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INTRODUCTION
TO THE ONLINE SEMINAR ON TIME AND MONEY
HOSTED BY GREG
RANSOM
MAY 5-12, 2001
I am pleased to
have been invited by Greg Ransom to do an e-Seminar on Time and Money:
The Macroeconomics of Capital Structure (Routledge, 2001). I look forward
to the experience and expect to learn much from the members of this list.
The heading Greg
has used in announcing the seminar is "Boom and Bust in a Hayekian Framework."
This heading also appears on my home page as the caption of a key diagram
that serves as the front door to the URL devoted to the book. My long-time
interest in the Austrian theory of the business cycle certainly figures
heavily in the origins of this book-length treatment of the issues. And,
as any reader will quickly notice, many of the arguments are drawn from
or inspired by Hayek's Prices and Production and related writings.
But Time and
Money has a broader focus than business-cycle theory. I’ve come to
think of it as Capital-Based Macroeconomics. The macroeconomics of boom
and bust and the critical distinction between sustainable and unsustainable
growth is the focus of Chapter 4. Chapter 3 sets out the capital-based
macroeconomic framework without special reference to cyclical problems,
and Chapter 5 uses the framework to deal explicitly with a varied assortment
of macroeconomic issue—deficit finance, Ricardian equivalence, credit controls,
and tax reform. Even more broadly, Time and Money is an exercise
in comparative frameworks. Chapters 7 through 9 set out the Keynesian alternative
as a labor-based macroeconomic framework; Chapters 10 and 11 deal similarly
with the Monetarist alternative. The objective here is to set out these
alternatives in way that (1) is true to Keynes and true to Friedman and
(2) facilitates the sharpest contrast to—and most satisfying (partial)
reconciliation with—the Hayekian framework.
Hayek’s “Technical”
Economics - a Reappraisal
I think I have an
adequate understanding and appreciation of Hayek's postwar writings and,
in particular, of his insights about spontaneous order, rule of law, and
use of knowledge. The recent seminar conducted by Pete Boettke reminded
us all about the importance and centrality of these ideas to contemporary
issues. But I would hope that these aspects of Hayekian scholarship are
not allowed to overshadow or crowd out Hayek's interwar contribution to
our understanding of the macroeconomy. The fact is that fellow classical
liberals, such as Friedman (and to a much more limited extent, even Keynes)
endorse many of Hayek’s arguments made in the defense of liberty, while
they quickly and summarily condemn his "technical" economics and particularly
his business-cycle theory. I realize, of course, that some members of this
list are, for their own reasons, critical of Hayek's business cycle theory.
Alan Ebenstein’s
recent and much-welcomed biography of Hayek downplays Hayek's macroeconomics.
There is a five-page chapter on "Money and Business Fluctuations," followed
by another five-page chapter on "Capital." Ebenstein quotes Friedman (seemingly
with approval) on Hayek the technical economist: "let me emphasize, I am
an enormous admirer of Hayek, but not for his economics. I think Prices
and Production was a very flawed book. I think his capital theory book
is unreadable. On the other hand, The Road to Serfdom is one of
the great books of our times." In an earlier chapter dealing with Hayek's
1931 lectures at the LSE, Ebenstein begins a paragraph, "Hayek's basic
misconception of economic production was concerning the nature of capital."
Time and Money
takes Prices and Production as a fundamentally sound book—but, of
course, like any book of that kind, not without some flaws. And it suggests
that Hayek's conception of economic production was not a misconception.
I would argue—though I didn't in Time and Money—that there is a
fundamental unity of Hayek's thought that should cause us to admire both
The Road to Serfdom and Prices and Production. Gerald O'Driscoll,
in his Economics as a Coordination Problem (1977), does make the
case for such a unity, and Hayek, in his foreword to that book, acknowledges
the unity but confesses surprise: "I must confess that I was occasionally
myself surprised when I found in Professor O'Driscoll’s account side by
side statements I made at the interval of many years and on quite different
problems, which still implied the same general approach. That it seems
in principle possible to recast a great part of economic theory in terms
of the approach which I had found useful in dealing with such different
problems as industrial fluctuations and the running of a socialist economy
was ... gratifying to me...."
