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AUSTRIAN ECONOMICS NEWSLETTER

Volume 3/No. 3 Summer 1982

Hutt’s Critique
of Keynes

Two Reviews of |
The Keynesian Episode

by William H. Hutt, Indianapolis: Liberty Press,
1979, 449 pp., pb. $4.50, hd. $10.00.

W.H. Hutt

Reviewed by John B. Egger | Reviewed by Leland B. Yeager

The Keynesian Episode is Professor Professor Hutt’s new book began as :

Hutt's second edition of Keynesian- | an intended second edition of his Key- fundamental problem of deficiency of
Ism— Retrospect and Prospect (1963). | nesianism—Retrospect and Prospect, aggregate demand. Any apparent prob-
He cautions us in his preface, however, | 1983 (which, Hutt says, he had originally lem of that sort traces to impediments
that the changes are enough to make | thought of entitling The Curse of to exchange of goods and services for
Episode “a new book,” and this Is sub- | Keynes). Not surprisingly, then, the each other—to failures of markets to
stantially accurate. While pages 3 | book echoes familiar themes. | shall try clear because of wrong prices. Impedi-
through 291 of Keynesianism appear as | to summarize them, not necessarily in ~~ ments to exchange discourage produc-
pages 87 through 401 of Episodes, about | Hutt's own terminology. - ~~ tion of goods and services destined for
120 pages of the earlier work are omitted Fundamentally, behind the veil of exchange. Say's Law, as Hutt further
and 85 pages of new material added. | money, people specialize in producing Interprets and extends It, points out why
Even in those pages which reproduce | particular goods and services to ex- cutbacks in production in some sectors
Keynesianism in substance, Professor | change them for the specialized outputs ~~ ©f the economy, meaning as they do
Hutt has rewritten many of its most con- of other people. Any particular output cutbacks in the real demands for the
fusing parts, adding and omitting words, | thus constitutes demand for other (non- outputs of other sectors, cause cut-
phrases, sentences, and even para- | competing) outputs. Since supply con- backs of production in those other sec-
graphs here and there, revising their | stitutes demand, there can be no tors also. With demands curtalled, what
orders, and employing a more modern | might otherwise have been equilibrium
style. Paragraphs are no longer num- prices for the outputs of those other
bered, terms like “whilst” have disap- Keynes and his followers, are focused sectors are now too high; and unless
peared, and most of his long lists of on the functioning of the market econo- these prices are adjusted downwards,
cases have been curtailed and incorpo my. The final five chapters zero in on they impede exchanges and production.
rated into ordinary paragraphs. In short, popular macro concepts—the multiplier In this way, wrong prices and produc-
Episode is much more pleasant to read and accelerator, for examples—and dis- tion cutbacks in some sectors make
than its ancester, and it's different cuss “the retreat” from Keynesianism existing prices wrong and cause pro-
anough that bibllophiles cannot give up by both Keynes and later economists. duction cutbacks in other sectors also;
a_eir used-bookstore searches for {Hutt is both modest and realistic the rot 1s cumulative. In the opposite
eynesianism. enough to observe that, despite his and more cheerful direction, anything
The first six chapters of Episode deal ~~ 1983-stated hopes, Keynesianism has that promotes market-clearing prices
explicitly with Keynes and “Keynesian- apparently had no impact whatsoever in ~~ and the recovery of production in some
ism.” The next seven, while frequently accelerating this process.) sectors promotes cumulative recovery

mentioning the ideas and policies of (continued on page 9) {continued on page 8)



===== PAGE 2 =====

The A.E.A. Session |

Reviewed by Mark Manasco -
’ 4

Lately considerable interest has been = investigation for it is through the inter-

AUSTRLAN ECONOMICS NEWSLETTER aroused within the economics profes action of planned individual actions that
sion by the emergence of a revived social institutions such as language,

Volume 3/No. 3 Summer, 1982 Austrian tradition. This was never more law, or money and the price system
in evidence than by a standing-room- evolve. The object of investigation is to
The Austrian Economics Newsletter1s | = Only session at the annual meeting of “recompose or reproduce the social in-

the American Economics Assoclation stitution under study by tracing its
devoted to “Recent Developments in logical origins to the interaction of in-
Economic Theory:Austrian Economics”, dividual plans”. Pursuing this logic,
‘With the recent attempts to reconcile Rizzo and O'Driscoll contend that we
“and incorporate Austrian insights into merely beg the question when, as in
mainstream analysis it is particularly much of modern economics, we ignore
interesting that the session included a the decentralization of knowledge, Ex-
‘Joint paper entitled “What is Austrian planations that treat the relevant data as
Economics?” written by two of the somehow given in general to society,
school’s more able practitioners, Pro- thereby abstract from an essential ele-
fessors Mario Rizzo (NYU) and Gerald ment of the socio-economic problem:
O'Driscoll (NYU) {soon to be expanded the fact that no single mind is in posses:

designed as a research and communica:
tions device for work In Austrian eco-
nomics. As such, It Is essential that we
have the active support and cooperation
of our readers. We need any Information |
which would be of value to other Austrl-
ans and we welcome any suggestions
for improving the Newsletter. The suc-
cess of the Newsletter fundamentally
depends on our ablilty to encourage the.
participation and involvement of our.

rs.

reade .. . | = into a book to be released by Blackwell). sion of all the requisite information.
: Editor - The Joint essay was one of three papers Analysis that proceeds in this direction
Don Lavole Lo which included discussions on “Inter- tends to lose sight of the crucial
Managing Editor temporal Coordination in Macro-eco- process and role that knowledge and

Tyler Cowen "nomic Theory” by Roger W. Garrison information play in decision making.
Editorial Board ©... (Auburn) and “The Micro- -foundations of The notion of subjectivism which the
Walter Block |. the Moderate Quantity Theory” by J.  schooi has at times been characterized
Richard M. Ebeling . - Huston McCulloch (Ohio State). N as having an unablding obsession with
Richar d Fink : ~ In their provocative paper, O'Driscoll is rigorously derived from the concept
John Kunze + | and Rizzo convincingly show that Aus. of purposeful behavior. Subjectivism is-

Gerald P.O'Drl scoll Jr. | - trian economics ‘can no longer be con- but the logical extension of Poeig

Mario J. Rizzo | © - sidered a minor footnote in the history ~~ economic ends and means-—strictly a
Joseph T Salerno | of thought, an old school whose revolu- perceived by the actors themselves—at
Ga Sho rt tionary ‘insights into the economic the heart of economic analysis.
ry 57 problem were long ago fused with neo- O'Driscoll and Rizzo have skillfully wo-
: : : classical theory. Rather, they contend, it ven the basic themes of purposiveness
Staff |" is a well integrated, vibrant body of and subjectivism into the fabric of a
Fernando Alvarez thought that has much to offer contem- variety of issues in economics, showing
Don Boudreaux porary economists in explanation of the analytical usefulness of the Aus
Sharon Gifford how markets work. In this clearly trian concepts of time, uncertainty, prof-
Sanford Ikeda written, lucld overview of the Austrian Its, disequilibrium, and the market
Roger Koppl “reasearch program,” the authors have process. What emerges is a wholly con-
Josh Zissman , not only argued for this favorable sistent and open-ended research pro-
assessment of the modern Austrian gram that provides an alternative to
school, they have supplied superb evi- those dissatisfied with “textbook eco-

: dence In the form of this paper itself. = nomics”.

