HIGH: Have the economic events since you wrote on trade cycle theory tended to strengthen or weaken your ideas on the Austrian theory of the trade cycle?One cannot help but notice the illogic running through Hayek’s responses. First, Hayek is completely and embarrassingly wrong on two points:
HAYEK: On the whole, strengthen, although I see more clearly that there’s a very general schema which has to be filled in in detail. The particular form I gave it was connected with the mechanism of the gold standard, which allowed a credit expansion up to a point and then made a certain reversal possible. I always knew that in principle there was no definite time limit for the period for which you could stimulate expansion by rapidly accelerating inflation. But I just took it for granted that there was a built-in stop in the form of the gold standard, and in that I was a little mistaken in my diagnosis of the postwar development. I knew the boom would break down, but I didn’t give it as long as it actually lasted. That you could maintain an inflationary boom for something like twenty years I did not anticipate.
While on the one hand, immediately after the war I never believed, as most of my friends did, in an impending depression, because I anticipated an inflationary boom. My expectation would be that the inflationary boom would last five or six years, as the historical ones had done, forgetting that then the termination was due to the gold standard. If you had no gold standard—if you could continue inflating for much longer—it was very difficult to predict how long it would last. Of course, it has lasted very much longer than I expected. The end result was the same.
HIGH: The Austrian theory of the cycle depends very heavily on business expectations being wrong. Now, what basis do you feel an economist has for asserting that expectations regarding the future will generally be wrong?
HAYEK: Well, I think the general fact that booms have always appeared with a great increase of investment, a large part of which proved to be erroneous, mistaken. That, of course, fits in with the idea that a supply of capital was made apparent which wasn’t actually existing. The whole combination of a stimulus to invest on a large scale followed by a period of acute scarcity of capital fits into this idea that there has been a misdirection due to monetary influences, and that general schema, I still believe, is correct.
But this is capable of a great many modifications, particularly in connection with where the additional money goes. You see, that’s another point where I thought too much in what was true under prewar conditions, when all credit expansion, or nearly all, went into private investment, into a combination of industrial capital. Since then, so much of the credit expansion has gone to where government directed it that the misdirection may no longer be overinvestment in industrial capital, but may take any number of forms. You must really study it separately for each particular phase and situation. The typical trade cycle no longer exists, I believe. But you get very similar phenomena with all kinds of modifications.
(Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 183–186).
(1) The golden age of capitalism (1945-1973) was not characterised by “rapidly accelerating inflation”: inflation was low, subdued and there was no tendency whatsoever towards its acceleration for virtually all the period. It was only in 1968 that inflation in many countries started to accelerate.Now, on the one hand, Hayek makes some surprising admissions:
(2) The stagflation crisis of the 1970s was not caused by an Austrian business cycle: it was the result of (1) wage–price spirals, (2) the speculative activity caused by the break up of Bretton Woods in 1971, (3) negative supply shocks in the prices of commodities which could have been prevented had the US not dismantled its commodity buffer stock polices in the 1960s, and (4) the oil shocks (see “Stagflation in the 1970s: A Post Keynesian Analysis,” June 24, 2011).
(1) His original trade cycle theory assumed the existence of a gold standard, and that this would cause an automatic mechanism causing the end of a credit expansion.The qualification that each historical cycle must be examined to see if it can in fact be explained by ABCT, since there is the possibility that it might not be, was also stressed by Israel M. Kirzner (see “Kirzner on Austrian Business Cycle Theory,” May 30, 2011). Yet when modern Austrians are pressed to identify real world cycles that are not explained by ABCT, most of them are reduced to dumbfounded silence.
(2) Hayek thought that the postwar boom would last only “five or six years,” and he was completely wrong.
(3) Hayek’s original theory assumed that capital would be directed to industrial expansion, but credit flows after 1945 were, and remain, rather different in nature, with credit flowing to important other sources as well. This can only mean that Hayek’s trade cycle effects would be less and less relevant, as he himself admits.
(4) Hayek recognises his theory had become far less relevant: “You must really study it separately for each particular phase and situation. The typical trade cycle no longer exists [my emphasis], I believe. But you get very similar phenomena with all kinds of modifications.”
Having admitted that his “typical” trade cycle no longer existed, Hayek never admitted what he should have, had he been more honest: that his trade cycle theory had serious flaws and, even if it had been relevant before 1931, it had become largely irrelevant.