I found encouragement
in some aspects of Ebenstein’s account of Hayek at the LSE. A student is
reported to have remarked that Hayek’s three-dimensional diagrams seemed
like something from the field of engineering. The members of this list
will not be surprised to learn that some Austrian-oriented economists have
had a visceral negative reaction to the interlocking graphics in Time
and Money. Some attribute this technique, I suspect, to my own questionable
background, which includes a BS in Electrical Engineering. Now, at least,
I can take comfort in the belief that whatever the grounds for criticism
of my graphics, they cannot be condemned as being unHayekian!
Hayek vs. Keynes
More substantively,
Ebenstein reminds us that the so-called Hayek-Keynes debate wasn’t much
of a debate. "Both sides launched their broadsides, and that was about
it. There was no sustained, considered, fruitful exchange." I agree that
there was no meeting of the minds, no head-to-head. A major objective of
Time and Money is the presentation of comparative frameworks which
does allow Hayek and Keynes to go head-to-head. I do believe that Hayek
zeroed in on a critical feature of the Keynesian system—a feature that
constituted a built-in perversity. For Keynes, consumption spending and
investment spending always move in the same direction. C and I
go up and down together. Hayek insisted that C and I must
be able to move in opposition to one another if changes in intertemporal
preferences are to get successfully translated into corresponding changes
in the intertemporal allocation of resources.
The contrasting
features of the Keynesian labor-based framework and the Hayekian capital-based
framework get crystalized as the dispute over the so-called Paradox of
Thrift, which was the topic of a key Hayek article in the May 1931 issue
of Economica. In Chapter 8 of Time and Money, I depict the
economy’s reaction to an increase in saving, using the Keynesian labor-based
framework, in which C and I move together. Then, retaining
the elements common to both frameworks, I let the labor-based framework
morph into the Hayekian capital-based framework, in which C and
I can move in opposition. Now the economy reacts to an increase
in saving by an increase in investment rather than by a decrease in income.
This Hayekian resolution to Keynes's Paradox of Thrift, which is true to
the arguments offered by Hayek in 1931, dramatizes the fact that the Keynesian
framework contains a built-in perversity. This graphical demonstration
plus a few more that round out Chapter 8 is as close as I can come to putting
Keynes and Hayek head to head.
Keynes vs. Keynes
The scope for interpreting
Keynes's General Theory is virtually limitless. I’ll claim, though,
to have made at least some headway on this front by making a first-order
distinction between "Cyclical Unemployment and Policy Prescription" (Chapter
8) and "Secular Unemployment and Social Reform" (Chapter 9). As I've noted
in the introductory chapters, Chapter 8 incorporates many of the insights
of Axel Leijohhufvud; Chapter 9 incorporates many of the insights of Alan
Meltzer. And, borrowing some imagery from Victoria Chick, I point out at
the end of Chapter 9 that the two sets of insights fit together in a "wheels-within-wheels
arrangement."
Hayek vs. Friedman
There is also scope
for interpreting Monetarist writings. My Chapter 10 deals with the popular
textbook rendition of boom and bust—as a movement of the economy along
a short-run Phillips curve followed by a subsequent shifting of that curve.
Monetarist conclusions, I argue, are virtually framework-independent. I
depict the boom-bust sequence as envisioned by Monetarists in both the
capital-based and the labor-based frameworks. This rendition of Monetarism
allows for a sharp comparison with Austrianism but does not allow for much
reconciliation since Friedman pays so little attention to interest-rate
considerations over the course of a business cycle. But I draw from an
article of his on the "Lag Effect of Monetary Policy" (in his Optimal
Quantity of Money) to show that when he does give some consideration
to interest rate changes and to the resulting effects on the pattern of
investment, his analysis begins to blend with Hayek's. That is, with the
interest-rate effects in play, Monetarism’s theory of boom and bust as
depicted in a capital-based framework morphs into the Austrian theory of
the business cycle. In Chapter 11, I deal with Friedman's claim that, on
the basis of his so-called "Plucking Model," there are no boom-bust patterns
to be explained.(!) I also take up the issues of "Monetary Disequilibrium
Theory," and, echoing Steven Horwitz, argue that the Yeager-Warburton insights
into the nature of monetary disequilibrium are complementary to the Hayekian
theory.
