Thursday, July 23, 2009


Rizzo on Keynes vs. Hayek

Mario Rizzo has another good post:
While I am not a Keynesian, I would agree that the economics of Keynes (and Keynesian economics!) is more relevant to the present crisis than the graduate macroeconomics taught in most high-level departments today.

I’d also suggest that the business cycle analysis of F.A. Hayek is also more
relevant than today’s macro-theory.

That's definitely true. Let me commit heresy and say that Keynes' General Theory is (a) comprehensible and (b) packed full of deep insights. Of course, Keynes' policy recommendations are wrong. Rizzo goes on to say:
By “relevant” I mean, in both cases, that the issues addressed and emphasized are keys to either understanding what is going on or making progress in so understanding. Hayek asks us to consider the role of resource misallocation. Keynes asks us to consider the role of radical uncertainty. Mainstream macro is silent on these issues. In fact, much of it recognizes no connection between financial markets and the real economy.

I am not saying that there is some grand synthesis of Hayek and Keynes that will yield truth. I am saying that these economists raised the fundamental issues. They are relevant.

I actually do think a grand synthesis of Hayek and Keynes is a good approach; I was trying to lay the foundation for such an enterprise in my dissertation [.pdf]. (Now Rizzo was my dissertation chairman, meaning he presumably read it. I hope I did not sour him on the prospects for a grand synthesis.)

Rizzo and O'Driscoll had a very important and (at the time) celebrated book, The Economics of Time and Ignorance. They pushed the idea of "pattern coordination" as a way to retain some type of equilibrium construct, in the face of "radical" uncertainty. The problem was, thinkers like Shackle and Lachmann had come up with very serious objections to the typical notion of intertemporal equilibrium, in which everybody's expectations about the future are compatible. So rather than just yell, "Ah take your nihilist doubt and go hang out with Krugman!" Rizzo and O'Driscoll tried to salvage things.

I think they were on the right track, and in my dissertation I tried to apply their new equilibrium concept to money. What was amusing is that the single biggest objection I got from Austrians (who had the intrepidity to read my dissertation) was, "Isn't your theory Keynesian?"

Matthew Mueller used to be very interested in that kind of Austrian & Post-Keynesian radically subjective/uncertain synthesis. Unfortunately, he went quite mad and deleted his blog. Let this be a lesson kids: friends don't let friends do heterodox economics.

LvMI, etc. are going to have a very hard time reconciling ("true") Keynesian economics with the fact that they've expended a lot of energy, lung pressure and saliva arguing vehemently that Keynes was a villain, a crook, and a liar.

Which I agree with 100%, so I'll have trouble swallowing it, as well. Point is, Keynes may have had some top-notch ideas here and there but it'll be tough for the more dogmatic folks to accept these insights "into the fold."

I'd caution you and Mario to tread very carefully, as well, and not try to go all metropolitan on our orthodox Austrian asses just because you can or want to or you want to be different (like the Goth kids in South Park).
...the “black hole of economics.”
"LvMI, etc. are going to have a very hard time reconciling ("true") Keynesian economics..."
I think, unfortunately, that many Austrians at LvMI have a rather one-sided perspective of Keynes which inhibits even their criticisms of him. Not to say that 'Keynes was right', but he certainly wasn't the devil and he was closer to the Austrian position than Milton Friedman.

"...the “black hole of economics.”
Heh, I don't think the problems are as severe as Lachmann imagined, though there certainly something(s) very wrong with 'equilibrium' as a concept or a 'tendency'.

Can you explain what you mean by Keynes being closer to the Austrian position than Milton Friedman?
"Can you explain what you mean by Keynes being closer to the Austrian position than Milton Friedman?"
In terms of methodology, conceptual analysis and terminology Keynes is playing at least the same game as the Austrians. Friedman's work isn't even properly 'economics' from the Misesian perspective.

What version of Keynes have you been reading? Keynes employs praxeology and a priori logic? Keynes rejects technical jargon and mathematicism in favor of clear, verbal English? Keynes conceptualizes the economy in terms of individuals and firms in specific industries, rather than studying the "macro" economy as aggregate sums?

No, no and no, the exact opposite, of course. This is the Austrians' beef with Keynes and it seems to be why, among many reasons, they come to such wildly different conclusions about economic issues.

