The opening shot is fired by David Warsh, and then followed by Paul Krugman in a post that I am quite sympathetic to, as it happens:
David Warsh, “Ruizismus among the Austrians,” Economicprincipals.com, December 4, 2011.Other relevant anti-Hayek views:
Paul Krugman, “Things That Never Happened In The History Of Macroeconomics,” December 5.
Robert Vienneau, “On Hayek’s Lack Of Impact On Macroeconomic,” Thoughts On Economics, December 9, 2011.Pro-Hayek responses are here:
Steven Horwitz, “Rizzo on Hayek vs. Keynes,” Coordination Problem, December 7, 2011.The comments on Rizzo’s post are well worth reading as well, and above all this comment by Roger Koppl.
Alex Tabarrok, “Hayek and Modern Macroeconomics,” Marginal Revolution, December 6, 2011.
“Hey Paul Krugman, Leading Economists Have Been Talking About Hayek’s Macro Throughout the Boom & Bust,” Cafehayek.com, December 5th, 2011.
Mario Rizzo, “Yes, Paul: It is Hayek versus Keynes,” ThinkMarkets, December 7, 2011.
I will have much more to say about this soon, but some quick points:
(1) It is astonishing how quickly Austrians move to defend Hayek’s business cycle theory, when that is probably an example of one of his worst failures. Why do they persist in defending a theory based so obviously on neoclassical equilibrium models, when the latter are supposedly contrary to Austrian theory?Funny how these, especially point (3), have gone down the memory hole.
(2) When Krugman says that “Hayek essentially made a fool of himself early in the Great Depression,” he is entirely correct. There are two reasons why. The first is that his business cycle theory - while it certainly got traction at the LSE - was greeted with derision by economists at Cambridge in the tradition of Marshall:“Immediately before giving his early 1931 lectures at LSE, which were his introduction to the school, Hayek gave a one-lecture to the Keynes-dominated Marshall Society at Cambridge. Richard Kahn, one of Keynes’ followers and later his literary executor, described the scene. Hayek had “a large audience of students, and also of leading members of the faculty. (Keynes was in London.) The members of the audience—to a man—were completely bewildered. Usually a Marshall Society talk is followed by a lively and protracted barrage of discussions and questions. On this occasion there was complete silence. I felt I had to break the ice. So I got up and asked, ‘Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?’ ‘Yes,’ said Hayek. ‘But,’ pointing to his triangles on the board, ‘it would take a very long mathematical argument to explain why’” (Ebenstein 2003: 53).Secondly, Hayek retreated from the stupidity of his liquidationism that he had held in the early 1930s:“Although I do not regard deflation as the original cause of a decline in business activity, such a reaction has unquestionably the tendency to induce a process of deflation – to cause what more than 40 years ago I called a ‘secondary deflation’ – the effect of which may be worse, and in the 1930s certainly was worse, than what the original cause of the reaction made necessary, and which has no steering function to perform. I must confess that forty years ago I argued differently. I have since altered my opinion – not about the theoretical explanation of the events, but about the practical possibility of removing the obstacles to the functioning of the system in a particular way” (Hayek 1978: 206).(3) The later Hayek is found endorsing monetary stabilisation and giving qualified support for fiscal policy, positions which are essentially Keynesian:
There are many other things to be said, and I intend to update this post after some more reading.
Some additional literature worth reading that is mentioned in this comment by Roger Koppl on Rizzo’s ThinkMarkets post:
Butos, W. N. and R. Koppl, 1997. “The Varieties of Subjectivism: Keynes and Hayek on Expectations,” History of Political Economy 29.2: 327–359.
Koppl, R. and W. J. Luther, 2011. “Hayek, Keynes, and Modern Macroeconomics,” Review of Austrian Economics (July): 1-19.
This paper can also be downloaded through the Social Science Research Network (SSRN).
Prychitko, David L. 2010. “Competing Explanations of the Minsky Moment: The Financial Instability Hypothesis in Light of Austrian Theory,” Review of Austrian Economics 23: 199-221.
Ebenstein, A. O. 2003. Friedrich Hayek: A Biography, University of Chicago Press, Chicago, Ill. and London.
Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.