Bruce Caldwell puts his finger on exactly this point:
“If one takes seriously ... [sc. Hayek’s] later work on the theory of complex phenomena, then one cannot make precise predictions about the path that a cycle must take, which is what his original cycle theory purported to do. In my opinion, Hayek began to recognize the difficulties with his approach as he responded to critics while laboring over The Pure Theory of Capital ... As noted earlier, he gave hints about those limitations in his 1978 oral-history reminiscences ... and again (and more provocatively) a few years later in his fiftieth-anniversary address .. at the London School of Economics (LSE). His ultimate position seems to have been very close to that of T. W. Hutchison ... , who expressed doubts about whether a general theory of the cycle was possible at all.” (Caldwell 2004: 326).By recognising that his trade cycle theory was not a general theory of cycles, Hayek in fact eventually had the same view as Ludwig Lachmann, Joseph Schumpeter and Israel M. Kirzner: ABCT cannot be used to explain all business cycles (Batemarco 1998: 222).
And there is a further issue here. Hayek’s original trade cycle theory used static equilibrium theory, and also assumes that all markets do in fact clear (Caldwell 2004: 324), partly by glossing over the role of uncertainty and assuming perfect foresight. But severe problems with Hayek’s static equilibrium theory had already emerged in the 1930s:
“by the middle of the 1930s, problems with [Hayek’s] static equilibrium theory had become ever more evident, as questions of the role of expectations came to the fore and, and, with them, the recognition that earlier models had assumed perfect foresight” (Caldwell 2004: 224).In light of all this, one can also only agree with Bruce Caldwell that Hayek’s trade cycle theory is now “chiefly of antiquarian interest” (Caldwell 2004: 325).
“Hayek’s changing assessment of the importance of equilibrium theory has some consequences for our story. The most telling of these concerns Hayek’s trade cycle theory, a paradigmatic example of equilibrium theory, one that Witt (1997, 48) describes as ‘an impressive example of allied price theoretical reasoning that may even delight a Chicago equilibrium economist.’ But, as Witt goes on to observe, if one rejects the usefulness of equilibrium analysis, then Hayek’s step-by-set story of how the cycle unfolds, one in which ‘each single stage necessarily had to be followed by the next one’ (46), can no longer be maintained. Witt concludes that Hayek’s cycle theory may well be incompatible with his later theory of spontaneous orders, a concern that others have voiced” (Caldwell 2004: 228).
To conclude, I link to a video below where Bruce Caldwell, Philip Mirowsky and Robert Skidelsky discuss Keynes versus Hayek on the Great Depression, as well as issues related to Hayek’s trade cycle theory (in the first half of the discussion).
Caldwell makes another valid point: Hayek needed a dynamic theory of a capital-using monetary economy, and he did not have the mathematic skills to do this. Around 1936/37, Hayek’s engagement with the socialist calculation debate caused him to pay more attention to the knowledge problem, and how this was also relevant to his business cycle theory.
At the end of the video there is some discussion about the scope for constructive dialogue between Austrians and Post Keynesians (from 13.19 minutes).
Batemarco, R. J. 1998. “Austrian Business Cycle Theory,” in P. J. Boettke (ed.), The Elgar Companion to Austrian Economics, Elgar, Cheltenham, UK. 216–336.
Caldwell, B. 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek, University of Chicago Press, Chicago and London.
Nobel Prize-Winning Economist: Friedrich A. von Hayek. Interviewed by Earlene Graver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen A. Alchian, Robert Chitester, Regents of the University of California, 1983.
Witt, U. 1997. “The Hayekian Puzzle: Spontaneous Order and the Business Cycle,” Scottish Journal of Political Economy 44: 44–58.
"Yet when modern Austrians are pressed to identify real world cycles that are not explained by ABCT, most of them are reduced to dumbfounded silence."ReplyDelete
ROFLMAO, Actually, it is you who claims that ABCT does not explain all business cycles who has to do this. Your explanations, in particular, are especially hilarious.
"(1) wage–price spirals"
What caused the "wage-price" spirals?
