Monday, June 13, 2011

On Hayek, not Mises, versus Keynes

A Washington D.C. insider with whom I have been discussing the importance of Ludwig von Mises beyond F.A Hayek, emails:


This is an old one but I just came across it. Thought you might read and comment on the blog. Hayek, not Mises, versus Keynes.
The first point that needs to be made is that although there is nothing inaccurate about the presentation of Hayek's view being a vertical aggregate supply curve, as Welker does. It does not give a complete picture of the way Mises and Hayek viewed the economy, they objected to over-aggregation. And the Welker simple chart with the aggregate supply and demand curves is an example of such over-aggregation. (Aside from the fact that, Mises in particular, wasn't a fan of diagrams. He wrote that supply and demand diagrams may help undergraduates but, overall, were merely byplay)  The aggregate supply curve eliminates a key point of emphasis with Austrian economists, that the key to the business cycle is how and where money is flowing within the broader supply and demand aggregates. If a central bank is pumping money and it ends up (as it usually does) in the capital goods sector, then that sector is boosted during the boom part of the cycle. During the bust period,it is the decline in money flow within that part of the  aggregate that the Austrians see as the causing the downturn (A necessary downturn, btw, to remove distortions from the money printing period.) So to talk in terms of super macro aggregates to an Austrian is sort of like saying, "Hey look down there, there are 22 people on the football field". Well yeah, but the Austrian is going to say disaggregate and look what is going on within the aggregation. There are 11 players trying to advance the football and 11 who are trying to stop the advance.

As for Hayek (and not Mises) taking on Keynes, that is mostly true that is mostly true, but that is a case of circumstances and the division of labor, than Hayek battling Keynes and Mises not seeing the errors in Keynes' thinking. At the time Keynes was advancing his theories, Hayek was in London, as was Keynes (They were personal friends), so Hayek saw Keynes work up close. Hayek was also writing in English, while Mises was mostly writing only in German (although he understood English). Further, there are so many errors in economics that there was something akin to a divison of labor going on in that Mises would have seen Hayek's  attack on Keynes and perhaps felt there was no need for him to go over that road in detail, since Hayek had done so, and further Mises didn't see anything new in Keynes theories that wasn't dealt with in the past by others. Mises had other work to do. Indeed, during part of the 1930's, he was writing Nationalokonomie, the early version of Human Action, arguably the most important work in economics, ever.

But, Hayek and Mises were clearly in sync when it came to business cycle theory, which is where Keynes focused.

At the time of Hayek's first seminar at the London School of Economics, Hayek wrote to Mises:
I am aware for the first time, that I owe to you virtually everything that gives me an advantage as compared to my colleagues here and to most economists even outside my narrow field of research.
Further, although Mises did not publicly comment on the Keynes-Hayek debates and did not comment on Keynes' General Theory when it was first published. He later did comment on Keynes as his popularity grew. In 1948, he wrote, for example, Stones into Bread, The Keynesian Miracle. It would not have made Keynes happy.

1 comment:

  1. I had a buddy who took a course from Gordon Tullock who made the same observation Hayek did about Mises. Tullock said - with certain exceptions involving quantitative methods - understanding Human Action gave him a huge advantage over other graduate level economists.