Nicholas Wapshott’s *Keynes Hayek*

by on December 6, 2011 at 3:41 pm in Economics, History | Permalink

I very much enjoyed this book — which is detailed and entertaining and conceptual all at once — and I wrote a lengthy review of it for National Review (not on-line that I can find, issue of 11/28).  It’s a model of how to write popular history of economic thought, and still teach professional economists at the same time.  Excerpt from my review:

For all his brilliance, Hayek didn’t — at the critical time — have a good enough understanding of the dangers of deflation.  He didn’t realize the extent of sticky wages and prices and, more deeply, he didn’t see that ongoing deflation would render the “calculation problem” of a market economy more difficult…

Hayek’s biggest [recent] intellectual victory probably has come in the aftermath of the Obama fiscal stimulus.  A lot of the modern-day Hayekians, most notably Mario Rizzo of New York University, predicted that the stimulus would not provide lasting aid to the economy but rather would impose an artificial boom-bust structure on the economy.  The early spending of money would boost measured national income, but eventually those jobs would prove unsustainable: the stimulus funding would run out, the jobs would disappear, and the economy would slow down once again.  That is exactly what we saw in the spring and summer of 2011.

A Hayekian perspective leads one rather naturally to the view — now quite vindicated — that the aid to state and local governments would preserve some jobs but the spending projects would mostly fail, including when it comes to sustainable job creation.  It’s often neglected that Hayek’s macro is a general perspective which goes well beyond the particular cyclical story involving the time structure of production.

In the review, loyal MoneyIllusion readers will enjoy my discussion of Scott Sumner and how he fits into these debates (“These days I cannot go anywhere in the world of economics, or blog readers, without hearing his name.”).

You can buy the book here.

Addendum: I quite agree with Alex’s take on Hayek, and had drafted a post of my own, saying much the same thing.  Eighty or so years later, people are still taking potshots at Prices and Production, among Hayek’s other works.  Eighty years into the future, how many current Nobel Laureates will be receiving comparable attention?

Greg Ransom December 6, 2011 at 3:55 pm

I found Wapshott’s book to be error ridden and deeply flawed by significant and repeated failures of understanding and interpretation. He really doesn’t get Hayek & can’t be said to have really mastered what is really going on in the conflict of economic strategies and specifics at the center of the Hayek / Keynes story.

For all that, he’s a very good writer, however, and tells a good story, even if it does more to rubber stamp old myths than it does to capture a story which truly has yet to be competently told.

But perhaps we didn’t read the same book.

ionides December 6, 2011 at 4:06 pm

As I understand the menace of deflation, no one spends if they expect prices to fall. But if you accept (or even entertain) the efficient markets story, then every price at every moment has an equal chance of going up or down. So how can there be such a thing as expected deflation? I have read that there was a sharp and sudden deflation in 1920, which terminated a severe recession rather quickly. According to these sources, it was the pressure on business by Hoover to keep wages up that prevented a similar adjustment in 1930.

Alex Godofsky December 6, 2011 at 4:16 pm

But if you accept (or even entertain) the efficient markets story, then every price at every moment has an equal chance of going up or down.

This just… isn’t true. At all. It means that returns aren’t serially correlated. Additionally, EMH on the timescales you’re discussing only applies to asset prices.

Curious Bystander December 6, 2011 at 4:31 pm

The “Menace of Deflation” main problem(luck) is that it stops after first iteration. Namely, at the question: “who’s gonnna buy stuff now if tomorrow it will be cheaper?”.

Let us assume that there is deflation and the tomorrow has come. Will consumers buy the cheaper stuff or will those wait for the day after tomorrow when it will be cheaper? And the day after tomorrow?

Since the conclusion that because of deflation people will never, ever buy anything again, is… pardon my English, absurd, there must be a problem with reasoning above.

I know what my answer is, but I’m curious to see other answers.

cthorm December 6, 2011 at 4:51 pm

Well before anyone stretched their brain a little too much, this much ballyhooed effect of deflation would only present itself for large purchases. Effectively no one would hold off purchasing groceries, clothing, children’s toys, gasoline etc. There simply is not much to gain from price declines on products that are small relative to your income/wealth. Let alone the likelihood of deflation being compressed into such a small time frame that it would even be noticed.

