Yes, Paul: It is Hayek versus Keynes

by Mario Rizzo

Although by the standards of contemporary economics, I am a historian of economic thought, I am not a historian of economic thought, properly considered. Thus my major interest in F.A. Hayek’s business cycle theory is not from the point of view of a historian. My interest is only incidentally in how Hayek’s contributions were perceived in the 1930s and 1940s, especially in light of John Maynard Keynes’s Treatise on Money and General Theory.

I am interested in Hayek’s business cycle theory because I believe it has much to teach us today – both in the style of reasoning it embodies and for its substantive points. Of course this is not to say that Hayek’s approach cannot be improved upon and revised in light of more recent theoretical and empirical developments.

But now comes Paul Krugman with his sometimes-echo Brad Delong (or is it vice versa?). Krugman thinks that Hayek was not an important “macro” economist; certainly not the rival or alternative to Keynes, either in the 1930s or today. In fact, Hayek embarrassed himself with his cycle and capital theory. Hayek’s brilliance as a monetary theorist (aka “macroeconomist”) is a figment of the political imaginations of those who love him for his “political” book, The Road to Serfdom.

Until just a little while ago, I thought it best to ignore the latest Krugmanic outburst, especially since there are excellent posts at Marginal Revolution and Café Hayek, just to mention two. And yet the recent obsession Krugman has with Hayek (and lately the obsession DeLong has with Mises) means that some nerve has been touched. Of course, it might simply be that Krugman needs material for his blogs and columns.  

However, I think the real issue is this. Hayek’s approach attacks, root-and-branch, the macroeconomic way of thinking. It is not simply a challenge to a particular theory of the determinants of mass unemployment, inflation, business cycles and the like. Hayek is not accepting the rules of the game or the parameters of the sub-discipline of modern macroeconomics. Hayek does not want to argue that the government expenditure multiplier is 0.5 instead of 2.0, for example. He does not want to discuss just how much fiscal stimulus should be undertaken and what form it should assume.

In short, he does not want to focus on aggregate spending and aggregate consequences. Hayek’s approach says: Let us pierce the veil of aggregates and look at the distortive effects on relative prices and relative output produced by boom-time credit expansions. Let us look at the distortive effects that booms leave us as we work our way through a recession. Let us concentrate on sustainable lines of expenditure both during the boom and during the road out from the bust.

Suffice it to say this greatly erodes the intellectual capital of a field of economics – although one not noted for its successes. It mocks the claim that Keynes was a true revolutionary in economic thought. It opens the possibility that he was muddled, inconsistent and unaware of the contributions to monetary and business cycle theory made by the “classical economists” on the eve of the General Theory.

It also opens the possibility that Keynes’s economics was catapulted into prominence not so much by its technical or scientific excellence but the compatibility of its policy nostrums with the temper of the times.

From the perspective of scientific frameworks, the debate is really between Hayek and Keynes – the traditional project of economic theory versus the obscurantist veil of macroeconomics. Hayek and his business cycle theory did not appear out of the blue.

Hayek is in a long classical tradition that eschewed focus on surface macro aggregates and understood business cycles as first and foremost crises of production disproportionality and only secondarily (and not always) problems of excess demand to hold money. This John Stuart Mill argued as early as the 1820s. (The economist Steve Kates traces the century-long history of classical business cycle theories in his book Say’s Law and the Keynesian Revolution and in some journal articles as well as other books.)  

This is what the conflict is all about and this is what Krugman and DeLong cannot abide. Politics is just an excuse for bad behavior.

70 thoughts on “Yes, Paul: It is Hayek versus Keynes

  1. Well said, Mario. And the sort of theory you describes goes back even further. Cantillon (1730) has a cycle theory in which a distortion of the exchange rate induces a self-reversing movement of resources between countries.

  2. Great insight into the key differences in approaches. Hayek himself admits he might have been slow to recognize that his main objection against Keynes of the GT was that it marked a transition from microeconomic reasoning to macroeconomic reasoning (Cochran and Glahe, The Hayek-Keynes Debate, 1999, 10, n. 8 and 172). Hayek’s approach is significantly different than just providing highly aggregated microfoundations as done by most “New Classical” models.
    Market processes are the result of actions by planning individuals and all economic phenomena must be explainable in terms of such actions/adjustments on the margin. The focus should be microeconomics, not macroeconomics. Macroeconomics, analysis based on causal relationships in terms broad aggregates is inappropriate and misleading (Hayek in “Personal Recollections of Keynes and the ‘Keynesian Revolution.’”Oriental Economist, Tokyo, January. In New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press, 1978, 283-289 especially 284, 285 and 289).

  3. Excellent post, Mario, thanks! It is getting tiresome to see Hayek so often misrepresented in some of the now-fashionable Hayek vs Keynes confrontations.

