Saturday, December 15, 2018

Professor Hayek on the Mythology of Capital: The Misleading Concept of Capital as a Definite “Fund” and the Meaningless Abstraction of a Single or Average Period of Production

Professor Knight’s crusade against the concept of the period of investment revives a controversy which attracted much attention thirty and forty years ago but was not satisfactorily settled at that time. In his attack he uses very similar arguments to those which Professor J. B. Clark employed then against Böhm-Bawerk. However, I am not concerned here with a defense of the details of the views of the latter. In my opinion the oversimplified form in which he (and Jevons before him) tried to incorporate the time element into the theory of capital prevented him from cutting himself finally loose from the misleading concept of capital as a definite “fund,” and is largely responsible for much of the confusion which exists on the subject; and I have full sympathy with those who see in the concept of a single or average period of production a meaningless abstraction which has little if any relationship to anything in the real world. But Professor Knight, instead of directing his attack against what is undoubtedly wrong or misleading in the traditional statement of this theory, and trying to put a more appropriate treatment of the time element in its place, seems to me to fall back on the much more serious and dangerous error of its opponents of forty years ago. In the place of at least an attempt of analysis of the real phenomena, he evades the problems by the introduction of a pseudo concept devoid of content and meaning, which threatens to shroud the whole problem in a mist of words.

--F.A. Hayek, Capital and Interested. Lawrence H. White, vol. 11 of The Collected Works of F.A. Hayek (Chicago: The University of Chicago Press, 2015), 119-120.



Thursday, December 13, 2018

"Forced Saving" Occurs When Real Resources Are Transferred (As a Direct Result of Monetary Expansion) from Producing Consumer Goods to Producing Capital Goods

Hayek contested the alleged 'neutrality' of money. Variations in money could instigate change in real economic variables; and Hayek's work emphasises the all-pervasive, short-run effects of changes in the money supply. Wicksell's analysis had ignored those effects, but his introduction of the concept of 'neutral money' itself suggested 'recognition of the fact that money need not be neutral' (Schumpeter). The subsequent search for the conditions in which money is neutral had only one logical outcome: for as soon as a set of conditions is established for ensuring monetary stability, it follows that money itself 'exerts an influence and hence that it is not neutral' (Schumpeter). Hayek emphasised that monetary disturbances affected real sectors of the economy through induced changes in relative prices and interest rates; and he focused upon the mechanism by which these occurred. Central to his analysis is the concept of 'forced saving' which occurs when real resources are transferred (as a direct result of monetary expansion) from the production of consumer goods to the production of capital goods.

--G.R. Steele, Monetarism and the Demise of Keynesian Economics (New York: Palgrave Macmillan, 1989), 32.


Keynesian (So-Called) Full-Employment Policies Are Implausible Because of the Ricardo Effect

In the practical world of business, the function of investment expenditure is to provide the capital necessary to increase the supply of consumption goods in the future. However, Keynes’s General Theory provides a macroeconomic analysis where investment is treated as a component of aggregate demand that may be used to boost employment both directly and indirectly via the multiplier process. In setting aside the functional purpose of investment, to produce a short-run model of employment and national income, Keynesian macroeconomics neglects a hugely important area of economics; that is, the determinants of the changing levels and composition of production through time.

Hayek argues that the strategy of an expansionary monetary policy as the means to reach full employment is explained by Keynes’s ignorance of Austrian capital theory. The successful implementation of roundabout production methods requires a prior provision of resources that is delivered by voluntary saving. Forced saving (which accrues whenever inflated consumption goods’ prices reduce real wages) is not a viable alternative, because the Ricardo effect tells cumulatively against roundabout production methods. The relevance of monetary expansion is clear. A macroeconomic investment boom launched upon the back of monetary expansion is an inevitable failure. Keynesian (so-called) full-employment policies are implausible because of the Ricardo effect.

--G.R. Steele, The Economics of Friedrich Hayek, 2nd ed. (Houndmills, UK: Palgrave Macmillan, 2007), 148-149.


Tuesday, December 11, 2018

Hayek on Keynes' Fourth Fundamental Error: The Keynesian Philosophy of “In the Long Run, We Are All Dead” Is the Height of Scientific Irresponsibility

The General Theory is a model focused primarily on the short term. Hayek criticized Keynes because, in his opinion, only entrepreneurs have much to say in the short term, and economists do not have much to contribute in this field. In his view, an economist has the privilege and duty to analyze the medium term and long term effects of the economic policies undertaken. For Hayek, the Keynesian philosophy of “in the long run, we are all dead” is the height of scientific irresponsibility, and leads to policies which may give good results in the short term but can be extremely harmful in the long run.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 296.


Hayek on Keynes' Third Fundamental Error: Keynes' Macroeconomic Approach Hides from Economists the Fundamental Mechanisms of Change in the Market

Keynes’ model is clearly macroeconomic. According to Hayek, though, this approach is wrong, as it hides the fundamental mechanisms of change in the market from the economist. In his view, in order to understand the market process, economists need to study the economy from the point of view of the actors involved. Therefore, the relevant things are relative prices and the investment structure, and not concepts such as aggregate investment or the level of wages. Thus, Keynes’ theory would not be enough to explain the market process.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 296.


Hayek on Keynes' Second Fundamental Error: Keynes Considers the Market Exclusively As a Set of Monetary Flows

In Hayek’s opinion, Keynes focuses his analysis mainly on the monetary surface of the market process while he neglects analyzing the underlying real process. Hayek believes that Keynes considers the market exclusively as a set of monetary flows and, therefore, in The General Theory everything is explained through the variation of monetary expenditure. For Hayek, this approach to the economic problem makes it impossible to construct theories to understand the market process.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 295.