The real “wait for tomorrow’s lower price” effect hits durable goods like cars, televisions, computers, and HOUSING. With the exception of cars, everything in the previous list could be considered in deflation now. For technology goods the effect is compounded because waiting for tomorrow will also yield a better product. In the case of housing, the inventory is taking forever to clear because of how long the foreclosure/short sale process takes, especially with idiotic interventions like foreclosure moratoriums.

bartman December 6, 2011 at 5:01 pm

Real prices of lots of tech goods (pcs, cell phones, big screen TVs, etc) go down more or less continuously – when I’m in the market for a computer, I know I can always get a better deal by waiting a month – yet people still seem to buy them. I guess the marginal utility of consumption between now and some future period is greater than the monetary gain derived by deferring consumption.

cthorm December 6, 2011 at 5:11 pm

>I guess the marginal utility of consumption between now and some future period is greater than the monetary gain derived by deferring consumption.

Bingo, that’s the central trade-off that still makes you buy. But consider the same situation where you’re not yet really in the market for a computer; sure you’d like a new one, but you still have one that works. It will take a lot better of a deal, or much better technology, to make you take the plunge. This is actually born out in the data – sales of new computers have been slowing for years while the average age of computers’ in use has risen (about 5 years now).

Curious Bystander December 6, 2011 at 5:37 pm

:: The real “wait for tomorrow’s lower price” effect hits durable goods like cars, televisions, computers, and HOUSING. With the exception of cars, everything in the previous list could be considered in deflation now. ::

So, are you saying that something must be done or people will never ever buy televisions, computers, houses again? (As in “deflation spiral” scenario)

Frank December 6, 2011 at 9:58 pm

Love you all, however we see here the classic error of confounding changes in individual prices, with changes in the price level.

Curious Bystander December 7, 2011 at 1:17 am

Love you three, Frank, but explain how deflationary changes in the price level will lead to consumer postponing the buying decisions forever. Anything less does not give you a deflationary spiral.

Just a deflationary blip, and there were plenty of them. The wholesale price index fall 40 percent from the summer of 1920 to summer of 1921. Quoting from memory the Allan Meltzer’s “History of Federal Reserve” which used to be available on Google Books.

Well, here’s another link: http://books.google.com/books?id=YKWvD7tn8uMC&lpg=PA34&dq=wholesale%20price%20index%201920%201921&pg=PA34#v=onepage&q=wholesale%20price%20index%201920%201921&f=false

Is a fall from 332.6 (May 1920) to 204.6 (May 1921) general enough? So where’s my deflationary spiral, dude?

cthorm December 7, 2011 at 10:28 am

>So, are you saying that something must be done or people will never ever buy televisions, computers, houses again?

No, that is not at all what I am saying. I’m pointing out that the demand curves for durable goods naturally tend to be more sensitive to price changes. I don’t put much stock in the “deflation spiral” idea other than a true debt-deflation (which ultimately has a floor); I think this is what has been observed in the housing market post 2007. With that being said I think Sumner is absolutely right that the severity of the economic slowdown has been exasperated by monetary policy, and one of the best remedies is to move to an explicit policy target like NGDP.

Andrew' December 6, 2011 at 4:20 pm

He’s going to be peeved when he learns there is no debate.

david December 6, 2011 at 4:22 pm

Review appears to be here provided you have a subscription, which I don’t (alas).

Dan December 6, 2011 at 4:36 pm

“ongoing deflation would render the “calculation problem” of a market economy more difficult…”

I would appreciate some clarification here. I’m not sure I understand the mechanism through which deflation worsens the calculation problem. My guess: suppose the economy goes into recession. There was some inefficient capital investment that needs to be reallocated. The velocity of money drops and deflation ensues. Deflation increases the present and future value of cash deposits relative to investment. Enterprises that would have been viable in a stable monetary environment are now starved for capital.

