Mario Rizzo nails the relevant issues in the debate over Hayek’s importance as a macroeconomist. (HT Steve Horwitz)
…..
On this same topic, Troy Camplin quotes Brad DeLong:
Friedrich von Hayek is only a very minor and very unproductive figure in the work of macroeconomics. He–and Schumpeter, von Mises, and the rest of them–spent a lot of time figuring out why it might be that when you learned that you had overinvested and overborrowed, the natural and necessary thing to do was to shutter (rather than repurpose) factories and send your workers home to eat Cheetos and watch “The Real Housewives of Galt’s Gulch”.
To reinforce Troy’s point: DeLong’s interpretation of Hayek is utterly mistaken. First, Hayek’s theory of boom and bust was not one of over-investment; it was one of mal-investment. (Arnold Kling would say something like ‘investments of resources in unsustainable patterns of specialization and trade.”) Second, and relatedly, Hayek emphasized the need to “repurpose” factories and other resources (including labor). To accuse Hayek of simply wishing “to shutter (rather than repurpose) factories and send your workers home” to remain idle indefinitely is to egregiously misunderstand Hayek.
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Brad DeLong is a bitter, hostile, frustrated little man who always desperately wanted to be a very powerful figure in the government, and is permanently enraged at the ideological foes who he imagines have unfairly frustrated his ambitions.
It’s remarkable and depressing that such a tiny, vicious, irrational, compulsively dishonest little intellectual pinprick is one of the leading intellectual lights of the respectable left. He’s not merely wrong; he has never even made an attempt to be right. He just doesn’t give a s**t, and unlike Krugman, he never did.
It’s remarkable and depressing that such a tiny, vicious, irrational, compulsively dishonest little intellectual pinprick is one of the leading intellectual lights of the respectable left.
Which says what exactly about the “respectable left”?
I’m a fan of Horwitz’s quips and one of my favourites is his description of DeLong as the poor man’s Krugman.
“Brad DeLong is a bitter, hostile, frustrated little man who always desperately wanted to be a very powerful figure in the government, and is permanently enraged at the ideological foes who he imagines have unfairly frustrated his ambitions.”
There are a lot of Brad DeLongs out there. Several post frequently at the Cafe.
There are a lot of Brad DeLongs out there. Several post frequently at the Cafe.
Indeed, they are collectively referred to as trolls.
“From the prospective of scientific frameworks”…….didn’t Milton Friedman have an enormous influence in validating the study of macroeconomic aggregates?
You keep bringing it up. Has anyone else given you an answer?
vv
No they haven’t. You don’t have to believe in the value of macro to realize that Friedman probably convinced more people alive today of its value than Keynes did.
yep
And yet, he argued for smaller, less interventionist government. I’m glad we, including you Greg G, can all agree with Milton Friedman.
And the Gold Medal in the Irony Olympics goes to….Greg Webb: the former regulator who, after learning his craft at taxpayers expense, now works for the industry he used to regulate as they proceed with the work of regulatory capture. And all the while, he multi-tasks by lecturing us on the dangers of crony capitalism.
What an inspiring story! It more than compensates with chutzpah for what it lacks in originality.
You really are complete incapable of learning.
“Is our children learning?”
-G W Bush
Apparently not. Obama thinks there are 57 states and Hawaii is in Asia.
LOL! You know you’ve soundly beaten Greg G in an argument when he changes the issue into a personal attack.
It’s nothing to be proud of though. He is merely a useful idiot to corrupt politicians and their political cronies.
Wait a minute. Last night I was a full blown statist. Have I been demoted?
Nope. Corrupt politicians, political cronies, and useful idiots such as yourself are all statists. You are simply the non-benefiting useful idiot that Vladimir Lenin referred to when talking about those who mindlessly parrot the big-government line, but were not included in the very small elite circle of those corrupted by the power conveyed upon them.
I hold that instead of wealth and/or power, useful idiots merely seek to preserve a model that excuses their personal failures.