The Austrian Economics Newsletter is This thoroughly researched, footnote- Professor Garrison in his paper on
an Independent project funded by the laden manuscript reveals that its “intertemporal coordination” presents a
Center for Libertarian Studles and is authors possess a remarkably wide = more specific case for the usefulness of
published three times a year. Annual grasp of contemporary economics and the Austrian research program as an al-
subscriptions are $7.50. that their school has a number of inter- ternative to textbook macro-economics,
Back issues are available for $3.50 esting things to say, both favorable and and in particular draws attention to the
apiece. unfavorable, about recent developments  hazzards of excessive aggregation. The-
in such areas as Rational Expectations oretical models that obscure the heter-
Austrian Economics Newsletter theory and the Economic Analysis of ogeneity of capital in general, and the
200 Park Avenye South Law. diversity of capital goods with respect
Suite 911 - The central task of the research pro- to the time structure of production in
‘New York, N.Y. 10003 gram as seen by the authors is its particular, conceal a key aspect of the

attempt to “render social phenomena market's coordination process. Garri-
intelligible in terms of individual pur- son argues that in contemporary macro -
poses and plans”. As such the study of models the adequacy of the market
economics begins with tracing out the process to allocate resources over tM.
(often unintended) implications of hu- “is problematic to non-existent”. The
man action. From the inception of the use of economy-wide aggregates is at
Austrian school the concept of purpose- the expense of a deeper analysis of
ful behavior has been placed at the core

of scientific inquiry. It is the origin of (continued on page 4)

PAGE 2 | AUSTRIAN ECONOMICS NEWSLETTER



===== PAGE 3 =====

“Muster-Voraussagen” und “Erklarungen des Prinzips” Briefs
bei F.A. von Hayek: Eine Methodologische Analyse oo

“wer by Hans-Georg Graf, Tubingen: J.C.B. Mohr, 1978, 108 pp.,

DM 19.80.
i Society”: his vigorous attack on “scient- The Winter 1980 issue of History of
Reviewed by Stephan B. Bohm ism”, athe slavish imitation of the Political Economy (Vol. 12, #4) contains
| method and language” of the natural an article by Professor Gerald P. O'Dris-
sciences by the social sciences. Incon- coll entitled “Frank A. Fetter and
Professor Hayek's keen interest in trast Hayek conceives of the social ‘Austrian’ Business Cycle Theory.” The
problems of the philosophy of science sciences as sharply distinguished by (1) article shows how Fetters theory of
in general and the methodology of the their essentially subjective character, capital and interest led him to develop a
social sciences in particular accounts not only in the sense that opinions, theory of business cycles which was
for a considerable portion of his impres- beliefs, and attitudes constitute their quite similar to the theory that was later
sive oeuvre and can be traced to his object, but also in that the method of expounded by Mises and Hayek.
celebrated 1937 paper “Economics and obtaining knowledge of these “facts” is
Knowledge”, which with its far-reaching subjective, (2) their “compositive” or R.R. Nelson's “Assessing Private En-

methodological implications can justly “synthetic” method (methodological in-  terprise: An Exegesis of Tangled Doc-
be regarded as a turning point in his il-  gjvidualism), and (3) the enormous com- trie,” which appeared in the Bell Jour-
lustrious career, plexity of their subject-matter. nail of Economics (Spring 1981) is an im-

Hayek's insistence on and defense of Chapter two, “A Closer Look at the portant attempt to reexamine the ques-

the subjective and indlvidualist ap- Methodological Problem of tion of market performance in light of
proach of the social sciences was the Complexity,” provides a perceptive many of the contributions of Mises and
central theme of “Scientism and the  ao50unt of the Austrian notion of the ~~ Hayek. Nelson contrasts the standard
Counter-Revolution of Science, 1952) 4a uments Hayek employs in Hayek's perspective which emphasizes
and sparked off one of the liveliest J sompetition as a Discovery the ability of institutions to disseminate
debates to have graced the philosophy procedure” (1968), and the Kirznerian ~~ knowledge.
troversy of the 1950s over the issue of compnerition and Entrepreneurship. “Sudha Shenoy has edited a recent
methodological Individualism versus In the third and final chapter, “The monograph put out by The Society for
~ ing that Hayek's plea for a methodologi- tion in Dealing with Complex Subject- the David Hume Society entitled Order
-— dualism went unnoticed by econo-  Maters”, covering half of the book, the ~~ Without Design: Three Conference
mists at a time when Milton Friedman's 5,4hor seeks to shed light on the logical ~~ Papers on Economic Models and Social
most influential 19563 essay imported gyueture and epistemological status of ~~ Formations. Contained within are three
allegedly Popperian “positivist”  avak's “pattern predictions” and “ex-  €8says: Antony Flew’s “Intended Action
philosophy of science into economics. pianations of the principle”, relating ~ @nd Unintended - Consequences”,
his ideas on the methodology of the  cuvering.law model of scientific ex- Which One?”, and Sudha Shenoy's
social sciences in a number of signifi- 5 apation, “From Walras to Menger. General
cant papers, “Degrees of Explanation” Many reasons have been offered, not ~~ Equilibrium and its Microfoundations —
(1955) and “The Theory of Complex eget by Hayek himself, for supposing An Austrian Commentary.”
moo Isao Matis wie that the social sclences require different |
: : : oY kinds of method and justification from Norman P. Barry's “Austrian Econom-
interest in Hayek's social and political {ne natural sciences, and conversely for © i atu? ;
hil h to b th i / ‘ Ists on Money and Society” (National
philosophy seems 10 be a growin n= g,pposing that these methods and jus- Westminster Bank Quarterly Review,
dustry (e.g. Norman Barry, Hayek's (itications are or ought to be the same. May 1981) provides a helpful explanati
ay } provides a helpful explanation
Soclal and Economic Philosophy, LON- In Hayek's case, it is by no means al- of Austrian monetary theory which
don: Macmillan 1979), his more recent wayg so clear that the sharp distinction shows that it is fundamentally different
contributions to the methodology of hg gjaims to obtain between the natural d at least i t
social science, beautifully summarized i i i rom and at ‘east In SOme respects
in his Nobel Memorial Lecture “The and social sciences is a distinction in superior to both the Chicago and Keyne-
methodology, i.e. the logic of justifica-  gjan approaches to macroeconomics.

Pretense of Knowledge”, have hardly tion as opposed to methods, i.e. tech
received any. serious attention from niques of investigation.

philosophers, let alone economists. As the author points out on p. 8, he
Austrians cannot be completely ab- appreciates Hayek's theory of complex
solved from this charge. phenomena as a modification of rather

In view of these circumstances, than as a radical departure from the
Hans-Georg Graf's methodological  mathodology of the natural sciences.

study of Hayek's “pattern predictions” For Graf, the emphasis on the aspect of A Conference on “The Contributions
and “explanations of the principle” is a complexity of social phenomena in of Ludwig von Mises to Economics’ was
most welcome and long overdue addi- Hayek's more recent writings does not held in New York from September 20-22

~~. “tion to the literature. The introductory ‘active an in honor of the 100th Anniversary of
| Ngorchapter, “The Principle of the Unity of ISpisce Us sued RT Mises’ birth. Sponsored by New York
: Method and the Peculiarities of the Sub- rather supplements it. The doctrine of ~~ University and Liberty Fund, the con-
ject-Matter of Economics” briefly dis- ‘methodological individualism, i.e. the ference included papers by James Bu-
cusses some of the recurrent themes  gypjanation of social processes in  chanan, Israel Kirzner, Steve Littlechild,
sounded by Hayek ever since the pub- Brian Loasby, Marlo Rlzzo, Leland Yeager,
lication of “Scientism and the Study of - {continued on next page) and Gerald O'Driscoll.

AUSTRIAN ECONOMICS NEWSLETTER PAGE 3


===== PAGE 4 =====

The A.E.A. Session “Muster-Voraussagen” und “Erklarungen des Prinzips”

—

-

(continued) (continued) /

terms of individual actlons, attitudes, in “Degrees of Explanation” Hayek
and bellefs remains the basis of the argues that in the construction and
theory of complex phenomena. This application of explanatory patterns for
point deserves special attention be- typical complex situations we are es-
cause a careless reading of Hayek's sentially performing a deductive task,
“explanatory patterns” might lend itself ~~ which does not provide us with new
to a holistic interpretation. Moreover, knowledge. “What will be new about
pattern models of explanation of the such a ‘new’ explanation of some phe-
holistic type, as expounded in the writ: nomena wlil be the particular combina-
“ings of A. Kaplan and P. Diesing, form tion of theoretical statements with
the methodological basis of institution- statements about facts regarded as sig-
al economics. In this connection, it is nificant for the particular situation (the

Viner, among others, has raised the any one of the theoretical statements
charge of “historicism” and “social from which it starts. And the problem
Darwinism” against Hayek in his review will not be whether the model as such is

Roger Garrison of The Constitution of Liberty (Southern true, but whether it is applicable to (or

CL Economic Journal, 1981). true of) the phenomena it is meant to
certain critical market processes involv Figuring prominently on the list of explain.” (Hayek, Studies, p. 7)

ing the intertemporal coordination of criticisms leveled at the possibility of a The assertion that a certain explana:

economic activity. The developmentand social science, the notion of “complex- tory pattern (or model) is applicable is
evolution of the crucial concept of time ity” has troubled social scientists, and an empirical, and hence falsifiable state-
and its role in the structure of capital is especially economists, for some time.. ment; in this case, “applicability” refers
traced from Bohm-Bawerk through However vague and ambiguous the term . to the phenomenon to be explained
Wicksell and others to the dominant may be, it is falrly safe to argue that, ina rather than to a subsumption of con
macro models of today. The Austrians, very broad meaning, it encapsulates all crete Initial conditions to the abstract

Garrison contends, are in a unique posi- those problems which are heid to face conditions contained in the If-com-
tion to grapple with the problem of inter- the establishment and developmentofa ponent of a nomological statement.

