Economics

Hayek vs Keynes at the LSE

July 26th saw one of the most eagerly anticipated economic events of recent years. At the London School of Economics (former employer of Friedrich von Hayek), Professor George Selgin and Dr. Jamie Whyte for the Hayekians and Professor Lord Skidelsky and Duncan Weldon for the Keynesians gathered in front of a packed lecture hall to debate Keynes vs. Hayek. Two other lecture halls were required for the overspill. The debate will be broadcast on BBC Radio Four on August 3rd.

In front of a boisterous crowd, Hayek won fairly easily. Skidelsky’s haughty style contrasted with Selgin’s bullishness and the perennial Keynesian failure to look at the origins of the bust won over nobody in an admittedly partisan crowd. But even an hour of discussion left a few things hanging.

China

One questioner asked whether the Chinese stimulus package had been so much more successful than America’s because the totalitarianism of China allowed the government to direct the spending more effectively than in the US with its dispersed government.

To my great surprise this question was largely ignored by the Hayekians and waved through by the Keynesians, Skidelsky murmuring his approval for the proposition. I was surprised this question generated so little comment because it proves one of Hayek’s key propositions, namely that economic control goes hand in hand with political and social control.

To Hayek there was no such thing as ‘the economy’, as some separate area of human activity which can be tweaked and tinkered with. The economy is, instead, the whole arena of what Hayek’s mentor called Human Action. Or as Ronald Reagan put it, “a government can’t control the economy without controlling people”

We see this with Mussolini’s declaration that “Fascism entirely agrees with Mr. Maynard Keynes” or with the fascistic Blue Eagle which represented the National Industrial Recovery Act of Roosevelt’s New Deal. The effectiveness of China’s Keynesian stimulus came at the price of Tiananmen Square.

Keynesian diagnosis

One of Skidelsky’s repeated attacks on Hayek was that while he had plenty to say about how we got into the bust he had nothing to say about how we get out of it. Selgin dealt with this very well, but there is another point: if a doctor has no idea why your foot is hurting, would you blithely accept his prescription that it needs to be sawn off?

Whereas Austrian economics is famous for its theory of business cycles, with unsustainable booms leading to busts in which bad investments are liquidated, Keynesian theory is silent about the business cycle. All we get is the concept of “animal spirits”, which simply states that at some point for some reason business people suddenly decide en masse to stop investing, and boom turns to bust. As an explanation for why an economy hits the skids, animal spirits is up there with “in the long run we are all dead” — a typical Keynesian shrug of the shoulders.

And it doesn’t even fit the current slump. The economy hit the skids, as Austrian theory always suggested it would, when the Federal Reserve raised interest rates to stifle the inflation caused by the unsustainable credit expansion of the boom period. Many investments that were viable in an environment of easy credit were sustainable no longer. Animal spirits played no part in this. If Keynes was wrong about the diagnosis, why should we place any faith in his prescription?

Mellon and liquidation

This led inevitably to the introduction of a quote attributed to Andrew Mellon, Secretary of the Treasury under President Hoover when the Wall Street Crash hit:

liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…it will purge the rottenness out of the system

There are two grounds on which to question this. First, this quote comes from Hoover’s memoirs and Hoover was the original executor of Keynesian stimulus.

Second, what actually is wrong with it? Look back at the recent boom. In Britain, the US, Ireland, Spain and elsewhere, we had rocketing house prices based on low interest rates. Lots of house building got under way to cash in, and lots of people were drawn into the construction industry.

Now, if we have too many houses as a result of the boom’s over-investment, we do not need new houses built. It follows that we also need fewer people building them. Elements of the construction industry, in other words, will be liquidated just as Mellon said.

They have to be. Consider the alternative: construction workers are laid off in large numbers and a movement begins to ‘do something’. All that can be done is either monetary or fiscal action directed to keeping these workers building houses we do not need. Anything else is Mellon’s liquidation.

Keynes famously said that unemployment could be solved

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again

His modern day disciples, it seems, think that we can build a prosperous economy around the building of houses no one will ever live in.

Larry Summers

I have to give Weldon some credit. For anyone even vaguely involved in the economic policy making of the last government to show his face in public takes real nerve. He was rewarded with a titter from the smattering of Keynesians when he quoted with approval the words of Larry Summers, who described the coalition’s belief that spending cuts are necessary for recovery as “oxymoronic”. Weldon suggested that Summers could have dispensed with the ‘oxy’.