  4. Mario is right about the thrust of Hayek’s analysis being a challenge to the very core of macroeconomic theory.

    This was understood, for example, by Mark Blaug. In his book on, “The Methodology of Economics,” he explicitly rejected the Austrian critique. He said that if taken seriously it would mean “goodbye” to virtually all macro thinking since Keynes, and this seemed impossible to him to accept.

    Because, then, how do you analyze and explain (and try to correct for) economy-wide fluctuations in output, employment and prices?

    That it might be possible to construct a micro-market process approach instead of traditional macro-analysis seemed outside of Blaug’s thinking.

    Furthermore, what does such a micro-process focus lead to as part of its possible policy implications? To return to sustainable re-coordination of interdependent markets, it may be necessary to accept a degree and a period of unemployment; money (and real) wages may have to adjust downwards (through appropriate relative price and resource allocation adaptations; some banks may fail, and depositors lose part or all of their savings; reductions in both government spending and taxing may be necessary (including on entitlement programs); etc., etc.

    This msy require a return to — oh, no! — real competitive free markets, the rugged individualism that Ohama attacked in his speech yesterday as a “failed” theory that is the opposite of “fairness” and “social justice.”

    Economic analysis of the “is” — how logically and historically did the boom come about and why a recession followed — may lead to an “ought” — given the micro-economic interconnections this is what may be required to assure sustainable and real re-coordinaton — that is implicitly and/or explicitly unacceptable to those with various ideological biases, or special interests that wish the government to protect them from “negative” change.

    This is the deeper Hayek vs. Keynes debate beyond “just” the Austrian economist’s micro vs. the Keynesian macro debate.

    Richard Ebeling

  5. Mario,

    Thank you so much for invoking J.S. Mill and Steve Kates’ wonderful book on Say’s Law. In it, I found the most lucid explanation for business cycles that I have ever encountered. In many respects, the Keynes/Hayek debate was simply a resurrection of the Malthus vs. Ricardo and Mill debate. The [straw man] version of Say’s Law that Keynes attacked in The General Theory was neither articulated by Say, Mill, nor Ricardo.

  6. You do not even know that it was David Warsh, not Krugman or Delong that said these things and you expect us to take your seriously.

  7. When I was in school, my macro prof. told me he didn’t believe in microeconomics. Isn’t an AD curve just a summation of a collection of individual demand curves, I asked him. Didn’t the physcial sciences advance by breaking macro phenomena into their micro constituents, molecules into atoms, then sub-atomic particles?
    If physicists thought like Krugman and other economists who accept macroeconomics and reject microeconomics answers, we’d still be in the phlogiston era.

  8. Spencer,

    Krugman and DeLong agree with the ideas I attacked above. Consider right at the beginning Krugman says: “David Warsh finally says what someone needed to say.” And DeLong says: “Friedrich von Hayek is only a very minor and very unproductive figure in the work of macroeconomics.”

  9. Re. the “recent obsession” of Krugman & DeLong with Hayek and Mises, let us enjoy it while it lasts. As Oscar Wilde said, “The only thing worse than being talked about is not being talked about.”

  10. John Maynard Keynes means many different things to many people. For some, his work was the precursor to standard textbook macroeconomic theory; for others, his works represents the final attack on classical economics; and yet for others his works represents the foundation of an entirely new economic theory — the economics of uncertainty. As a starting point, we can cite to Keynes’ chief biographer, Dr. Skidelsky (?), who has opined that the latter category (science of uncertainty) is the most consistent interpretation of Keynes’ work. Indeed, it was Shackle who argued that Keynes changed economics from the science of scarcity to the science of uncertainty. And, building on this theme, it was people like Paul Davidson (and Victoria Chick, Fiona Maclachlan, Jan Kregel, etc. etc.) who argued that Keynes’ theory was not so much a theory of aggregate consumer behavior and fiscal policy as it was a theory of animal spirits and uncertainty in financial markets and how that destabilizes investment in capitalist industries.

    Why don’t Austrians respond to this sort of research? Mario Rizzo, whose work I really do admire and appreciate, dedicated a very important book of his to Ludwig Lachmann. Yes, Ludwig Lachmann was deeply interested in Keynes’ work. In fact, if you read the book edited by Don Lavoie, you will note that many of Lachmann’s papers were a direct response to the sort of arguments that were being propounded by people like Joan Robinson, Harrod, and all the other people who worked in the post-Keynesian tradition. Lachmann had some deeply insightful things to say about this literature. For example, he correctly understood that Keynes was a more complete subjectivist than Hayek (it is true!), but also noted that the marginal productivity of capital theory is flawed because (as every Austrian knows) capital is heterogenous and cannot be aggregated as Keynes so blithely assumed.