- temporal coordination precisely be- theoretical soclal science. More On the other hand, Hayek has force-
cause of the tradition’s fundamental specifically, ever since J.8. Mill's fully insisted on the possibility and

emphasis on the market process con- discussion of the moral sciences in A Indispensability of “abstract” social
ceived as a decentralized procedure for ~~ System of Logic it has been maintained theory. As Graf notes on p. 46, Hayek
coordinating the heterogeneous compo- that the relevant factors in social sets out to find a solution to the follow-
nents of the capital structure into a - scientific studies are far too numerous ing problem: Given the social scientist's
coherent network of production. Treat- (“plurality of causes") to be ascertained ignorance of the circumstances deter-
ing capital as a simple quantity, K, does and too rapidly in flux to provide the mining specific outcomes, how is it
not take us very far in explaining the necessary stable conditions for the sep- ~~ possible In the disciplines dealing with
complex coordination through timethat aration of causes from contingently ac- structures of essential complexity to es-
continually takes place within the - companying factors. A radical conclu- tablish empirical theories which do take
capital structure. sion from these points, which has the causality of the individually known
In the third paper Professor McCul frequently been drawn, would be the facts somehow into account instead of

loch, drawing on Ludwig von Mises’ dis- assertion that ali phenomena of the assuming them away and relegating
cussion of how monetary disturbances social world must be considered unique, them to unspecified ceteris paribus con-
affect the price level, constructs a thus precluding any satisfactory empiri- ditions? Hayek proposes that instead of
mathematical model of the inflationary cat generalisations. aiming at explanations and predictions
process under the guise of a moderate ‘of individual events, which would re-
quantity theory. The attempt is to de- quire unattainable knowledge of singu-
velop “a new and somewhat different reiterated that Austrians should not be ar circumstances, we should content
partial adjustment equation” using mi- “too exclusive”. He was concerned that ourselves with less specific explananda,
croeconomic¢ considerations, although the Austrial school “tends to disassoci- thereby reducing the Information re-
members of the audience may have ate” itself from the rest of the profes- . quired in the explanans.“Explanations
wondered whether some of Garrison's sion even though “there is a lot going of the principle” and pattern predictions
warnings about the pitfalls of overly on in modern theory today and a lot that go not refer to particular events but

simplified macro models could be di deserves to be taken notice of.” . always to some properties of a particu
rected at McCulloch's model as well. But the exclusion that has kept jar phenomenon.
The commentators’ remarks and the. Austrians and other modern economists The far-reaching implications of this

brief discussion that followed the three from fruitful interaction has not been position for interventionist policies are
papers were both interesting and quite entirely the fault of the former disasso- obvious. Under the formidable aegis of
revealing. The chair, breaking from stan- ciating themselves from the latter. In Erich Hoppmann of the University of
dard practice, acknowledged the pres- any case, as this session of the AEA. Freiberg, the translator of Competition
ence of the distinguished scholar, Lord eloquently testifies, the modern Aus- and Entrepreneurship, these Hayekian
Lionel Robbins, for comment. Professor trian school does not see itself as-a arguments have had a great impact on

worth mentloning that the late Jacob “initial” and “marginal conditions”), not

-w

Robbins, somewhat startled from the at- wholesale rejection of contemporary ec- discussions of antitrust policy in the

tentlon, was sympathetic with the main onomics but rather a positive program  Wast German literature.

theme of the O'Driscoll/Rizzo paper and for its further development. (continued on next page)
PAGE 4 AUSTRIAN ECONOMICS NEWSLETTER

i

=
Xx

5


===== PAGE 5 =====

“Muster-Voraussagen” und
“Erklarungen des Prinzips”
(- (continued)

In “The Theory of Complex Phenom-
ena” Hayek takes pains to point out that
“predictions of a pattern are neverthe-
less both testable and valuable. Since

the theory tells us under which general

conditions a pattern of this sort will
form itself, it will enable us to create
such conditions and to observe whether
a pattern of the kind predicted will
appear.” (F.A. Hayek, Studies in Philos-
ophy, Politics and Economics, p. 36)

This quotation seems to suggest very
clearly that Hayek's “pattern predic-
tions” are statements in the logical form
of a universal conditional, or in other
words, the general “if-then” statement
is subject to falsification, and not only
the singular statement that a particular
pattern will occur. According to this In-
terpretation, “pattern predictions” and
“explanations of the principle” are
based on a system of nomological hy-
potheses about the occurrence of ab-
stract patterns.

Graf argues (p. 84) that the examples
which Hayek offers as candidates for
potential falsifications of his pattern
predictions are misconceived because
they merely negate the if-component of

Sr ihe universal conditional, which simply
means that the statement is not applic-
able to this specific example. The
author proceeds to demonstrate that
Hayek himself has come up with a
rather different interpretation of the
logical structure of his “explanations of
the principle”.

To be sure, many questions will stil
trouble students of Hayek's theory of
complex phenomena after having read
Graf's essay. Nevertheless, the author
is to be congratulated on his admirable

job of clarification of a somewhat mys.

terious, hitherto sadly neglected aspect
of Professor Hayek's work. He credits
Hayek with having designed a system-
atic methodology which enables us to
do theoretical work in the face of the

seemingly insurmountable problems

posed by the complexity of social phe-
nomena, contrary to those critics of
“scientism” who simply argue that
“social science is not ‘really’ possible.”
Moreover, Graf succeeds in demonstrat-
ing that Hayek’s notion of complexity is
intimately linked to his familiar notion
of competition as a discovery procedure,
Substantive and methodological issues
cannot be separated in Hayek's theory
of complex phenomena. And that is pre-
WY cisely why, in the reviewers opinion,
Hayek's theory is so much superior to
the shallow trivialities that many econo-
mists—with the notable exceptions of
Brian Loasby and Herbert Simon—have
written on the subject of complexity.
AUSTRIAN ECONOMICS NEWSLETTER

A Tiger by the Tail: The Keynesian Legacy of Inflation
by F.A. Hayek, compiled and introduced by Sudha R. Shenoy;
San Francisco: Cato Institute, 1979, 176 pp. $4.00.

Reviewed by Robert L. Bradley, Jr.

Over the past five decades, F. A.
Hayek has been a notable yet relatively
‘neglected participant in the debates of
greatest concern to professional econ-
omists and laypersons alike—unempioy-
ment, Inflation, and the trade cycle. In
an expanded reprint recently published,
pertinent excerpts from Professor
Hayek's writings over this period are
collected that in sum constitute a sys-
tematic critique of what is called “the
Keynesian Legacy of Inflation.” Entitied
A Tiger By the Tail, Hayek focuses on

the theoretical case for and conse

quences of expansionary monetary pol-
icy, a policy popularized by J.M. Keynes’
General Theory of Employment, interest, -
and Money of 19386.

Historlans of thought will remember
that in the early thirties, Hayek and
‘Keynes - and thelr respective students -
carried on theoretical debates in the
journals. of economics. {An account of
this rivalry is provided in J.R. Hicks’
“The Hayek Story” in Essays in
Monetary Theory.) The debate, however,
was prematurely ended when Keynes’
above work became so methodological-
ly and politically in favor that a non-
theoretical victory was achieved over
Hayek. The “Revolution” was so com-
plete, in fact, that a discouraged Hayek
left economics for soclal and political
philosophy. But with the recent recon-
sideration of Keynesian theory, in light.
of the problems Hayek had originally
warned against, the once closed debate
is reopened with Hayek's contributions

. as pertinent as ever.

The book under review is distin
guished in two different but highly
related senses — one methodological
and one analytical. After first examining
Hayek's methodological positions, we
will apply these to his specific criti-
cisms of Keynes’ case for expansionary
monetary policy.

I. Hayek on Methodology

Throughout all of Professor Hayek's
writings - including the rich sampling
contained in the present volume - four
methodological parameters, sxplicity or
implicity, are to be found.
1). Statistical averages and aggregates
are inappropriate in economic reason-
ing since only within their micro com-
ponents is causality present. As he
states (p. 14): "...none of these [macro]
magnitudes as such ever exerts an influ-
ence on the decisions of individuals; yet

- it is on the assumption of a knowledge

of the decisions of individuals that...