This is, of course, the same Larry Summers who said of the recent Japanese tsunami

It may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength

Perhaps Weldon could find an adjective for this?

It is quite a bizarre argument that a man can destroy his house in year one, rebuild it in year two, and at the end of that second year pat himself on the back for increasing his GDP by the cost of his new house. But then you are through the looking glass with Keynesianism. The doctrine holds, after all, that the more you spend the richer you get. Predictably it wasn’t an argument which impressed the tough crowd at the LSE.

43 comments to Hayek vs Keynes at the LSE

  • An excellent post; looking forward to listening to the LSE debate when it goes on-line.

  • Frances Coppola

    For me, Selgin won the evening, and quite early on. He produced actual evidence to support his case, unlike the other speakers – though unfortunately the audience couldn’t see the graphs. And he pointed out that Hayek believed that govt spending should be MAINTAINED during recovery from bust, but not INCREASED to stimulate (because this starts another boom). A very important point which in my view killed off the main arguments of the Keynes lobby straight away. Skidelsky argued with it, of course, but without any evidence he was doomed to lose.

    Question of the evening for me was Shiv Malik’s identification of the tension between freedom and security represented by each camp. Shame the panel didn’t discuss this much.

    Overall, an excellent debate even over a video link. Can we now have another debate between some of the main schools of thought in 21st century economics?

  • Interesting the Keynesians took food and fuel out of inflation. Evidently it didn’t accord with their computations.

    Surprised no-one mentioned the 1920/21 recession and how not borrowing and spending (as it were) saved the day.

    Good balanced debate. Chairman (Mason from BBC Newsnight) was impartial (unusual for the Beeb).

    The only thing – the only thing – Skidelsky said that was true, was that no-one takes any notice of Austrians and there are none in power.

  • This is fascinating. I am so sorry not to have been there. To find out more about the original Kaynes Hayek debate, my Keynes Hayek: The Clash That Defined Modern Economics is published by W.W.Norton in October. To read an extract: https://sites.google.com/site/wapshottkeyneshayek/
    Nicholas Wapshott

  • Dan Mosley

    “One of Skidelsky’s repeated attacks on Hayek was that while he had plenty to say about how we got into the bust he had nothing to say about how we get out of it.”

    Absolutely right, and this is in my view the central problem of Austrian economics – in a modern democracy, it would be politically impossible for a government to take the “do nothing” option. If unemployment rockets and the economy is on the rocks, it is fantasy to think that an elected government would be able to take no action whilst the people suffered. This point of view perished with the end of the Great Depression.

    Attractive though the ideas of Austrian economics may seem, I think that they does not fit with political reality.

    • mrg mrg

      I’m sure you’re right, Dan, about the political pressure to “do something”, but there’s plenty that the government could do that’s in line with Austrian principles.

      To start with, they could simplify taxes and reduce tax rates, while abolishing regulations that pose barriers to entry, and generally cutting red tape.

    • Robert Thorpe Rob Thorpe

      I haven’t listened to this radio program yet since the podcast isn’t available yet.

      There are many things that Austrian Economists, including Hayek, have suggested to deal with recessions, both before and after they occur. But you’re right that the focus of “internet austrians” has often been the cause of recessions.

      Even if political reality means that Keynesian policies will always be chosen we are left with the purely scientific issue of whether or not they work.

    • People suffer? Those on benefits are obese, not starving or wanting from gluttony. That is suffering, and they are trapped in joblessness and have ben robbed of their ambition by politicians who bribe them and want their static vote to expand the STATE.

  • Dan

    Don’t understand the ‘do nothing’ criticism of Hayek.

    If he’s right, which I suspect he is, then what does it matter that Keynes offers a solution? If the solution is going to make the problem worse then it’s no solution at all.

    To support an economist because it seems like his solution is a nicer way of going about things, despite real danger of exacerbating the issue, is just stupid.

  • In this debate, Hayeksplosive was exactly that.. I just wish it was in a court and under oath in order that the burden of poof be put upon the Keynesians. incredible how Sidelsky can extract a salary and pension I couldnt dream of no matter how many years I worked running a very successful (until recently busts) business..?! ‘Speaketh of the Keyens and thou shalt be rewarded with treasure and glorious abundance and shalt bask in the glow of thieves forty fold as they garner the same for themselves, this is the excellent foppery of the world that when we are surfeit of fortune we make good the printing press, the debasement of metal and the selfish greed and false philanthropy of those who would receive reward but not toil’.

