Showing posts sorted by relevance for query lachmann. Sort by date Show all posts
Showing posts sorted by relevance for query lachmann. Sort by date Show all posts

Saturday, December 31, 2011

Ludwig Lachmann: Bibliography and Resources

I generally enjoy reading the work of Ludwig M. Lachmann (1906–1990), even if I am in no sense an Austrian. However, if there is one Austrian that Post Keynesians should be familiar with, it is Lachmann.

That being so, I’ll start a bibliography for Lachmann’s work below. Some interesting trivia:
(1) Lachmann received a PhD in 1930 under Werner Sombart at the University of Berlin.

(2) Lachmann was at the London School of Economics (LSE) as research assistant to Hayek, and observed the epic debates between Keynes and Hayek. Lachmann was a friend of George L. S. Shackle.

(3) Lachmann went to South Africa in 1948.

(4) His radical subjectivism played a major role in the revival of Austrian economics in the 1970s, when in 1975 he became a Visiting Professor of Economics at New York University (for modern Austrians talking about Lachmann’s influence, see here and here).
Lachmann’s work came to emphasise subjective expectations and the volatility of asset markets (see Lachmann 1988) and their effects on investment – ideas he shared with Keynes (Garrison 1987). Lachmann analysed the emerging Post Keynesian school at Cambridge (including Sraffa’s work) in Lachmann (1973; see also Mongiovi 1994).


MY POSTS ON LACHMANN

“Audio Lecture by Ludwig M. Lachmann,” December 21, 2011.

“A Startling Admission from Ludwig Lachmann,” July 11, 2011.

“Ludwig Lachmann on Government Intervention,” July 9, 2011.

“Lachmann on Trade Cycle Models,” August 27, 2011.


BIOGRAPHICAL, REVIEWS AND FESTSCHRIFT WORKS ABOUT LACHMANN

Peter Lewin, “Biography of Ludwig Lachmann (1906–1990): Life and Work,” Mises.org.

Koppl, R. and G. Mongiovi, 1998. Subjectivism and Economic Analysis: Essays in Memory of Ludwig M. Lachmann, Routledge, London.

Kirzner, I. M. 1986. Subjectivism, Intelligibility, and Economic Understanding: Essays in Honor of the Eightieth Birthday of Ludwig M. Lachmann, New York University Press, New York.

Torr, C. S. W., Bohm, S. and K. H. M. Mittermaier. 1992. “L.M. Lachmann: A Bibliography (1930-1990),” South African Journal of Economics 60.1: 78–81.

Mittermaier, K. 1992. “Ludwig Lachmann (1906-1990): A Biographical Sketch,” South African Journal of Economics 60.1: 4–12.
N.B. the South African Journal of Economics, March 1992 (60.1) issue has a number of articles relating to Lachmann.

Garrison, R. W. 1987. “The Kaleidic World of Ludwig Lachmann” (review article of The Market as an Economic Process), Critical Review 1.3: 77–89.
http://www.auburn.edu/~garriro/r8lachmann.htm

Boettke, P. J. 1994. “Ludwig Lachmann and His Contributions to Economic Science,” Advances in Austrian Economics (vol. 1).
http://econfaculty.gmu.edu/pboettke/pubs/ludwig_lachmann.pdf

Mongiovi, G. 1994. “Capital, Expectations and Economic Equilibrium: Some Notes on Lachmann and the So-Called Cambridge School,” in P. Boettke and M. Rizzo (eds.), Advances in Austrian Economics (vol. 1), JAI Press, London. 257–277.

INTERVIEWS

Ludwig Lachmann, “An Interview with Ludwig Lachmann,” The Austrian Economics Newsletter, Volume 1, Number 3 (Fall 1978), Mises.org.

ARTICLES

Lachmann, L. M. 1935. “Commodity Stocks and Equilibrium,” Review of Economic Studies 3: 230–234.

Lachmann, L. M. 1937. “Uncertainty and Liquidity-Preference.” Economica n.s. 4.15: 295–308.

Lachmann, L. M. 1938. “Commodity Stocks in the Trade Cycle,” Economica 5: 435–454

Lachmann, L. M. 1938. “Investment and Costs of Production,” American Economic Review 28.3: 469–448.

Lachmann, L. M. 1939. “Expectations, Investment and Income by G. L. S. Shackle” (review), Economica n.s. 6.21: 103-105.

Lachmann, L. M. 1939. “On Crisis and Adjustment,” Review of Economics and Statistics 21: 62-68

Lachmann, L. M. 1940. “A Reconsideration of the Austrian Theory of Industrial Fluctuations,” Economica n.s. 7.26: 179–196.

Lachmann, L. M. 1941. “On the Measurement of Capital,” Economica 8.32: 361–377.

Lachmann, L. M. 1943. “The Role of Expectations in Economics as a Social Science,” Economica n.s. 10.37: 12–23.

Lachmann, L. M. 1944. “Finance Capitalism?,” Economica n.s. 11.42: 64–73.

Lachmann, L. M. 1945. “A Note on the Elasticity of Expectations,” Economica n.s. 12.48: 248–253.

Lachmann, L. M. 1947. “Complementarity and Substitution in the Theory of Capital,” Economica n.s. 14.54: 108–119.

Lachmann, L. M. 1948. “Investment Repercussions,” Quarterly Journal of Economics 62.5: 698–713.

Lachmann, L. M. 1949. “Investment Repercussions: Reply,” Quarterly Journal of Economics 63.3: 432–434.

Lachmann, L. M. 1951. “The Science of Human Action,” Economica n.s. 18.72: 412–427.

Lachmann, L. M. 1954. “Some Notes on Economic Thought, 1933–1953,” South African Journal of Economics 22: 22–31.

Lachmann, L. M. 1956. “The Velocity of Circulation as a Predictor,” South African Journal of Economics 24: 17–24.

Lachmann, L. M. 1958. “Mrs. Robinson on the Accumulation of Capital,” South African Journal of Economics 26:87–100.

Lachmann, L. M. 1959. “Professor Shackle on the Economic Significance of Time,” Metroeconomica 11: 64–73.

Lachmann, L. M. 1962. “Cost Inflation and Economic Institutions,” South African Journal of Economics 30: 177–89.

Lachmann, L. M. 1963. “Cultivated Growth and the Market Economy,” South African Journal of Economics 31: 165–174.

Lachmann, L. M. 1966. “Sir John Hicks on Capital and Growth,” South African Journal of Economics 34: 113–123.

Lachmann, L. M. 1967. “Causes and Consequences of the Inflation of Our Time,” South African Journal of Economics 35: 281–291.

Lachmann, L. M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54-62.

Lachmann, L. M. 1973. “Sir John Hicks as a Neo-Austrian,” South African Journal of Economics 41: 195–207.

Lachmann, L. M. 1977. “The Significance of the Austrian School of Economics in the History of Ideas,” in W. E. Grinder (ed.), Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy, Sheed Andrews and McMeel, Kansas City. 55–62.

Lachmann, L. M. 1988. “The Huttian Philosophy,” Managerial and Decision Economics (1986-1998): 13-15.

Lachmann, L. M. 1988. “Speculative Markets and Economic Complexity,” Economic Affairs 8.2: 7–10.

BOOKS

Lachmann, L. M. 1951. Economics as a Social Science. Inaugural Lecture, University of the Witwatersrand, Johannesburg.

Lachmann, L. M. 1970. The Legacy of Max Weber: Three Essays, Heinemann, London.

Lachmann, L. M. 1973. Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-foundations and its Consequences, Institute of Economic Affairs, London.

Lachmann, L. M. 1977. Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. by W. E. Grinder), Sheed Andrews and McMeel, Kansas City.

Lachmann, L. M. 1978. Capital and its Structure, S. Andrews and McMeel, Kansas City.

Lachmann, L. M. 1986. The Market as an Economic Process, B. Blackwell, Oxford, UK and New York.

Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London.

AUDIO




NOTE: The Ludwig von Mises Institute has given permission under the Creative Commons license that this audio presentation of Lachmann can be publicly reposted as long as credit is given to the Mises Institute and other guidelines are followed. More info at: http://creativecommons.org/licenses/by/3.0/us/

My blog Social Democracy for the 21st Century: A Post Keynesian Perspective is in no way endorsed by or affiliated with the Ludwig von Mises Institute, any of its lecturers or staff members.

Wednesday, December 21, 2011

Audio Lecture by Ludwig M. Lachmann

I have just found this talk by Ludwig M. Lachmann, delivered at the Department of Economics at the University of Colorado in the 1970s. Some biographical trivia:
(1) Lachmann obtained a PhD from the University of Berlin, where from 1924 to 1933 he was a graduate student.

(2) Lachmann went to England in 1933, and was at the London School of Economics (LSE) as research assistant to Hayek.

(3) Lachmann went to South Africa in 1948.




Here are some comments:
(1) Lachmann ascribes the Austrian view of time to George L. S. Shackle, which I find interesting.

(2) From 8.31 onwards Lachmann gives what he calls the Austrian view of macroeconomic entities: he says Austrians don’t deny the existence of macroeconomic entities (consumption, investment, etc.). Lachmann objects to the idea that these entities have mechanical effects on each other.

(3) Lachmann (27.44 onwards) notes that Schumpeter was early on affiliated with the Austrian school, but became a Walrasian.

(4) From 43.14 Lachmann describes the victory of Keynesianism at the LSE: by 1939 he and Hayek, he says (perhaps with some exaggeration), were the only Austrians left!

(5) From 44.55, Lachmann refers to the early writings of George L. S. Shackle, and includes these writings as making a contribution to his own work on time.

(6) From 55.38, in response to a question about policies for the macroeconomy, Lachmann explicitly allows government intervention in a depression: he notes that Hayek retreated from his liquidationism of 1932 (“Hayek has now realised that that was wrong,” he says from 56.53). “In a situation in which nothing really is scarce” there can be government intervention to increase employment (56.57). That is very significant, and I have written about it here:
“A Startling Admission from Ludwig Lachmann,” July 11, 2011.