"the speculative activity caused by the break up of Bretton Woods in 1971"
The breakdown of Bretton Woods did not usher in a pure fiat money regime with unlimited potential for growth in money supply. The breakdown of Bretton Woods had nothing to do with the US running out of gold reserves to redeem its obligations to foreigners leading to Nixon unilaterally closing the Gold window. That in turn had nothing to do with the massive monetary inflation in the form of fiduciary media in the 1950's and 60's.
"the oil shocks"
Yeah!! The oil shocks had nothing to do with the severe debauchment of the dollar, leave alone the potential for further and even more severe debauchment under a pure fiat money regime. The move to pure fiat from the gold exchange standard had nothing whatsoever to do with it.
"Actually, it is you who claims that ABCT does not explain all business cycles who has to do this."ReplyDelete
False. That was also the view of
(1) Ludwig Lachmann,
(2) Israel M. Kirzner
(3) Joseph Schumpeter and
(4) Hayek himself by the late 1970s.
For Kizner's statement:
AEN: Do you accept the idea that interest-rate manipulation by the central bank can cause distortions in the structure of production?
KIRZNER: Certainly the Austrian cycle theory showed brilliantly how this can happen. But it’s one thing to develop a theory which could explain a downturn. It’s quite another to claim that historically every downturn is to be attributed to that particular theory. That does not necessarily follow. If one were asked, does this theory necessarily explain each and every cycle, I would say no.
Fine. Now please list out the cycles that the theory does not explain.ReplyDelete
"The golden age of capitalism (1945-1973) was not characterised by “rapidly accelerating inflation”: inflation was low, subdued and there was no tendency whatsoever towards its acceleration for virtually all the period. It was only in 1968 that inflation in many countries started to accelerate."ReplyDelete
Firstly, there is the false claim that 1945-1973 was the 'golden age of capitalism'. Did you borrow this technique from Hitler? I mean that if you repeat an outrageous lie brazenly and often enough, people will slowly start believing it to be the truth.
Secondly, there is the ever present thorn in the flesh - price inflation is not an increase in the price level. It is prices being higher than they would be had the prior inflation (increase in the money supply) not happened. At least, that's the way Austrians view it. Showing prices not increasing is not an argument against that viewpoint.
"It’s quite another to claim that historically every downturn is to be attributed to that particular theory. That does not necessarily follow. If one were asked, does this theory necessarily explain each and every cycle, I would say no."ReplyDelete
Why do I feel like strongly agreeing with him? The important point, however, is the use of the phrases "is to be", "does not necessarily follow" and "necessarily explain". Note that he does not say that it does not explain. He says that it does not BY NECESSITY explain.
It just so happens that it explains. ROFLMAO.
"The Trade Cycle cannot be appropriately described by means of one theoretical model" ...
Ludwig M. Lachmann, Capital and its structure, p. 100ff.
“In the first place, we do not maintain that the Austrian theory could explain every and any industrial fluctuation that has ever occurred. Such a view of course would be incompatible with our plea for eclecticism. The Austrian theory is a theory of the strong boom, it deals with its causes and consequences. Undoubtedly, weak booms which ended when consumption failed to keep in step with production have occurred in history.”
Ludwig M. Lachmann, Capital and its structure, p. 113ff.
"The Trade Cycle cannot be appropriately described by means of one theoretical model"ReplyDelete
By all means, do come up with a model. Just let its theoretical foundations be strong. 'Subjective expectations' and 'animal spirits' do not constitute a model.
"we do not maintain that the Austrian theory could explain every and any industrial fluctuation that has ever occurred"
Note the emphasis on the 'could'.
"Now please list out the cycles that the theory does not explain. "ReplyDelete
It explains NO cycles, because there is no such thing as a natural rate of interest. Period.
"Firstly, there is the false claim that 1945-1973 was the 'golden age of capitalism'."ReplyDelete
> "we do not maintain that the AustrianReplyDelete
> theory could explain every and any
> industrial fluctuation that has ever
Note the emphasis on the 'could'.
You suppress Lachmann's next words:
"The Austrian theory is a theory of the strong boom, it deals with its causes and consequences. Undoubtedly, weak booms which ended when consumption failed to keep in step with production have occurred in history.”
Ludwig M. Lachmann, Capital and its structure, p. 113ff.
Therefore in practical terms ABCT does NOT explain all cycles.
"It explains NO cycles, because there is no such thing as a natural rate of interest. Period."ReplyDelete
There goes your crappy explanation. There is such a thing as natural rate of interest, Sraffa's crappy denial of the same notwithstanding.