‘economic theory [is] based.”

2) Statistical modeling and testing like-
wise cannot decide between competing
theories since the macro correlations
are more coincidental than causal.
Hayek speaks (p. 104) of the “complex
order of economic life” that for testing
makes the necessary ceteris paribus
postulate impossible to assume, unlike
in the laboratory sciences.

3) Economic analysis must study an
hypothesized economic situation in its
entirety rather than emphasize short run
developments only. Hayek recognizes
{pp. 33-34) that “what is best in the short
run may be extremely detrimental in the
long run,” and thus to leave the public
uninformed regarding the latter would
be a ‘'dangerous intellectual error’ and
“betrayal of the main duty of the
economist.”

4) Economic analysis must methodo-
logically (not empirically!) assume full
employment to understand situations of
tess than full employment rather than

beg the disequilibrium question.

Keynes, contrarily, postulated, in

Hayek's estimation “(p. 101) “full

unemployment: the assumption that

there normally exist unused reserves of

all factors and commodities” and is

criticized since “this assumption—

makes the whole price system redun-

dant, undetermined, and unintelligible.”

The above methodological statements
are all antithetical to the Keynesian para-
digm. The “model-test” method, sug
gested more than utilized by Keynes in
The General Theory, has become the lit-
mus test of theoretical inquiry for this
school. Averages and aggregates, hand-
maidens to the “positivist” method, are
assumed to be independent of the mic-
roeconomic interrelationships within
them.

Further, Keynes’ preoccupation was
with the short run, indicated by his most
famous quotation {In the long run we
are all dead”) while his most remem-
bered theoretical novelty was the al-
leged “escape” from the neo-classical
full employment assumption. So all in
all, we can appreciate the sharp diver-
gences between Keynes and Hayek re-
garding method that brought forth the
specific arguments we wlll review
below.

Il. Hayek on Keynes

Keynes’ holistic thinking simplified
an economy to the point that his “de
mand management” idea assumed plau-
sibility. To him, the twin (and supposed-

{continued on page 7)
PAGES


===== PAGE 6 =====

Unemployment and Monetary Policy: Government as
Generator of the “Business Cycle” | ~

by F.A. Hayek, San Francisco: Cato Institute, 1979, 80 pp., $2.00.
Reviewed by J.A. Dorn

This reprint is an updated version of  tistic prejudice” led to the rejection of today's atmosphere.
the IEA’s Full Employment at Any Price his “true” theory and the adoption of a Hayek's second proposal is to re
revised for the American audience, in- ~~ “fatal idea” that the cause of unem- establish competitive markets through
cluding in this edition a new Preface by ployment is insufficient aggregate de- long-run institutional reform. He empha-
Hayek, a conclse introductory note on ~~ mand rather than a disequilibrium pat-  slzes that unless we can reduce union
Austrian Capital Theory by Sudha R. tern of relative wages. The second monopoly power and other barriers to
Shenoy and an excellent Forward by reason Hayek gives ‘is that since entry, unemployment will persist. In
Gerald P. O'Driscoll, Jr. It is divided into ~~ Keynes’ policy prescriptions generate modern jargon, he wants to shift the
three parts. Part |, “Inflation, Misdirec- instant benefits, they offer broad politi- long-run Phllilps curve leftward, and
tion of Labor, and Unemployment,” Isa cal appeal compared to Hayek's call for reduce the “natural rate” of unemploy-
revision of a lecture Hayek delivered in immediate sacrifice. In Hayek’s opinion ment by making markets more efficient.

Rome in February, 1975. Part Il, “The this is ‘a much stronger reason for the Part Il is devoted to an attack on
Pretense of Knowledge,” is a reprint of ~~ success of the “Keynesian Revolution”  "scientism”—the application of the
Hayek's 1974 Nobel Address, and Part that its “scientific” appeal.

mM, “Unemployment: inevitable Conse Not only does Hayek reject the notion

quence of Inflation,” is a revision of his + of a permanent trade-off between infla-
Rome lecture delivered In the United tion and unemployment, he sees infia-
States in April, 1975. The purpose of tion as ultimately increasing unemploy-
these lectures Is to make us rethink the ment. In other words, he sees the
fallacies of the now-crumbling Keynes- possibility of an upward sloping Phillips
ian orthodoxy in order to avold repeat- curve in the absence of stabilizing
ing the same policy errors that have expectations. His explanation is that as

produced the current “stagflation.” inflation accelerates it will introduce
In Part | Hayek presents his main more and more distortions into the
policy message of the last 40 years— relative price structure. This ‘“‘nclse”

the impossibility of curing inflation with- renders the market communications
out unemployment. By this Hayek does system less useful as a means of
not mean we should use unemployment efficiently allocating resources. Conse-
"to fight inflation; he means that unem- quently, more labor and capital will be
ployment necessarily follows from infla- misdirected and unemployment rates
tion's effect on relative prices. The will increase along with inflation. In-
inflationary “full employment” policies deed, empirical evidence has been con-
followed since the end of World War Il sistent with this thesis: the inflation
present us with three policy alterna- rate and unemployment have ratcheted
tives: Allow inflation to accelerate and upward in the U.S. over the last 30 years.
ultimately destroy the market economy; In Hayek's view, the most serious
impose wage-pricé controls and sabo- consequence of ‘inflation is not the
tage the indispensable guiding role of arbitrary redistribution of Income, but
relative prices; or stop expansionist . the misallocation of resources. indexing
monetary policy altogether and accept would not cure inflation nor would it
the temporary increase in unemploy- alleviate its effect on the pattern -of
ment. Hayek, of course, favors the third relative prices and production. Hayek
alternative. His experience with the therefore proposes two policy meas-
“Great inflation” taught him that ‘the ures that he believes will generate pros-
employment created by inflation dimin- perity without inflation. First, in a
ished as soon as the inflation slowed departure from his earlier work (e.g.
down, and that the termination of the Prices and Production) and one that
inflation always produced . . . a ‘stabili- would perplex many “Austrians,” Hayek Friedrich A. Hayek
zation crisis,” with substantial unem- recommends the adoption of a monetary Lo
ployment” (p. 4). Consequently, Hayek rule in order to stabilize the value of )
has never been convinced by the Key- money. He desires a rapid stabilization, methods of the physical sciences to the
nesian thesis that employment is deter- but recognizes that for technical rea- social sciences—and its contribution to
mined by total spending. : sons the deceleration in monetary the adoption of Keynesianism. Hayek
Hayek offers two reasons why the growth will probably have to be gradual. seems to believe that economic theo-
Keynesian paradigm gained attention Hayek's monetary rule (like Friedman’sl) ries are testable in Popper's sense of
vis-a-vis his own theory, which stipulates would limit the growth of money to the being refutable, but that they cannot be
a direct relationship between above- growth rate of real output. According to used to make the same type of predic
equilibrium wage rates and unemploy- Hayek, .this pollcy should be clearly tions as most physical sciences. The.
ment. First, Keynes’ theory was statis announced in order to dampen inflation- best we can hope for is “pattern predic;
tically tested and found apparently ary expectations; however, he says, the tion,” rather than prediction of specific
consistent with the facts, while his own. rule should not be legally binding. We numerical results. Nevertheless, many
theory was "untestable” because equi-- should emphasize that Hayek has not economists have been swayed by the
librium states are. unknown ex ante. abandoned his affection for the gold “scientistic attitude” to search for theo-
Hayek therefore contends that “scien- standard, but thinks it is impractical in ries that produce numerical predictions.