“Ludwig Lachmann on Government Intervention,” July 9, 2011.
Lachmann was a different Austrian from the hordes of modern Austrian anarcho-capitalists. In fact, one gets a wonderful insight into Lachmann’s thinking on this from his Austrian Economics Newsletter (AEN) interview:
“AEN: After you moved to England in 1933 you became a research assistant to Hayek. What type of topics were usually of interest in the famous Hayek-Robbins seminar.

Lachmann: In general, problems of the business cycle and of capital theory. I actually worked on secondary depressions. That is to say, what Hayek first used to call the process of secondary deflation, a word that had been coined by a German economist to denote that part of the process of depression which goes beyond any kind of primary maladjustment. That is to say, that kind of depression that would not be an adjustment process in the Hayekian sense. It was by then (1933) admitted that a depression of this kind could develop and I think everybody admitted that by 1933 the world was in a process of secondary depression.”

Ludwig Lachmann, “An Interview with Ludwig Lachmann,” The Austrian Economics Newsletter, Volume 1, Number 3 (Fall 1978), Mises.org.
When I read this I thought: it’s all falling into place! (as an aside, in the same interview, Lachmann talks of Paul Rosenstein-Rodan’s comments on the role of expectations and the Austrian trade cycle theory).

(7) From 59.14, Lachmann rejects the gold standard for the modern world.

(8) From 1.06.20 Lachmann gives his view on government. He confirms that he was a Classical liberal who supported a minimal state, like Mises, as the institutional foundation of the market. Lachmann sees modern democracy in which voters choose to re-distribute wealth as a problem.

(9) From 1.08.12 onwards, Lachmann argues that Austrian economics is consistent with Popper’s methodology. Lachmann quotes Keynes’s letter to Roy Harrod of 16 July 1938 on the proper method for the social sciences.
Other Resources on Lachmann:
Peter Lewin, “Biography of Ludwig Lachmann (1906-1990): Life and Work,” Mises.org.

Ludwig Lachmann, “An Interview with Ludwig Lachmann,” The Austrian Economics Newsletter, Volume 1, Number 3 (Fall 1978), Mises.org.
I strongly urge people to read the interview with Lachmann.

NOTE: The Ludwig von Mises Institute has given permission under the Creative Commons license that this audio presentation of Lachmann can be publicly reposted as long as credit is given to the Mises Institute and other guidelines are followed. More info at: http://creativecommons.org/licenses/by/3.0/us/

My blog Social Democracy for the 21st Century: A Post Keynesian Perspective is in no way endorsed by or affiliated with the Ludwig von Mises Institute, any of its lecturers or staff members.

Friday, May 17, 2013

Was There an “English Subjectivist School”?

Here is an interesting anecdote from Rothbard on British economists who were influenced by George L. S. Shackle whom Rothbard called the “English Subjectivist School”:
“An amusing but instructive event occurred on the occasion of the conference of American Austrians at Windsor Castle in the summer of 1976. Under the good offices of Professor Stephen C. Littlechild of the University of Birmingham, a kind of summit conference was arranged so that some of the American Misesians could meet the English Subjectivist School, as the Shackleians call themselves. The eminent Subjectivists at the meeting included the doyen of that school, Shackle himself, as well as Terence W. Hutchison, Jack Wiseman, and Brian Loasby. At one point, the Subjectivists were lamenting that they could not offer a program of graduate economics courses as alternatives to the neoclassical paradigm, since all they had produced were a few critical essays but no substantial body of economic theory. I replied in some surprise that there was indeed a great deal of systematic Austrian literature available, including works by Mises, the early Hayek, and my own work, in addition to volumes of Böhm-Bawerk and Frank A. Fetter, among others. The blank looks of incomprehension on the faces of the distinguished Subjectivists were a revelation of the enormous extent of the inherent gulf between Shackleian Subjectivists and Misesians.” (Rothbard 2011: 176–177, n. 21).
So who were these English Subjectivists? Economists in the tradition of Shackle?

Shackle, the so-called doyen of the school, was associated with Post Keynesianism, but the others seem to be regarded as Austrians, e.g., Jack Wiseman (1919–1991), Stephen Littlechild, Terence W. Hutchison, and Brian Loasby.

Rothbard’s “English Subjectivists” are a peculiar group of economists, apparently influenced by Shackle who was linked to Post Keynesianism, but affiliated with the Austrian school. Excepting Shackle, perhaps they are better called “British Austrians.”

Moreover, Rothbard’s idea that they were unfamiliar with the writings of the Austrian school (especially Hayek) is nonsensical.

My final point concerns George L. S. Shackle and Lachmann. Lachmann at one point called Shackle an “Austrian” (Lachmann 1978: 15), even though Shackle was a Keynesian in his policy prescriptions. Some classify Shackle as a hybrid Austrian/Post Keynesian (or someone who drew “Keynesian conclusions from Austrian premises”). But an equally valid question might be: how should Lachmann be classified? I have to admit that Lachmann intrigues me. He is the most interesting Austrian. He was willing to endorse Keynesian stimulus in a depression. Is it possible that some radical subjectivists like Lachmann could be regarded as almost “Keynesian” Austrians?

Links
On Shackle
“Bibliography on George L. S. Shackle,” March 4, 2011.

“Interview with G. L. S. Shackle,” August 2, 2011.

“Shackle on Keynes on Equilibrium,” October 11, 2012.

On Lachmann
“Mises versus Lachmann on Equilibrium Prices,” December 17, 2012

“Caldwell on Lachmann on Equilibrium Prices,” November 6, 2012.

“Lachmann on Hicks on Fixprices,” May 13, 2013.

“Lachmann and Menger on the Law of Demand,” January 20, 2013.

“Ludwig Lachmann on Government Intervention,” July 9, 2011.

“A Startling Admission from Ludwig Lachmann,” July 11, 2011.

“Austrians on Public Works and Fiscal Stimulus,” November 20, 2011.

“Audio Lecture by Ludwig M. Lachmann,” December 21, 2011.

“Ludwig Lachmann: Bibliography and Resources,” December 31, 2011.

“Lachmann Endorsed Keynesian Stimulus in a Depression,” February 8, 2012.

“Who Said this About Austrian Economics?,” July 2, 2012.

“Lachmann and Post Keynesianism on Prices,” August 1, 2012.

Lachmann on Liquidity Preference, October 26, 2012.

“Caldwell on Lachmann on Equilibrium Prices,” November 6, 2012.

Further Reading (Off Site)
Isaac Marmolejo, “Some Comments on Rothbardian Criticism,” The Radical Subjectivist, August 29, 2012.

Isaac Marmolejo, “A Forgotten Austrian: Jack Wiseman,” The Radical Subjectivist, June 16, 2012.


BIBLIOGRAPHY
Lachmann, L. 1978. “An Austrian Stocktaking: Unsettled questions and Tentative Answers,” in L. M. Spadaro (ed.), New Directions in Austrian Economics. Sheed Andrews and McMeel, Kansas City. 1–18.

Rothbard, M. N. 2011. Economic Controversies. Ludwig von Mises Institute, Auburn, Ala.

Friday, October 26, 2012

Lachmann on Liquidity Preference

Ludwig Lachmann wrote this paper in 1937 on liquidity preference:
Lachmann, L. M. 1937. “Uncertainty and Liquidity-Preference,” Economica n.s. 4.15: 295–308.
I began reading this paper and at first remained quite disappointed, for Lachmann (on p. 302) about halfway through his discussion declares that his “attempt to establish a causal relationship between Uncertainty [sic] and liquidity-preference has so far turned out to be a complete failure.”

After this, the paper improves. If uncertainty is defined as the anxiety of the debtor whose debt is due on demand, then uncertainty, says Lachmann, can be the cause of liquidity preference (Lachmann 1937: 302).

Money has as a medium of exchange an indirect utility derived from the goods it can purchase (Lachmann 1937: 303).

Then the following interesting analysis occurs:
“In other respects Money yields direct satisfaction, e.g., in its function of a store of value. But we have already seen that in this respect it has almost as many substitutes as there are (non-perishable) goods, and that it is impossible to predict when it will be used as store of value and when something else. Sometimes the satisfaction derived from its possession will be even more ‘direct’. Moliere’s Harpagon, e.g., derives as much ‘direct satisfaction’ from the contemplation of his hoarded treasures as does the spectator from seeing him on the stage.” (Lachmann 1937: 303–304).
So here we see that the notion that money yields direct utility is not unknown in Austrian economics, and was proposed as early as 1937 by Lachmann.

Lachmann also notes how, in the world of business, demand for money for investment and other business activity essentially means demand for credit, and that many businesses can obtain that credit via negotiable debt instruments, and not high-powered money directly (Lachmann 1937: 306) – which anticipates endogenous money theory.

Lachmann concludes that uncertainty is the cause of liquidity preference (Lachmann 1937: 306).

Postscript
It is a pity that the final two pages of the article (Lachmann 1937: 307–308), where Lachmann discusses liquidity preference and the trade cycle, are disappointing, in that Lachmann’s proposal for dealing with increased liquidity preferences of banks during a recession/depression is to compel “immediate reconstruction [sc. of banks] after the outbreak of a crisis” and to “enforce the early closing of all banks” where reconstruction is not possible (Lachmann 1937: 308). While quick bank “reconstruction” is all well and good, it does not follow that insolvent banks must close (which, I assume, requires mass loss of the money of depositors?). The latter would just exacerbate the crisis.


BIBLIOGRAPHY
Lachmann, L. M. 1937. “Uncertainty and Liquidity-Preference,” Economica n.s. 4.15: 295–308.

Monday, May 13, 2013

Lachmann on Hicks on Fixprices

Sir John Hicks’s book Capital and Growth (Oxford, 1965) has an important discussion of the history of fixprices.