    I think scholars like Dr. Rizzo should pick up on the tradition Ludwig Lachmann started (which is decidedly Austrian) instead of participating in these naive policy debates with people like DeLong and Krugman.

    What do you guys think?

    -austrian away

  11. It is true that Hayek is not an important figure in macroeconomics. The textbook I used didn’t even mention his name once. As for his “contributions” to other fields; there are none.

    So, no, this “historian” of economics is not presenting the facts accurately. Hayek is also cited less far less frequently than Krugman and Stiglitz in modern economics. So, judging by citation numbers alone, Krugman and Stiglitz are far more important figures than that Hayek.

    Claiming Krugman has an “obsession” with Hayek is as ridiculous as Roger Koppl’s idiotic claim that the US is practicing a form of “Nazism” in regards to the banks (and notice by his logic Germany is still under the rule of the Nazis).

    A simple Google search shows that Krugman’s name appears frequently on the blogs of Libertarians, such as Robert Murphy (which is now down apparently), thoughts on economic policy, and so on.

    None of these kooks should be taken seriously and the totalitarian society Hayek/Libertarians envision has no chance of ever happening.

  12. It is only through our extreme forbearance that comments like those immediately above get through here. We do not follow the Brad DeLong philosophy of sanitizing the comments.

  13. Hayek is a minor economist when it comes to macroeconomics. His major work on ABCT is flawed when you ask the questions: what is the ‘natural’ rate of interest? Does it exist in real life? Why doesn’t account for multiple interest rates? and finally, Is equilibrium analysis the method that Austrians should be taking when it goes against the Austrian principles of subjectivism, expectations, and uncertainty?

    His ABCT method wasn’t going against mainstream macroeconomic principles, its main similarity is that it accepts general equilibrium and formalism, both things are nothing but enemies to human action and expectations.

  14. As the marginal utility of debt tanks, and we remember how Hayek evolved as an economist, seemingly rejecting the concept of equilibrium outright as he grew more intimate with complexity theory, I think we can say that Hayek fundamentally disagreed with virtually every major principle Keynes made.

    What may be more telling is that Keynes very arguably came Hayek’s way as he aged.

  15. Hayek rejecting equilibrium outright, and therefore also formalism? are you kidding? Have you read “Prices and Production” ?

  16. On the instability of financial markets. The points made in The Econonomics of Time and Ignorance about real time and radical uncertainty point to certain theoretical issues. Whether a particular business cycle is attributable to the market process itself or to other factors is not a question of pure theory. With all of the myriad forms of government intervention involved in the recent cycle I would be hard-put to think that the primary or initiating cause was the endogenous uncertainty of the market. After all, we are always in real time, so why did the apple cart get upset in 2008 or therabouts?

  17. Excellent post, Mario.

    Gunnar Myrdal and Hayek shared the Nobel Prize in Economics in 1974 “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.”

    Hayek did not, of course, invent the idea of a natural rate of interest. Wicksell did, although Henry Thornton should perhaps be creditaed as the originator. It plays a similar role in Hayek’s analysis as does the marginal efficiency of investment in Keynes’. No equilibrirum value of a variable is observable, but economic analysis is impossible without employing the concept.

    Hayek did invent the concept of neutral money, which is at the center of much of modern macroeconomics. Along with Mises and Wicksell, he also incorporated the core of what we now call rational expectations into his analysis. The fact is that much of modern macroeconomics (particularly of the fresh water variety) owes a great deal to Hayek.

    In turn, especially with “Price Expectations, Monetary Distrubances and Malinvestments,” Hayek centered his theory of economic fluctaions in time and focused on inherent (endogenous) uncertainty. Austrians recognize Keynes but don’t pay hommage to him. They have Mises and Hayek (and Knight) to deal with uncertainty.

  18. I wouldn’t say Hayek rejected the concept of equilibrium. He reformulated it as plan coordination. Mario and I dealt with the issue at length in The Economics of Time and Ignorance.

  19. Let’s not forget that Mydral opposed giving the “reactionary” Hayek the Nobel Prize in economics and thought the process itself was rather meaningless. It’s important to stay on top of your facts.

  20. Then why should Hayek be praised on the fact that he incorporated the concepts of neutral money, the core foundations of rational expectations, natural rate of interest (which the origins of this concept is irrelevant here), and the use of general equilibrium (even if he did reformulated it into plan coordination) ? Aren’t these general neoclassical assumptions that Austrians are supposed to oppose?

  21. I don’t know if the natural rate of interest is part of neoclassical economics. Marshall didn’t mention it, if I recall, and it’s not part of the neoclassical synthesis.
    It’s not in Samuelson’s textbook, nor in those of his clones, at least the ones I read.
    I didn’t learn about it until Hayek crossed my desk.