  • In the long run we are all dead. Great if you dont have kids but I do and the future is theirs not ours to squander.

  • Very interesting. Cant wait to watch it. The time will show that Keynes was wrong with all he wrote…

  • Now if we can only get Paul Krugman square off with Robert Murphy! Together we can kill Keynesianism!

    http://KrugmanDebate.com/

  • “I think that they does not fit with political reality.”

    Political “reality” is actually nothing more than the instantiation of particular ideas, which is why, unlike the laws of actual reality, it can be radically altered by human choice.

  • Mostyn Faulkner

    The drive to be right is always more important than the truth. Even when they have no proof that their point of view works, they still cling to it. They will die before they can admit they are wrong. Sorry for the philosophic twist. Until our classrooms are teaching the truth, we are doomed to this false historic data. The general public here in America doesn’t even know what type of government our founders set up here. A republic if we can keep it. They think it is a Democracy. The economic climate here is more blame the other guy and government will fix it. We run pell mell into the same ditch over and over again listening to the Keynesians. If it didn’t work last time, we just didn’t try hard enough. The exact definition of Insanity.

  • “Whereas Austrian economics is famous for its theory of business cycles, with unsustainable booms leading to busts in which bad investments are liquidated, Keynesian theory is silent about the business cycle.”

    That is false. Have you never heard of Hyman Minsky’s financial instability hypothesis‎?

    As for the Austrian business cycle theory, Piero Sraffa dealt it the death blow back in 1932 by pointing out to Hayek that there is no such thing as a unique “natural rate of inetrest” in a growing money-using economy or even a growing barter economy:

    Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

    Sraffa, P. 1932. “A Rejoinder,”Economic Journal 42 (June): 249–251.

    More here:

    http://socialdemocracy21stcentury.blogspot.com/2011/06/austrian-business-cycle-theory-and.html

    http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html

    “All we get is the concept of “animal spirits”, which simply states that at some point for some reason business people suddenly decide en masse to stop investing,

    The concept of “animal spirits” is nothing but a red herring and irrelevant to Keynes’ theory on the fluctuation of investment under subjective expectations:

    http://socialdemocracy21stcentury.blogspot.com/2011/06/animal-spirits-is-red-herring.html

    The concept of “subjective expectations” ought to be known to anyone who claims an affinity with the Austrian school. The Austrian Ludwig Lachmann reached rather similar conclusions to Keynes on the nature of expectations:

    Lachmann, L. M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54-62.

    On this issue, Lachmann even wrote an appreciation of Keynes:

    Lachmann, L. “John Maynard Keynes: A View from an Austrian Window,” South African Journal of Economics 51 (1983): 253–260.

    • mrg George A Selgin

      Three quick points:

      (1) Minsky’s theory is Minsky’s theory, not Keynes’s. Keynes had nothing to say about unsustainable booms.

      (2) Sraffa’s supposed “refutation” of Hayek has itself been convincingly refuted. See Joseph Conard’s discussion of commodity “own rates of interest” in his Introduction to the theory of interest (1959), pp. 123-7, the gist of which is that, contrary to what Sraffa and Keynes claimed, “With given and uniform expectations the rates of interest on different commodities are identical in equilibrium, provided only that they be measured in the same standard.”

      (3) The claim that animal spirits is a red herring rather than something important in the GT is without foundation. And Lachmann was quite idiosyncratic among Austrians in that he shared Shackle’s views concerning the role of “radical uncertainty” in economic affairs. On the dispute between Lackmann and Kirzner (among others) see my Praxeology and Understanding and this paper by Butos and Koppl:

      http://econpapers.repec.org/paper/wpawuwpmh/9505001.htm

      • “Minsky’s theory is Minsky’s theory, not Keynes’s. Keynes had nothing to say about unsustainable booms.”

        Keynes’ writings are not the be all and end all of Keynesian economics.

        Minsky’s theory is a far more convincing explantion of many business cycles, where asset bubbles and excessive private debt are driving the boom.

        “Sraffa’s supposed “refutation” of Hayek has itself been convincingly refuted. …. With given and uniform expectations the rates of interest on different commodities are identical in equilibrium, provided only that they be measured in the same standard.””

        Natural rates in equilibrium are irrelevant to the real world, and this does not refute Sraffa.

        Robert Murphy, to his credit, is an Austrian who understands how damaging Sraffa’s critique of Hayek was:

        Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
        http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

        Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University. pp.100–107.