PAGES AUSTRIAN ECONOMICS NEWSLETTER

7


===== PAGE 7 =====

I

A Tiger by the Tail

(continued)

Keynesian theory filled this mold and ly opposite) evils of Inflation and cure, then, is to have wages and prices,
gave rise to numerous forecasting resource idleness were, in final analy- sectorally, be at market clearing levels.
models, while Hayek's did not. sis, an aggregate demand problem that ~~ This would translate into lowering
Hayek is not opposed to the use of monetary policy could control. (Hayek's ~~ wages and prices In surplus situations
mathematics in economics. Pareto’s interpretation of Keynes, one notices, and not as Keynes recommended, de-
equations, he points out, are very useful ~~ downplays the other two levers of de- ~~ preciating real wages via monetary cre-
"to lllustrate general equillbrium and eco- mand manipulation — government ation. In this regard, a free market In
nomic interdependence, but to think spending and taxing.} In the context of labor—a “true freedom of assoclation”
that they can actually be solved by Keynes’ 1936 work, despite the adjective  (P. 78)—is the recommended institution
plugging numbers into some computer ~~ General, expansionary monetary policy ~~ @l framework. |
model is absurd. Central planners sim- to combat economic depression was -
ply do not have the relevant information = the focal point.” It. Hayek on the Future of the Debate

that would be necessary to predict exact Against this, Hayek's view of “easy :
money,” before and after Keynes The close interrelationship between

restated the inflation argument "in an the methodological and analytical in his
original and apparently much improved censure of Keynes Is fully recognized by
form (p. 127), is that such policles Hayek. His dissatisfaction with Keynes’
would both create tendencies for un- General Theory stemmed from (p. 98)
wanted upward price movements and “the general (macro) approach followed
distort the production structure away . in the whole work” and not “so much to
from underlying consumer preferences. any detail of analysis.” And he believes
Thus to Hayek, far from being a cure for that his fellow economists will also
unemployment, monetary expansion is ~~ choose sides on the “Hayek-Keynes”

Note To The Reader: the root cause of the problem. debate beacause of method rather than
sincerely apologize for the fact argues, was his belief that (p. 101) “the
, that the printing of this issue has creation of additional money (would) | believe (my debate with Keynes)
A been delayed for so long. Due to lead to the creation of a corresponding will be decided not by any future
circumstances beyond anyone's amount of goods.” Such an error discussions of his special theorems
control, however, this delay was | logically followed the equally specious but rather by the future develop-
unavoidable. assumptions It was based upon—the ~~ ment of views on the appropriate
It is our intention to once again | full unemployment postulate as well as method of the social sciences...|
and, of course, to continue in our changes and the capital structure. But problem of method is settled, the
efforts to provide a useful forum once we admit to the (p. 27) "varying “Keynesian Revolution” will appear
for the communication of Austrian degrees of scarcity”, as Hayek postu- as an episode during which errone-
ideas. |" lates, “bottlenecks” and the like allow . ous concepts of the appropriate
Be assured. that your subscrip- inflationary pressures to develop within scientific method led to the tempo-
tion is on a per volume basis, rather a situation of Idle factor capacity. Thus, rary obliteration of many important
than based on a calendar year. ‘a rudimentary explanation of “stagfia- (read microeconomic) insights
tion” is provided. Further, the inherent ~~ which we had already achieved and
shifts of relative prices due to the mone which we shall then have painfully
tary increases employ and reemploy - to regain.
resources that create tensions of rever-
sibility once the Impermanent money In all, A Tiger By the Tail offers the

creation is anticipated andior slowed. reader a wide ranging review of Keynes’

(See pp. 60-61, 8889 on this point) ideas by his then and now principal

Hayek's cycle theory, stemming from rival, F.A. Hayek. And since Hicks and

Wicksell and Mises, is elaborated in his ~~ others steeped in the Keynesian tradl-

other writings, notably Prices and Pro- tion have tried to emphasize to the pro- .

outcomes in a complex system like the duction. fession this rivalry and the need to

market. This has been one of Hayek's “Thus Hayek's analysis of Keynes’ pro- ~ understand Keynes through under-

main points during his long career (see gram for achieving and maintaining full standing Hayek, the book under review

“Economics and Knowledge” in Indivic- employment emphasizes the microeco- ~~ Should be of great service.

ualism and Economic Order). Hayek nomics of prices and production that
therefore warns us to be “humble” in the macro method must preclude. But of
our expectations concerning the useful- equal importance is the understanding
ness of mathematics in economics. We  —also made possible from the micro-
(jr Should not be embarrassed by our in- - theoretic point of view—of the exist
ability to predict specific outcomes: ence of “non-fictional” unemployment.
pattern predictions are useful and can To Hayek (p. 123), “the problem of
help us avoid costly policy errors. unemployment is in the last resort a
wage (read price) problem,” not an In-
(continued on next page) adequacy of aggregate demand. The

AUSTRIAN ECONOMICS NEWSLETTER PAGE?


===== PAGE 8 =====

Unemployment and Monetary The Keynesian Episode: Yeager

Policy (continued) {continued) o
In Part Ill Hayek repeats many of the in other sectors also. decentralized planning, and an appre-
ideas covered in Part |; one important Since wrong prices are what frustrate ciation of the role of entrepreneurs.
addition, however, 1s his discussion of exchanges and impair production, Hutt Hutt touches on certain crucial ques-
“secondary depression.” We can list does not blame any inadequacy of tions, but without being explicit enough
two causes of a secondary depression. “spending”. Instead of determining the In answering them. Just what is the role

(1) Institutional rigidities such as union volume of exchanges, spending gets de- of money in economic coordination and
power and minimum wages could force termined: the flow .of money changing discoordination? In some passages
real wage rates above their market-clear- hands in lubricating transactions de- Hutt is at such pains to penetrate
ing levels, causing localized unemploy- pends on the physical volume of trans. behind the veil of money that he prac-
ment. This would induce a cumulative actions and on the level of money prices tically denies money's routine but mo-
process—the secondary depression— at which this real flow is measured in-  mentously important function as the
in which unemployment would feed on nominal terms. Economists went wrong medium of exchange; he actually says
itself. in this case, Hayek would not call when, under Keynesian influence, they that peopie are buying goods and ser-
for monetary expansion but would rec- “came to regard Income as created by vices with money only when, untypically,
ommend institutional changes to cor- transfers of ‘money instead of as they are acting to reduce their cash
rect the relative price structure. (2) A provided in the form of a flow of produc- batances. When inflation appears to be
decrease in the money supply, initiated tive services measured in money” (p. 90). stimulating a depressed economy-—a
by the monetary authorities or by real “ .. It Is fallacious to suppose that phenomenon beloved of the Keynesians
factors, leads to a distortion in the expenditure sither produces real income but not of Hutt—does the stimulus
structure of relative prices, profits and or the money valuation of income come from the monetary expansion as
production. The process of deflation, (determined by the value of the money - such, with prices lagging and the
however, is cumulative: as investment unit), but . . : , on the contrary, it is the quantity of money thus growing in real
projects are terminated there is areduc- value of the money unit which deter- terms, or from the price inflation itself,
tion in the flow of money income at that . mines how much expenditure is neces- which may be rectifying wrong relative
point, which then spreads in all direc- sary in order to acquire a given quantum prices (for example, by eroding excess-
tions to further reduce employment. In of services or assets” (p. 381). This is ively high real wage rates}? In a malcoor-
this case Hayek recommends the “ap- not to say that monetary disorder never dinated and depressed economy, does

propriate monetary countermeasures” plays any role in frustrating exchanges the trouble necessarily stem from
{p. 40). and production. It does. Even then, how- wrong relative prices (such as EXCESS Ivers i

Hayek makes several other important ever, wrong pricing must be involved. real wage rates) or might it stem instead !
points in Part lll. (a) During a period of (More about this comes later) mainly from prices and wages that, al- ]
“prosperity,” brought about by an ex- Hutt modestly claims little originality though not badly out of line with each

cessive increase in the money supply, it for his doctrine. He claims to be justex- other, are generally too high (or con-
is very difficult to discover the mis- pounding and perhaps amplifying what  ceivably too low) in relation to the
directed resources except through the classical and neoclassical economists nominal quantity of money? in some
market mechanism. Moreover, the only had been saying and, In particular, what passages Hutt ‘emphasizes unstable
permanent way to increase employment he learned at the London School of price rigidities and people's postpone
and raise the standard of living is to ~~ Economics after World War I. Huts ment of purchases in order to hold
increase labor productivity via capital doctrine obviously is not Austrianism. money while walting for the rigidities to
accumulation. Every recovery must be- He makes less use than the Austrians of break down and prices to fall: he seems
gin with the restoration of profitable the distinctions between consumer and to imply that the particular price level
investment. (b) Hayek thinks the quan- capital goods and among capital goods would not matter if its permanent rigid-
tity theory Is a useful pedagogic device of different orders. He propounds noth- ity were obviating the just-mentioned

for the general public, but stresses the ing closely resembling the Mises-Hayek expectations and postponements. In