  22. More importantly, Hayek re-conceived the role of equilibrium tautologies in the explanatory strategy of economic, see, e.g. the first few chapters of _The Pure Theory of Capital_ , and his essays “Economics and Knowledge” and “The Use of Knowledge in Society”.

    Jerry writes,

    “I wouldn’t say Hayek rejected the concept of equilibrium. He reformulated it as plan coordination. Mario and I dealt with the issue at length in The Economics of Time and Ignorance.”

  23. Bill, it’s neoclassical in the sense that it has the same neoclassical assumptions… What regardless, call it a classical assumption then… Nevertheless the same assumptions, thus the same flaws, are still in it

  24. Forgive me, Matt, but you really need to update your model of Austrian economics. You keep saying how we need to deal with the epistemic Keynes that Shackle so rightly emphasized. But the thing is that we have and we do! The O’Driscoll & Rizzo volume certainly does that. My Big Players work with Butos, Yeager, and others is all about engaging the epistemic Keynes as was my HOPE article with Butos on Hayek vs. Keynes. And the Post Keynesian responded quiet a bit to that HOPE article. Butos and I got several published comments from Post Keynesians and responded to them. Steve Horwitz pointed out to you over at coordinationproblem that this year’s SDAE best-paper prize went to Dave Prychitko’s paper on Minsky, a Post Keynesian. My recent RAE paper with Will Luther addresses Minsky and animal spirits. And so on. If you re-read Karen Vaughn’s book on “Austrian Economics in America,” you will see that it is a story about how, basically, Lachmann won the day. Lachmann taught us that we need to deal with the epistemic Keynes and we got the lesson. It was a huge change in the American branch of Austrian economics.

    Indeed, Matt, we in the Austrian camp have some substantial criticisms of the Keynesian theory of uncertainty from the radical subjectivist point of view. Please have a look at them and see if they speak to you. For starters, probably you could go to my paper with Will Luther, “Hayek, Keynes, and modern macroeconomics,” in the RAE:

  25. Forced to debate by facts, anti-Hayekians like Krugman love to submit these fallacies ad personam against their opponents, i.e. Hayek did not match Keynes, no matter what he said, because he wasn’t a “real” economist, but a political scientist. Yet, who anointed Krugman as the ultimate source of truth in defining what economics is about? The New York Times? Really good stuff, Mario.

  26. Excellent post!
    Like Mario, I recommend reading “Say’s Law and the Keynesian Revolution” from Steven Kates.

  27. Krugman’s rhetoric, and the current state of political discourse in this country (as well as historically) more generally, must give pause for concern. Specifically, we must recognize legitimacy concerns (as a philosophical anarchist myself, this seems obvious). If one believes in a public reason legitimacy requirement of some sort, one is likely committed to an idea of sincerity (or some sort of civic virtue/trust, etc.). It seems pretty clear to me that this important precondition is missing in the public realm, especially within the domain of popular political discourse.

  28. Excellent! You describe why Hayek was so different and important to the field of economic thought. Wealth creatin begins with each as an individual, not a centralized plan. TRTS stands as a warning that the seed of disaster lies within each of us.

  29. Excellent post; Kates’ book (Say’s Law…) offers a nice historical perspective, and Mr. Rizzo nails it that Keynes “Theory” was written during precisely the times that FDR’s administration needed independant “validation” of their profligate ways.

    Once government got the spending green light from the “Theory”, they haven’t stopped doling out the pork.

  30. Matt Mueller: As Roger point out above, Austrians have hardly ignored the epistemic issues you emphasize. But many of us see little reason to engage Keynes and the post Keynesians on these topics. I think Knight, for example, is far superior to Keynes. My own work builds heavily on Knight and Lachmann (in addition to Mises, Hayek, and Rothbard) but I find Keynes’s stuff on uncertainty hopelessly muddled and superficial. And Paul Davidson? Puh-lease.

  31. I fully agree with this point, and I think it’s fully consistent with Krugman and Delong’s point.

    “Hayek is not accepting the rules of the game or the parameters of the sub-discipline of modern macroeconomics.”

    You’ve pinpointed the reason why he’s not considered an important figure in modern macro. He objected to the direction the field was going, and he lost the argument. Whether his business cycle theories were a failure or had real and lasting influence is really the heart of the matter. I think Tabarrok hits the nail on the head, is Hayek in some way the father of computational macro, the macro of Lucas and Prescott and the revolution they began? Modern Austrians certainly say no. Tabarrok says yes. He also said Lucas “long considered himself an Austrian.”

    What did Lucas actually say, “I once thought of myself as a kind of Austrian, but Kevin Hoover’s book persuaded me that this was just a result of my misreading of Hayek and others.”