        “The claim that animal spirits is a red herring rather than something important in the GT is without foundation”

        The expression “animal spirits” is used but 3 times in the whole General Theory, and all towards the end of Chapter 12.

        Despite what you say, all talk and use of the phrase and concept of “animal spirits” can be dropped entirely from Post Keynesian treatments of subjective expectations without any problem at all:

        http://socialdemocracy21stcentury.blogspot.com/2011/06/animal-spirits-is-red-herring.html

        Modern psychology provides a strong confirmation of Keynes’ views on business decision making: e.g., the “heuristic and biases” method of Tversky and Kahneman (1974; and Kahneman et al. 1982) confirms and complements the Post Keynesian theory of business decision-making under uncertainty.

        Kahneman, D., Slovic, P. and A. Tversky (eds), 1982. Judgment Under Uncertainty: Heuristics and Biases Cambridge University Press, Cambridge.

        Tversky, A. and D. Kahneman, 1974. “Judgment under Uncertainty: Heuristics and Biases,” Science (American Association for the Advancement of Science) 185 (4157): 1124–1131.

    • Robert Thorpe Rob Thorpe

      “Lord Keynes”,

      I’ve read your criticisms of ABCT on other blogs (where I call myself “Current”).

      As I’ve said before I don’t understand how you escape the issue of account falsification.

      Let’s say I own a business and that I expect 4% price inflation next year. That means I need a money return of 4% to avoid a loss in real terms. Of course other business owners will have different expectations. But, I think we can say that there will be some sort of overall level of expectation for the price level next year or the price level trend. It may be positive, zero or negative. In any case business planning and household planning will incorporate expectation of it.

      As I understand it you hope to disprove ABCT in every practical case. Now, in normal times (not in a recession), suppose that a central bank creates much more money than usual, enough to alter the future path of the price level. In this case before this is recognised plans will be made on false presumptions. How can this occur without causing losses? I can’t conceive of a way. How do you think this happens?

  • Not an Eonomist

    May I ask sbdy who was there to listen to the radio 4 transmission and then post about whether or not it appears to have been carefully edited in the Keynesian arguments favour?

    Sorry to sound like a r/w paranoiac but I don’t entirely trust the BBC’s reporting on the economy these days.

  • George Selgin

    LK: (1) If one has to deal with every post-General Theory development that styles itself “Keynesian” (Post- or New- or whatever) in addressing what Keynes had to say, then there’s no answering the question. The debate last Tuesday was, in any event, about Hayek versus Keynes, not Hayek versus “Keynesianism.” (2) It’s a shame that Murphy hadn’t read Conard or he might have saved himself the trouble. (A glance at the references to the paper you link suggest that he relied on very few works outstide those of Austrians, and especially Rothbardians. This is an all-too common practice among the latter, and it is why they’re theory often leaves much to be desired.) As for equilibrium rates being irrelevant, they most certainly aren’t irrelevant to Hayek’s theory! (3) Those three references to animal spirits in Keynes are essentially all he has to say about cycles as such. Animal spirits up: all’s well; down: depression. The significance doesn’t reside in the number of times the phrase appears but in the fact that Keynes’s theory of cycles rests entirely on exogenous (spirit-driven) shifts in autonomous investment.

    AJE: Shackle wasn’t influenced by Mises, but he was certainly aware of Knights work.

    • “As for equilibrium rates being irrelevant, they most certainly aren’t irrelevant to Hayek’s theory!”

      This is a really straw man. I don’t deny that Hayek’s ABCT uses Wicksellian monetary equilibrium theory, nor did Sraffa – and, as I have said above in the real world there is no such thing as a unique natural rate.

      Sraffa already admitted that a unique natural rate would exist in an imaginary, fantasy world of static equilibrium (or what Mises later called his Evenly rotating eocnomy), but this is quite irrelevant to his critique of Hayek. Sraffa’s 2 main points were:

      (1) you can’t make money neutral, and

      (2) the “natural rate of interest” in a growing money-using economy or even a growing barter economy does not exist. Therefore, in the former case, there is simply no natural rate the bank rate can equal to allegedly prevent the cycle effects from happening.

    • Anthony J. Evans aje

      AJE: Shackle wasn’t influenced by Mises, but he was certainly aware of Knights work.

