel Grandmont (Apr. 1977). "Temporary General Equilibrium Theory", Econometrica, V. 45, N. 3: 535-572.
• Frank Hahn (1982). "The Neo-Ricardians", Cambridge Journal of Economics, V. 6: 353-374.
• J. R. Hicks (1946). Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory, 2nd edition, Oxford University Press,
• Heinz D. Kurz and Neri Salvadori (1995). Theory of Production: A Long-Period Analysis, Cambridge University Press.
• Robert P. Murphy. "Multiple Interest Rates and Austrian Business Cycle Theory".
• Paul A. Samuelson (Dec. 1958). "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money", Journal of Political Economy, V. 66, N. 6: 467-482.

Against Hegemony Of "Overton Window"

I don't see why some people are so willing to talk about the "Overton Window". Another theory is available to discuss how and why some range of ideas become hegemonic in a society. And this is a theory of politics that was formulated when the left was doing poorly.

Actually, reading more of Antonio Gramsci's prison writings has been and probably will continue to be on my to-read list for a long time.

Some More On Hayek And Sraffa

1.0 Introduction
I have previously discussed Sraffa's review of Prices and Production, Hayek's reply, and Sraffa's rejoinder. I thought I would bring up today a couple of other aspects of that debate.

2.0 Hayek Changes His Notion Of Equilibrium
The traditional neoclassical equilibrium concept, in the period roughly from 1870 to 1930, is roughly of a stationary state. Neoclassical economists in this period erroneously thought that one could define such an equilibrium, given tastes, technology, and endowments, including the endowment of capital, by some or another definition of capital. As Walras recognized, such an equilibrium can never be expected to be established. At most, actual capitalist economies can be expected to be tending towards this kind of equilibrium at any point in time.

This was Hayek's equilibrium concept in Prices and Production. He put forth another equilibrium concept in The Theory of Capital, a concept he had been developing for some time. (Hayek is very clear on this in Chapter 2.) This equilibrium concept is of plan compatibility, a concept formally equivalent in some sense to the Arrow-Debreu model of intertemporal equilibrium.

Given spot prices, a monetary interest rate, and the past history of an economy, entrepreneurs, based on their economic theories, form expectations about future prices and the expectations and plans of others. They form their plans based on these expectations. Equilibrium exists if all these plans are mutually compatible. Under this equilibrium concept, no need exists for entrepreneurs to plan to produce the same quantities period after period. Likewise, consumers might plan to consume different quantities in different periods. Furthermore, entrepreneurs and consumers will generally expect spot prices to vary over time.


Hayek's equilibrium concept of plan compatibility, as I understand it, cannot be used to ground Austrian Business Cycle Theory.

3.0 Austrian Business Cycle Theory Outside Of Historical Time
Sraffa destroyed Hayek's version of Austrian Business Cycle Theory, as Robert Skidelsky notes.

I am amused in noting part of Sraffa's critique. Keynes sets his General Theory in historical time, not logical time. I read Sraffa as pointing out that Hayek's theory, like neoclassical theory on Keynes's reading, is set in logical time:

"That the position reached as the result of 'voluntary saving' will be one of equilibrium... is clear enough; though the conclusion is not strengthened by the curious reason he gives for it.¹³

But equally stable would be that position if brought about by inflation; and Dr. Hayek fails to prove the contrary. In the case of inflation, just as in that of saving, the accumulation of capital takes place through a reduction in consumption. 'But now this sacrifice is not voluntary, and is not made by those who will reap the benefit from the new investments... There can be no doubt that, if their money receipts should rise again [and this rise is bound to happen as Dr. Hayek promises to prove] they would immediately attempt to expand consumption to the usual proportion', that is to say, capital will be reduced to its former amount; 'such a transition to less capitalistic method of production necessarily takes the form of an economic crisis'...

As a moment's reflection will show, 'there can be no doubt' that nothing of the sort will happen. One class has, for a time, robbed another class of a part of their incomes; and has saved the plunder. When the robbery comes to an end, it is clear that the victims cannot possibly consume the capital which is now well out of their reach. If they are wage-earners, who have all the time consumed every penny of their income, they have no wherewithal to expand consumption. And if they are capitalists, who have not shared in the plunder, they may indeed be induced to consume now a part of their capital by the fall in the rate of interest; but not more so than if the rate had been lowered by the 'voluntary savings' of other people.

¹³The reason given is that 'since, after the change had been completed, these persons [i.e., the savers] would get a greater proportion of the total real income, they would have no reason' to consume the newly acquired capital... But it is not necessarily true that these persons will get a greater proportion of the total real income, and if the fall in the rate of interest is large enough they will get a smaller proportion; and anyhow it is difficult to see how the proportion of total income which falls to them can be relevant to the 'decisions of individuals'. Dr. Hayek, who extols the imaginary achievements of the 'subjective method' in economics, often succeeds in making patent nonsense of it." -- Piero Sraffa (March 1932)

And again:

"The first question is whether, as Dr. Hayek asserts, the capital accumulated by 'forced saving' will be, 'at least party' dissipated as soon as inflation comes to an end: 'It is upon the truth of this point that my [Dr. H's] theory stands or falls'. My simple-minded objection was that forced saving being a misnomer for spoliation, if those who had gained by the inflation chose to save the spoils, they had no reason at a later stage to revise the decision; and at any rate those on whom forced saving had been inflicted would have no say in the matter. This appeal to common sense has not shaken Dr. Hayek: he describes it as 'surprisingly superficial', though unfortunately he forgets to tell me where it is wrong." -- Piero Sraffa (June 1932)

The distribution of endowments - who owns what - is a datum for traditional neoclassical theory. Disequilibria employment, production, and purchases will change this data. So one cannot expect, contrary to Hayek, the previous equilibra corresponding to previous data to be restored after the economy is on some disequilibrium path for some extended time.