Not to mention that Keynes was an establishment professor and later public functionary involved in the very interventions he preached, whereas Mises and the other early Austrians seemed to be on the opposite path (non-interventionist public employees who turned to academia later on).

I'm open to understanding why Keynes and some of his principles or strategies should be adopted or synthesized by the Austrians, but this hasn't been convincing so far, and I've found a lot of Rizzo's posts on the subject to be perplexing seeming attempts at forcing Keynes into an open-minded Austrian box where he just does not belong.
Isn't giving Keynes props sort of like giving Michael Moore props? A blind squirrel finds a nut every now and then, and you can commend him on it, but since he usually burns it when he finds it you have a hard time really getting enthusiastic about it.
Taylor wrote:

LvMI, etc. are going to have a very hard time reconciling ("true") Keynesian economics with the fact that they've expended a lot of energy, lung pressure and saliva arguing vehemently that Keynes was a villain, a crook, and a liar.

Sounds to me like a good reason not to spend time calling theorists villains, crooks, and liars. If they happen to be right on particular issues, then you are forced into holding false views yourself.

I take it this is supposed to be a jab at my extremism related to someone like Sumner?

Yeah... you're right Bob. When someone advocates theft and moral relativity as a serious economic theory for productive effort, let's try to read the best of intent into it and do our best to sanitize the conversation so that it's appetizing to as many people as possible.

I will definitely admit there's some kind of grey area here as far as how to treat people who put forth ridiculous (and violent) propositions and expect to be taken seriously, but that doesn't lead me to conclude we should start excusing people of what they're saying, either.

While it's probably hard to trace responsibility between a mugger on the street and the 'enabling' sociologist who provides moral cover by arguing he's only a mugger because of what everyone else did to him, it seems rather clear to me, at least, that especially in an avowedly 'intellectual' administration like Obama's, there's a thin and tenuous line between the bureaucrats and politicians intervening in the economy, and the academic types such as Sumner who are doing everything they can to come up with the next best argument for why they should be doing it.

Pardon my French, but I am getting really fed up with this whole "let's treat stupid a-holes like they have a respectable opinion" charade. I guess I've just reached the point where I'm tired of the dithering and serious circumspect about the probability of changing a person's mind with reason and logic who very likely are just trying to find reasons, any reasons, to justify the aggression they feel in their hearts to be righteous.

But hey, maybe I am a stupid a-hole and no one should respect what I have to say. I'm open to that possibility, as well.

My guess is maybe you agree with me, but your blog has become a bit of a political platform for self-promotion (and why wouldn't it, it's your blog after all, I don't begrudge you of that desire) and so the fiery rhetoric of angry, disorderly and unfriendly people like me doesn't really help you when popularity contests with your critics.

Then again, I guess that's my point-- we shouldn't be trying to win popularity contests. Somehow, the socialists always end up winning those. That was my take-away from Mises, anyhow.

Oh, my.
Taylor wrote:

I take it this is supposed to be a jab at my extremism related to someone like Sumner?

It's true I thought you overreacted to Sumner, but no, it was a jab at the quotation I drew from this very thread. Your argument against my attempt to draw on Keynes' views on expectations, was that we would have a hard time going that route since we spend so much time calling Keynes a villain and a liar. In this thread you haven't said a single word about whether Keynes' views on expectations are wrong, you just keep telling me he's immoral. You don't see a problem with that approach? You don't think there's a danger of locking in your own opinions, if you insist that "crook A" is only capable of uttering falsehoods?

My guess is maybe you agree with me, but your blog has become a bit of a political platform for self-promotion (and why wouldn't it, it's your blog after all, I don't begrudge you of that desire) and so the fiery rhetoric of angry, disorderly and unfriendly people like me doesn't really help you when popularity contests with your critics.

Yep, if there's one thing I do on this blog, it's trying to curry favor with the establishment. When I disagree with Silas on environmental issues, it's because I want to see poor Africans drown. And if I disagree with you on considering the possibility that a non-libertarian might have a correct idea on something, the only explanation is that I'm trying to win a popularity contest.