Don, you said,
“To accuse Hayek of simply wishing “to shutter (rather than repurpose) factories and send your workers home” to remain idle indefinitely is to egregiously misunderstand Hayek.”
I believe you misunderstood DeLong. DeLong had no intention of ever trying to understand Hayek, therefore, how could he have misunderstood him?
It’s remarkable that business cycle research can be considered peripheral to macro.
But not surprising, given our current predicament.
It’s not a “misunderstanding” of Hayek. It’s an intellectually bankrupt, totally dishonest bunch of demagoguery. Sorry, Brad, but unlike the comments on your website, you cannot delete the historical record that is out there in black and white for all to read.
Has Krugman or DeLong even bothered to read Hayek’s “Monetary Theory and the Trade Cycle” or “Price and Production”? All of the defenders of Hayek have read Keynes but none of the critics of Hayek have read Hayek. So why should anyone care about what they say when there is no possible way they can understand what they are talking about?
At least if they read the works, they could offer intelligent critiques.
No, he hasn’t read Hayek. The modern intellectual already knows that everything he disagrees with is stupid and therefore a complete waste of his time.
“The modern intellectual already knows that everything he disagrees with is stupid and therefore a complete waste of his time.”
Josh S: Your above statement rates quote of the day IMO.
Don
Any attempt to draw a line between over and mal-investment is a distinction without a difference. Over investment in steel factories is mal-investment.
Mal-investment in steel factorites (in excess of demand) is over investment.
Hayek is the one intellectually bankrupt.
Never does he give any means of method of correcting either over investment or mal investment.
How, save for intervention of the confidence fairy, is “repurposeing” or factories and other resources (including labor) to take place, especially once one passes the zero bound and deflation and liquidation are set apace?
We have all read Hayek. There is nothing there.
Any attempt to draw a line between over and mal-investment is a distinction without a difference.
There is a difference. The term “mal-investment” refers specifically to an investment that was made due to false market signals from an artificially-lowered interest rate. Now, a mal-investment may certainly be considered an over-investment. But an over-investment is not necessarily a mal-investment.
If interest rates are near what could be considered market levels, then over-investments are just a manifestation of, um, animal spirits run amok.
“Now, a mal-investment may certainly be considered an over-investment. But an over-investment is not necessarily a mal-investment.”
Shouldn’t that be he other way around? Even if all overinvestments are malinvestments, that doesn’t detract from the fact that it is malinvestments, and not overinvestments, that Hayek described–as any *economist* would know.
Never does he give any means of method of correcting either over investment or mal investment.
You mean you don’t know?
The means for correction is obvious to anyone who groks markets.
Wat is wrong with so many “smart” people not understanding how markets correct?
I’d tell you but you would refuse to believe it and likely abuse me for attempting to do so.
Mal-investment in Austrian thought refers to investments that are misdirected due to arbitrary (political) depression of interest rates.
Exactly!
Mal-investment, once its occurs (and how anyone knows when there has been a depression of interest rates is beyond me (especially if aggregates don’t matter)) is over investment.
How it happens is meanings and provides no insight as to the solution.
If, because of low interest rates alone we built a steel factory (another completely implausible assumption), we still have an over capacity of steel factories.
To correct the problem we have only two choices or options.
1) Increase the demand for steel
2) Increase the demand for something else, so that the steel factory is changed into a factory that makes: donuts.
Either solution requires an increase in demand.
How does Hayek propose to increase demand?
I love it when trolls change their names once their old nome de plumes are recognized and no longer responded to.
Yep. Which fool do you think this one is?
Luzha.
Reads like Luzha.
You’re talking about the wrong thing when you say “increase demand.” Demand in the abstract is limitless. You should be looking at supply, and what tradeoffs people are willing to make to access that supply.
In your scenario, there’s still demand for steel produced by that extra factory. The problem is that other uses of the factory are more profitable (your point # 2). Finding those uses is the big challenge, and it’s also where capitalism is so successful.