The significance of that discussion is described by the Austrian Ludwig Lachmann in a review of article of Capital and Growth:
“Two other matters of great significance are dealt with in the first part of the book. As others have done before him, Professor Hicks finds it necessary to stress, in his chapter on Marshall’s method, that our world differs from that which Marshall took for granted in that we live in a world of prices ‘administered’ by manufacturers, ‘but in those days even manufactured goods usually passed along a chain of wholesalers and retailers, each of whom was likely to have some independent price-making opportunity.’ (55) Again, like others before him, our author attributes the cause of this change to the virtual disappearance of the wholesale merchant and his price-setting function after 1900. Formerly ‘the initiative would come from the wholesaler or shopkeeper, who would offer higher prices in order to get the goods which, even at the higher price, he could re-sell at a profit. Similarly, when demand fell, it would be the wholesaler who would offer a lower price. The manufacturer would have to accept that price if he could get no better.’ (56) Hence, while Marshall’s was a world of flexible prices, even though not of ‘perfect competition,’ ours is a ‘fixprice world’ with prices set on a ‘cost plus’ basis and wage rates as ultimate price determinants.

The analytical significance of this historical change lies, on the one hand, in the fact that the ‘Temporary Equilibrium Method’ which Hicks himself, following Lindahl, used in Value and Capital in 1939, has lost much of its validity. ‘The fundamental weakness of the Temporary Equilibrium method is the assumption, which it is obliged to make, that the market is in equilibrium—actual demand equals desired demand, actual supply equals desired supply—even in the very short period.’ (76) Hence we have to look for another method of dynamic analysis. To find it we must move nearer to Keynes and his successors who are here given credit for having understood, earlier than others, that a fixprice world requires a fixprice method of analysis.” (Lachmann 1977: 238–239).
Lachmann was well aware of the significance of fixprices, and discussed them in The Market as an Economic Process (Oxford, 1986), pp. 122–136.

Lachmann stated:
“Those who glibly speak of ‘market clearing prices’ tend to forget that over wide areas of modern markets it is not with this purpose in mind that prices are set. They seem unaware of the important insights into the process of price formation, an Austrian responsibility, of which they deprive themselves by clinging to a level of abstraction so high that on it most of what matters in the real world vanishes from sight.” (Lachmann 1986: 134).
Lachmann even concluded that his own fellow Austrians had badly neglected the task of studying real world price formation (Lachmann 1986: 130–131).

That is a failing that most Austrians are guilty of to his day, despite some discussion of the issue in Reisman (1996), pp. 414–417, where Reisman does not consider the implications of cost of production plus profit mark-up pricing for Austrian theories of economic coordination.

Links
“Lachmann and Post Keynesianism on Prices,” August 1, 2012.

“Mises versus Lachmann on Equilibrium Prices,” December 17, 2012.

“Caldwell on Lachmann on Equilibrium Prices,” November 6, 2012.

“Kaldor on Economics without Equilibrium,” March 9, 2013.


BIBLIOGRAPHY
Hicks, John Richard. 1965. Capital and Growth. Oxford University Press, Oxford.

Lachmann, Ludwig M. 1966. “Sir John Hicks on Capital and Growth,” South African Journal of Economics 34: 113–123.

Lachmann, Ludwig M. 1977. Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. Walter E. Grinder). Sheed Andrews and McMeel, Kansas City.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

Reisman, George. 1996. Capitalism: A Treatise on Economics. Jameson Books, Ottawa, Ill. and Chicago.

Tuesday, December 27, 2011

Hayek’s Natural Rate on Capital Goods, Sraffa and ABCT

Consider this passage from Hayek’s Prices and Production (2nd edn.; 1935):
“Put concisely, Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks.

Now, so long as the money rate of interest coincides with the equilibrium rate, the rate of interest remains “neutral” in its effects on the prices of goods, tending neither to raise nor to lower them. When the banks, however, lower the money rate of interest below the equilibrium rate, which they can do by lending more than has been entrusted to them, i.e., by adding to the circulation, this must tend to raise prices; …” (Hayek 2008 [1935]: 215).
This passage illustrates a fundamental reason why Sraffa’s critique of Hayek was so important. In Sraffa’s analysis of Hayek’s theory, we see that
(1) the relevant market for the “demand for and the supply of capital” is the market for capital goods. Depending on how one defines “saving” (see Pollin 2003: 304–308) and “investment,” the demand for capital that is met results in investment (if savings is defined simply as “income not spent,” savings can exceed investment when money or even goods are held without lending for capital goods investment).

(2) By the words
“because the demand for and the supply of capital do not meet in their natural form but in the form of money,”
Hayek is referring to the idea of loans being made in natura (in real commodities), as opposed to in money terms.

(3) A state where loans are made in in natura is a barter state (or, more correctly, a credit/debt transaction where real goods are lent out and repayed with interest with some other goods later). What would a rate of interest be when loans are made in goods? The rate of interest would be the rate on loans of a physical commodity or commodities (Sraffa 1932: 49–51). In a world of heterogeneous goods as factor inputs (including capital goods) which is out of equilibrium, there could be as many natural rates on each commodity considered as a factor input (or capital good) as there as such commodities (Barens and Caspari 1997: 288).

(4) Which one of these rates would in fact be the “natural rate”? There is no unique natural rate, but multiple rates. Any monetary rate could be both above and below a number of multiple natural rates, or, as Lachmann stated, “it is evidently possible for the money rate of interest to be lower than some [sc. multitude of commodity rates] but higher than others” (Lachmann 1994: 154). In short, one should agree with Robert P. Murphy, who concludes that “canonical ABCT does need to be updated, in light of a crippling objection raised early on by Piero Sraffa (1932a, 1932b) [my emphasis]” (see “Multiple Interest Rates and Austrian Business Cycle Theory,” p. 1).

(5) It therefore makes no sense to speak of a monetary rate of interest diverging from the unique Wicksellian natural rate of interest (or what Hayek calls the equilibrium rate), because there is no such rate outside of an imaginary equilibrium position.

(6) If some average of multiple natural rates were constructed, would this get Hayek out of his conundrum? No. As Sraffa argued,
“I pointed out that only under conditions of equilibrium would there be a single rate; and that when saving was in progress there would at any one moment be many ‘natural’ rates, possibly as many as there are commodities; so that it would be not merely difficult in practice, but altogether inconceivable, that the money rate should be equal to ‘the’ natural rate. And whilst Wicksell might fall back, for the criterion of his ‘money’ rate, upon an average of the ‘natural’ rates weighted in the same way as the index number of prices which he chose to stabilise, this way of escape was not open to Dr. Hayek, for he had emphatically repudiated the use of averages. Dr. Hayek now acknowledges the multiplicity of the ‘natural’ rates, but he has nothing more to say on this specific point than that they ‘all would be equilibrium rates.’ The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates.” (Sraffa 1932b: 251).
Lachmann also noted that Wicksell’s natural rate could be interpreted as an average of actual own-rates in a barter economy (Lachmann 1978: 76–77), and later tried to defend the natural rate idea.

For Lachmann’s attempts to salvage the notion of a natural rate, see Lachmann (1978: 75–77) and Lachmann (1986: 225–242). See Robert P. Murphy (2003) and Murphy’s paper “Multiple Interest Rates and Austrian Business Cycle Theory” for why Lachmann’s solution does not work.
BIBLIOGRAPHY

Barens, I. and V. Caspari, 1997. “Own-Rates of Interest and Their Relevance for the Existence of Underemployment Equilibrium Positions,” in G. C. Harcourt and P. A. Riach (eds.), A “Second Edition” of The General Theory (Vol. 1), Routledge, London. 283–303.

Hayek, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249.

Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala.

Lachmann, L. M. 1978. Capital and its Structure, S. Andrews and McMeel, Kansas City. pp. 75–77.

Lachmann, L. M. 1986. “Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect,” in W. Grassl and B. Smith (eds.), Austrian Economics: Historical and Philosophical Background, Croom Helm, London. 225–242. [reprinted in Lachmann 1994: 141–158.]

Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London. 141–158.

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”

Pollin, R. 2003. “Saving,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, Edward Elgar, Cheltenham, UK and Northhampton, MA, USA. 304–308.

Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.


UPDATED BIBLIOGRAPHY ON THE HAYEK–SRAFFA DEBATE

Barens, I. and V. Caspari, 1997. “Own-Rates of Interest and Their Relevance for the Existence of Underemployment Equilibrium Positions,” in G. C. Harcourt and P. A. Riach (eds.), A “Second Edition” of The General Theory (Vol. 1), Routledge, London. 283–303.

Bellofiore, R. 1998. “Between Wicksell and Hayek: Mises’ Theory of Money and Credit Revisited,” American Journal of Economics and Sociology 57.4: 531–578.

Burger, P. 2003. Sustainable Fiscal Policy and Economic Stability: Theory and Practice, Edward Elgar, Cheltenham, UK.

Caldwell, B. 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek, University of Chicago Press, Chicago and London.

Cottrell, A. 1993. “Hayek’s Early Cycle Theory Re-examined,” Cambridge Journal of Economics 18: 197–212.

Harcourt, G. C. and P. A. Riach. 1997. A “Second Edition” of The General Theory (Vol. 1), Routledge, London.

Hayek, F. A. von, 1931. Prices and Production, G. Routledge & Sons, Ltd, London.

Hayek, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249.

Hayek, F. A. von, 1935. Prices and Production (2nd edn), Routledge and Kegan Paul.

Hicks, J. R. and J. C. Gilbert. 1934. Review of Beiträge zur Geldtheorie by F. A. von Hayek, Economica n.s. 1.4: 479–486.

Kurz, H. D. 2000. “Hayek-Keynes-Sraffa Controversy Reconsidered,” in H. D. Kurz (ed.), Critical Essays on Piero Sraffa’s Legacy in Economics, Cambridge University Press, Cambridge. 257-302.

Kyun, K. 1988. Equilibrium Business Cycle Theory in Historical Perspective Cambridge University Press, Cambridge. p. 36ff.

Lachmann, L. M. 1978. Capital and its Structure, S. Andrews and McMeel, Kansas City. pp. 75–77.

Lachmann, L. M. 1986. “Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect,” in W. Grassl and B. Smith (eds.), Austrian Economics: Historical and Philosophical Background, Croom Helm, London. 225–242. [reprinted in Lachmann 1994: 141–158.]

Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London. 141–158.

Lawlor, M. S. and Horn, B. 1992. “Notes on the Hayek–Sraffa Exchange,” Review of Political Economy 4: 317–340.