need to go beyond the mechanical rela- theory of the business cycle. His diag: other passages he advocates a policy of
tionship between money and prices. In nosis of macroeconomic disorder is less flexibly accommodating the nominal
particular, we should examine the trans- specific: interferences with ‘setting quantity of money to the existing price
mission process initiated by the mone- prices at which markets would clear are level, as if he were indeed concerned
tary disturbance and ask why the disrupting economic coordination. In apout the painful necessity of otherwise
money supply normally increases faster the realm of policy, Mutt envisages a adjusting the price and wage level to the
than real output. (c} Finally, Hayek re- . more activist government than the Aus- money supply.
iterates hls main theme by way of trians do, particularly in thwarting the
analogy. He likens the “choice” just-mentioned interferences. With res-
between inflation and unemployment to ~~ ervations, he advocates a policy of trying
the “choice” between overeating and to stabilize the purchasing power of
indigestion. money. Yet he .has much in common
In conclusion, this pamphlet is a use- with the Austrians, including an appre-
futintroduction to Hayek’s methodology ciation of general economic interdepen-
and his theory of unemployment and the dence, of the problem of coordination,
business cycle. The serious reader, how- and of the significance of complemen-
ever, will want to pursue these ideas  tarities among capital goods; a concern
further. A good place to start is the with actual processes and with the de- yas 80 dominant in scholarship and
recommended reading list at the end of cisions and actions of individual per- policy. Mis article “The Yield from
the pamphlet. sons; an understanding of why effective :

use of dispersed knowledge requires (continued on next page)
PAGE 8 AUSTRIAN ECONOMICS NEWSLETTER

give what | consider the right answers to
most of them. However, his failure to
make his meaning clear in the first place
prompts me to make some observations
on his writing style. {I regret seeming to

© criticize Hutt. His message is important ~
and largely correct—far more so than 'w/
the Keynesianism that until recently

If Hutt were cross-examined on these
and other issues, he would, | imagine, !


===== PAGE 9 =====

The Keynesian Episode: Yeager The Keynesian Episode: Egger

\Jpicontinued) (continued)
Money Held”, first published in the Episode’s message is that “macro- outlawing of strikes and strike-threats
{ Mises Festschrift of 1956, is in my opin- economic” problems of unemployment (see p. 133 of Episode, for example).
ion absolutely fundamental to monetary and declining output result from im- The chapter “The Nature of Money”

theory. Not the Jeast of his admirable proper. relative prices, not from insuffi- reveals a much-expanded role (since
personal qualities is his indefatigability cient consumption or an improper gen- 1963) for the “identity” of exchange
in pursuing impressive scholarship even eral price level, and that various MV = PT, permutations of which pop
at the age of 81. However, a book review theoretical misunderstandings prevent up frequently throughout the book. Al
is not supposed to stop short with a the Keynesian outlook from realizing though he occasionally writes things
summary; it is supposed to go on to an this. Most important—and the topic of like “the inflationary part of the expan
assessmert.) another Hutt book—is Say's Law, by sion of money income can be defined as
in the present book and earlier ones, which Hutt means that the supplying of that part of the increase in MV which is
Hutt has complained about how little a good or service contributes to the not accompanied by an equivalent in-
serious attention his writings have com- - source of demands for noncompeting crease in T” {p. 129), his real insights are
- manded and how little substantive goods or services. Although this idea much more subtle: changes In V should
scholarly dialogue he has been able to appears frequently in the book, It is not be said to cause changes in P, for
elicit from economists under Keynesian worded a little differently each time. In example: both are caused by a change
influence. Those of us who are sym- his new chapter on pre-Keynesian weak- in individuals’ valuations of money. Hutt
pathetic to his message can learn from nesses, for example, Hutt states that criticizes the claim that Keynes inte-
his frustrations. ~ many economists “did not realize the grated monetary and value theory, point
For two reasons | myself have been extent to which each individual pricing ing out that in fact pre-Keynesians had
turned off by Hutt’s style less than most of an input or output above the market- long since accomplished this. (What-
readers probably would be. First, when | clearing level is depleting the source of ever one may think of Adam Smith's
came across Hutt's writing decades demands for noncompeting inputs or value theory, he clearly applied it to
ago, | happened to be predisposed in outputs.” (p. 58) On page 160, he writes: money; while Mises (1911) first success-
~ favor of the sort of message he was try- “Say’s Law (in the broad sense of the fully integrated money with modern
ing to convey. Second, and perhaps principle that the demand for any com- subjective value theory, he was by no
more important, | was privileged in or modity is a function of the supply of means the first either to emphasize the
around 1955 to attend a two-week con- noncompeting commodities)...” Misun- importance of—or to achleve—integra-
fierence at which Hutt was one of the derstanding and excessive aggregation, tion of monetary theory with whatever
main speakers (along with Ludwig von Hutt argues, thwart the Keynesians’ re- value theory was dominant at the time.)
Mises). Later, when he served as Visit- cognition of this truth, while the desire What Keynes did was attribute “to
ing Professor at the University of Vir- for political acceptability (he writes of monetary and fiscal policy coordinative
ginia, we were colleagues. His analytical. “the buying off of antisocial pricing” functions which are normally performed
message, his humanitarian concern for through “the policy of maintaining ‘ef- In a quite different way” (p. 187)—pre-
those suffering from restrictions on fective demand’ ” (p. 129)) further moti- sumably through relatlve-price adjust
economic opportunity, his intellectual vates the ignoring of Say’s Law insights. ments.
force and zeal, and his integrity come The focus on Say's Law highlights Professor Hutt's monetary policy is
across better when he has ample oppor- Professor Hutt’s emphasis on coordina basically “stable price index.” In three
tunity to present his message in person tion via the price system. A higher wage new pages at the start of this chapter,
than when he offers it in print alone. | = demand by plumbers, for instance, may he proposes a bifurcate policy: Con-
‘am not surprised that readers who lack increase our demand for plpe wrenches, gress is to specify the rate of change of
my advantages in approaching his work sponges, and “how to fix your own the price index, while the central bank is
may react with bafflement or even toilet” books, but It will reduce our to effect this goal. Strangely, Hutt, like
hostility. demands for goods which (unlike these ~~ Wicksell, fails to follow through with his
There seems to be a trend in eco- things) don’t compete with plumbers’ own reasoning: he uses the term “natur-
nomics toward insisting that everyone services. In principle, given time, a new al rate” as the non-inflationary rate of
be either presenting a “model” or “test- set of relative prices will emerge con- interest and discusses briefly the time
ing” one. “What is your model?” is the sistent with “full employment,” but new structure of capital, yet fails to realize
insistent cry. Well, Hutt’s style is so skifls will have to be earned and differ that the creation or destruction of
much at the opposite pole that a prefer- ent wages accepted. Professor Hutt nominal money required to preserve the
ence for model-mongering would be joins Lionel Robbins and F.A. Hayek, level of prices will necessarily cause
understandable if one had to choose among others, in observing that expan- relative-price distortions and attendant
between the two extremes. Hutt's ex-  sionary monetary policy may be a polit: resource misaliocation. With the real ex-
position is a collection of discursive and ically attractive means of concealing or ~~ citement nowadays revolving around
often cryptic remarks. Strewn over hun- postponing the real adjustments which competing, privately-produced monies,

dreds of pages, and in no readily intelli- are required— “buying off antisocial it reflects Hutt’s conservatism that he
gible order, we find bits of positive pricing.” oo still seeks reform which would harness
- analysis, bits of criticism of Keynesian- ‘The Keynesian Episode is more anti- the government monopoly for the public

Aug's: historical allusions, and policy pro- union than its 1963 predecessor. Profes- good.
Q¥posals. Hutt has a hablt of latching onto sor Hutt's position is best presented in
remarks by other writers as they are his The Strike-Threat System (1973); he
apparently cast up at random by hisown believes unions can provide useful in-
formation which benefits both employer

and employee, and would not wish them
(Continued on next page) outlawed. He does, however, favor the (continued on next page)