    There is no question that Hayek was influential, but whether he was an influential macroeconomist rests entirely on whether he is the intellectual father of the computational macro. I, like others, see the shadows and the resemblences, but it would be an incredible irony, for the reason this post points out. The way in which Hayek rejected the game, and the way modern Austrians continue to reject the game is the opposite of the direction “freshwater” macro went. They went to more math, more computing and simpler, more abstract models. The Lucas critique is really not Hayekian.

    Is it possible that Lucas’s misreading of Hayek gave him insight that sparked a field that lead to a revolution that went about as far away from Hayek’s skepticism as possible? If so, do we give Hayek credit? Is he a trade cycle theorist that muddled through a theory in words that was put into math in the 70s and 80s? Or is he a critic lobbing rocks at what would become modern macro? Who’s major criticisms, a complete rejection of the rules of the game, continue to be ignored to this day?

    Can he be both?

  32. In Hayek’s notion of plan coordination, the natural rate of interest is undefined. Hayek’s business cycle theory is incoherent.

    As Sraffa did not point out (but it follows from his 1960 work) Hayek is incorrect in his understanding of the relationship between the allocation of resources across orders of good and interest rates. Hayek’s business cycle theory is also incoherent in its description of the real economy.

    If Keynes is as Matthew Mueller describes him above, the original post is attacking a strawperson. Keynesianism, as is well known, is not the same as the economics of Keynes. The responses to Matthew seem to say austrian school economists should be able to recognize the strawperson nature of the original post.

  33. Some people are arguing that if Hayek disagreed with the macroeconomic method (or income-expenditure way of looking at problems) he could not, by definition, be an important macroeconomist. Of course, this is sophistry.

    The phenomena of business cycles, mass unemployment, inflation etc. are out there — at least in the sense that they are the problems people seek to understand.

    So now the appropriate questyion is: What is the best way to understand these phenomena? Keynes says X; Hayek says Y.

    The reason I put macro and macroeconomist is quotation marks in the early part of my post is to show recognition of the difference in method. If you *define* the field by its method and not by the underlying phenomena it seeks to explain, then you can say Hayek was not a macroeconomist at all. Hence he could not be an important macroeconomist. QED.

    But then the other part of the story is that macroeconomics (so defined) is unscientific and an illegitimate field. So to be be a great macroeconomist is akin to be a great fortune teller — a charlatan. Is this how we should think of Keynes?

    In general we need to be careful of confusing stipulative definitions with substantive points.

  34. “The phenomena of business cycles, mass unemployment, inflation etc. are out there — at least in the sense that they are the problems people seek to understand.”

    Surely, Hayek should be objectively measured on his influence of how people actually study these fields to day. If you argue for a new method that ends up being rejected and has no influence on the field today, how can it be called important? Does Hayek deserve credit for the present body of knowledge important to leading researchers in the field today? For instance, no one questions that Lucas had a critique of the way people did macro that forever changed the way people addressed these phenomena. There is no question that Lucas was incredibly influential, and there is no question that his method was different that Keynes. It doesn’t follow that it was Hayekian.

    The question remains, is Hayek’s influence traceable to Friedman, Lucas, Prescott and the freshwater revolution, or is his influence limited to the largely overlooked and unimportant school called “Austrian Economics.” Obviously, the former is an extremely important and influential school of thought, and if Tabarrok is right that Hayek should get some credit, then Hayek was an important macroeconomist. The latter is not a very important and influential school of thought (objectively) and if you put your personal sentiment for it aside, that should be obvious. Certainly, the Austrians would agree as they complain about it all the time.

    Lastly, it should be obvious that Hayek can be an important economist and not an important macroeconomist. It’s certainly not incoherent to say that Hayek had some real insights into economics, but he was not very influential in the way we study “business cycles, mass unemployment and inflation.” It’s certainly possible that while there are shadows of similarities between Recursive Dynamic Macro and Hayek’s work, that they are independent movements and unrelated schools of thought.

  35. There is a different between being influential in affecting the way economists at the top dozen schools in the US do macroeconomics and being “important.” Hayek’s importance lies in that his way is THE alternative way of looking at so-called macro phenomena. It has behind it almost the whole of the pre-Keynesian classical tradition. Furthermore, if one truly understands what Hayek is saying it sheds new light on a myriad of theoretical problems. If some people do not recognize Hayek’s importance in this sense, they are simply mistaken. What Krugman, DeLong and Warsh meant to convey is that we do not have to pay attention to Hayek’s monetary theory today AND that he never was important in the discussions among major economists on “macro” issues. They just want him to go away so that they can proceed undisturbed.

  36. “Hayek’s importance lies in that his way is THE alternative way of looking at so-called macro phenomena.”