Lawlor, M. S. 1994. “The Own-Rates Framework as an Interpretation of the General Theory: A Suggestion for Complicating the Keynesian Theory of Money,” in J. B. Davis (ed.), The State of Interpretation of Keynes, Kluwer Academic, Boston and London. 39–90.

Milgate, M. 1979. “On the Origin of the Notion of ‘Intertemporal Equilibrium,’” Economica n.s. 46.181: 1–10.

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”

Myrdal, G. 1965 [1939]. Monetary Equilibrium, Augustus M. Kelly, New York.

Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

Wednesday, February 5, 2014

Austrians and their Incoherent Views on Administered Prices

Of the very few writings by Austrian economists or those heavily influenced by Austrian economics that mention (or supposedly mention) the concept of administered prices/mark-up prices, one can list the following:
(1) Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala. pp. 163–164.

(2) Rothbard, Murray N. 1959. “The Bogey of ‘Administered Prices,’” The Freeman 39–41.
http://www.fee.org/the_freeman/detail/the-bogey-of-administered-prices#axzz2s3nbZRZX

Rothbard, M. N. 2009 [1962]. Man, Economy, and State, The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala. 662–664.

(3) Hazlitt, Henry. 1965. What You Should Know About Inflation (2nd edn.). D. Van Nostrand Company Inc. London and New York. 88–90.

(4) Howard, Irving E. 1966. “Will the Real Price Administrator Please Stand Up!,” The Freeman April 1: 46–50.
http://www.fee.org/the_freeman/detail/will-the-real-price-administrator-please-stand-up#axzz2s3nbZRZX

(5) Poirot, Paul L. 1971. “Cost-Plus Pricing,” The Freeman, January 1: 48–50.
http://www.fee.org/the_freeman/detail/cost-plus-pricing#axzz2s3nbZRZX

(6) Greaves, Bettina B. 1984. Free Market Economics: A Syllabus. Foundation for Economic Education, Irvington-on-Hudson, NY.

(7) Shapiro, Milton M. 1985. Foundations of the Market Price System. University Press of America, Inc. Lanham, MD and London. 365–366.

(8) Lachmann, Ludwig M. 1977. Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. Walter E. Grinder). Sheed Andrews and McMeel, Kansas City. 238–239.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford. 134.

Lachmann, L. M. 1994. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” in D. Lavoie (ed.), Expectations and the Meaning of Institutions: Essays in Economics. Routledge, London. 159–178, at 165–166.

(9) Reisman, George. 1996. Capitalism: A Treatise on Economics. Jameson Books, Ottawa, Ill. and Chicago. 167–169, 200–201, 414–417.
For reasons explained here, Mises (2009 [1953]: 163–164) is neither a description of mark-up pricing nor a refutation of it.

Rothbard (1959: 39–41; 2009 [1962]: 662–664), Hazlitt (1965: 88–90), Howard (1966), Poirot (1971), Greaves (1984), and Shapiro (1985: 365–366) simply constitute unconvincing denials that any such thing as “administered pricing” even exist, and even worse do not even show basic understanding of the doctrine.

But, by the time we come to Lachmann (1977: 238–239; 1986: 134; 1994: 165–166) and Reisman (1996: 167–169, 200–201, 414–417) suddenly there is an embarrassing volte face: now administered pricing and cost-plus pricing is acknowledged as a reality and not only that but also a significant part of the price systems of modern market economies.

So which is it?

It is absurd for any Austrian to say that “Austrians have refuted the existence of administered pricing,” because two major Austrian economists have frankly admitted their existence and economic significance.

Yet another confusion about what Austrians think about administered prices stems from George Reisman’s Capitalism: A Treatise on Economics (1996), where administered prices are mentioned on p. 417 in a context that suggests that Böhm-Bawerk somehow anticipated the doctrine, when he did not.

Further Reading
“Lachmann and Post Keynesianism on Prices,” August 1, 2012.

“Caldwell on Lachmann on Equilibrium Prices,” November 6, 2012.

“Mises versus Lachmann on Equilibrium Prices,” December 17, 2012.

“Do Modern Austrians ever Read Lachmann?,” October 13, 2013.

“Böhm-Bawerk had No Theory of Administered Prices,” November 10, 2013.

“Does this Passage show that Mises understood Mark-up Pricing?,” February 1, 2014.

“Rothbard’s Non-Refutation of Administered Prices,” February 1, 2014.


BIBLIOGRAPHY
Greaves, Bettina B. 1984. Free Market Economics: A Syllabus. Foundation for Economic Education, Irvington-on-Hudson, NY.

Howard, Irving E. 1966. “Will the Real Price Administrator Please Stand Up!,” The Freeman April 1: 46–50.
http://www.fee.org/the_freeman/detail/will-the-real-price-administrator-please-stand-up#axzz2s3nbZRZX

Lachmann, Ludwig M. 1977. Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. Walter E. Grinder). Sheed Andrews and McMeel, Kansas City.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

Lachmann, L. M. 1994. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” in D. Lavoie (ed.), Expectations and the Meaning of Institutions: Essays in Economics. Routledge, London. 159–178.

Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala.

Poirot, Paul L. 1971. “Cost-Plus Pricing,” The Freeman, January 1: 48–50.
http://www.fee.org/the_freeman/detail/cost-plus-pricing#axzz2s3nbZRZX

Rothbard, Murray N. 1959. “The Bogey of ‘Administered Prices,’” The Freeman 39–41.
http://www.fee.org/the_freeman/detail/the-bogey-of-administered-prices#axzz2s3nbZRZX

Rothbard, M. N. 2009 [1962]. Man, Economy, and State, The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Shapiro, Milton M. 1985. Foundations of the Market Price System. University Press of America, Inc. Lanham, MD and London.

Saturday, January 28, 2012

Equilibrium Amongst the Austrians

When Schumpeter published his first major work Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (Leipzig, 1908), the influence of Walrasian general equilibrium theory was apparent. Schumpeter accepted the existence of general equilibrium states, and the alleged long-term tendency to Walrasian general equilibrium. It should also be noted that Schumpeter’s “circular-flow model” is a kind of general equilibrium, basically in a stationary state.

Yet, of course, Schumpeter was not technically an Austrian: he may have studied under Eugen von Böhm-Bawerk (and obtained a PhD in 1906), but was converted to the rival neoclassical Walrasian school.

In fact, it is notable that the Austrian Hans Mayer (a student of Wieser) attacked Schumpeter’s first major work for making general equilibrium a real state (Shionoya 1997: 157; Mayer 1911).

But other Austrians were soon lost to the Walrasian equilibrium tradition. Hayek before 1936 is also best seen as a neoclassical equilibrium theorist (Gloria-Palermo 1999: 75; McCloughry 1984: viii; cf. Arena 2003: 316). In fact, 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). But Hayek’s Austrian trade cycle theory is an equilibrium theory that falls apart once equilibrium is seen to be unsound, and this is why Hayek essentially abandoned his trade cycle work after about 1940.

B. Tieben (2009: 264) has noted the divisions within the Austrian school on the issue of equilibrium. In my view, there are two broad traditions:
(1) Mises and Rothbard held that actual equilibrium states do not exist, but accepted a long term tendency to general equilibrium, even if the state was never attained, and Mises’s Evenly Rotating Economy (ERE) was a purely imaginary state.

(2) By contrast, Ludwig Lachmann criticised Mises for the view that there is a tendency towards general equilibrium, and Lachmann concluded that the economy is an on-going, open-ended “market process” with subjective knowledge and subjective expectations. Other Austrians influenced by Lachmann (e.g., Boettke, Horwitz, and Prychitko) adopt the idea of a market economy as an open-ended, evolutionary process, or “evolutionary ordering process” (Tieben 2009: 264).
This is clearly seen in a passage from 1976 article by Lachmann:
“Professor Hayek and Mises both espouse the market process, but do not ignore equilibrium as its final stage. The former, whose early work was clearly under the influence of the general equilibrium model, at one time appeared to regard a strong tendency towards general equilibrium as a real phenomenon of the market economy. Mises, calling the Austrians ‘logical’ and neoclassicals ‘mathematical’ economists, wrote: ‘Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease’ ... It is this view of the market process as at least potentially terminating in a state of long-run general equilibrium that now appears to require revision.”
In a kaleidic society the equilibrating forces, operating slowly, especially where much of the capital equipment is durable and specific, are always overtaken by unexpected change before they have done their work, and the results of their operation disrupted before they can bear fruit. Restless asset markets, redistributing wealth every day by engendering capital gains and losses, are just one instance, though in a market economy an important one, of the forces of change thwarting the equilibrating forces. Equilibrium of the economic system as a whole will thus never be reached. Marshallian markets for individual goods may for a time find their respective equilibria. The economic system never does. What emerges from our reflections is an image of the market as a particular kind of process, a continuous process without beginning or end, propelled by the interaction between the forces of equilibrium and the forces of change. General equilibrium theory only knows interaction between the former.” (Lachmann 1976: 60-61).
By these words, it appears Lachmann is saying that there is no tendency towards general equilibrium in a market economy.

Other Austrians invoke the concept of pattern/plan co-ordination as an alternative to equilibrium (e.g., the later Hayek, Rizzo and O’Driscoll), while those who follow Lachmann (the radical subjectivist tradition) would probably hold that there is no reliable, long term tendency to pattern/plan co-ordination or full employment “equilibrium” in a free market economy.

Indeed, the Austrian school is itself split between the Lachmann-wing and the moderate subjectivists. The latter have not properly dealt with the consequences of radical uncertainty and subjective expectations:
“Kirzner initially saw his project as improving neoclassical economics and providing a ‘story’ as to how markets adjust, whereas the kaleidic Lachmann-inspired wing (including Shackle and Loasby) seems to have been reaching out to Post keynesians such as Davidson. Indeed, in their debate with Davidson … both Prychitko (1993) and Torr (1993) acknowledged the tension between the kaleidic wing of Lachmann, Shackle and Boulding, with their stress on divergent and disequilibrating expectations, and the more dominant, market-as-an-equilibrating-process axis of Mises, Hayek and Kirzner” (Dunn 2008: 136).
BIBLIOGRAPHY

Arena, R. 2003. “Beliefs, Knowledge and Equilibrium: A Different Perspective on Hayek,” in S. Rizzello (ed.), Cognitive Developments in Economics, Routledge, London and New York. 316–337.