Can anyone provide some insight?

UnlearningEcon December 6, 2011 at 4:48 pm

It seems to me the reason still people have to take potshots at P&P is because it’s kept alive by Hayekians, particularly on the internet, despite the fact that they *still* haven’t reconciled Hayek’s ABCT with multiple interest rates.

Curious Bystander December 6, 2011 at 5:48 pm

If you don’t mind, where from did you learn about ABCT? My guess is some review of Hayek-Sraffa debate.

There’s absolutely nothing wrong with second-hand knowledge (all textbooks are), as long as it is accurate. But in this case it isn’t. There is nothing in ABCT which depends in a essential manner on the existence of a single interest rate.

At least, for Mises’ ABCT. Because if you think that ABCT is Hayek’s, that wrong. Now if you think that Hayek’s version of ABCT is technically flawed, that’s quite a different thing.

UnlearningEcon December 7, 2011 at 9:13 am

I admit to starting P & P and giving up as it is a tough read and I was aware that it is not widely regarded as valid. I also read Sraffa’s review.

From what I understand the CB supposedly suppresses the rate below the ‘right’ rate, leading some projects to appear profitable and causing capital misallocation. From there the impact of Sraffa’s criticism is obvious.

I can’t see how you can reconcile this with multiple interest rates, as it suggests misallocation will occur and almost any interest rate and one that is too high might invalidate investments that would have been ‘OK’ according to ABCT.

UnlearningEcon December 7, 2011 at 9:14 am

Correction: *at* almost any interest rate.

Curious Bystander December 7, 2011 at 10:34 am

I’d say that ABCT comes in two varieties. The CB (central banking) and FRB (fractional reserve banking) variety. The first one stresses manipulation of percent rate by CB, the second the creation of money substitutes (Mises) by FRB.

Couple the second with Cantillon effects, entrepreneurs being the one which get the greatest part of newly created money (substitutes) and you get the (over)mailinvestment Austrian theory of boom & bust. Once again the important part is that entrepreneurs actually have more money at their disposal, while the price of capital goods is lagging behind. The percent rate in this story, while easily the more visible effect, is only of secondary importance.

And of paramount importance is the mis-allocation of resources which is revealed during the bust phase of cycle.

UnlearningEcon December 7, 2011 at 11:48 am

Hmm but I am curious as to what exactly constitutes ‘overinvestment’. It seems to me many Austrian arguments are circular: credit expansion due to FRB causes over/malinvestment, which is bad, so credit expansion is bad. But I rarely see anybody justify the first statement, except perhaps through vague and slightly mystical stories about gold.

Curious Bystander December 7, 2011 at 12:36 pm

:: overinvestment ::

The best what I can come on the spot is: Let’s imagine a smallish economy in equilibrium where in the absence of credit expansion a 100 houses are build and sold per year. Now if a credit expansion occurs and most of it goes to the builders of houses they suddenly have money to build 120 houses. And they go for it. Expect that when the projects are started it turns out there are not enough bricks to finish 120 houses. It was not obvious from the beginning because the price of bricks was lagging behind the trend, and in money terms the projects where looking good.

Another problem can that since the surplus of money has gone to the builders, the buyers of new houses have money just for 100 houses to buy, not for 120.

Just an example of course, not a definition.

TallDave December 8, 2011 at 10:09 pm

In China, they are bulding entire cities where no one lives.

Their investment ratio is ridiculously high. By some estimates, within a decade the depreciation and maintenance will exceed economic growth. That could be a truly epic crash.

Ryan December 7, 2011 at 8:39 am

Similarly, people are still taking pot shots at Ayn Rand, because true-believers keep bringing her up and she couldn’t think her way out of a paper bag. Longevity isn’t a good standard for someone who says what an interest group wants to hear.

TallDave December 6, 2011 at 4:50 pm

Looks fun, thanks for sharing, have to add that to my reading list.

Tim December 6, 2011 at 4:55 pm

“A Hayekian perspective leads one rather naturally to the view — now quite vindicated — that the aid to state and local governments would preserve some jobs but the spending projects would mostly fail, including when it comes to sustainable job creation.”