AUSTRIAN ECONOMICS NEWSLETTER PAGE #


===== PAGE 10 =====

The Keynesian Episode: Egger The Keynesian Episode: Yeager | ~
(continued) (continued)

rf

Professor Hutt prefers not to be reading, even if those writers are not in mind. Even when an intensification of
classified into any “school,” although leading or typical controversialists on demands for money balances is contrib-
Austrians will applaud many of his argu- the points at issue, and then using their uting to macroeconomic disequilibrium,
ments. The whole volume is an impres- remarks as pegs onto which to string the blame should fall not on this particu-
sive restatement of the “coordination” observations of his own. This habit lar change in preferences as such but
view of macroeconomic issues {and so, gives his exposition an unnecessarily on the fallure of prices to adjust to it. in
it is important to realize, was its 1983 polemical tone. The jumbie of analysis the face of insufficiently flexible prices,
ancestor). More specifically, he comes and polemics includes observations any change in technology or resources
down hard on Keynes's mixing and about Keynes's slipshod and unoriginal or preferences, including not only an
blending of time preference and liquid- theorizing and about his unfairness in intensification but even a weakening of
ity preference, arguing forcefully that scholarly controversy, as well as obser- savings preference or of liquidity prefer-
the one has no logical relation to the vations about Keynes's forceful person- ence, can impede market-clearing, ex-
other and, in particular, that liquidity ality and conjectures about the popular- changes, and production. The diagnosis

preference (the demand for money bal ity of Keynesianism In the academic must thus focus on how well or poorly
ances) has nothing to do with interest. world and on the political scene. the pricing process is working, and why.
Although this alone does not make Hutt Hutt scorns the fundamentalist Keynes- Nowhere does Hutt precede his criti-
a “pure time-preference” interest theor- anism that broods about adequacy or ¢ism with a systematic exposition of
ist (a la Fetter, Mises, and Rothbard), inadequacy of demand, about the pro- the Keyneslan system; nowhere does he

several passages suggest his sympathy pensity to consume out of real income, follow Karl Popper's healthy precept
with such a view {pp. 306-7, for example). and about a saving gap that grows with about trying to refute erroneous ideas in
Few such theorists, however, would income and wealth and so supposedly their soundest possible versions. In
agree with his interpretation (pp. 331-2) becomes all the harder to plug up with some places, as in criticizing multiplier
that what the existence of perishable real investment spending, especially as theory, Hutt interprets Keynesian propo-
goods may produce is properly termed a real capital formation leaves fewer and sitions in an unnecessarily unsympa-
negative interest rate. fewer outlets available for still further thetic way, which gives his own com-

Hutt cites Keynes's “user cost” as investment. Saving, as such, cannot ments the character of blowing down
“the most original and useful concept pose a problem. People cannot save straw men. How effective a controversi-
which Keynes introduced,” {p. 418 n.), without acquiring some assets or other. alist against actual Keynesianism would

referring to the subjective-cost Appen- If this process, together with the asso- someone be who relied on Hutt's PreSyeglh
‘dix in The General Theory which Profes- ciated financial transactions, results in entation and criticism?

sor Lachmann has repeatedly identified real capital formation, weli and good; Strewn about among Hutt's other

as Austrian in character. His "The opportunities for further investment stl passages are echoes of obsessions that
Nature of Consumption and Saving” are not foreclosed. Complementarities have long preoccupied him. He seems

(Chapter 13) takes a delightfully “essen: exist among capital goods; having more unwilling to recognize, for example, that
tialist” approach in which consumption of some makes it advantageous tO the absence of sufficient price and
is, following J.B. Say, “the extermina- create more of others. More fundament- wage flexibility to keep markets always
tion of value” and has nothing to do ally, perhaps, employing additlonal real clearing even in the face of severe jolts,
with spending money. “Consumption capital in some sectors of the economy such as monetary jolts, is practically
demand” appears a rather silly phrase in tends to raise productivity and real in- = jnevitable and that theory and policy
this view, referring—albeit misleading- comes there, which constitute addition- should take account of this inflexibility
ly-~to replacement in one’s portfolio of al demands for the outputs of other (along with other hard facts of reality).
some asset (.g., a can of beans) which sectors and for the means of producing No; he blames price and wage inflexibil-
he has consumed (literally, | guess, in them. In short, saving devoted to capital ity on villainy. An activist government
thls case). When one consumes an as- = formation and income growth in no way has the duty of thwarting and punishing
set, his ability to demand other goods subverts the operation of Say’s Law. If, the villians, prominent among whom are
by offering it in trade evaporates. What- on the other hand, savers neither labor unions. Even for me, no great
ever it may do to the desire, consump- acquire real assets themselves nor admirer of unions, the repeated fulmina-
tion reduces the ability to demand. He transfer their command over resources tions against them become downright
introduces Bohm-Bawerkian capital the- to entrepreneurs who will construct boring. Some of the space so used
ory as a necessary part of his saving- assets, then they must be trying to build might better have been devoted to
and-investment discussion (p. 292), and = up their holdings of money. Yet Keynes, evidence bearing on how quantitatively
refuses to force these concepts inte the says Hutt, trled to put the blame on an important unions are relative to other

traditional houssholds-and-tirms classi- excessive propensity to save as such, factors that also contribute to macro-
fication. While his brief (pp. 99-103) Ap- abscuring the liquidity-preference or de- economic disorder. Hutt might well
pendix, ‘The Limitations of Mathemati- mand-for-money aspect of the have considered whether unions are

cal Method in Economics,” is principally . disequilibrium. (This charge, it seems to less (or more) important in these re-

a harsh criticism of the overwhelmingly me, overlooks chapter 17 of the Genera!  spects in the United States than in
pervasive scientistic silliness afflicting Theory. What Keynes might better be Great Britain (often he seems to have
the profession (“Where's your model?”), charged with is a lack of consistency British conditions at the back of his
Hutt seems aware that the use of sym- among different parts of his book.) mind). Another obsession carried overngs
belism and mathematical technique Actually, says Hutt (p. 295), “saving pref- from Hutt's earlier books concerns
may occasionally aid in the solution of erence and liquidity preference are as Britain's return to the gold standard in

logical puzzles. unrelated as demands for monocles and 1925 at the prewar parity, requiring in-
bubble gum.” Diagnosticians of depres- :
(continued on next page) sion should keep this distinction clearly {continued on next page)

PAGE 10 AUSTRIAN ECONOMICS NEWSLETTER


===== PAGE 11 =====

The Keynesian Episode: Yeager The Keynesian Episode: Egger
(continued) (continued)

|
ternal deflation if that parity were to Nonetheless, all is not peaches and of Nations and used often in Hutt’s 1974
remain workable. Repeatedly, though cream. Even an improved-readibifity ver- ~~ The Rehabilitation of Say’s Law—with-
often in cryptic language, Hutt offers. sion of Keynesianism has its difficulties. out definition; he considers It a Say’s
apologetics for that policy. He may even ~~ While after a half-dozen slightly diferent Law insight that “we buy with ‘money’s
be right, but the way those apologetics exposition of it one begins -to think he ~~ worth’ and not with money unless we
keep intruding in unlikely places ischar- has the idea, Hutt's interpretation of are reducing our inventories of money.”
acteristic of Hutt's style. Say’s Law may well leave the reader {(p. 238). Surely it’s nice to be able to
Another characteristic is his propen- uneasy. If it said “the supply of one understand that there is a sense in
sity to write in special terminology of good is the demand for another,’ it which an agent in a money economy
his own invention and to brood at length ~~ would at least be interpretable in a pays for his purchases with the services
over the meanings of terms and con- precise fashion. But when “is” is re- ~ which yield his income, differences in
cepts. (Mercifully, Hutt's terminological placed by the more rubbery “contributes their money values implying changes in
eccentricities are somewhat less obtru- 10,” and when—in addition—"demand” his money balances, but does the term
sive in the present book than in earlier ~~ becomes “the source of demand,” the “money's worth” add to this under-
ones; perhaps he has taken some heed reader is burdened with wondering in standing? Now, | like the phrase, it has a
of criticism) Hutt uses one term so what circumstances these substitutions neat ring to it, but—so far—its precise
much that |, anyway, have become may be important. At four or five points meaning has eluded my occasional ru-
accustomed to it: “withheld capacity”. Professor Hutt uses his term “money’s ~~ minations, which are apparently either
This term conveys the suggestion that © worth” —a phrase found in The Wealth . t00 deep for the concept or not deep
people who, in ordinary language, are Le enough,
meeting frustration in finding customers
for their products or in finding jobs are
in fact withholding their capacity to pro-
duce or to work by Insisting on prices or
wages above the market-clearing level.
So doing, they are withholding their
demands for the goods and services of

such prospects certainly do Influence An innovator necessarily has prob-
the form taken by accumulation)’ (p. lems with existing terminology. Defini-
349). A similar habit is to mention gov- | tions of words are inextricably linked
ernment policies not straightforwardly with theories about the concepts which
but rather with reference to the results the words denots, a fact of life which
that Hutt would expect them to have. has caused Austrians no end of prob-