Sraffa, like later Post Keynesians, suggested a coherent economic theory must be set in historic time.

References

• P. Garegnani (1976) "On a Change in the Notion of Equilibrium in Recent Work on Value and Distribution", reprinted in Keynes's Economics and Theory of Value and Distribution (edited by J. L. Eatwell and M. Milgate, 1983), Oxford University Press.
• F. A. Hayek (1935) Prices and Production, 2nd. Edition, Routledge and Sons.
• F. A. Hayek (June 1932) "Money and Capital: A Reply", Economic Journal, V. 42: 237-249.
• F. A. Hayek (1941) The Pure Theory of Capital, University of Chicago Press.
• M. Milgate (1979) "On the Origin of the Notion of 'Intertemporal Equilibrium'", Economica, V. 46, N. 1: 1-10.
• P. Sraffa (March 1932) "Dr. Hayek on Money and Capital" Economic Journal, V. 42: 42-53.
• P. Sraffa (June 1932). "A Rejoinder", Economic Journal, V. 42: 249-251.

Against The TSSI: Some Literature

The Temporal Single System Interpretation (TSSI) is a reading of Marx in which Marx's theory of value, including his approach to the transformation problem, is internally consistent. I think of Alan Freeman and Andrew Kliman, among the extensive community developing the TSSI, as the most prominent advocates. And, for me, Andrew Kliman's book, Reclaiming Marx's "Capital": A Refutation of the Myth of Inconsistency (Lexington Books, 2007) is the canonical statement, for now, of the TSSI. (I have already posted some initial reactions to Kilman's book.)

The purpose of this post is to list some literature criticizing the TSSI, often harshly. At least some of the articles in the bibliography have replies and responses. Despite the tone of some of this literature, I think the TSSI worth engaging with. On my lengthy to-do list is, some day, to carefully step through Kliman's refutation of the Okishio theorem and through refutations of Kliman's refutation. The Okishio theorem refutes Marx's law of the declining rate of profit.

If one were curious about what Marxists economists have to say today, one might browse recent back issues for some of these journals.

Bibliography

• Simon Mohun and Roberto Veneziani (Summer 2007) "The Incoherence of the TSSI: A Reply to Kliman and Freeman", Capital and Class, V. 31: 139-145.
• Gary Mongiovi (Fall 2002) "Vulgar Economy in Marxian Garb: A Critique of Temporal Single System Marxism", Review of Radical Political Economics, V. 34, N. 4: 393-416.
• Ernesto Screpanti (Jan. 2005) "Guglielmo Carchedi's 'Art of Fudging' Explained to the People", Review of Political Economy, V. 17, N. 1: 115-126.
• Ajit Sinha (Summer 2009) "Book Review: Reclaiming Marx's 'Capital'", Review of Radical Political Economics: 422-427
• Roberto Veneziani (2004) "The Temporal Single-System Interpretation of Marx's Economics: A Critical Evaluation", Metroeconomica, V. 5, N.1: 96-114.
• Roberto Veneziani (Fall 2005) "Dynamics, Disequilibrium, and Marxian Economics: A Formal Analysis of Temporal Single-System Marxism", Review of Radical Political Economics, V. 37, N. 4: 517-529.

Too Long; Didn't Read

Tom Walker mentions Paul Lafargue The Right to be Lazy. I started reading this book months ago and did not get much further than the description of the horrors of nineteenth century working conditions. Is not finishing in the spirit of the piece?

J. R. Hicks' Use of "Malinvestment"

In the influential Value and Capital: An Inquiry Into Some Fundamental Principles of Economic Theory (2nd edition, Oxford, 1946), J. R. Hicks writes:

"...it is the strict interpretation - divergence between expected and realized prices - which is of central importance theoretically. Whenever such a divergence occurs, it means (retrospectively) that there has been malinvestment and consequent waste. Resources have been used in a way in which they would not have been used, if the future had been foreseen more accurately; wants, which could have been met if they had been foreseen, will not be satisfied or will be satisfied imperfectly. Thus, disequilibrium is a mark of waste, and imperfect efficiency of production." -- J. R. Hicks, p. 133, my emphasis.

This passage occurs in Hicks' introduction of the method of temporary equilibrium. I think Hicks relied heavily on Hayek in developing this method¹. But I see a large difference in Hicks' use of "malinvestment" here and Hayek's account in Prices and Production.

For Hayek's version of ABCT, malinvestment occurs when entrepreneurs more or less share the same systematic expectations and plans. In explaining business cycles, he abstracts from non-systematic mistakes in capital investments. Hayek thinks entrepreneurs will invest in too capital-intensive techniques when monetary authorities set the interest rate too low. They will tend to adopt a capital structure in too many high-order goods and not enough low-order goods are produced, as compared to the capital-structure justified by consumer tastes².

Hicks, on the other hand, is considering a case in which all spot markets clear, but some ongoing production could be the result of variation among entrepreneurs in expectations or plans. Since some expectations or plans are incorrect, he characterizes this state as a disequilirium. Hicks does not posit a systematic bias in plans or expectations for his use of the term "malinvestment". Consequently, his business cycle theory is quite different from Hayek's.

Footnotes

1. Hicks mentions Hayek in his acknowledgments. I'm surprised to see he also acknowledges criticisms from Sraffa.
2. This theory cannot be sustained.