It’s interesting that you put this down as a being vindicated. Since most states CUT their budgets after the stimulus on top of losing the stimulus dollars.

I suppose you can fix this by taking the opposite tack and cutting tax and interest rates, oh wait…

TallDave December 6, 2011 at 5:01 pm

The strong Keynesian argument says the wonderful bounty of government spending would have lifted revenues higher, negating the need for future cuts.

Tim December 6, 2011 at 5:08 pm

Only so long as you don’t do it half-way. But I suppose that’s the argument for why cutting-taxes and interest rates has done jack for the economy as well.

TallDave December 6, 2011 at 5:22 pm

Yes, yes, the $1.5T deficits weren’t big enough. Frankly, I’m just glad we didn’t have to find out $4T deficits weren’t big enough either.

I suppose one can always argue “it could have been worse!” it’s hard to square this graph with the notion increasing gov’t spending is the road to prosperity.

http://www.usgovernmentspending.com/us_20th_century_chart.html

UnlearningEcon December 6, 2011 at 5:35 pm

It’s not really about the size of the deficit, it’s about the size of the stimulus. Plenty of countries that clearly have contractionary policies have deficits like Greece, Ireland and the UK.

TallDave December 6, 2011 at 6:41 pm

Unfortunately, the bond markets do care about solvency.

TC December 6, 2011 at 6:52 pm

In the case of the United States and Japan sovereign debt, the Bond markets are wrong.

Believing something impossible is possible doesn’t make it possible, even if you really, really believe it.

Solvency isn’t an issue for the person that owns the printing press. Solvency is not the same thing as value. These distinctions are missed by modern macro. They are two fundamental errors that makes everything based on them logically flawed.

TallDave December 6, 2011 at 9:47 pm

Zimbabwe isn’t doing all that well either.

TC December 7, 2011 at 10:01 am

That’s the entire point, thanks.

Call me Bob December 6, 2011 at 5:13 pm

You’re missing Tim’s point. The federal government spent more, but the total amount of fiscal stimulus is less than the federal price tag because states used the money from the federal government in part to reduce their own spending. Whatever you think of Hayek and Keynes, the point is that total amount of stimulus funds is not just the federal increase, but federal increase + state cuts.

Separately, I would say that the Keynesians like Krugman would say that their was not enough fiscal stimulus and that it did not last long enough. So it’s not really clear from the outcome of the crisis that Keynes is wrong.

TallDave December 6, 2011 at 5:19 pm

Tim’s argument said they cut their budgets after the stimulus, not during.

It’s never quite clear, that’s why economics is the dismal science. OTOH a few trillion more in debt probably would have meant more downgrades.

TC December 6, 2011 at 8:41 pm

Krugman has said the same over and over – the stimulus was way, way too small. He said it at the time.

We know today the fall in GDP (and NGDP) during this time was much more severe than we thought in 2009.

Using the correct GDP and unemployment rates from 2008-2009 with Okun’s law and the size of the stimulus puts us very close to current unemployment rates.

How is does this vindicate the Hayekian view at all?

TallDave December 6, 2011 at 9:53 pm

How is does this vindicate the Hayekian view at all?

“that the aid to state and local governments would preserve some jobs but the spending projects would mostly fail, including when it comes to sustainable job creation.”

That seems pretty self-explanatory, but if you need more…

http://reason.com/blog/2011/11/03/ener1-the-next-solyndra

Andrew' December 7, 2011 at 7:51 am

“How is does this vindicate the Hayekian view at all?”

Couple things, “too small” may be always true according to Krugman, as in “if it failed, then it was too small.” I remember seeing something like it was 1/3 to 1/2 of what Keynesians would have preferred. Well, that’s fine, but if it’s not a threshold and is relatively linear then we’d expect something rather than nothing. I don’t expect that it is linear, however according to the models such as the administration and Zandi’s they over-estimated the effect on unemployment and the economy.