    What are you talking about here? Are you counting what today is called Austrian Economics, published in Austrian journals? And in what objective way can we call that important?

    “It has behind it almost the whole of the pre-Keynesian classical tradition.”

    Does it? Surely, Irving Fisher is really that link and Krugman and Delong would not doubt that he was a very important macroeconomist.

    The clearest line between the classics through Hayek would be through Milton Friedman. After all they were friends, Hayek maybe was even a mentor. Yet, Friedman was an outspoken critic of Hayek’s business cycle theory and of Austrians that were his contemporaries. Surely, this is one reason Tabarrok tries to draw the link with Lucas. It just seems clear that is a stretch.

    “Furthermore, if one truly understands what Hayek is saying it sheds new light on a myriad of theoretical problems. If some people do not recognize Hayek’s importance in this sense, they are simply mistaken.”

    I guess this is sort of the heart of the matter. In every sort of objective sense, Hayek doesn’t influence macroeconomics today. You think he should and that modern macro is wrong to think otherwise. I have sympathy. I have some views out of the mainstream too, but I would hardly criticize someone recounting a mainstream history of thought.

    “that he never was important in the discussions among major economists on “macro” issues.”

    This is obviously a false statement. The Warsh recount specifically says that Hayek was brought by LSE to be the important figure rebutting Keynes. He was the great hope of a very important thought movement. They just argued he lost the debate. Macro followed Keynes and not Hayek, and that the important movements in macro that followed were not greatly influenced by Hayek.

    I must say, I’m very surprised by the line of argument you took. I’m not at all convinced that Krugman and Delong are right. Maybe there is a line of connection between Hayek and modern macro (defined by phenomena not method). Macro today looks nothing like the economics that Keynes actually practiced. It’s just pretty easy to show he is heavily influential of it. New Keynesian [Keynes -> Tobin -> Mankiw], Monetarism/Neoclassical/RBC [Keynes -> Friedman -> Lucas -> Prescott]. Obviously, that leaves a lot of people out.

    Your line of argument really seems that you want to make a subjective appeal that Hayek should be a large influence modern macro even though by and large he isn’t. I have no problem with that, but let’s not call it history. History is empirical and objective.

  37. “You keep saying how we need to deal with the epistemic Keynes that Shackle so rightly emphasized. But the thing is that we have and we do! The O’Driscoll & Rizzo volume certainly does that. My Big Players work with Butos, Yeager, and others is all about engaging the epistemic Keynes as was my HOPE article with Butos on Hayek vs. Keynes. And the Post Keynesian responded quiet a bit to that HOPE article.”

    And in general the Post Keynesian assessment of the Austrian attempt to come to grips with radical uncertainty, non-neutral money, etc., is to find the Austrian analysis deeply wanting:

    Davidson, P. 1989. “The Economics of Ignorance or Ignorance of Economics?,” Critical Review 3.3/4: 467–487.

    Davidson, P. 1993. “Austrians and Post Keynesians on Economic Reality: Rejoinder to Critics,” Critical Review 7.2/3: 423–444.

    As for Hayek, by the end of his life he is found endorsing monetary stabilisation and qualified support for fiscal policy during depression, positions which are essentially Keynesian:

  38. Hayek in1975:

    “The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.


    In contrast, the modern fashion demands that a theoretical assertion which cannot be statistically tested must not be taken seriously and has to be discarded. As a result of this belief, a theory which, in my opinion, is the true explanation has been discarded as not adequately confirmed, and a false theory has been generally accepted merely because it happens to be the only one for which statistical evidence, even though very inadequate evidence, is available.”

  39. There are legitimate criticisms to be made of Hayek, but what is being posted here is pretty thin gruel — warmed over at that.

    Hayek did NOT originate the theor of the “natural rate of interest.” And it is perfectly well-defined.

    In Prices and Production (1935, p. 23), he introduces his English audience to Wicksell. “If it were not for monetary disturbances, the rate of interest would be determined so as to equalise the demand for and the supply of savings.” Hayek expressed his own preference for calling that rate the “equilibrium rate,” but noted that Wicksell christened it the “natural” rate.

    Hayek had only one criticism of Wicksell. Hayek argued that Wicksell was incorrect to identify that equilibrium rate of interest with the one that would keep average consumer prices constant (zero inflation). Refuting that proposition (which he broke up into “three very erroneous opinions,” p.7) motivated his lectures.

    Hayek did not title the work “Money and Interest,” or anything with interest in it. He titled the book “Prices and Production.” Interest is the income flow derived from differences in prices of present and future goods. He employed a multi-period model to explain his theory of interest. The theory of intertemporal price formation is his theory of interest.