Hayek vs. Mises
Though I continue
to think of Time and Money as presenting the Hayekian framework,
I am increasingly often reminded by readers that the framework is actually
my own—with elements from Hayek, elements from Mises, and a few extra elements
from neither. Murray Rothbard always insisted that, because of its actual
origins, this theory of the business cycle should be called the Mises-Hayek
theory. I have come to appreciate this labeling—but for a different reason.
As documented in my Chapter 4, Mises repeatedly refers to the boom as being
characterized by "malinvestment and overconsumption"; Hayek deals at length
with the malinvestment and the consequent "forced saving." Mises downplays
the role of "forced saving"; Hayek never mentions "overconsumption." So,
is the cycle characterized by overconsumption or by forced saving? In my
own analysis, and as depicted by my Figure 4.4, the process entails both—in
sequence. (And contrary to the denials of both Mises and Hayek, it also
entails some overinvestment—as distinct from malinvestment.) By the logic
of the process, there is an initial period of overconsumption and a subsequent
period of forced saving. In essence, the Hayekian triangle is pulled at
both ends against the middle by credit expansion. Forced saving begins
only when the production processes that were in their middle stages at
the beginning of the boom reach maturity. Here is an instance, I believe,
where the use of interlocking graphics go beyond pedagogy. They call attention
to the different aspects of the logic and help to sort out the interconnections.
(I have recently had a long give-and-take with Richard Ebeling on these
issues and am drafting a paper to provide further clarification.)
Triangles vs.
Crosses
In his new Making
of Modern Economics, Mark Skousen recounts the story of the first successful
Keynesian-oriented economics textbook. It was, of course, Samuelson's Economics,
published in 1948. Skousen tells us that the Keynesian Cross, invented
by Samuelson, appeared on the cover of the first three editions. Skousen
also quotes Samuelson as saying, "I don’t care who writes a nations's laws—or
crafts its advanced treatises—if I can write its economics textbooks."
We can only wonder where economic education would be today if a Hayekian
triangle instead of a Keynesian cross had adorned Samuelson’s cover—with
corresponding changes in the text itself. I think of Time and Money
as my best effort at making up for lost time and developing a capital-based
macroeconomics that can effectively counter the now-entrenched alternatives.
Here are some suggestions to list members interested in participating in
this seminar. Greg has already introduced the seminar, giving several URLs
where relevant materials can be found. All or most all of these materials
are accessible through:
http://www.auburn.edu/~garriro/tam.htm
There you can click
your way to several items:
Table of Contents
(which includes a brief Synopsis of the book)
Preface
Chapter 1
Chapter 2
Interview
(in the Austrian Economics Newsletter)
PowerPoint
Show (based on parts of Chapters 3 and 4)
Selected Figures
(not intended to be self explanatory but possibly useful
during the seminar)
My recommendation,
for those who have PowerPoint on their machines, is to run the show. Titled
"Sustainable and Unsustainable Growth" and using both graphics and text,
it builds the capital-based framework and puts it through its paces—including
the boom-bust sequence. As you will see, my timing of the bust is off.
I show Clinton still in office at the time of the downturn. But, I say
cheerfully, this error is true to the original formulation of the Mises-Hayek
theory: The theory predicts only that the downturn is inevitable; it does
not predict the timing.
Erratum
Finally, let me
say that Time and Money, which is dominated by its graphics, was
to have only one equation in it. I say "was to have" because Routledge
left it out. (The equation appeared in the page proofs but not in the book.)
An Erratum strip is included in some recent copies. So let me issue an
e-Erratum for the early copies. On page 136 in that blank spot, write
C = a/(1-b) + b/(1-b) I.
This is the simple
linear equation that relates consumption spending to investment spending.
It follows straightforwardly from the Keynesian equilibrium condition for
a wholly private economy (Y = C + I) and the consumption
equation ( C = a + bY). I call it the Keynesian demand constraint.
Keynes never wrote it, but he talked his way through it in a passage from
his 1937 article that I quote on page 137.
Roger W. Garrison
Department of Economics
Auburn University
Auburn, AL 36849
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