      Hi George – we know that he was also aware of Mises’ work – the index section to many of his books shows this (as indeed the preface he wrote to Alex Shand’s textbook on Austrian economics).

      Perhaps I misunderstand, and you’re only saying that we wasn’t “influenced” by him. This depends on what we mean by influenced though (and note I didn’t use this term). I certainly wouldn’t argue that he was influenced to the extent that Rothbard, or Kirzner were. But I think it’s evident that he was familiar with the work, that there are important points of tangency, but that in many areas Shackle went in different directions. I don’t think that’s controversial is it?

  • George Selgin

    Soory: read “their” for “they’re.” (It would be nice to have a preview option!)

  • George Selgin

    (And “sorry” for “soory”! (I’d better get going to bed!)

  • “Those three references to animal spirits in Keynes are essentially all he has to say about cycles as such.”

    A whole chapter in the GT is devoted to what influences short and long run business expectations.

    Since you are obviously familiar with Lachmann, you must know that in Keynes’ thinking the subjective expectations of business decision-makers causes the instability of investment when expectations are shocked.

    When people in business make decisions about investment under uncertainty, with their use of instincts, conventions and habits of mind (as Keynes would have said), this is actually very similar to Tversky and Kahneman’s “heuristics and biases” work in psychology on decision-making under uncertainty.

  • George Selgin

    LK: Since for Keynes “animal spirits” was just another way of referring to those “instincts, conventions and habits of mind” that occasionally led to unpredictable shifts in “the subjective expectations of business decision makers,” you make my point for me.

    • Lord Keynes,

      You are welcome to comment on this blog, I would encourage you to use your own name out of manners to those who are engaging with you.

      I was spoon fed Keynes at A Level and as an undergraduate . His theory of boom bust is summed up in George Selgin’s comments above.

      My tutor was Dr Robert Orr and his teacher was Michael Oakeshott , now believe me, if you do not know him , your should. His statement of Political Philosophy in On Human Conduct is one of the greatest works of the 20th Century. One little essay of his I remember reading was “The Concept of a Philosophical Jurisprudence ” I read it as a photo copy and it has much relevance to Keynes . Every concrete philosophy consists not only of conclusions or views of this or that, but “it provides a ratio decidendi for every obiter dictum.” Your man is barren with respect to this point. Infact, Oakeshott goes one step further and says the ratio decidendi IS the most important part of any conversation apart from of course the coherent philosophical start point. Where and what is this in Keynes? Animal spirits or what ever you may dress it up as , is a very shallow conclusions, obiter dictum. Shallow, very shallow work.

      The great merit of the Austrian School is it has a philosophical start point where it is coherent and a whole series of reasons for deciding that follow one from the other. Its economics is put part off this wider intellectual manifest, deep and rich as it is wide and broad . No other School offers this. Obiter dictum is the rage . Empirics is the rage.

      Another great learning I will share with you, Oakeshott’s essay on Bentham, “The New Bentham” is very pertinent to Keynes. This essay written in 1932 shows how Bentham has been presented as a great modern prescient critical thinker , Oakeshott argues the opposite, Bentham, I would substitute Keynes, “begins with a whole miscellany of presuppositions which he has neither the time, the inclination nor the ability to examine.” Superficial , but never wise. He “skims the cream.”

      “Creation, contraception, coeducation, this or that reform of the law, may be advocated for a hundred different reasons, and what is influential is, usually the bare advocacy of this view…..And in the case of Bentham, these grounds and reasons were all typical of eighteenth-century thought, and nearly all fallacious. For Bentham, so far from having thought out his first principles, had never given a moment’s consideration.”

      This is Keynes.

      The great merit of the economic branch of the Austrian School is it is part of a wider thought out and considered , logical and coherent , even concrete system.

      I am with the Austrians any day over a dangerous peddler of wonky conclusions. Animal spirits is just one of many.

  • Rex

    If Sraffa is right (and I think he does have the better of the 31-32 exchange with Hayek), then could a free banking system ever equate the money rate to the natural rate unless we were already in equilibrium? And, of course, as Mises and company argue, we are never in equilibrium.

    Sneering at LK above hardly knocks down his argument does it?

    Free banking theory is neat. Austrian cycle theory is a joke – it can’t even explain co-movement (but that is Cowen’s objection).

    • Anthony J. Evans aje

      @Rex – have you read Roger Garrison’s work on co-movement?