Also, there are far more than 2 options in your scenario. The factory could produce steel (#1), it could be repurposed to produce other things (#2), or it could be torn down and the components & land used to build an endless array of other things (#3+++). By ignoring the endless other options you are ignoring the benefits of the market.
My hypo doesn’t ignore the market
It asks the question you refuse, continually to answer—where is the demand, the $$$, going to come from to pay for whatever use to which the factory is put.
We can borrow the money, or use sweat equity, to convert the factory from steel to donuts, but the public still has to have the money to pay for the donuts we make.
Without an increase in total aggregate demand, our selling donuts can only result in some one else losing sales, say of shoes.
So, again, I ask, how does Hayek increase aggregate demand, other than the confidence fairy?
As to malinvestment, there is nothing there. The description is meaningless. It tells one nothing about what to do to get a closed factory reopened and its workers re-employed.
Further, there is no difference between re-fitting a factory and tearing it down, etc., the later just being an extreme form of the first. (As an aside, we can also tell that due to market failure and inadequate regulation, many factory sites are not torn down and reused, due to site pollution. Hayek was a very poor observer of reality.)
To correct the problem we have only two choices or options
If you see only two options which are really the same option (increase demand), then I see the problem as your self imposed limitation.
There is always demand latent in humans, to be expressed when factors align.
The problem with macro people is that they assume that they can direct the demand appetite of others.
People aren’t interested in fulfilling economaster equations.
Sam Grove asserts, “The problem with macro people is that they assume that they can direct the demand appetite of others.”
Quit to the contrary, salt water economists understand that total aggregate demand is a zero sum game. If people buy more donuts, they have less to spend on steel.
It is because one cannot direct the demand appetite of others directly, that one must focus on aggregate demand.
Macro economics attacks the zero sum problem by looking for and means and methods to increase aggregate demand, leaving it for the market to allocate how the increase is spent.
Since Hayek had no means or method to increase aggregate demand, it is self evident and true that he wasn’t much of a macro economist.
If people buy more donuts, they have less to spend on steel.
Unless clever people figure out how to reduce the cost of producing donuts and steel, and THAT is the history of economic development.
I promised myself I wouldn’t respond to trolls, but this one is just too easy:
“Macro economics attacks the zero sum problem by looking for and means and methods to increase aggregate demand…”
If aggregate demand is a zero-sum game, as you claim, then it cannot, by definition, be increased. A gain in one area would be offset by a loss in another and the AD would remain exactly the same.
and how anyone knows when there has been a depression of interest rates
Usually after the fact, but when the central bank decides what interest rates are going to be and they are pushing them lower, we can assume that rates are being depressed.
When the central bank decides what interest rates are going to be and they are pushing them lower, we can assume that rates are being depressed?
But of course, as Friedman explained, this isn’t true at all.
Surely, you are aware (the only thing that Friedman may have gotten right) that low interest rates show an inadequate supply of money. Don posted the quote a few days ago. It is self evident that the low rates are intended to create conditions where people will borrow money from banks, resulting in an increase in the money supply (and aggregate demand).
Surely, you are aware (the only thing that Friedman may have gotten right) that low interest rates show an inadequate supply of money.
That’s another thing about macro people, they seem to think it’s all about “the money”.
IAC, that’s only according to Keynesian theory. Low interest rates, as arbitrarily set by the central bank, indicate the intention of the bank to create an oversupply of money.
How it happens is meanings and provides no insight as to the solution.
Understanding how it happens can inform us as to how to preclude or minimize them.
As for the solution, it seems obvious to me. I don’t get how you can’t or refuse to see it.
The assumption that the point of economics is policy to “increase aggregate demand” strikes me as hubristic. Aggregating demand ignores the hierarchy of that demand, lumping “mal” with productive. The difference is not a line but a band, say, of gray between white and black that moves and changes through the day even. It’s up to entrepreneurs and business people to discover the profitable areas on the spectrum, not economists and policy wonks at central banks. If central banks are to have a roll then it’s to set the most efficient conditions for said people to prosper, and for economists to assist in lighting the most efficient paths towards that goal. There’s so much that’s important before demand can even express itself, it’s not just want, and it follows production, not the other way around.