Dunn, S. P. 2008. The ‘Uncertain’ Foundations of Post Keynesian Economics, Routledge, London.

Gloria-Palermo, S. 1999. The Evolution of Austrian Economics: From Menger to Lachmann, Routledge, London and New York.

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

Lachmann, Ludwig M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54–62.

McCloughry, R. 1984. “Editor’s Introduction,” in F. A. von Hayek, Money, Capital & Fluctuations: Early Essays (ed. by R. McCloughry), Routledge & Kegan Paul, London. vii–x

Mayer, H. 1911. “Eine neue Grundlegung der theoretischen Nationalökonomie,” Zeitschrift für Volkswirtschaft Sozialpolitik und Verwaltung 20: 181ff.

Schumpeter, J. A. 1908. Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, Duncker & Humblot, Leipzig.

Shionoya, Y. 1997. Schumpeter and the Idea of Social Sciences, Cambridge University Press, Cambridge.

Tieben, B. 2009. The Concept of Equilibrium in Different Economic Traditions: A Historical Investigation, PhD Thesis, Tinbergen Institute.

Monday, December 17, 2012

Mises versus Lachmann on Equilibrium Prices

Here is Mises on equilibrium prices:
“The characteristic feature of the market price is that it equalizes supply and demand. The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy. The notion of the plain state of rest as developed by the elementary theory of prices is a faithful description of what comes to pass in the market at every instant. Any deviation of a market price from the height at which supply and demand are equal is – in the unhampered market – self-liquidating.” (Mises 2008: 756–757).
This is a strident statement, and not just limited to Mises’s entirely fictitious evenly rotating economy (ERE), for Mises invokes the “plain state of rest,” a temporary state in which all desired transactions are completed and no further trades are conducted (e.g., the end of a trading day in the stock market).

For Mises, the “unhampered market” would produce prices caused by the dynamics of supply and demand curves, and deviations would lead to self-liquidation and market-clearing prices.

Yet even this vision is little more than ideological fantasy. Even in undergraduate economic classes, students will usually learn that the law of demand cannot really be universal, for Veblen goods and Giffen goods (perhaps often perceived as anomalies) already rule out an absolutely universal law of demand. And, even if government “distortions” could be eliminated, what about businesses that engage in price setting/price administration?

Prices set by businesses are not equilibrium prices. As Lee says, “administered prices are not market-clearing prices and nor do they vary with each change in sales (or shift in the virtually non-existent market or enterprises ‘demand curve’)” (Lee 1994: 320, n. 18).

Matters are different when we turn from Mises to Ludwig Lachmann, who did indeed understand the existence of fixprice markets. First, an anecdote Bruce Caldwell tells about Lachmann is quite instructive:
“I first met Ludwig M. Lachmann on February 4, 1982 at the first spring semester meeting of the Colloquium in Austrian Economics at New York University. ….

During that first meeting I had an exchange with Mario Rizzo about the concept of market-clearing. I argued that though the speed of adjustment problem was an empirical issue, it was not something that could be tested as a general proposition. I drew the implication that one’s view of the rapidity of clearing was a matter of faith, nothing more than a metaphysical assumption, though obviously a crucial one. Lachmann nodded his head vigorously as I was finishing up, which pleased me immensely.” (Caldwell 1991: 140).
Secondly, Lachmann’s own judgement on the usefulness of equilibrium prices:
“Those who glibly speak of ‘market clearing prices’ tend to forget that over wide areas of modern markets it is not with this purpose in mind that prices are set. They seem unaware of the important insights into the process of price formation, an Austrian responsibility, of which they deprive themselves by clinging to a level of abstraction so high that on it most of what matters in the real world vanishes from sight.” (Lachmann 1986: 134).
This is yet another divergence between Lachmann’s brand of Austrian theory and the other branches of Austrian economics.


BIBLIOGRAPHY

Caldwell, Bruce J. 1991. “Ludwig M. Lachmann: A Reminiscence,” Critical Review 5.1: 139–144.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

Lee, F. S. 1994. “From Post Keynesian to Historical Price Theory, Part 1: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.

Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.

Monday, July 2, 2012

Who Said this About Austrian Economics?

Who said this?:
“For Austrian economists the third quarter of the … [sc. 20th century] was a bad time. To those who lived through them these were years in the wilderness. It is often thought that this eclipse of Austrian fortunes was brought about by the ‘Keynesian revolution’, but in fact this was only one of the misfortunes that befell Austrian economics in the 1930s, a decade of calamity. The promise of an Austrian theory of the trade cycle, which might also serve to explain the severity of the Great Depression, a feature of the early 1930s that provided the background for Hayek’s successful appearance on the London scene, soon proved deceptive. Three giants – Keynes, Knight and Sraffa – turned against the hapless Austrians who, in the middle of that black decade, thus had to do battle on three fronts. Naturally it proved a task beyond their strength.”
Was it some “evil” Keynesian?

The author held that the promise of the Austrian business cycle theory was “deceptive.” Also, that Austrians in the 1930s failed to meet the challenge of Keynes, Sraffa and Frank Knight.

Curiously, it was none other than Ludwig M. Lachmann, in The Market as an Economic Process (Oxford, 1986), p. ix of his preface.

I am in the process of reading this book, and it looks like interesting reading indeed, not just because of Lachmann’s view that there is no tendency to general equilibrium in market systems, but because, by the end of the book, Lachmann appears to be endorsing the Post Keynesian theory of markup pricing (or what he calls “fixprice” [Lachmann 1986: 132]) in certain markets:
“... in our world the flexprice type prevails in financial asset markets and those for raw materials, industrial and agricultural, while in modern industry, except in secondhand markets, the fixprice type predominates.” (Lachmann 1986: 132).
Lachmann is even willing to say that the concept of “market clearing prices” does not really apply to many markets where fixprices are set for other reasons (p. 134), and finds Austrian economics wanting for its failure to study markup prices or fixprices (Lachmann 1986: 130-131).

Further Reading

If you cannot get hold of Lachmann’s The Market as an Economic Process, one can read the following to get an overwiew:
Jonathan Finegold Catalán, “Notes to Lachmann’s ‘The Market as an Economic Process,’” Economic Thought, 21 April, 2012.
A set of reviews of the chapters by Jonathan Finegold Catalán.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York. pp. 157-160.
A short but useful overview of the book by Vaughn.
BIBLIOGRAPHY

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

Wednesday, September 18, 2013

Lachmann on Speculative Markets and Economic Complexity

Ludwig Lachmann’s article “Speculative Markets and Economic Complexity” (1988) was written in the wake of the US stock market crash of 1987, and was meant to be defence of the market order. Lachmann, an Austrian economist, takes aim at those who stress “financial fragility,” a reference which was perhaps aimed at Hyman Minsky and his theories.

Lachmann divides markets into (1) ordinary markets and (2) speculative markets (Lachmann 1988: 7). In the “ordinary markets,” Lachmann sees a certain stability that is the result of underlying patterns of supply and demand, and the tendency for expectations to converge (Lachmann 1988: 7–8).

By contrast, speculative markets have an instability owing to the way in which market participants can quickly switch from being bears to bulls, and how “divergent expectations” are the very essence of such “speculative markets” (Lachmann 1988: 8). The latter is a crucial point because general equilibrium theory is dependent on the idea that expectations convergence over time, but that is not possible in speculative markets where, as in other areas of economic life, the future is unknowable. This is why speculative markets create a destabilising element in capitalist systems.

Strangely, while trying to defend markets, Lachmann ends up undermining the case for them in this article.

BIBLIOGRAPHY
Lachmann, L. M. 1988. “Speculative Markets and Economic Complexity,” Economic Affairs 8.2: 7–10.

Saturday, July 9, 2011

Ludwig Lachmann on Government Intervention

I have recently read this interesting passage in a book by Gene Callahan:
“Because of his focus on uncertainty, Lachmann came to doubt that, in a laissez-faire society, entrepreneurs would be able to achieve any consistent meshing of their plans. The economy, instead of possessing a tendency toward equilibrium, was instead likely to careen out of control at any time. Lachmann thought that the government had a role to play in stabilizing the economic system and increasing the coordination of entrepreneurial plans. We call his position ‘intervention for stability.’” (Callahan 2004: 293).
The question immediately arises: what government interventions did Lachmann support?

I have yet to find passages in Lachmann’s writings that support government interventions “for stability.” Lachmann appears to have accepted a small state, as in Mises’s Classical liberal conception of government:
“[sc. Lachmann thought that] … government intervention in economic affairs should be minimal. The role of government should be as circumscribed as possible and conform to the classical liberal ideal of supporting the free market by strengthening the institutions of private property and voluntary business contract.” (Grinder 1977: 22).
Perhaps Lachmann’s idea of interventions for stability refers to the admission by some Austrians that an economy can suffer a “secondary deflation” that will plunge it into unnecessary suffering, and that some kind of monetary stabilisation is required.

This appears to have been Hayek’s position late in life, as he retreated from his liquidationist extremism:
“Although I do not regard deflation as the original cause of a decline in business activity [sc. after 1929], 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).
In saying this, Hayek presumably would have accepted a monetarist solution of stabilizing the money supply by open market operations and other interventions.