Hayek on Keynes' First Fundamental Error: Keynes' General Theory Lacks a Theory of Capital and It Suppresses the Production Structure in the Concept of Aggregate Investment

From Hayek’s point of view, the major deficiency in The General Theory is that it is not based on a theory of capital. According to Hayek, the market is a network of millions of companies that complement and coordinate with each other intertemporally and synchronically, forming an extremely complex production structure. In order to understand how and why this structure is coordinated or discoordinated, we need to apply a theory allowing us to study the way it works. However, Keynes does not study this production structure, but suppresses it in the concept of aggregate investment. This is why Hayek thought that Keynes was not able to understand the causes of and the solutions to economic fluctuations.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 294.


Monday, December 10, 2018

The Concept of Social Justice Has No Meaning

More recently, I have encountered similar difficulties with the blessed word 'social.' Like 'planning' it is one of the fashionable good words of our time, and in its original meaning of belonging to society it could be a very useful word. But in its modern usage in such connections as 'social justice' (one would have thought that all justice is a social phenomenon!), or when our social duties are contrasted with mere moral duties, it has become one of the most confusing and harmful words of our time, not only itself empty of content and capable of being given any arbitrary content one likes, but depriving all terms with which it is combined . . . of any definite content. In consequence I felt obliged to take a position against the word 'social', and to demonstrate that in particular the concept of social justice had no meaning whatever, calling up a misleading mirage which clear-thinking people ought to avoid. But this attack on one of the sacred idols of our time again made many people regard me as an irresponsible extremist, entirely out of sympathy with the spirit of our time.

--F.A. Hayek, The Market and Other Ordersed. Bruce Caldwell, vol. 15 of The Collected Works of F.A. Hayek (Chicago: The University of Chicago Press, 2014), 40.


Sunday, December 9, 2018

Theories of Underconsumption Permeate the Main Doctrines of Socialist Economics

The assertion that saving renders the purchasing power of the consumer insufficient to take up the volume of current production, although made more often by members of the lay public than by professional economists, is almost as old as the science of political economy itself. The question of the utility of 'unproductive' expenditure was first raised by the Mercantilists, who were thinking chiefly of luxury expenditure. The idea recurs in those writings of Lauderdale and Malthus which gave rise to the celebrated Théorie des Débouchés [Theory of Markets] of James Mill and J.B. Say, and, in spite of many attempts to refute it, permeates the main doctrines of socialist economics right up to Tugan-Baranovsky, Thorstein Veblen, and J.A. Hobson. . . .

This state of affairs, however, may yet be endangered by a new theory of underconsumption now current in the United States and in England. Its authors are people who spare neither money nor time in the propagation of their ideas. Their doctrine is no less fallacious than all the previous theories of underconsumption . . .

The teachings of Messrs Foster and Catchings, with which I am primarily concerned in this study, attained their widest circulation in the United States where they have achieved considerable repute not only among members of the public, but also among professional economists.

--F.A. Hayek, Contra Keynes and Cambridge: Essays, Correspondence, ed. Bruce Caldwell, vol. 9 of The Collected Works of F.A. Hayek (London, UK: Routledge, 1995), 74-76.


Friedrich A. Hayek Attributes the Severity and Duration of the Depression to the World Taking Monetary Policy Advice from the "Stabilizers" (Forerunners of the Monetarists)

Hayek wrote Monetary Theory and the Trade Cycle as an explication of the monetary causes of the business cycle. However, in order to do so, he believed that he had to “save the sound elements in the monetary theories of the trade cycle” by refuting those naïve quantity theorists who posited a simplistic and mechanical connection between the aggregate money supply and the average price level. Thus he took after the price “stabilizers” like Irving Fisher and Gustav Cassel who were the forerunners of the modern monetarists. He identified “the critique of the program of the ‘stabilizers’” as “the central theme of this book.” Nor did Hayek tread lightly in verbalizing his criticisms. He placed the blame for “the exceptional severity and duration of the depression” squarely on central banks’, particularly the Fed’s, “experiment” in “forced credit expansion,” first to stabilize prices in the 1920s, and then to combat the depression in the early 1930s. Hayek defiantly declared:
We must not forget that, for the last six or eight years [up to 1932] monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.
--Joseph T. Salerno, introduction to Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, by F.A. Hayek (Auburn, AL: Ludwig von Mises Institute, 2008), xix-xx.


Friedrich A. Hayek Defends a Solid and Natural Theory of Capital Against Frank Knight's Mythology of Capital

In the “The Mythology of Capital,” Hayek took on the long and bitter crusade against the Austrian theory of capital waged by Frank Knight, fifteen years Hayek’s senior, an eminent American economist and the founder and leader of the early Chicago School. Hayek fittingly adopted as the introductory quotation of his article a statement by Eugen von Böhm-Bawerk, not coincidentally the greatest economic disputant of the nineteenth century and Hayek’s chief influence in capital theory. Hayek’s quotation of Böhm-Bawerk read, “With every respect for the intellectual qualities of my opponent, I must oppose his doctrine with all possible emphasis, in order to defend a solid and natural theory of capital against a mythology of capital.” This is actually a concise statement of the early Hayek’s general method of attaining theoretical breakthroughs: he would carefully develop the correct theoretical position and then use it as a weapon with which to strike down the fallacies of his opponents. In this article he proceeded to demolish Knight’s claim that capital, once accumulated, was a permanent fund that perpetually and automatically reproduced itself without regard to human purposes and the prevailing conditions of scarcity. Hayek trenchantly characterized Knight’s notion of capital as “a pseudo-concept devoid of content and meaning, which threatens to shroud the whole problem in a mist of words.”

--Joseph T. Salerno, introduction to Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, by F.A. Hayek (Auburn, AL: Ludwig von Mises Institute, 2008), xviii-xix.