    Prices and Production is a barebones treatment of what became Hayek’s theory of economic fluctuations. It is ridiculous to focus on his first presentation (first, at least in English) as his last word. But I cited P&P to drive home the point that even P&P is innocent of the criticisms made here.

  40. Hayek’s “support” for re-inflation must be understood in context:

    PROFESSOR HAYEK 1975: I will tell you of an episode that may be significant. In 1929, or perhaps 1930, when the depression was beginning to get quite serious on the European continent, a German political commission—the Braun Committee— proposed to combat it by reflation (though that term had not yet been coined), by rapid credit expansion. One of the members, in fact the main author of the report, was my late friend, Professor Wilhelm Roepke. I thought that in the circumstance the proposal was wrong, and I wrote an article against it. I did not publish the paper, however, but sent it to Roepke with a covering letter in which I made the following point:

    Apart from political considerations, I think you should not—not yet at least—start expanding credit. But if the political situation is so serious that continuing unemployment would lead to a political revolution, please, do not publish my article. That is a political consideration, however, which I cannot judge from outside Germany, but which you will be able to judge. Roepke’s reaction was not to publish the article, because he was convinced that at that time the political danger of increasing unemployment was so great that he would rather risk the danger of causing further misdirections by more inflation in the hope of postponing the crisis; at that particular moment, such postponement seemed to him politically necessary.

    I have never denied that one can, in the short run, reduce unemployment in that fashion,. All I am arguing is that in the long run you do more harm than good by inflation, and unless the circumstances of the moment threaten greater .dangers, I would not inflate.

  41. Charlie: history is objective?? I guess you’ve never actually studied history, then. If history is objective, then you can tell me exactly what parts of the Sackets Harbor & Saratoga Railroad were graded, and which were not? Or you can tell me why the Great Depression was so much worse than previous recessions.

    Robert: why is a “natural rate of interest” so hard to understand? It just means that people have their own idea of how much they want to be paid for rent on their money. Should that surprise you, when people have opinions about how much an apartment, or a tool, should be rented for?

  42. Lord Keynes (such a self-effacing choice of moniker!):

    Sure, Post Keynesians and Austrians do not agree, so each will judge the other’s analysis as “wanting.” But your cites are pretty old and do not engage the Austrian theory of Big Players, or the computability issues raised by Koppl & Rosser in Metroeconomica 2002. Note that Rosser is generally esteemed a Post Keynesian and I am generally considered an Austrian, though each of us has taken some own-school flack for supposed deviations and for writing with “one of *them*.” Fortunately, such attitudes seem to have faded away in both groups. Anyway, there is a lot of Austrian vs. Post Keynesian literature after 1993. And my point, recall, was just to counter that Matt’s claim that Austrians need to wake up and start engaging Post Keynesian arguments on uncertainty. Matt missed all the repeated writings and exchanges on precisely that theme.

  43. […] opinion of Hayek’s importance. (If anyone cares, my own views on the subject are closest to Mario Rizzo’s. This whole thing to me, is like arguing that the “Jedi vs. Sith lord” thing is a big […]

  44. “But your cites are pretty old and do not engage the Austrian theory of Big Players, or the computability issues raised by Koppl & Rosser in Metroeconomica 2002.”

    Well, then: my mistake.
    I will read Butos and Koppl, 1997, Koppl and Luther 2011, and Prychitko 2010 carefully.

    I am struck by your comment @December 8, 2011 at 8:09 am above as insightful now that I re-read it.

    Do you mind if I copy it (with of course full attribution to you and a link to here) on my blog, so I can discuss it?

  45. Russ,

    I don’t think you know the difference between objective and subjective. Being objective doesn’t mean you know everything with certainty, it just means you grapple with facts rather than your personal feelings. An objective argument supporting Hayek as a great macroeconomist would trace his impact on macro to important ideas still in the field today. One might try to show, for instance, that Hayek was in part responsible for the recursive dynamic macro revolution (as Tabarrok does). A subjective argument would be saying that Hayek is just totally awesome with awesome ideas and if modern macro doesn’t acknowledge that modern macro is dumb. That’s basically the argument Rizzo gave.

    It’s fine to have that opinion, but let’s not pretend disagreeing with it is distorting the history of economic thought. If there are no facts to support it, it isn’t history.

    Tabarrok shows evidence that Hayek has been very frequently cited in Nobel lectures. I would guess that he wasn’t cited much by macro winners post Lucas. I wonder if Lucas cited him? If that’s true, that seems to lead to the conclusion that Hayek was an important economist, but not because of his thoughts related to the macroeconomy. Did Sargent or Sims cite him? I think they spoke today, but I don’t see text of the speech.

  46. I’m not sure it’s helpful to talk about objective/subjective distinction as a matter of “feelings.” I think it’s better to think about it by saying that something is ‘objective’ if the truth of the matter is independent of the observer’s cognition.