The effects of “secondary deflation” are also acknowledged by Roger Garrison:
“Deflation caused by a severe monetary contraction is another matter. Strong downward pressures on prices in general put undue burdens on market mechanisms. Unless, implausibly, all prices and wages adjust instantaneously to the lower money supply, output levels will fall. Monetary contraction could be the root cause of a downturn - as, for instance, it seems to have been in the 1936–7 episode in the USA. The Federal Reserve, failing to understand the significance of the excess reserves held by commercial banks, dramatically increased reserve requirements, causing the money supply to plummet as banks rebuilt their cushion of free reserves. But what caused the money supply to fall at the end of the 1920s boom? The monetarists attribute the monetary contraction to the inherent ineptness of the central bank or to the central bank’s (ill-conceived) attempt to end the speculative orgy in the stock market, an orgy that itself goes unexplained. In the context of Austrian business cycle theory, the collapse in the money supply is a complicating factor rather than the root cause of the downturn. In 1929, when the economy was in the final throes of a credit-induced boom, the Federal Reserve, uncertain about just what to do and hampered by internal conflict, allowed the money supply to collapse. The negative monetary growth during the period 1929 to 1933 helps to account for the unprecedented depth of the depression.” (Garrison 2005: 515).

“The problem of policy-induced intertemporal discoordination can easily get compounded by a loss of business confidence and/or by a collapse of the banking system. These complicating factors can cause the economy to suffer a general economic contraction.” (Garrison 2002: 249).
A more interesting admission is made by Jesus Huerta de Soto:
“As Austrian economists in general and Mises in particular demonstrated as early as 1928, in the specific event that idle resources and unemployment are widespread, entrepreneurs, relying on new loans, may continue to lengthen the productive structure without provoking the familiar reversion effects, until the moment one of the complementary factors in the production process becomes scarce.66 At the very least, this fact shows Keynes’s so-called general theory to be, in the best case, a particular theory, applicable only when the economy is in the deepest stages of a depression with generalized idle capacity in all sectors.”67
….
66 Mises, On the Manipulation of Money and Credit, p. 125 (p. 49 of Geldwertstabilisierung und Konjunkturpolitik, the German edition).

67 For Roger Garrison, the true general theory is that of the Austrians and “Keynesian theory [we would also say monetarist theory] becomes a special case of Austrian theory.” See Garrison, Time and Money, p. 250.

(Huerta de Soto 2006: 553).
Of course, Huerta de Soto then goes on to deny that government intervention will work in such circumstances, but the concession that he attributes to Garrison - that Keynes’ theory might work “when the economy is in the deepest stages of a depression with generalized idle capacity in all sectors” - is quite an admission. What else was the Great Depression?

To return to Lachmann, I am curious to know if other people have read anything of Lachmann’s arguments for government interventions “for stability.”


BIBLIOGRAPHY

Callahan, G. 2004. Economics for Real People: An Introduction to the Austrian School (2nd edn), Ludwig von Mises Institute, Auburn, Ala.

Garrison, R. W. 2002. Time and Money: The Macroeconomics of Capital Structure, Routledge, London.

Garrison, R. W. 2005. “The Austrian School,” in B. Snowdon and H. R. Vane (eds), Modern Macroeconomics: Its Origins, Development and Current State, Edward Elgar, Cheltenham.

Grinder, W. E. 1977. “In Pursuit of the Subjective Paradigm” [Introduction], in L. M. Lachmann, Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. by W. E. Grinder), Sheed Andrews and McMeel, Kansas City.

Huerta de Soto, J. 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala.

Thursday, December 13, 2012

Critics of the Classic Hayekian Business Cycle Theory

Daniel Kuehn raises the question of who the major critics of the Hayekian business cycle theory were (or are).

My list:
(1) Piero Sraffa:
He was really the first and possibly the most important in these articles:
Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932. “A Rejoinder,” Economic Journal 42 (June): 249–251.
See also:
Kurz, H. D. 2000. “Hayek-Keynes-Sraffa Controversy Reconsidered,” in H. D. Kurz (ed.), Critical Essays on Piero Sraffa’s Legacy in Economics. Cambridge University Press, Cambridge. 257-302.

Lawlor, M. S. and Horn, B. 1992. “Notes on the Hayek-Sraffa exchange,” Review of Political Economy 4: 317–340.

Lachmann, L. M. 1986. “Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect,” in W. Grassl and B. Smith (eds.), Austrian Economics: Historical and Philosophical Background, Croom Helm, London. 225–242.
(2) Karl Gunnar Myrdal:
Myrdal, G. 1933. “Der Gleichgewichtsbegriff als Instrument der geld-theoretischen Analyse,” in F. A. Hayek (ed.), Beitrage zur Geldtheorie, Vienna. 361–487.
(3) Paul Rosenstein-Rodan:
However, I don’t think his criticisms were ever published (I could be wrong), but were certainly conveyed to Ludwig Lachmann in conversations in the 1930s as reported in this Austrian Economics Newsletter (AEN) (an interview with Lachmann):
“AEN: You have talked a number of times about the importance of expectations in business cycle theory. What first drew your interest to expectations as far as the business cycle question was concerned.

Lachmann: Talking to Paul Rosenstein-Rodan, who was then a lecturer at University College, London – not technically in the London School of Economics – but he gave a course on the history of economic thought to which all of us who were research students then went.
It was Rosenstein-Rodan who in discussing Austrian trade cycle theory with me said, ‘Ah yes, but whatever happens in the business cycle is in the first place determined by expectations.’ And then he told me of the work that had been done in Sweden.”
Ludwig Lachmann, “An Interview with Ludwig Lachmann,” The Austrian Economics Newsletter, Volume 1, Number 3 (Fall 1978), Mises.org.
http://mises.org/journals/aen/lachmann.asp
Rosenstein-Rodan was possibly referring to Gunnar Myrdal’s work listed in (2) above.

(4) John Maynard Keynes:
Keynes’s criticisms were in a response to Hayek’s review of his earlier work, and mostly in his private correspondence with Hayek:
Keynes, J. M. 1931. “The Pure Theory of Money. A Reply to Dr. Hayek,” Economica 34 (November): 387–397.

Ingrao, B. 2005. “When the Abyss Yawns and After. The Correspondence between Keynes and Hayek,” in M. C. Marcuzzo and A. Roselli (eds.), Economists in Cambridge. A Study Through their Correspondence, 1907–1946. Routledge, London. 236-256.

Ingrao, B. and F. Ranchetti. 2005. “Hayek and Cambridge: Dialogue and Contention,” in M. C. Marcuzzo and A. Roselli (eds.), Economists in Cambridge. A Study Through their Correspondence, 1907–1946. Routledge, London. 392-413.

Moggridge, D. (ed.). 1973. The Collected Writings of John Maynard Keynes (vol. 13). Macmillan for the Royal Economic Society, London.
It was in Keynes (1931) that he delivered his rather harsh verdict on Prices and Production:
“The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45 … It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam.” (Keynes 1931: 394).
(5) Ludwig M. Lachmann:
Lachmann, L. M. 1943. “The Role of Expectations in Economics as a Social Science,” Economica n.s. 10.37: 12–23.
(6) Frank H. Knight:
Knight, Frank H. 1935. “Professor Hayek and the Theory of Investment,” Economic Journal 45.177 (March): 77-94.
Here is one of Hayek’s responses to Knight:
Hayek, F. A. von. 1936. “The Mythology of Capital,” Quarterly Journal of Economics 50.2: 199-228.
See also:
Boettke, P. and K. Vaughn. 2002. “Knight and the Austrians on Capital and the Problem of Socialism,” History of Political Economy 34: 155–176.

Cohen, A. J. 2003. “Hayek/Knight Capital Controversy: The Irrelevance of Roundaboutness, or Purging Processes in Time?,” History of Political Economy 35.3: 469-490.
(7) Nicholas Kaldor:
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.
(8) George L. S. Shackle:
Shackle, George L. S. 1981. “F. A. Hayek, 1899– ,” in D. P. O’Brien and J. R. Presley (eds.), Pioneers of Modern Economics in Britain. Macmillan, London. 234–261, at p. 240.
(9) Gottfried von Haberler:
Haberler, G. 1986. “Reflections on Hayek’s Business Cycle Theory,” Cato Journal 6: 421–435.

Reprinted in Haberler, G. 1991. “Reflections on Hayek’s Business Cycle Theory,” in John Cunningham Wood and Ronald N. Woods (eds.), Friedrich A. Hayek: Critical Assessments (vol. 4). Routledge, London. 249–262.
(10) Gordon Tullock:
Tullock, G. 1988. “Why the Austrians are Wrong About Depressions,” The Review of Austrian Economics 2: 73–78.
(11) David Ramsay Steele
His views (quite insightful) are described in this comment:
http://consultingbyrpm.com/blog/2012/05/federal-government-outlays-and-receipts-as-of-nominal-gdp.html#comment-39021
I am not certain, but there may be some more discussion of the ABCT in David Ramsay Steele’s book From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (Open Court, La Salle, Ill., 1992).

(12) Allin Cottrel:
Cottrell, A. 1993. “Hayek’s Early Cycle Theory Re-examined,” Cambridge Journal of Economics 18: 197–212.
(13) Ulrich Witt:
Witt, U. 1997. “The Hayekian Puzzle: Spontaneous Order and the Business Cycle,” Scottish Journal of Political Economy 44: 44–58.
(14) Tyler Cowen:
Cowen, Tyler. 1997. Risk and Business Cycles: New and Old Austrian Perspectives. Routledge, London.
(15) Robert P. Murphy:
Although I suppose Murphy sees himself as a defender of the ABCT, nevertheless his work here is nothing but a critique of the classic Hayekian theory (where Hayek uses the Wicksellian natural rate of interest):
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
(16) Robert L. Vienneau:
Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921183

Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671886
A very good work on this issue is Constatinos Repapis, “Hayek’s Business Cycle Theory during the 1930s: A Critical Account of its Development,” History of Political Economy 43 (2011): 699–742.

The list above is far from complete. I may update it after further thought.

In addition, here are some criticisms of Mises’s version of the ABCT:
Vasséi, Arash Molavi. 2010. “Ludwig von Mises's Business Cycle Theory: Static Tools for Dynamic Analysis,” in Harald Hagemann, Tamotsu Nishizawa, Yukihiro Ikeda (eds.). Austrian Economics in Transition: From Carl Menger to Friedrich Hayek. Palgrave Macmillan, Basingstoke. 196–217.

Vasséi, Arash Molavi. 2010. “The Foundation of Ludwig von Mises’s Business Cycle Theory: Real Analysis as a Chain of Tautologies,” SSRN paper, June 5, 2012.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2077604

Friday, December 6, 2013

Critics of the Classic Hayekian Business Cycle Theory (Updated)

This list is updated in light of Kuehn (2013), a great overview of the subject.

