Tuesday, February 7, 2012

Economic Calculation Yet Again

Jonathan Finegold Catalán responds here to my previous post:
Jonathan Finegold Catalán, “Economic Miscalculation,” Economic Thought, 6 February, 2012.
While I did enjoy the post and mostly appreciated the points made, nevertheless I don’t think it was quite fair.

Some points follow:
(1) Catalán makes the following comment:
“While the theory of intertemporal discoordination is one facet of the theory of economic coordination (or, more accurately, a theory of what occurs when prices are distorted and there is serious and prolonged discoordination), it is a minor one (although, one of the best elucidated to-date). How Austrian business cycle theory fits into the framework of coordination can be best picked up from a reading of lecture two and lecture three of Friedrich Hayek’s Prices and Production, which explains the intertemporal coordination of producers’ goods in conditions of equilibrium. The real substance of coordination theory in the Austrian exposition of the business cycle is not in the explanation of how resources are misallocated, but rather in how resources are allocated without interference or distortion.”
It seems rather strange to assert that the Austrian theory of intertemporal discoordination (the Austrian trade cycle theory or ABCT) is only a minor “facet of the [sc. Austrian] theory of economic coordination.” Most Western economies today are ones where the vast majority of all production is done privately and the majority of capital goods are owed privately, so the ABCT must be the major Austrian theory that applies to them.

Catalán states that the “real substance of coordination theory in the Austrian exposition of the business cycle is not in the explanation of how resources are misallocated, but rather in how resources are allocated without interference or distortion.” Since Hayek’s theory depends on a natural rate of interest conceived as an equilibrium rate, and his theory begins with a stationary equilibrium state, the Hayekian versions of ABCT are not even quintessentially “Austrian” at all, given that, historically, Austrian economics rejects Walrasian equilibrium analysis.

The only state where “resources are allocated without interference or distortion” in the Hayekian theory is an equilibrium state – a completely fictitious, imaginary state of no relevance to the real world in which we live. Hayek’s Austrian business cycle theory (ABCT) was the product of his neoclassical phase, and he himself stated that he originally held that his “theory of the trade cycle ... ought to be organically superimposed upon the existing theory of equilibrium” (Hayek 1975 [1939]: 137). Does Catalán think that Austrian economics is just another boring and useless equilibrium theory? (the answer, I presume: of course he doesn’t).

Now the anarcho-capitalists would no doubt demand that no government must exist at all to achieve “resources ... allocated without interference or distortion,” but that was not the view of Hayek or Mises, both of whom had a role for government. For both Mises and Hayek there was presumably a type of limited government that can exist without causing economic calculation problems.

(2) Catalán states:
“Do only socialist economics lack economic coordination? This is the claim that LK essentially makes when he balks at Austrians who accuse him of not understanding “economic calculation.”
I am afraid that Catalán appears to have missed my point.

I am well aware that Austrians charge that market economies with government intervention or even with fractional reserve banking expanding fiduciary media are subject to alleged economic calculation problems. I understand the alleged economic calculation problems as described in ABCT perfectly well. The absurd charge made by internet Austrians is that I don’t even understand this (i.e., presumably I never heard of it, have never read the various versions of ABCT, or don’t even know the alleged processes causing the distortions, and so on). This is the most tiresome nonsense.

In the theory of Hayek and Mises, it was, above all, the private fractional reserve banks expanding fiduciary media that cause the cycle: so one major cause of the alleged “economic calculation problems” was in fact the endogenous capitalist banking system.

(3) Another point made by Catalán:
“For instance, an Austrian will tell a Keynesian that the market does not fail at intertemporal allocation, whereas a Keynesian (at least one loyal to Keynes’ business cycle theory) will tell you that it does.”
Which type of Austrian is Catalán referring to?

Ludwig Lachmann and other Austrians influenced by him would agree with Post Keynesians that there is no tendency to general equilibrium in a market economy.

Real world market economies lack the type of highly efficient coordination alleged by Classical and neoclassical economists. Uncertainty means it is extremely unlikely that production decisions will mesh with consumers’ purchasing patterns perfectly. Subjective expectations make investment liable to fluctuate.

Post Keynesianism would add: Say’s law is a myth. Saving of money without its use for investment and secondary financial asset markets diverting money from current income streams can cause a shortfall in aggregate demand. Private debt, asset bubbles and the dynamics of debt deflation can wreck havoc on market economies.

(4) Catalán charges that:
“Economists like LK need to understand, though, where exactly Austrians stand on the debate with regards to [sc. how the private economy works] ... So far, he has shown that he does not.”
In fact, I understand well that Austrians themselves disagree on the tendency for market coordination to occur, and even, to some extent, how the private economy works (e.g., the dispute between anti-fractional reserve banking Austrians and free bankers). Catalán’s charge is simply false (I would also add that I have never made any claims to being an actual economist, and I’m not).


Hayek, F. A. von. 1975 [1939]. Profits, Interest and Investment, Augustus M. Kelley Publishers, Clifton, NJ.

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