“Any attempt to draw a line between over and mal-investment is a distinction without a difference.”
No, Solyndra is malinvestment. Nobody but BHO would give ANY amount to an enterprise that already had a “going concern” qualification from its auditor and no record of profitibility.
Excellent point!
your distinction still makes no difference, once the factory closes (and it makes no difference when the factory is open)
it is not an operative principal. it is merely a label.
people made a judgment about future demand that was in error. so what. happens all the time.
the distinction is really meaningless when we are talking about an economy, world wide, which has been destroyed by fraud. Look at this chart that shows the scope and extent of value destruction by the Lesser Depression
http://ftalphaville.ft.com/blog/2011/12/05/778301/the-decline-of-safe-assets/
Hayek, not being a macro economist, neither under that this could happen, what could cause such, or what had to be done to correct such.
Building too big a place is overinvestment. Its a misestimate of scale.
Building something that never should have been built is malinvestment. Its a misestimation of scope.
Try to follow, sewerwater.
What does “going concern” qualification mean?
It’s auditor speak basically warning financial statement readers that there is a good chance the entity won’t survive the next 12 months. All accounting is done with the presumption that the entity will continue to exist for an indefinite period of time. When this appears to not be the case, the auditors have to issue a going concern warning with their auditor’s report.
Learn something new everyday. Thanks for the brief lesson.
A going concern qualification is provided in an audit report when the outside auditor has reason to believe that the entity is not viable, i.e., will not remain “a going concern” within a year.
Since there’s so many possible indications of such distress, there are no specific tests to make this assessment, but with judgment you can identify things like loss of major customers that would raise this concern.
For many reasons, not the least of which is that it can be a self-fulfilling prophecy, and there is a likely loss of a client, auditors are very reluctant to issue this qualification. If one is issued, you can be sure that business is a really, really bad bet.
But hey, none of those geniuses in the Obama administration would check for this as due diligence.
Sorry, missed QGambit’s excellent description.
Ah, thank you IFRSdrools and Qgambit. The word “qualification” threw me off since company valuations are always done in perpetuity because of the going concern assumption.
Always good to learn auditorspeak
Clearly, you have not read hayek.
He and other Austrians give clear explanations about how the repurposing takes place. The present owners go bankrupt, sell off the factories and capital at fire sale prices, and new owners find new uses for the capital. A fall in consumer goods prices allows consumers to again take control over directing the economy, guiding those new owners of capital into more productive endeavors. The deflation and liquidation ARE the means for correcting the malinvestment.
Try actually reading Hayek instead of just claiming you did.
“Friedrich von Hayek is only a very minor and very unproductive figure in the work of macroeconomics. He–and Schumpeter, von Mises, and the rest of them …”
The fury shows. They cannot stand the fact that Hayek was right and they were/are/were always/ wrong.
here’s adding to your fury
Hayek was totally wrong:
1) he had no tools that predicted the Lesser Depression
2) according to his principles, it could not have happened, as it took place in a period of: (a) lowest taxes in history; (b) lowest regulation in history
3) Hayek offers no means or methods for repairing the damage. Specifically, we have about ten million families living in homes with negative mortgages. Now according to Hayek this was all malinvestment (although interest rates are lower now than when the homes were bought) which should be liquidated tomorrow. If we foreclosed on Friday and had the sheriff evict everyone next Monday, we would have 10 millions homeless families and 10 million vacant homes. What “market” could correct such a situation?
here is the data
http://www.corelogic.com/about-us/news/corelogic-third-quarter-2011-negative-equity-data-shows-slight-decline-but-remains-elevated.aspx
The principal reason the Lesser Depression continues is that we refuse to use Gov’t power and regulation to correct this total market failure. 200 years ago the Founding Fathers had the good sense to realize that bankruptcy proceedings are the only sensible solution to some problems, but we refuse to pass the laws (cram down) necessary to make bankruptcy work
because Congress refuses to act, the state courts are acting. They are close to shutting down the ability of lenders to foreclose in many areas (they are overwhelmed with cases—NY has a 57 year back log), which we result in total failure. Hayek has nothing to say about such macro conditions
I’m not sure how a regulatory capture narrative at all negates anything in Austrian theory.