My list:
(1) Piero Sraffa:
He was really the first and possibly the most important in these articles:
Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932. “A Rejoinder,” Economic Journal 42 (June): 249–251.
See also:
Kurz, H. D. 2000. “Hayek-Keynes-Sraffa Controversy Reconsidered,” in H. D. Kurz (ed.), Critical Essays on Piero Sraffa’s Legacy in Economics. Cambridge University Press, Cambridge. 257-302.

Lawlor, M. S. and Horn, B. 1992. “Notes on the Hayek-Sraffa exchange,” Review of Political Economy 4: 317–340.

Lachmann, L. M. 1986. “Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect,” in W. Grassl and B. Smith (eds.), Austrian Economics: Historical and Philosophical Background, Croom Helm, London. 225–242.
(2) Karl Gunnar Myrdal:
Myrdal, G. 1933. “Der Gleichgewichtsbegriff als Instrument der geld-theoretischen Analyse,” in F. A. Hayek (ed.), Beitrage zur Geldtheorie, Vienna. 361–487.
(3) Paul Rosenstein-Rodan:
However, I don’t think his criticisms were ever published (I could be wrong), but were certainly conveyed to Ludwig Lachmann in conversations in the 1930s as reported in this Austrian Economics Newsletter (AEN) (an interview with Lachmann):
“AEN: You have talked a number of times about the importance of expectations in business cycle theory. What first drew your interest to expectations as far as the business cycle question was concerned.

Lachmann: Talking to Paul Rosenstein-Rodan, who was then a lecturer at University College, London – not technically in the London School of Economics – but he gave a course on the history of economic thought to which all of us who were research students then went.
It was Rosenstein-Rodan who in discussing Austrian trade cycle theory with me said, ‘Ah yes, but whatever happens in the business cycle is in the first place determined by expectations.’ And then he told me of the work that had been done in Sweden.”
Ludwig Lachmann, “An Interview with Ludwig Lachmann,” The Austrian Economics Newsletter, Volume 1, Number 3 (Fall 1978), Mises.org.
http://mises.org/journals/aen/lachmann.asp
Rosenstein-Rodan was possibly referring to Gunnar Myrdal’s work listed in (2) above.

(4) John Maynard Keynes:
Keynes’s criticisms were in a response to Hayek’s review of his earlier work, and mostly in his private correspondence with Hayek:
Keynes, J. M. 1931. “The Pure Theory of Money. A Reply to Dr. Hayek,” Economica 34 (November): 387–397.

Ingrao, B. 2005. “When the Abyss Yawns and After. The Correspondence between Keynes and Hayek,” in M. C. Marcuzzo and A. Roselli (eds.), Economists in Cambridge. A Study Through their Correspondence, 1907–1946. Routledge, London. 236-256.

Ingrao, B. and F. Ranchetti. 2005. “Hayek and Cambridge: Dialogue and Contention,” in M. C. Marcuzzo and A. Roselli (eds.), Economists in Cambridge. A Study Through their Correspondence, 1907–1946. Routledge, London. 392-413.

Moggridge, D. (ed.). 1973. The Collected Writings of John Maynard Keynes (vol. 13). Macmillan for the Royal Economic Society, London.
It was in Keynes (1931) that he delivered his rather harsh verdict on Prices and Production:
“The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45 … It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam.” (Keynes 1931: 394).
(5) Ludwig M. Lachmann:
Lachmann, L. M. 1943. “The Role of Expectations in Economics as a Social Science,” Economica n.s. 10.37: 12–23.
(6) Frank H. Knight:
Knight, Frank H. 1935. “Professor Hayek and the Theory of Investment,” Economic Journal 45.177 (March): 77-94.
Here is one of Hayek’s responses to Knight:
Hayek, F. A. von. 1936. “The Mythology of Capital,” Quarterly Journal of Economics 50.2: 199-228.
See also:
Boettke, P. and K. Vaughn. 2002. “Knight and the Austrians on Capital and the Problem of Socialism,” History of Political Economy 34: 155–176.

Cohen, A. J. 2003. “Hayek/Knight Capital Controversy: The Irrelevance of Roundaboutness, or Purging Processes in Time?,” History of Political Economy 35.3: 469-490.
(7) Nicholas Kaldor:
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.
(8) George L. S. Shackle:
Shackle, George L. S. 1981. “F. A. Hayek, 1899– ,” in D. P. O’Brien and J. R. Presley (eds.), Pioneers of Modern Economics in Britain. Macmillan, London. 234–261, at p. 240.
(9) Gottfried von Haberler:
Haberler, G. 1986. “Reflections on Hayek’s Business Cycle Theory,” Cato Journal 6: 421–435.

Reprinted in Haberler, G. 1991. “Reflections on Hayek’s Business Cycle Theory,” in John Cunningham Wood and Ronald N. Woods (eds.), Friedrich A. Hayek: Critical Assessments (vol. 4). Routledge, London. 249–262.
(10) Gordon Tullock:
Tullock, G. 1988. “Why the Austrians are Wrong About Depressions,” The Review of Austrian Economics 2: 73–78.
(11) David Ramsay Steele
His views (quite insightful) are described in this comment:
http://consultingbyrpm.com/blog/2012/05/federal-government-outlays-and-receipts-as-of-nominal-gdp.html#comment-39021
(12) Allin Cottrel:
Cottrell, A. 1993. “Hayek’s Early Cycle Theory Re-examined,” Cambridge Journal of Economics 18: 197–212.
(13) Ulrich Witt:
Witt, U. 1997. “The Hayekian Puzzle: Spontaneous Order and the Business Cycle,” Scottish Journal of Political Economy 44: 44–58.
(14) Tyler Cowen:
Cowen, Tyler. 1997. Risk and Business Cycles: New and Old Austrian Perspectives. Routledge, London.
(15) Robert P. Murphy:
Although I suppose Murphy sees himself as a defender of the ABCT, nevertheless his work here is nothing but a critique of the classic Hayekian theory (where Hayek uses the Wicksellian natural rate of interest):
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
(16) Robert L. Vienneau:
Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921183

Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671886
(17) Daniel Kuehn:
Kuehn, Daniel. 2013. “Hayek’s Business-Cycle Theory: Half Right,” Critical Review 25.3–4: 497–529.
Another very good work on this issue is Constatinos Repapis, “Hayek’s Business Cycle Theory during the 1930s: A Critical Account of its Development,” History of Political Economy 43 (2011): 699–742.

In addition, here are some criticisms of Mises’s version of the ABCT:
Vasséi, Arash Molavi. 2010. “Ludwig von Mises's Business Cycle Theory: Static Tools for Dynamic Analysis,” in Harald Hagemann, Tamotsu Nishizawa, Yukihiro Ikeda (eds.). Austrian Economics in Transition: From Carl Menger to Friedrich Hayek. Palgrave Macmillan, Basingstoke. 196–217.

Vasséi, Arash Molavi. 2010. “The Foundation of Ludwig von Mises’s Business Cycle Theory: Real Analysis as a Chain of Tautologies,” SSRN paper, June 5, 2012.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2077604


Sunday, December 5, 2010

The Different Types of Austrian Economics

Although I advocate Post Keynesian economics, I have always been rather intrigued by Austrian economics. In the 1930s, when John Maynard Keynes was establishing the beginnings of the Keynesian revolution, his great intellectual opponent was the Austrian economist Friedrich August von Hayek.

The Austrian school arise in the 1870s as part of the marginalist revolution in economic thought. The founder was Carl Menger, who wrote an influential book called the Principles of Economics in 1871.

In a previous post (see “Friedrich von Wieser and Eugen von Philippovich von Philippsberg: Austrian Economists and Fabian Socialists”), I noted that the early Austrian school was in fact split into two factions: (1) a Classical liberal wing and (2) a wing that was not opposed to government intervention per se, and that even included members sympathetic to Fabian socialism. Hayek explains the history of the Austrian school in this interview:
LEIJONHUFVUD: In economics, let me come back to a question we have touched upon before. In the twenties in Vienna, was there such a thing as an Austrian school in economics? Did you and your contemporaries perceive an identification with a school?

HAYEK: Yes, yes. Although at the same time [we were] very much aware of the division between not only Meyer and Mises but already [Friedrich von] Wieser and Mises. You see, we were very much aware that there were two traditions—the [Eugen von] Böhm-Bawerk tradition and the Wieser tradition—and Mises was representing the Böhm-Bawerk tradition, and Meyer was representing the Wieser tradition.

LEIJONHUFVUD: And where did the line between the two go? Was there a political or politically ideological line involved?

HAYEK: Very little. Böhm-Bawerk had already been an outright liberal, and Mises even more, while Wieser was slightly tainted with Fabian socialist sympathies. In fact, it was his great pride to have given the scientific foundation for progressive taxation. But otherwise there wasn’t really—I mean, Wieser, of course, would have claimed to be liberal, but he was using it much more in a later sense, not a classical liberal (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 49–50).
The split in the Austrian school in the 1920s was between (1) the classical liberal wing of Eugen von Böhm-Bawerk/Mises (which evolved into modern American libertarianism), and (2) the wing of von Wieser, some of whom were leaning towards Fabian socialism.

However, with the migration of Austrian economics to America and the emergence of Mises as a leading figure, the Classical liberal wing won out, and modern Austrian economics developed from the Classical liberal wing under Mises’ influence.

For much of the 1940s, 1950s and 1960s, Mises, Hayek and Rothbard were the major Austrian thinkers. However, there were a number of other less well known third-generation Austrian economists in this era, including Oskar Morgenstern (1902–1976), Gottfried von Haberler (1900–1995), Fritz Machlup (1902–1983), Paul N. Rosenstein-Rodan (1902–1985), and Friedrich A. Lutz (1901–1975). Not all of them were reflexively hostile to government. Paul N. Rosenstein-Rodan, for instance, was famous for his work on how the state can initiate industrialization in poor nations through planned investment (Rosenstein-Rodan 1943).

