Thursday, July 8, 2010

Rizzo on Hayek and Cowen

Yikes, there's a jumbled mess going on at ThinkMarkets.

Mario Rizzo writes:
Do we have more evidence of the continuing great debate between Hayek and Keynes?

In the now “famous” 1932 letter to The Times of London signed by F.A. Hayek, Lionel Robbins, T. E. Gregory and Arnold Plant, we read:
The signatories of the letter referred to [by Keynes, Pigou et al.], however, appear to deprecate the purchase of existing securities on the ground that there is no guarantee that the money will find its way into real investment. We cannot endorse this view. Under modern conditions the security markets are an indispensable part of the mechanism of investment. A rise in the value of old securities is an indispensable preliminary to the flotation of new issues. The existence of a lag between the revival in old securities and revival elsewhere is not questioned. But we should regard it as little short of a disaster if the public should infer from what has been said that the purchase of existing securities and the placing of deposits in building societies, etc., were at the present time contrary to public interest or that the sale of securities or the withdrawal of such deposits would assist the coming recovery. It is perilous in the extreme to say anything which may still further weaken the habit of private saving.
And now we read Tyler Cowen at Marginal Revolution who is discussing the alleged problem of too much corporate saving:
Overall I am puzzled at the nature of the worry here. Corporations with cash surpluses are not destroying real resources, nor are they stuffing cash in their mattresses. They are investing in financial assets.

Take a financially conservative corporation, which holds its surplus in the form of T-Bills. If it bought the T-Bills fresh at auction, that’s lending money out to the government and the capital is still deployed. Isn’t that called…in some circles…stimulus? (I’ve even heard the multiplier might be 1.4! Or does only the borrower get credit and not the lender?) It’s trickier if the corporation buys the T-Bill on the secondary market, but still a) someone else has the money now, and b) this resale opportunity encourages other investors to buy freshly created T-Bills, thus putting capital in the hands of the government. In terms of final effect, there should be a near-equivalence between buying old and new T-Bills.

I am not claiming that they are making exactly the same point (but perhaps they are). But the similarities are patent. Perhaps this is another example of the continuing debate on the fundamental issues raised by Hayek and Keynes in 1932.
First as far as the Hayek, Robbins, et al, comment is concerned, it is correct, but misses the greater point that the business cycle is a re-structuring of the economy away from the capital goods sector toward the consumer sector. Thus, the focus shouldn't be exclusively on the buyer of existing stock during a downturn, but also the seller. The seller, if he sells stock to use in the consumer sector, is actually draining funds from the capital goods sector. Something you would expect during a downturn. Thus, the new buyer (i.e.saver) rather than expanding the capital structure is merely trading his cash for already created capital. Thus,  his money (via the seller) could very well be going into the consumption sector, versus a direct investment where new resources are used to create an expanded capital goods sector.

This is the key to what is going on, the capital structure impacy, and seems to have eluded (of all people) Hayek, Robbins et al, with their focus on on the buyer rather than the buyer and seller. That said, their point with regard to the importance of buyers of already created capital is important, but we can extend their view to say that it is also important in the sense that future investors in securities know, that at the time they choose to sell, buyers will be around to purchase their previous investment. This knowledge and buyer action (in buying existing securities) is of utmost importance, since if these type purchases were dissuaded or redirected, it would result in less interest from original purchasers in making investments.

Rizzo's error  is in equating what Hayek, Robbins, et al, discuss with what Tyler Cowen discusses.

Cowen is discussing the charge that corporations are holding large sums of "cash" that are therefore not "working" in the economy. Cowen correctly points out that it is incorrect to view this cash as being idle. In fact, I made the same argument the day before in my post, Krazed, Konfusion from Krugman.

I get a little nervous when Cowen calls the purchase of T-bills " lending money out to the government and the capital is still deployed." It isn't capital in my book, it is lending out for government consumption. Cowen seems to understand this since  in a roundabout way he eventually gets close to this point, though you really have to look carefully for it. But Cowen's main point is correct, money being held by corporations isn't idle, it is being loaned out and all those who think otherwise are mistaken.

There's something to the Hayek-Keynes debate in Cowen's discussion, since he ties it in with his closing sentence:

Why is it so frequent that economists take Keynes's analysis of sitting on currency and apply it to savings and investment?
But it has little to do with the section of the letter Rizzo quotes. Hayek, Robbins et. al are discussing what happens to investment money when already issued securities are purchased, Cowen is doing no such thing. He is pointing out that corporate cash isn't idle when it shows up on a balance sheet as "cash". That investment is actually going on is Cowen's point. He does not go near the topic of whether new securities or old are purchased.


1 comment:

  1. RW - I agree Thinkmarkets does occassionally get lost in the tall grass but I don't think Rizzo was trying to "equate" Hayek/Robbins with Tyler Cowen. I think he was trying to point out the saving/investment versus spending argument that never seems to die.

    Rizzo's summary statement was a little confusing but the second half seems on target: "Perhaps this is another example of the continuing debate on the fundamental issues raised by Hayek and Keynes in 1932."

    Hayak/Robbins are talking about the value to the capital market of transactions in the stock market. Cowen is talking about cash on corporate balance sheets which means it can't be "invested" in anything with a maturity date exceeding one year. This money is deployed but not invested in productivity enhancing capital. Particulalry if used for T-Bills as the govt. will just spend it. But this is what Tyler Cowen (and Keynes) want to happen. And so (according to Rizzo) Cowen continues what I consider a useless "debate," ie. is it better to spend or save to cure a recession?

    While Hayek/Robbins seems to be stressing the importance of savings and capital investment which is suported by transactions in the stock market. And here I have a view different than yours - it is of little importance to mechanistically track the cash back to the seller to see if he uses it to buy a suit or invests in capital equipment. It can't be done. Whether the suit is a consumer good or a business investment depends entirely on the perception of the seller of stock. A subjective judgement which he himself may change from day to day.

    However, the PRICE established by the continuous transactions in the stock market provides indispensable information for both consumers and investors and this, I believe is the key point.