I guess I need to pay more attention to what I am writing. The first comments I made were general observations about the LvMI coterie in general and how those people (and I suppose I'm one of them) might have trouble "synthesizing Hayek and Keynes" because much of what is published over there is an attempt at denigrating not only Keynesian ideas but "Keynes the Man" (ie, Rothbard's essay).

My later comments about immorality and such were directed less at Keynes specifically and more at "stupid a-holes" in general.

And lastly, my comments about a popularity contest were directed more at the fact that you come very close to calling people dishonest liars (you may have even done it once or twice with Krugman and DeLong) and scoundrels, but ultimately you seem to back off of laying your cards fully on the table. I interpreted this (and your understandable hostility towards my reluctance to show similar reluctance) as an attempt at currying favor with some of the intellectuals outside the Austrian circle who I figured you thought might be "gotten to." But maybe you are just concerned about coming off as angry, rabidly dogmatic, etc., to people who aren't 'big names in the biz' but are just curious people like you and I once were who might be scared off of Austrianism if that's the perception they draw from such an experience.

I'll be honest, I've tried to have an open mind to some of Keynes supposed brilliant moments as Rizzo keeps petitioning his readers to be considerate, and it's difficult to admit that someone who is, on the whole, a pretty big doofus about economics, might now and again have something useful to contribute. But I struggled with the same thing with Marx and ultimately was able to get over it and appreciate some of his "class analysis" which I think is most applicable to the State vs. the productive people.

Either way, no point in stoking these flames any more at this point, I don't seem to be communicating my thoughts well and maybe that has something to do with my tone so I'll try to be (re)considerate.
Ah, I see Taylor has made an entrance. Notoriously sharp tongue on that libertarian :)

My simple question is this : Bob - do you disagree with what was written by Henry Hazlitt in "Failure of the new economics"?

I'll admit to not having read it thoroughly (so I have no opinion in regards to that book), but the point I'm getting at is that if Hazlitt is right, then Keynes "General Theory" is a complete sack of rubbish, and any "rights" in it is most likely due to :

a ) Temporary insanity from Keynes
b ) Spelling errors
c ) A flux in the space-time continuum

If I understood Hazlitt correctly, he consideres Keynes work to be highly amateurish, lacking in any scientific standards what-so-ever, and continously dependant on weak interpretation of language constructs to "prove" certain fundamentals. Or am I completely off-the-track here (and in need of a knowledgeable austrian to put me right again)?

Btw, I do consider Keynes the devil, but that may be due to an image of him in a godawful hat and moustache ....

The devil wears a hat?

If I can pre-empt Bob here, I think that the reason Bob (channeling Rizzo) would like to see Hayek synthesized with Keynes is because, in Rizzo's words "Keynes asks us to consider the role of radical uncertainty."

Now, I'm honestly not well-read enough to know why Keynes particular take on radical uncertainty, and his request that we "consider" it, is worthy of synthesis, but that seems to be what they're after.
Confession Time:

I haven't yet read your dissertation - though I think I probably should, especially if it is something of an Austrian/Keynesian synthesis, as I've been wondering if that might be a profitable path to go down.
I read your dissertation a couple years ago and I thought it was great. You really exposed some of the internal inconsistencies of various Austrians, as well as proposing (what I thought) was a reasonable foundation for a better approach to money and interest.

BTW I have your reaction to some people, like Karl Rove. When he has a WSJ article I don't even bother reading it, because any "facts" that are in there, I don't trust.

However, Keynes is a legitimate thinker, and his theories are, well, theoretical. So it's worth thinking them through, even if just to pinpoint why they're wrong.

Now obviously we don't need to consider every theory out there, but Keynes is a deep thinker (deeply flawed too) and of course he is immensely popular.

I said I was not endorsing a Keynes-Austrian synthesis largely because I did not want to be misinterpreted. It would be easy to do that.

But, strictly speaking, Keynes did have some common ground with Austrian economics. Jerry O'Driscoll and I tried to explore that in The Economics of Time and Ignorance. The problem is that Keynes's policy ideas are so un-Austrian even if *some* of his theoretical-methodological insights are compatible.
Well there was an Austrian economist who argued Keynes was more relevant to the Great Depression than Hayek.

Wilhelm Ropke.

