“For what it’s worth, I think Hayek has a more useful set of ideas on the business cycle than Mises anyway. Keynes even made basically the point in Ch. 16 of the [General Theory] that Hayek does in Prices and Production – that a lower interest rate will make production processes longer (and also more capital intensive – but the elongation is the main point). Hayek’s business cycle theory hinges on the fixed [and specific] nature of those investments in longer production processes. That guarantees that adjustment is not costless. I’m not that familiar with Mises, but I don’t think he has that mechanism that Hayek does.It also well worth reading the comments on that post.
My concern with all the Austrian work is that while it may be a very interesting description of what happens to what they call the ‘time structure of production’ in response to the interest rate, there’s no obvious reason to tie that to the business cycle. Their story is ‘during the boom interest rates are artificially low, and during the bust they go back to their natural rate’. In a loanable funds world, that makes sense. But in a liquidity preference world, the story is ‘interest rates are too high for full employment’. In a liquidity preference world where those interest rates are kept too high by a zero lower bound, you of course have even more trouble.
So the whole Hayekian story is predicated on the assumption that we move below Wicksell’s natural rate during the boom, and return to it in the bust. Our best understanding of macroeconomics (from Hicks et al.) says that we’re at Wicksell’s natural rate during periods of full employment, and are above it during the bust.
In other words, the Hayekian mechanism should produce a capital structure that is just right during the boom and too short during the bust – exactly the opposite of their normal story.
So while all the fluctuations of the ‘temporal structure of capital’ are quite interesting to me, I don’t think they offer much in the way of a business cycle theory.’”
Daniel Kuehn, “A Comment I Left on Brad DeLong’s Post which may be of Interest...,” November 16, 2011.
Some quick comments:
(1) I think Daniel concedes too much when he says:“Their story is ‘during the boom interest rates are artificially low, and during the bust they go back to their natural rate’. In a loanable funds world, that makes sense.”It is better to say: if the natural rate of interest actually existed and loans were made in natura.
(2) This reminds me of Nicholas Kaldor’s different critique of Hayek’s ABCT. In 1942, Kaldor published “Professor Hayek and the Concertina-Effect” (Economica n.s. 9.36 (1942): 359–382), which was an attack on Hayek’s new version of his trade cycle theory in Profits, Interest and Investment (London, 1939). Kaldor focussed on Hayek’s Ricardo effect (or what Kaldor preferred to call the “Concertina-Effect,” since Ricardo had the examined the relative prices of labour and capital), and argued that in fact Hayek’s postulated mechanism to explain a decrease in capital goods investment when an increase in demand for consumer goods occurred during a period of full employment was not credible (for a short analysis, see Kyun 1988: 37–38 and Kaldor 1996: 156–157). Hayek argued that rising demand for consumer goods during full employment raises the prices of consumer goods and reduces real wages. Capitalists increase investment, but use less “capitalistic methods of production” (Kyun 1988: 37) by more labour intensive methods and less capital goods. The decrease in investment in capital goods overwhelms the use of labour and an overall decrease in investment results. Kaldor debunked this “Concertina Effect,” arguing instead that an increase in consumer goods demand increases overall investment.
Hayek, F. A. von, 1939. Profits, Interest and Investment, Routledge and Kegan Paul, London.
Hayek, F. A. von, 1942. “Professor Hayek and the Concertina-Effect: A Comment,” Economica n.s. 9.36: 383–385.
Kaldor, N. 1939. “Capital Intensity and the Trade Cycle,” Economica n.s. 6.21: 40–66.
Kaldor, N. 1940. “The Trade Cycle and Capital Intensity: A Reply,” Economica n.s. 7.25: 16–22.
Kaldor, N. 1942. “Professor Hayek and the Concertina-Effect,” Economica n.s. 9.36: 359–382.
Kaldor, N. 1996. Causes of Growth and Stagnation in the World Economy, Cambridge University Press, Cambridge.
Kyun, K. 1988. Equilibrium Business Cycle Theory in Historical Perspective, Cambridge University Press, Cambridge.