Friday, December 09, 2011

On Hayek's Lack Of Impact On Macroeconomics

I'm agreeing with, for example, Brad DeLong, Paul Krugman, and David Warsh. I'm disagreeing with, for example, Peter Klein, Mario Rizzo, Alex Tabarrok, and Steven Horwitz. I suppose I'm also disagreeing with Nicholas Wapshott. Refutations of Austrian Business Cycle Theory (ABCT) are relevant today because of confusions propagated in popular literature.

Keynes argued with many while writing the General Theory. Why not say Keynes versus Dennis Robertson is "the clash that defined modern economics"? I think one could argue that Hayek influenced mainstream macroeconomics through J. R. Hick's exposition of temporary equilibrium in Value and Capital, but this seems a quite attenuated influence.

Keynesians can accept that Hayek had the better of the early 1930s debate with Keynes over Keynes's Treatise on Money. The Treatise is not the General Theory. But Sraffa and Kaldor embarrassed Hayek in his attempt to develop the ABCT. I think the two most important errors in the ABCT are:

  • The natural rate of interest is undefined in intertemporal General Equilibria (also known as, more or less, "plan coordination").
  • No simple relation exists between the optimal allocation of resources among orders of goods and interest rates.
In short, both Hayek's monetary theory and his capital theory are incorrect.

Qualitative stories about the embodiment in capital goods of misaligned plans are, perhaps, the best one can get from Hayek's capital theory. Ludwig Lachmann and Peter Lewin are my favorite Austrian-school economists to read on this point. (Did Lachmann have any enduring effect on mainstream economics?) But it is hard to quantitatively estimate the effects of such misalignments, and I don't find convincing that recovering from these misalignments are the source of the largest worldwide business cycles that we have seen. Anyways, I prefer Joan Robinson on capital theory in disequilibrium.

The importance one should assign the clash between Hayek and Keynes in the history of macroeconomics seems to me to depend crucially on the impact of Hayek on mainstream views of Keynes' General Theory. But Hayek had no such impact. Hayek tried to address the General Theory in his Pure Theory of Capital. But Hayek's book was ignored at the time and is generally considered a failure. About the only thing else Hayek had to say about Keynes's General Theory occurred in interviews and other transient popular pieces. So, whatever you may think about the worth of Hayek's writings, where can you locate their impact?


Gualra said...

also, Hayek had two different theories of the great depression. Hayek number one asserted that "artificial expansions" fueled by forced savings would sooner or latter collapse; Hayek number two stressed the fact that overconsumption is the problem.
In Hayek number one the period of production gets too long; in Hayek number two the period of production gets too short.


Matías Vernengo said...

Also, if I'm not wrong Sissela Bok, daughter of Gunnar and Alva Myrdal, says in her biography of her mother that Hayek received his Nobel Prize because the people at the Riksbank wanted to slight her father.

Unlearningecon said...

'Why not say Keynes versus Dennis Robertson is "the clash that defined modern economics"?'

This would actually be far more accurate, considering Robertson basically developed IS/LM and Hicks just put the finishing touches to it.

Robert Vienneau said...

Thanks for the comments.

I like to emphasize Hayek's theory in Prices and Production. I realize he changed his views on the structure of production, partly in response to Kaldor. I don't think they became more coherent.

Matías, I have Bok's book on my shelf, but I never read it. Looking up Hayek in the index, I find some such passage. I assume this is a matter of reporting Myrdal's belief.

I don't know much about Robertson, except for how he appears in secondary literature on Keynes. That's an interesting take on the IS/LM model.

Gualra said...

well, most austrians don´t seem to realize that Hayek changed his view after Kaldor attack. They always complain that artificially low interest rates misalocate resources mainly moving them from consumption to investment. The "last Hayek" emphasized overconsuption.