“To accuse Hayek of simply wishing “to shutter (rather than repurpose) factories and send your workers home” to remain idle indefinitely is to egregiously misunderstand Hayek“. – Don Boudreaux
“But now comes Paul Krugman with his sometimes-echo Brad Delong (or is it vice versa?). Krugman thinks that Hayek was not an important “macro” economist; certainly not the rival or alternative to Keynes, either in the 1930s or today“.
“Of course, it might simply be that Krugman needs material for his blogs and columns“. – Mario Rizzo
-Or-
Brad “Skippy” DeLong is a notionalist, not an economist. Krugman is a columnist, not an economist.
Krugman is a columnist, not an economist.
I hear he used to be one, though. Too bad he decided to switch careers.
Don, it’s not misinterpretation. In Hayekian thought, since a recession is caused by a mismatch of consumer need and capital investment, the owner of the factory in this example will go bankrupt, and someone else will buy the factory in his liquidation. This new owner will likely repurpose it in some way, but in the process of repurposing, the workers who originally worked there will likely be laid off. But if the mismatch is bad enough, it may be time for the wrecking ball.
When DeLong says “repurposing,” he means the slight retooling needed to change a car factory into a tank factory, or into a “green” car factory, or something that won’t require the kind of radical restructuring involved in liquidation. And he wants to do this across the economy.
What DeLong wants is for the government to swoop in and prevent anyone to be laid off at all, prevent the owner from going bankrupt, and most definitely prevent that factory from being knocked down and replaced with a housing development, a shopping mall, or a corn field.
this statement is not true:
What DeLong wants is for the government to swoop in and prevent anyone to be laid off at all, prevent the owner from going bankrupt, and most definitely prevent that factory from being knocked down and replaced with a housing development, a shopping mall, or a corn field.
What macro economists understand is that change requires cash. They want to assure that the money exists to pay for the changes needed. If adequate aggregate demand prevents a liquidation, that is fine. If it funds replacement, that too is fine.
You simply make up false charges
My favorite part of Dr. Camplin’s point is his bold assertion of the ascent of the Austrian school.
So bold!
My assertion is based on the fact that Austrian economics is the only one that takes and has always taken into consideration complexity theory, information theory, self-organization, network theory, evolutionary psychology, etc. — even before they came into their own as distinct sciences. Unlike neoclassical economics, Keynesianism, or phlogiston theory . . . er, macroeconomics . . . Austrian economist has done the best job of taking the full scope of reality into consideration. I was doing all of the above when I discovered Austrian economics, and realized I had finally found the economic theory that matched the real world as it truly is.
My focus was on the fact that DeLong got the basic economics wrong. Which I think matters more than the details of malinvestment vs. overinvestment. Malinvestment essentially means overinvestment in a particular area. But it is not overinvestment across the board. To say “overinvestment” implies it is across the board, while “malinvestment” implies overinvestment in a particular area.
Also, malinvestment can be underinvestment, too.
Maybe tomorrow we can have a thread:
Moron Delong as Macroeconomist
Thanks!
Capital = K (a k a “fattest economist alive”) doesn’t know economic coordination from discoordination. Obviously neither he nor Krugman (“Krug” is pronounced to rhyme with “thug” or “bug”) have read Hayek or Mises or….
Practically all Austrians started learning economics at the hands of non-Austrians, then had to find Austrian reading material on their own, because they were interested in going beyond their assigned texts.