  47. Some sensitive soul above suggests that Hayek is a progenitor of rational expectations theory. How can this be? The Austrian theory of the business cycle says that when interest rates are held below their natural equilibrium, an artificial boom results. But a bust must follow because builders will run out of resources at attractive interest rates because saving has been too low.

    Is it rational to borrow at short-term interest rates if it’s obvious these interest rates (being below their natural level) will rise? Why not lock-in low interest rates by selling long-term bonds? Of course, if it’s not obvious that the central bank is holding interest rates below their natural level, then what’s the basis for the Austrian criticism of the central bank?

  48. Greg,

    Along with a long list of people who opine on this website, you do so without having read anything on the topic you choose to address. There is a chapter in The Economics of Time and Ignorance devoted to the question you pose. Please return when you have actually read something relevant.

  49. Jerry,

    Good to see that you’re again willing to engage in controversy!

    But why not just respond to my questions? Does someone have to refer to your book in order engage in the conversation? Could reading Tyler Cowen, and Barkley Rosser’s, articles on this subject in Critical Review possibly substitute for reading you book?

  50. Peter Klein, interesting that you find Knight superior to Keynes. I have read most of Knight’s work, and his stuff is much more radical than most Chicago-type scholars think. (Indeed, I often find it curious why most Chicago-school economists consider Knight the progenitor of their tradition.) I have a post discussing some of his work here:

    Indeed, I often lump Knight with people like Keynes and Veblen as being some of the most incisive critics of the “supply-demand” economic tradition. Would you agree, Dr. Klein, that Knight can be characterized as so radical?

    I also don’t think his “uncertainty” contribution is nearly as significant as Keynes’s; but then again, he has never really had proponents like Davidson and Shackle. There is an interesting book that discusses the similarities between Knight and Keynes here:

    Anyway, I am disappointed that you consider Paul Davidson’s work “muddled.” Personally, I think he is just great on uncertainty, and that is why I find it hard to believe that Austrians — who purport to believe in radical subjectivism and uncertainty — totally reject his views. I just can’t understand it.

    Anyway, I will give your work a closer look Dr. Klein. I am actually studying law now at Mizzou, so I am just a few buildings down from you. Do you have any contact with Professor Lambert at the law school? He is quite fond of incorporating Hayek and Coase into his lectures in Antitrust and Business Organizations.

    You can email me at


  51. Matt: Yes, I do consider Knight a radical in this sense:

    Glad to know you are at our campus. Thom Lambert is a good friend — we actually have a coauthored chapter on Austrian economics and business law coming out in a Boettke-Zywicki volume on Austrian law and economics.

    Incidentally, it might amuse you to know that I have an inscribed copy of Davidson’s Economics for a Civilized Society (I knew him years ago), the inscription urging me to convert from Austrianism to Post Keynesianism. (I didn’t take up the offer!)

  52. Thank you Mario for an your excellent article.

    I run an investing group with 3500 members (the New York Investing meetup) and we are interested in economics from a practical perspective. We are even having Nicholas Wapshott in to discuss his book “Keynes Hayek: The Clash That Defined Modern Economics.”

    It seems to me that the major difference between Keynes and Hayek is that Keynes was a short-term optimizer and Hayek a long-term optimizer. Keynes was also offering a well-disguised free lunch. His system will inevitably lead to ever-rising government debt, first funded by borrowing and then by printing money. This describes the current state of affairs in almost every developed economy globally.

    While all the original Keynesians have died in the long run, their grandchildren are around to clean up the mess that they have left behind (and they will soon discover that their inheritance has been spent). It has always been known that you can live well today by borrowing against the future. Keynes repackaged the idea with lots of theory around it so it became more palatable.

    For those who would reply that Keynes said that when the economy is in good shape government should cut spending and pay down its debt, I would say he was insincere about this and doing so is impractical (it doesn’t work in the real world). Keynes maintained the government had a moral responsibility to reduce unemployment, so how could it significantly cut spending during the good times if the multiplier effect would cause a lot of jobs to be lost? Governments in effect have not done this and they are not likely to.

    The ultimate test of an economists ideas are how they actually work when applied. Keynes ideas do indeed work in the short-term, so does communism and so do a lot of other things. It is not surprising that “in the long run, we are all dead” has become associated with Keynes. Few people probably appreciate the irony of that remark however.

  53. It seems to me that the major difference between Keynes and Hayek is that Keynes was a short-term optimizer and Hayek a long-term optimizer. Keynes was also offering a well-disguised free lunch. His system will inevitably lead to ever-rising government debt, first funded by borrowing and then by printing money. This describes the current state of affairs in almost every developed economy globally.

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