TC December 7, 2011 at 10:05 am

Ya’all do know the empirical data, right? The employment rate was already much higher than the administrations maximum rate “without stimulus” when the stimulus was enacted.

Facts have an unfortunate Keynesian Bias.

TC December 7, 2011 at 10:19 am

Here is me calling for much higher spending before Krugman using Okun’s law:

http://www.dailykos.com/story/2008/12/19/670412/-How-much-Stimulus-is-Needed-Estimate:-$1T-to-$16T?via=history

Here is me saying the recovery will be horrible because of too little spending and calling for a payroll tax cut:

http://www.dailykos.com/story/2009/03/10/695441/-Finally-the-beltway-notices-the-Stimulus-passed-was-too-small?via=blog_641371

Agnotology is alive and well.

It’s funny you want to talk about a few hundred million of “waste” on technology when the banks got orders of magnitude more money.

http://www.dailykos.com/story/2009/01/21/686821/-Bank-need-trillions-to-remain-solvent,-but-economists-are-concerned-about-government-waste?via=blog_641371

The truth of the banking bailouts is actually worse than that post.

Then, If you think “my perfect libertarian world would have let these banks fail”, you are evil. The human misery caused by a world wide banking system failure cannot be overestimated.

TallDave December 8, 2011 at 10:13 pm

I’m duly impressed with your ability to be even more wrong than Krugman.

It’s not a few hundred in waste on “technology,” it’s tens of billions in cronyism — GM alone cost taxpayers $40B when the unusual tax treatment is included (oh, and their inventory levels are looking unhealthy again). Also, the banks paid their money back. Solyndra, Sun Power, GM, not so much. Nor is massive malinvestment the road to prosperity.

Floccina December 6, 2011 at 8:55 pm

Whatever you think of Hayek and Keynes, the point is that total amount of stimulus funds is not just the federal increase, but federal increase + state cuts.
Why not federal increase + state cuts.+ private spending cuts?
I think the fiscal stimulus debate is moot because even using the Keynesian numbers the cost per job created is much too high. IMHO better to use monetary policy and replace minimum wage with a wage subsidy. That spending would be much better targeted at unemployment.

Andrew' December 7, 2011 at 7:07 am

The only thing I can think of that uses no (well, not much) real resources to keep people busy is training and education.

TallDave December 6, 2011 at 4:59 pm
Torrey Byles December 6, 2011 at 5:04 pm

Hayek is an ideologue. He is not a macro economist. There is no “vindication” of Hayek’s views of anything particularly Obama’s stimulus. What world do you live in?

Wimivo December 6, 2011 at 5:31 pm

Basically. About 20 different models, including Keynesian ones, predicted “exactly what we saw in the spring and summer of 2011.” Kinda bizarre to highlight Hayek’s.

TallDave December 9, 2011 at 10:45 am

Hayek’s were the best fit.

Meegs December 6, 2011 at 5:33 pm

I doubt anyone will bother taking potshots at Nobel Laureate Krugman in 80 years. His views, particularly on our current problems, may be irrelevant by then.

“The fiscal stimulus needs to be bigger.” Really? That’s the only insight he can offer on the greatest economic crisis of our lifetimes?

joan December 6, 2011 at 5:54 pm

Eighty years into the future, only Nobel Laureates in economics will still have people taking taking potshots. In other fields problems are solved and people move on.

k December 7, 2011 at 11:20 am

As the recent faster than light particle controversy proves, you are not correct.

Michael Carroll December 6, 2011 at 6:02 pm

I am persistently baffled why otherwise intelligent people think it would be better to be persistently unemployed from 2008 to 2011, than to be employed from 2008-2010 and unemployed in 2011. If the big argument against stimulus is that it doesn’t generate sustainable jobs then the critics need to go back to the drawing board on several fronts.

The whole ARRA was about 2.5 percent of GDP and a third of that was tax cuts. Is there really someone stupid enough to be arguing there would have been a big rebound in employment between 2008 and 2011 if only we refused to spend that anemic $500 billion in stimulus?