In the US, the Austrian tradition was strongly influenced by Mises and Rothbard. Then Austrian economics experienced a resurgence in America from the 1970s onwards:
“American Austrianism revolves around an axis that passes through Auburn University, George Mason University, and New York University. It gets its spin from a 1974 conference held at South Royalton, Vermont, a week-long affair that featured lectures by Murray Rothbard, Israel Kirzner, and Ludwig Lachmann” (Garrison 2001: 259).
A proceedings of that conference was later published as The Foundations of Modern Austrian Economics (ed. E. G. Dolan; Mission, Kansas, 1976). For a fascinating discussion of the history of this Austrian resurgence, see Mario Rizzo’s post “What Is Austrian Economics?” (November 23, 2009) at the ThinkMarkets blog and the comments on it.

Modern Austrians come in a number of forms, and there are clear differences between them. In my view, a useful division of modern Austrians would be as follows:
(1) The Anarcho-capitalists
E.g., Murray Rothbard, Hans-Hermann Hoppe and Jörg Guido Hülsmann;

(2) The minimal state/classical liberal Austrians in the tradition of Mises
This variety supports praxeology and utilitarianism;

(3) Hayek’s economics, with a minimal state;

(4) Moderate subjectivist Austrians
E.g., Israel Kirzner and Roger Garrison;

(5) Radical subjectivists like Ludwig M. Lachmann (1906-1990), and Austrians influenced by him.

(see Böhm 1989: 60–61; Hutchison 1994: 222).
One should note that the differences between these types of Austrians are not trivial.

From the 1970s, a new generation of Austrians challenged the older, pure aprioristic methodology of Mises, and advocated a greater role for empirical testing, and Hayek had already moved away from Mises’ methodology with his paper “Economics and Knowledge” (1937).

Personally, I have little time for Austrians of types (1) and (2). The anarcho-capitalists (1) have a radical view that the state must be completely abolished and all of its functions privatized. In the form developed by Rothbard, the case for anarcho-capitalism is based on an untenable and deeply flawed moral argument using natural rights and Aristotelian, neo-Thomist natural law theory (Rothbard 1998). Though my purpose here is not to offer a detailed critique of anarcho-capitalism, one of the most convincing arguments against it is that private protection firms would in fact have an incentive to victimise potential customers to increase market share. Violence of the type that already happens between private mafia groups might occur. A natural monopoly would probably develop as the most powerful firm drove its competitors out of business (or a cartel might become dominant), and one would be left with a de facto state, the very thing anarcho-capitalism sought to abolish! (see Holcombe 2004: 330–331). Moreover, the power relations in an anarcho-capitalist society would appear to be rather like feudalism, with no sense of the common good (Freeman 2001: 147–149). If history is any guide, a movement towards anarcho-capitalism might well result in the kind of incessant violence and warfare between private warlords/protection agencies, as in medieval feudalism. Above all, do we really want to privatise the ownership, use and production of nuclear weapons or biological and chemical weapons? Quite frankly, an anarcho-capitalism system would be one of utter insanity.

The classical liberal Austrians (2) in the tradition of Mises support a minimal state with limited functions, like justice and defence. But Mises’ praxeology is heavily aprioristic, involves an absurd and radical rejection of empirical evidence, and falls apart once one sees the vast number of unsupported subsidiary hypotheses, both present and assumed, that underlie his deductive arguments. Moreover, by admitting the possibility of rational government intervention on utilitarian grounds, Mises’ ideology has a severe logical contradiction (see “Was Mises a Socialist?: Why Mises Refutes Himself on Government Intervention”).

Austrians of type (5) are more interesting. The Austrian radical subjectivists have a “kaleidic” view of economics influenced by the views of the peculiar Austrian–Keynesian hybrid George L. S. Shackle (Lachmann 1976) and stress the subjectivist nature of value, expectations, and knowledge. Lachmann, for example, even denied that free market systems tend to equilibrium or have coordinating processes (Kirzner 2000: 46–47). Lachmann’s radical subjectivism is rejected by Austrians of type (4), who condemned his position as “nihilism” (Kirzner 2000: 47). This rejection is not unreasonable from the perspective of those who support extreme laissez faire economics, because, if there is no neoclassical tendency to full employment equilibrium or Hayek’s plan coordination in a free market system, the alleged economic or moral superiority of such a system collapses. It is thus not surprising that the Lachmann-inspired wing of Austrians aroused some hostility from the moderates who defended the free market as an equilibrating or coordinating mechanism (Dunn 2008: 136).

I am not certain whether Gerald P. O’Driscoll and Mario J. Rizzo are moderate subjectivist Austrians of type (4). Their interesting book The Economics of Time and Ignorance (Oxford, UK, 1985) appears to use Lachmann’s views on the role of time and fundamental uncertainty, but also tries to overcome the charge of “nihilism” by postulating the idea of pattern coordination in place of equilibrium (Gloria-Palermo 1999: 138).

O’Driscoll and Rizzo have made some favourable comments about Post Keynesian economics:
“[i]t is evident that there is much more common ground between post-Keynesian subjectivism and Austrian subjectivism …. the possibilities for mutually advantageous interchange seem significant” (O’Driscoll and Rizzo 1985: 9).
There are indeed some limited similarities in economic analysis between Austrians of type (4) and (5) and the Post Keynesian economists (Böhm 1989: 61).

Paul Davidson, one of leading American Post Keynesians, criticised The Economics of Time and Ignorance in his classic articles “The Economics of Ignorance or Ignorance of Economics?,” Critical Review (1989) 3.3/4: 467–487, and “Austrians and Post Keynesians on Economic Reality: Rejoinder to Critics,” Critical Review 7.2/3 (1993): 423–444. Clearly, there are also very significant differences between Austrians and Post Keynesians.

Austrians of type (4) include Israel Kirzner, who argues that plan/pattern coordination (the Austrian substitute for neoclassical equilibrium) in a free market economy can be achieved by entrepreneurial discovery and creation (Parsons 2003: 7). Type (4) Austrians also include Roger Garrison and others who even engage in “Austrian macroeconomics,” which seems peculiar, given that other Austrians reject the whole concept of macro-theory in economics.

From the perspective of Post Keynesianism, Austrians of type (4) and especially (5) are the most interesting. Ludwig Lachmann, like Keynes, stressed that expectations are subjective, and Lachmann even produced work that has a positive view of aspects of Keynes’ thought. Lachmann’s paper “John Maynard Keynes: A View from an Austrian Window” (South African Journal of Economics 51 (1983): 253–260) argues that
“In the field of methodology Keynes and the Austrians agree that economics is a social science to which methods that have proved successful in the natural sciences should not be applied without careful inspection, …. But Keynes’s mind also moves in another direction. ‘I also want to emphasize strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth’ … Keynes sees in social facts manifestations of the human mind. While to Hayek it is the complexity of these facts, their multitude and diversity, that defies the attribution of numerical values to social concepts, to Keynes it is their mental character … that does so. Rather to the surprise of some of us, Keynes emerges as being more deeply committed to subjectivism than is his Austrian opponent (Lachmann 1983: 256).
These similarities have been noted by other scholars too (Caldwell 1989; Parsons 2003: 6).

Though the practical policy recommendations and political outlook of Post Keynesians and Austrians will remain deeply in conflict, there might be something that Post Keynesians can learn from studying the theories of Austrians of type (4) and (5) above.

WALTER BLOCK’S CLASSIFICATION OF AUSTRIAN SUBJECTIVISM

In an article published in 1988, Walter Block proposes a useful division of different types of Austrian subjectivism:
1. The nonsubjectivists
2. The moderate subjectivists (i.e., Yeager)
3. The Austrian subjectivists (i.e., Rothbard, Kirzner, Buchanan)
4. The ultra- or extreme subjectivists (i.e., Jack Wiseman, G.L.S. Shackle, Ludwig Lachmann, and “hermeneuticians” associated with the market process group located at George Mason University) (Block 1988: 201).
Categories (2) and (3) here include my category of “Moderate subjectivist Austrians.”

BIBLIOGRAPHY

Böhm, S. 1989. “Subjectivism and Post-Keynesianism: Towards a Better Understanding,” in J. Pheby (ed.), New Directions in Post-Keynesian Economics, Edward Elgar, Aldershot, Hants, England. 59–93.

Block, W. 1988. “On Yeager’s ‘Why subjectivism?,’” Review of Austrian Economics 2: 199–208.

Caldwell, B. J. 1989. “Post-Keynesian Methodology: An Assessment,” Review of Political Economy 1465-3982, Volume 1, Issue 1, 1989, Pages 43 – 64

Dolan, E. G. (ed.). 1976. The Foundations of Modern Austrian Economics, Sheed & Ward, Mission, Kansas.

Dunn, S. P. 2008. The “Uncertain” Foundations of Post Keynesian Economics: Essays in Exploration, Routledge, London and New York.

Freeman, S. R. 2001. “Illiberal Libertarians: Why Libertarianism Is Not a Liberal View,” Philosophy & Public Affairs 30.2: 105–151.

Garrison, R. W. 2001. Review of Subjectivism in Economic Analysis: Essays in Memory of Ludwig M. Lachmann (Routledge, London, 1998), Review of Political Economy 13.2: 258–262.

Gloria-Palermo, S. 1999. The Evolution of Austrian Economics: From Menger to Lachmann, Routledge, London and New York.

Holcombe, R. G. 2004. “Government: Unnecessary but Inevitable,” Independent Review 8.3: 325–342.

Honderich, T., 2005. Conservatism: Burke, Nozick, Bush, Blair? (rev. edn), Pluto, London.

Hutchison, T. W. 1994. The Uses and Abuses of Economics: Contentious Essays on History and Method, Routledge, London.

Kirzner, I. M. 2000 The Driving Force of the Market: Essays in Austrian Economics, Routledge, New York.

Lachmann, L. M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54-62.

Parsons, S. D. 2003. “Austrian School of Economics,” in J. E. King (ed.), The Elgar Companion to post Keynesian Economics, E. Elgar Pub., Cheltenham, UK and Northhampton, MA. 5–10.

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