I for one can’t figure out what these left-wing economists want. They hyperventilated about “inequality” and “corporatism,” yet they heap piles and piles of scorn upon free-market economists who think businesses should be allowed to fail. They don’t seem to think the government should guarantee eternal, perpetual profits to everyone, yet that seems to be where this is all leading.
They only want Nirvana, and we know that’s simply a matter of “leadership” and “political will”.
macro economists are not concerned with businesses fail, except when such happens needlessly due to inadequate aggregate demand
However, macro economics is not the end of the field. One also has the nuts and bolts of finance and banking. Macros economists are generally bright enough to understand both, so when the financial markets stop working and are not capable of providing adequate capital, they will support gov’t steps such as shoring up GM or AIG. While coincident with macro, such is not macro economics.
Such is just good old fashioned common sense, modeled mostly on the thinking of Adam Smith (who, for example, strongly supported the regulation of banking and the use of the concept of insurance). These steps by gov’t are actually best understood as acts of an insurer—they work for the same reason that insurance works–the socialization of the loss, the spreading of the risk, means that the cost is affordable. Gov’t is best thought of as the ultimate CDS
How do businesses fail if there is adequate aggregate demand? If there isn’t mal-investment, where does the aggregate demand go?
This might help you make your points better:
http://www.penny-arcade.com/comic/2002/10/11/
due to inadequate aggregate demand
What brings about inadequate demand?
Good point, Josh S. It’s like reading the work of a whole group of people afflicted with multiple personality disorder.
Like or is?
Somebody should clue DeWrong in–insults fall flat when they don’t even so much as ring true.
At what point can stop bothering to even call this guy an economist? It appears to be a field he’s not even interested in.
Translation: Hayek actually has a reasonable explanation of the trade cycle; therefore he isn’t a relevant macro-economist. Brilliant.
By the way, I was perusing the intratrucks, and came across a tantalizing piece about the business cycle, written by a chap named Fred E. Foldvary. He uses an Austrian and Georgian synthesis, that I find pretty convincing.
Here is the link to anyone who is interested.
http://www.foldvary.net/works/geoaus.html
Don
Adds a link to comments on Hayek by Bruce Caldwell, which include the following:
Those who think that it is a “core Hayekian belief that the size of government should be kept to a minimum” should read chapter 3 and chapter 9 of the book, where Hayek recommends many interventions, including a safety net and minimum income. . . .
Nuance has disappeared from our political discourse. It is increasingly disappearing from our public discourse. There are signs too that it is disappearing from our academic discourse. This is probably why David Warsh’s column upset me. Are there any adults left out there?
Others point out that Hayek would support Obamacare and that the Hayek of Glen Beck and the trolls here is not the real Hayek. Don, will you start calling them trolls?
Which are you Don, a true Hayekian who does not believe that the size of Gov’t should be kept to a minimum and who supports “many interventions, including a safety net (Obamacare), and minimum income.”
Or, and this is what I suspect, are you a closet Beckian/Menckenian, merely wanting to roll the clock back to Charleston, December 31, 1860 and using Hayek as cover for your real agenda?
merely wanting to roll the clock back to Charleston, December 31, 1860 and using Hayek as cover for your real agenda?
A familiar if wrong headed attack.
Those who think that it is a “core Hayekian belief that the size of government should be kept to a minimum” should read chapter 3 and chapter 9 of the book, where Hayek recommends many interventions, including a safety net and minimum income. . .
Curious from someone who supposes that Hayek was wrong.
You guessed it. The reason Don wants everyone to be free to pursue their own desires as they see fit is that he hates black people. You have cracked the DaBoudreaux Code. Someone should make a movie out of your life.
They have. One Flew Over the Cooco’s Nest.
I think you have some things wrong here. Referring back to Garrison, and Hayek and Mises helps:
http://factsandotherstubbornthings.blogspot.com/2011/12/boudreaux-25-right-delong-75-right.html
Like the “scientists” of the global warming cult, when you simply talk among yourselves and keep out contrary views you’re headed for a fall.