It is sad how certain people’s ideological blinders have come to outgrow their heads.

return December 6, 2011 at 7:53 pm

IOW the stimulus was destined to fail and that it should have been passed if only to create the appearance of doing something. Furthermore, it is on the critics of the stimulus to go back to the drawing board, and not the ones who came up with it if it did not create sustainable jobs. Bizarre.

TC December 6, 2011 at 8:42 pm

Somehow, we’ve reached maximum output with 20m people sitting on their ass and 15% of the country on food stamps.

NAME REDACTED December 7, 2011 at 5:45 am

Assuming that actually helps at all.
There are arguments (that I ascribe to) that say that stimulus makes things worse.

Martin December 6, 2011 at 6:38 pm

“I doubt anyone will bother taking potshots at Nobel Laureate Krugman in 80 years. His views, particularly on our current problems, may be irrelevant by then.”

Aaaah, Tyler Cowen knew exactly what he did there with his cheap shot on the current Nobel laureat(s): so good that Krugman has one, that’s really an advantage for Mr Cowen! It’s not like the profession has changed or so, and a single person simply doesn’t play the role any more they played back then, as in physics, chemistry etc., too: Tell me, Mr Cowen, who are the phycisists and chemists we will talk about in 100 years from now like we talk about Marie Curie today?

Congrats, again – your readers know exactly who to be angry at (don’t say his name….pssssss….) – for disrupting the standards of your blog writing with silly Krugman bashing, sure you’ll get a Nobel for that.

Chris D December 6, 2011 at 6:53 pm

“Eighty years into the future, how many current Nobel Laureates will be receiving comparable attention?”

As many of them whose work seems to support the right-wing narrative. Bonus if it gets flogged by the future’s Glenn Beck.

But Martin makes a good point: individual contributors in any field are no longer what they were.

Danny December 6, 2011 at 6:56 pm

Where is the empirical evidence for the “dangers of deflation”? When gas prices deflate, people buy more. When Walmart deflates prices, people buy more. When house prices deflate, people buy more. When health care prices deflate, people buy more. In fact, if you take the purest empirical model of deflation, a dutch or descending auction, we should expect that nobody would ever buy anything at all…and yet they do, and they have been doing it daily for centuries.

The “danger of deflation” is a myth supported by an incomplete theory. Sure, people may expect prices to drop more when they see them drop a little bit, but people compete for the things that money buys just as much as producers compete for the money that buys it. On black friday, we had people pepper spraying each other for electronics…if they would have just bought into the Keynesian fear a little more, they could band together and wait it out for lower prices…but real people don’t do that!.

Dan December 6, 2011 at 7:29 pm

When the price of a good goes down, people buy more of it because it has become cheaper relative to other goods. That’s not deflation. Deflation is a general decline in the price level. You need to do a little more reading and thinking.

http://www.frbsf.org/education/activities/drecon/2003/0305.html

Danny December 6, 2011 at 9:03 pm

Price level metrics, always are driven by some goods more than others. In this recession, deflation was driven by oil and housing, but health care was pushing in the opposite direction. Is that not the same thing as becoming “cheaper relative to other goods”?

And if there is some danger of a deflationary spiral, shouldn’t we see the “rational” expectations effects of postponed purchases in the sectors that are driving the deflation? Or are consumers supposed to immediately halt all discretionary purposes because their CPI iPhone app says things are going to get cheaper “in general”? Do they stop buying video games because gas prices are falling? Do they start buying cars because health care costs are rising?

Neither the most rational person nor the least rational person I know act “rationally” according to the Keynesian interpretation of rational expectations theory. In fact, nobody I know acts this way. What is this, some sort of niche rationality?

NAME REDACTED December 7, 2011 at 5:47 am

GAAAA, you know, if only macroeconomists had paid attention in micro theory class.
Deflation due to productivity increases is good. Deflation due to money supply decreases on the other hand, are bad.
George Selgin made this point in his paper “Less Than Zero”

George Selgin December 7, 2011 at 6:33 am

Actually, Dan, most price level measures refer to prices of final goods, not factors. So you can have deflation according to the usual definition that’s due to most or even all goods getting cheaper relative to factors of production. Neglect of this very real possibility is evidence that quite a few economists “need to do a little more reading and thinking” when it comes to the commonplace claim that deflation is necessarily a bad or “dangerous” thing.