    • Rex, the joke you refer to is the only Theory that has predicted this boom , this bust, the last boom and the last bust around the technology period . I have been around many people , financial investors and strategist who have benefited very well from this knowledge. I as an entrepreneur could also plan my business much better.

    • Robert Thorpe Rob Thorpe

      But, see the response I give to LK here:
      http://www.cobdencentre.org/2011/07/hayek-vs-keynes-at-the-lse/comment-page-1/#comment-34254

      I’ve actually asked him this several times on various forums and he never has an answer.

      ABCT starts with injection effects. If the monetary injection is expected then it will be priced into interest rates through the Fisher effects and there will only be minor wealth redistribution. But, if it isn’t expected then it won’t be priced in, and if that happens plans for capital allocation will be inconsistent with the future price level. To make the assumption that it will always be expected is unrealistic at the level of individual businesses for who excess money causes higher profits. Businesses can’t disambiguate those higher profits from the results of their own actions and the state of the market they’re working in.

      The argument about natural interest rates only really attacks the more complex formulations of ABCT that rely heavily on this idea. For what it’s worth I agree that it is dubious. But abandoning it doesn’t make ABCT effects go away.

      (Or are you talking about capital reswitching here? I have another response for that.)

      • “The argument about natural interest rates only really attacks the more complex formulations of ABCT that rely heavily on this idea. For what it’s worth I agree that it is dubious. But abandoning it doesn’t make ABCT effects go away.”

        That is very powerful admission. If the sophisticated, technical versions of ABCT do not work, then your are reduced to some simplified verison of it.

        “ABCT starts with injection effects. If the monetary injection is expected then it will be priced into interest rates through the Fisher effects and there will only be minor wealth redistribution”

        You assume an economy at full employment equilibrium, just as Hayek did.

        In the real world, we we have idle resources, unemployment, and unused capacity at factories.

        Even at full employment, the economy is open to international trade, yet another weakness in the theory.

        • Robert Thorpe Rob Thorpe

          That is very powerful admission. If the sophisticated, technical versions of ABCT do not work, then your are reduced to some simplified verison of it.

          A lot of us are aware of the problem and have made steps to fix it. For what it’s worth, I’m looking into ways of fixing this myself.

          You assume an economy at full employment equilibrium, just as Hayek did.

          In the real world, we we have idle resources, unemployment, and unused capacity at factories.

          Your argument here I suppose is that after an injection rather than prices rising output will rise. To a degree that’s true. But, even Keynes didn’t argue that it applied all the time. He said that at some point prices begin to rise. It’s worth mentioning that that point would come before all unemployed resources are exhausted because keeping unemployed resources is a sensible decision for building a robust business. There are really two kinds of unemployed resources, those unemployed because of of macroeconomic reasons and those unemployed because of planning reasons (just as there are macro and micro forces making workers unemployed).

          What you are doing here is supposing that initially we are in a “deficient AD” recession. Then your supposing that we can move to monetary equilibrium. But, surely we can also move beyond monetary equilibrium in the inflationary direction?

          In either case how are agents to plan for unexpected deflation of unexpected inflation?

          I think what you’re doing here is that you are supposing that at any time there are a set of real interest rates that could prevail given specific monetary and fiscal policy. Some of those trajectories produce more output than others. I agree with this.

          But, I think what you’re also supposing (though maybe you don’t realise it) is that plans will be consistent with each interest rate. That’s what I don’t agree on, because agents only have limited ability to come to good expectations of the money interest rate and the price level.

  • Rex

    Garrison yes. I found his undergraduate level treatment fun (all that PPF stuff) but scarcely found any high-level treatment of Cowen (let alone Sraffa).

    Sraffa’s point that there is no unique natural rate but rather a multiplicity of natural rates outside of equilibrium seems to be still standing after all these years.

    • Sraffa’s critique of Hayek wa so devastating that the Austrians have never produced a satisfactory answer to it, as the Austrian Robert Murphy acknowledges:

      http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html

      A sample:

      Murphy points out the following:

      “In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.

      • LK, did you look at what George Selgin suggested in his earlier response to you. I believe the Sraffa points have been dealt with.

        “It’s a shame that Murphy hadn’t read Conard or he might have saved himself the trouble. (A glance at the references to the paper you link suggest that he relied on very few works outstide those of Austrians, and especially Rothbardians. This is an all-too common practice among the latter, and it is why they’re theory often leaves much to be desired.) As for equilibrium rates being irrelevant, they most certainly aren’t irrelevant to Hayek’s theory! “