A Wikipedia entry only shows that some people consider it to be so. That does not make it that. Laughable.
"Note that he does not say that it does not explain. He says that it does not BY NECESSITY explain."ReplyDelete
= gross distortion of Kirzner's words.
"You suppress Lachmann's next words:"ReplyDelete
ROFLMAO. Why should I suppress them? They are there for all to see. The statement "The Austrian theory is a theory of the strong boom" does not invalidate ABCT.
Further, the statement
"Undoubtedly, weak booms which ended when consumption failed to keep in step with production have occurred in history"
only means that further theoretical development may be required for the explanation of weak booms.
But then there you go deflecting the discussion from the boom-bust cycles and the phenomenon of "depressions" and their underlying causes to a discussion of strong and weak booms. Nice attempt at parrying a body blow to your nonsensical theories. Your desperation is showing.
"= gross distortion of Kirzner's words."ReplyDelete
Crap. I just identified what he said and noted what he did not. Here are his words again.
Kirzner: "If one were asked, does this theory necessarily explain each and every cycle, I would say no."
I just replaced "necessarily" with "by necessity" which is a grammatically perfect replacement in the circumstances. You see distortions because your underlying theories are warped.
Your idiotic claim:ReplyDelete
"Firstly, there is the false claim that 1945-1973 was the 'golden age of capitalism'. Did you borrow this technique from Hitler? I mean that if you repeat an outrageous lie brazenly and often enough, people will slowly start believing it to be the truth.
(1) that I "invented" the idea of a golden age of capitalism;
(2) that I lied in speaking of such a period.
(1) I did not lie or invent the concept;
(2) the idea of a golden age of capitalism is an idea from mainstream economic history. All you need to do is type that expression into a serach engine or Google books;
(3) it is based on the high real GDP growth, low unemployment and high productivity growth experienced in these years:
“During the Golden Age of Bretton Woods, the growth rate was almost double the previous peak annual growth rate of the industrializing nations during the Industrial Revolution (from 1820 to 1913). Between 1950 and 1973 annual labor productivity growth was more than triple that of the industrial revolution and real GDP per capita in the developed (or OECD) nations grew 2.6 times faster than between the wars.
The resulting prosperity of the industrialized world was transmitted to the less developed countries (LDCs) through world trade, aid, and direct foreign investment. From 1950 - 73, average growth in per capita GDP for all developing nations was 3.3 per cent, almost triple the growth experienced by the industrializing nations during the industrial revolution.”
Macroeconomic causes of unemployment: diagnosis and policy recommendationsp. 99
Here's an extract from the same Wikipedia article.
"In academic literature, the period is frequently and narrowly referred to as the post–World War II economic boom, though this term can refer to much shorter booms in particular markets. It is also known as the Long Boom, though this term is generic and can refer to other periods. The golden age of Capitalism is a common name for this period in both academic and popular economics books. However in older sources and occasionally in contemporary ones, Golden age of Capitalism can refer to the period from approximately 1870 to 1914 , which also saw rapid economic expansion. Yet another name for the quarter century following the end of World War II is the Age of Keynes."
Note the reference to 1870-1914.
"Golden age of Capitalism can refer to the period from approximately 1870 to 1914 ,"ReplyDelete
= red herring fallacy.
That the expression is also used to refer to 1870 to 1914 does not refute anything I have said above.
1945-1973 IS conventionally called the golden age of capitalism: it had real GDP and productivity growth superior to the 1820-1914 period.
Average OECD real GDP growth:ReplyDelete
1700-1820 - 0.2%
1820-1913 - 1.2%
1919-1940 - 1.9%
1950-1073 - 4.9%
1973-1981 - 1.3%
1950-1973 - 4.9%ReplyDelete
"Why do you use the words of Kirzner and Lachmann and Hayek to defend the position that the ABCT can explain some cycles, not all cycles"ReplyDelete
You are confused or presenting a straw man argument.
I do NOT defend or support the idea that ABCT "explains" some cycles. I do not belive it explains any cycles.
I merely note the positions of various Austrians as relevant to my discussion.
There is no contradiction.
The problem with economists is that they have to be either left wing or right wing. If you could shed that you would get much further.ReplyDelete