Floccina December 6, 2011 at 9:03 pm

What about debt service, sticky wages and minimum wages.

Danny December 6, 2011 at 9:30 pm

What about wealth erosion and higher costs of living? Deflation isn’t problem free, but inflation is also not problem free, and neither are disastrous in small quantities. Despite the warnings of Krugman, we aren’t going to spontaneously melt into a disastrous spiral if we nudge a little below zero on your favorite price index.

Alan December 6, 2011 at 7:20 pm

The economic beliefs of most people are
a) preferences about how the world ought to be
b) a product of genetics and upbringing and never change after the age of about 15.

Most economic theory is an attempt to find a mathematical justification for wanting the world to conform to a set of preferences.

Scott H. December 6, 2011 at 10:37 pm

I feel that the economy, the world economy, needed to massively adjust circa 2009. I just don’t think those adjustments can happen with gigantic stimulus dollars creating additional bubbles. I’m happy we had the stimulus we did to stave off panic after the “mark to market and kill Lehman Bros.” period.

Summary: Stimulus for short term panic = good. Stimulus for longer term economic restructuring = meh.

Of course, its not science; its my gut.

Scott H. December 6, 2011 at 10:55 pm

One other important point about this Keynesian view is that, when Keynes was writing, government expenditures and safety nets were nothing like they are today (as a % of GDP). This sizable portion of the economy that is tied to the government, while not stimulus, is also impervious to the standard business cycle. That has to count as some sort of Keynesian response beyond what could ever be contemplated in the 1930s. These safety nets and government spending are much more “credible” over the long term than any stimulus monies. Therefore, I would expect them to be more easily calculated into business’s calculations regarding the future.

Maybe we do live in the best of all possible worlds? Maybe the Obama/Bush (85/15) stimulus packages were the right size?

NAME REDACTED December 7, 2011 at 5:48 am

And yet, recessions are longer and slower to recover from than ever?
I suspect that the length of the recession is made worse by all the government activities that are designed to prevent readjustment.

TallDave December 9, 2011 at 10:49 am

Exactly!

People tend to forget the meaning of the word “stabilizer.”

Merijn Knibbe December 7, 2011 at 5:09 am

1. Hayek’s social theory is very much like Norbert Elias his theory of ‘civilisation’: http://fr.wikipedia.org/wiki/Norbert_Elias. Both of course came from Vienna and it’s ironic (and a corroboration of the ideas of Elias) that they both fostered and believed in the same kind of ideas. Center stage in these ideas are people who adapt to their society, to enable civilisation (including market relations) as we know it. They do not only adapt behaviour, they adapt their soul, “You are an american”. As society becomes more complicated people adapt more (see the book Traces of this can of course be found in Huizinga’s ‘Herfsttij der Middeleeuwen”, a work admired by Elias. Elias ideas were of course much more sophisticated and empirical than those of Hayek, a recent book based on comparable ideas is ‘our better angels’. No stable, well behaved indifference curves and individual rationality in these ideas, by the way.

2. Unlike Hayek, Keynes did master National Accounting and his lasting legacy is the fusion of ideas about the market with the empirical estimates of the circular flow of money as estimated with the National Accounts (and the flow of funds). Hayek never even came close. The National Accounts are, of course, to modern and ancient macro economics what the Periodic Table of the Elements is to chemistry, and even more. Lucas of course tried to introduce macro indifference curves into the equations, but these don’t even have an ordinal scale (Arrow paradox), nobody have ever succeeded in even estimating ‘revealed preference’ (and ordinal concept) because of this. These curves are lacking concept als well as definition and it’s indeed the largest failure of neo-classical economics that no neo-classical inclined economist has ever been able to even try to estimate one ‘Bentham’ of social utility (never mind the demagoguery of ‘micro foundations’: these social indifference curves are, if anything emergent macro curves, no methodological individualism and micro overthere)

And no: GDP or total expenditure or intermediate spending or whatever are not a measure of prosperity. And they were never designed to be such a measure, even though neo-classical economists tried to use them in this way. They were designed to track the circular flow of money. Might be interesting, surely when, as in the thirties and in the Eurozone right now, money stops flowing.