He argued in favor of a 'limited Keynesianism' to deal with the "secondary depression".

By this he meant that although credit expansion / credit collapse (akin to the mainstream Austrian explanation of bubble and bust) was the main cause of the depression, and the business cycle generally, he believed more was happening. Once the slip started, it tended to be self sustaining and (my words) "snowball" below the level that liquidating malinvestments alone would collapse to. Standard Austrianism wasn't enough, he argued.

Although well known at the time, the rejection of the Austrian liquidationist recommendation during the Great Depression made both political and economic sense, at least, according to Ropke.

So during the Great Depression, the real depression was aggravated by a 'secondary depression'. He saw Keynesian remedies as useful in the relief of the secondary depression.

His Austro-Keynesian secondary depression synthesis is mainly outlined in his "Crises and Cycles" . In "Crises" he has some footnote criticisms of Hayekian business cycle theory as it was applied in the Great Depression even if as a 'general theory' agrees with it.

In a sense Ropke is saying that Keynes' "General Theory" was really a "Special Theory" and that Hayek/Mises and their forebears who provided the real General Theory. That's how I read Ropke anyway. (Keynes modelled the name for his book "General Theory of Employment, Interest and Money" on Einstein's "General Theory of Relativity".)

(It is possible that Keynes himself may have moved to a more Ropke-like position in the late 1940s. There is some media commentary from Hayek, who was a personal friend of Keynes, that Keynes came to disagree with the "Keynesians" who followed him. (In particular I am thinking of a 1970s 'Newsweek' interview with Hayek where he says this, although Hayek didn't mention Ropke.) I think Rizzo has had some "Keynes versus the Keynesians" quotes too. This historical / biographic issue seems unresolved and may be unresolvable. Nonetheless we still have to deal with "Keynesianism" even if Keynes himself soured on some of it late in life. His defection would not be the end of the school.)

Was Ropke heterodox? Probably yes. He was heterodox in his political sociology as well. In his 'The Social Crisis of our Times', written during WW2, he argues that classical liberalism's failure opened the way to the horrid right and left wing collectivisms of his era. He wanted the liberal patrimony to survive as it was mostly beneficial but didn't see a return to laisser faire as desirable or possible. His preferred "fusionism" (to use a term from Rothbard) was libertarianism/distributism, with the development of a degree of non-market local and family self sufficiency a la the Swiss peasantry. This he believed would furnish a class that had a stake in the liberal order that would help stabilise the whole system from it's own inherent (and mostly beneficial) dynamic instability.

I was wondering of Bob and / or Mario had ever come across Ropke's 'secondary depression' arguments before? I'm not really sure how you distinguish a secondary from a primary depression in any kind of operationally meaningful sense. I don't think Ropke answered this either.
Röpke is interesting. I do think that he was correct about the failure of liberalism, though for different reasons - I think liberalism failed because it is essentially vacuous.

I first became aware of his views on the business cycle when I was reading an interview with Shackle. Reading Röpke, I find that while he was ahead of many of his contemporaries some of his views stem from methodological and theoretical issues that (taking a Misesian perspective) may well be mistaken. That being said, he is quite a good read, especially on his analysis of 'Brown' and 'Red' totalitarianism.

I'm afraid I'd have to read him again to give a more detailed analysis in regard to 'earth that was'. One thing I will say is that the 'secondary depression' of which Röpke and Shackle speak seems to be more easily explained as the fact that existing (and new) government interventions created problems with liquidating and reallocating capital - the problem was that the depression proper was never allowed to work itself out, so it just got worse.

Let me commit heresy and say that Keynes' General Theory is (a) comprehensible and (b) packed full of deep insights. Of course, Keynes' policy recommendations are wrong.
What were his deep insights? I would really like to know. Can you recommend any article/book on that? I've read GT, but it was quite incomprehensible to me.

Yesterday I read an article by a swedish economics professor which stated "keynes was a genius". But unfortunately he didn't explain why he thought so.
I have written a text where I explain why the manner in which the gold standard stabilizes the economy is very similar to the way keynesians like to stabilize the economy. The gold standard stabilizes aggregate expenditure which is perfectly keynesian.

Unfortunately it is in Swedish.

Her you are.

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