Thus, In a historical context: ©... not a lems in describing their approach to the
- Other people. This terminological ally single governmental step toward multi- | profession. In view of my difficulty with
Sion 10 villainy serve plying the wages flow was taken" (itali- | certain of Professor Hutt's concepts, |

a’ economic analysis of the nature of and
reasons for price and wage inflexibility,
including insights Into how the Interde-
pendence of wages and prices narrows
the reasonable options available to in-
dividual price-setters and wage-negoti-

cized, p. 81}, meaning, approximately, can't really be certain of whether they
that the government did not engage in pay their way or not in increased in-
union-busting. (If | have got his meaning | sight. Let the conscientious reader be
only approximately correct, wel, Hutt forewarned: be prepared to spend many
should have straightforwardly said what | hours on the precise meaning of an
X e does mean.) occasional phrase, or hope it isn't
Sore: Behind the oil of terminology, Because of its style, | do not expect | crucial and jump over it, assuming your
utt can damn reality for being real. Hutt's book to accomplish much toward | general impression is OK. You may end

His special terminology would permit soqverting the Keynesians. If they lack | up doing both.
Hutt, if pressed, to defend propasitions the background and the will to make the An occasional perplexing phrase,
that are startling on their face. “The  gtfort necessary to understand his ec- | however should certainly not dissuade
withholding of capacity which Is capa-  ggntrically phrased message, they may | the scholar from a thorough reading of
bie of providing currently valuable ser-  gyen come away from his book fortified | The Keynesian Episode. Admittedly, it's
vices is always a case of restraint on. their belief that he and their other | pretty harsh on Keynes and Keynesians,
freedom. ..” {p. 371n.} “.... the labor of gritos are in the wrong. Whether he | but the modern student accustomed to
all able-bodied persons was demanded realizes it or not, Hutt is preaching to | the fashion of attributing all sorts of
throughout the depression years. /t was tng already saved. Doing so, however, is |- brilliant insights (e.g., into institutional
not supplied” (p. 189). “. . . consumption far from pointless. Sympathetic readers | price or wage rigidities) to the murky
is always the extermination of powerto oan find much in Hutt’s book to fortify | General Theory should consider some
demand. The failure of the Keynesians heir understanding of how the real. | of Hutt’s points: the potential for dis-
to understand this simple truth lies at yor14 works and could be made to work | coordination via institutional rigidies
the root of what | believe to be the most patter and much to deepen theirinsights | was thoroughly recognized by pre-Key-
outrageous intellectual error of this into the fallacies of macroeconomic | nesians, Keynes and his followers are
age” (p. 341). : Co doctrines whose recent dominance has | largely responsibie for the aggregative-
Hutt frequently covers himself against gy) not entirely been overcome. Teach- | macrd mess, and Keynes (despite
challenge by qualifying apparently egre- ors willing and able to give a sympa- | reports that he found them “silly”) never
(gious propositions with cryptic phrases thetic exposition of Hutt's book can | formally repudiated his followers’ al-
that are hardly understandable unless ake good use of it in their classes. It | leged misinterpretations of hls work.
one is already familiar with his termin- may well serve as the focus of stimulat- | The policies Hutt brilliantly attacks
. ology and his allusions. For example, “It jn4" ang enlightening controversy In | (here and in 1963) have caused immense
wy IS Quite wrong to assume that unfavor- seminars and discussion groups that | human suffering—he never loses sight
able prospects can deter net accumula-  ¢ontain sympathetic readers. Hutt's lat- | of that, and his readers shauldn't, either.
tion, otherwise than through the dis-  agt hook is another milestone in a long Books taking a thoroughgoing coor-
couragement of saving preference, of— ang gistingulshed career of indefa- | dination view of macroeconomic issues

indirectly—through the encouragement {izanle scholarship and humanitarian | are few and far between. This one
of the withholding of capacity (although concern. Ce should not be missed.

AUSTRIAN ECONOMICS NEWSLETTER PAGE 11


===== PAGE 12 =====

The Theory of Social Action:
The Correspondence of Alfred Schutz and Talcott Parsons

University Press, 1978, xxvi + 145 pp., $12.50.
Reviewed by Ludwig M. Lachmann |

In 1937 the Harvard” sociologlst The present volume consists of a ponent’s strictures, and defensive in his
Talcott Parsons sprang to fame withthe ~~ foreward by Maurice Natanson, an Intro- attitude, the more he is aware that his
publication of his book The Structure of ~~ duction by Richard Grathoff, the editor, own interpretation of Weber is not the
Social Action in which he demonstrated ~~ Schutz's paper, here called “Inquiry into only one possible.
that the social thought of four European the Structure of Social Action”, fol- We also have to remember that at the
thinkers, Durkehim, Marshall, Pareto lowed by the letters exchanged between time of their correspondence Schutz
and Weber, for ali the difference in their the two between October 1940 and April was an immigrant scholar without ac-
backgrounds and interests could be 1941, and a “1974 Retrospective Per-  ademic position while Parsons was well
shown to converge on a “voluntaristic ~~ spective” by Parsons, followed by ensconced at Harvard.

theory of action.” He then proceeded to another Retrospect by the editor. What lessons does this dispute hold
outline what in his view the conceptual The failure of two such minds to for Austrian economists today?
structure of such a theory should be. meet, let along reach agreement, makes

Hayek, as an editor of Economica, for sad reading. The reasons are many
asked the Austrian philosopher Alfred - and varied. We can only glance at a few
Schutz, a noted member of the Mises of them. Strange to say, one of them lies
Circle, to review the book. Schutz soon in the very closeness of the positions
became so fascinated with his task the two authors occupy, It sometimes
that what was intended as a book review ~~ makes them use similar words for dif-
turned into a “monstrous paper of about - ferent things.

20,000 words” which he had no hope to in part the controversy reflects dif-
publish in this form. ferences between philosophical

In the late summer of 1939, soon after schools. Parsons, like Weber, is a Neo-
Schutz's arrival in this country, he and kantian while Schutz, a disciple of
Parsons started to correspond. In Husserl, espouses phenomenology.
November 1940 he sent the paper men- Parsons writes to Schuiz: “I think what
a you mean essentially is an ontological
reality, what a concrete reai actor ‘really’
experiences. | think | have legitimate
reasons to be skeptical that by your
analysis or by any others avallable it is
possible to arrive at anything approach-
ing a definitive description of such a For them, clearly Schutz is the hero of
reality. | am afraid | must confess to be- the encounter, defending a radical sub-
ing skeptical of phenomenological Jectivism against a lukewarm one, and
analysis.” (p. 88). the claims to our attention of the par-

To Parsons all knowledge is gained by  ticipant actor against those of the out-
observation and the difference between side observer.

Talcott Parsons

actor and observer a mere matter of We must beware, on the other hand,
degree. He looks at Schutz’s “life of imputing to Parsons a position
world” with pronounced suspicion. similar to that held today by the neo

Both our authors are committed to classical orthodoxy, even though there
subjectivism, but to Schutz this commit- are some parallels between the general
ment. carries implications Parsons equilibrium model and the “structural
seems able to avoid. For Schutz, Par-  functionallsm” he espoused. Parsons -
sons does not go far enough. “Pro rejected behaviorism and positivism at a
fessor Parsons has the right insight that time when they were in full flood, and
a theory of action would be meaning- some eminent economists only too
less without the application of the sub- ready to be engulfed by it. “The position
Alfred Schutz jective point of view. But he does not | take is certainly not that of certaln

follow this principle to its roots. He re- schools of economic thought which
tioned to Parsons who commented in places subjective events in the mind of restrict themselves to studying such
three long letters. The correspondence the actor by a scheme of interpretation things as indifference curves and claim
ceased in April 1941. From the tone of for such events, accessible only to the thereby to have eliminated the concept
the letters exchanged it is obvious that observer, thus confusing objective = of utility. That is something very close
by then both correspondents had be- schemes for interpreting subjective to behaviorism and | think ends up there
come rather disappointed with each phenomena with these subjective if followed out consistently.” (p. 80).
other. In the following years, however, phenomena themselves.” (p. 36). A sophisticated thinker, he had
“(both kept to their decision to keep Both authors are Weberians with dif- nothing in common with the typesetters
their dispute a private affair.” Schutz ferent views on the portent of Weber's of our textbook industry. Schutz found
never published his paper. He died in work. One gains the impression that in ‘him a worthy opponent whom, alas,
1959. Parsons is the more sensitive to his op- he could not turn into a friend.

~ PAGE12 AUSTRIAN ECONOMICS NEWSLETTER

edited by Richard Grathoff, Bloomington, Ind.: Indiana ~t/