P.S. – the flow of money of course also includes trade in second hand stuff, which is not always included in the National Accounts, like stocks and existing houses. It’s therefore quite silly to estimate the velocity of money by deviding GDP by the money stock. Dividing total expenditure including turnover on the stock market by the stock of money would already do a better job. However: a lot of money creation is actually driven by the second hand trade: think about mortgages on purchased existing homes, the ECB stats (part of the flow of funds) clearly show how much this is.

Summary: Hayek’s understanding of the macro economy was limited.

NAME REDACTED December 7, 2011 at 5:50 am

Furthermore the national accounts don’t come close to balancing and haven’t since the late seventies.

NAME REDACTED December 7, 2011 at 5:51 am

I mean the USA’s National Accounts.

Curious Bystander December 7, 2011 at 8:07 am

:: Unlike Hayek, Keynes did master National Accounting ::

– Daddy, who as Karl Marx?
– An economist, honey?
– Like, aunt Sarah?
– Oh, no. Aunt Sarah is a senior economist.

nemi December 7, 2011 at 7:01 am

“Eighty years into the future, how many current Nobel Laureates will be receiving comparable attention?”
Well – here is a list of people who got their nobel prizes at about the same time as Hayek.
Outside right-wing circles I can assure you that most of them resive a lot more attention than Hayek.

1978
Herbert A. Simon
1977
Bertil Ohlin, James E. Meade
1976
Milton Friedman
1975
Leonid Vitaliyevich Kantorovich, Tjalling C. Koopmans
1974
Gunnar Myrdal, Friedrich August von Hayek
1973
Wassily Leontief
1972
John R. Hicks, Kenneth J. Arrow
1971
Simon Kuznets
1970
Paul A. Samuelson

Tom December 7, 2011 at 7:46 am

How many Nobel Laureates have the Koch brothers buying economic departments off to have professors hired that spread their propaganda that favors the Koch brothers?

TallDave December 9, 2011 at 10:48 am

We have the Koch brothers, they have Soros plus the large majority of academia on their side plus most people in gov’t.

NAME REDACTED December 7, 2011 at 8:11 am

“A Hayekian perspective leads one rather naturally to the view — now quite vindicated — that the aid to state and local governments would preserve some jobs but the spending projects would mostly fail, including when it comes to sustainable job creation. ”

Beyond that. It would make the second crash bigger, because you kicked the can down the road without fixing the structural problems that caused the crash.

george December 7, 2011 at 8:38 am

Deflation isn’t necessarily a bad thing, neither is inflation. Economists believe in witches.

nemi December 7, 2011 at 9:09 am

Of course not – but if holding money offer a positive rate of return, while the (risk adjusted) return on real investment does not – you are in a bad place.

roystgnr December 7, 2011 at 3:59 pm

Does your statement become any less true if “money” is replaced with any other commodity? We can run the printing presses as fast as necessary to prevent dollars from appreciating in value, but don’t people have the same disincentive towards spending and investment if they can just trade their dollars for something else that will appreciate? I suppose capital gains taxes put a limit on how well you can pull that off.

Brian J December 7, 2011 at 9:14 am

How can we say fiscal policy has been tried when states wiped out much if not all of the effect at the federal level? You’d think someone would have found something, anything, that tries to model this or even try to argue against this effect in broad ways. I have yet to see anyone take this into account, although that could be just because I missed something.

W. Peden December 9, 2011 at 4:15 am

Brian J.,

“How can we say fiscal policy has been tried when states wiped out much if not all of the effect at the federal level?”

If fiscal policy has not been tried, does that mean that it is incorrect to attribute the stabilisation of output (it would be wrong to say “recovery”) since 2009 to fiscal stimulus?

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