Austrian Theory of the Trade Cycle | Roger W. Garrison

Presented by Roger W. Garrison at the 2009 Mises University. Recorded 27 July 2009 at the Ludwig von Mises Institute; Auburn, Alabama.

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[Questfortruth86]

@treddas851

"What have Mises-Hayek done?"

Mises incorporated monetary theory into marginal utility theory, something that all other neoclassical economists were simply incapable of doing (this was seen, at the time, as a major problem with subjective theories of value). He also explained, in great detail, how money emerges, the nature of inflation (it's not a uniform and/or measurable variable), and built upon Bohm-Bawerk's capital theory. (I purposely ignored business cycles for the moment)

[FanofFormerPresident]

The more I learn about the Austrians, the more it is absolutely obvious that Keynes is nothing other than a statist, simple-minded fake. An enabler of government money-printing.

[Questfortruth86]

@zsylvana

In fact, Wicksell took the concept of natural interest from Bohm-Bawerk, Mises’ professor at Vienna. Bohm-Bawerk referred to the pure rate of interest as the “natural rate.” In other words, Wicksell was employing the Bohm-Bawerkian capital framework though it is true he would later modify it. This is absolutely crucial to understanding WIcksell’s trade cycle theory, and it’s something that Keynes entirely missed (Hayek deeply stressed this in his critique of treatise on money).

[Questfortruth86]

@zsylvana

In other words, I reject the assertion that “The existence of subjective expectations in the real world and the non-existence of equilibrium states are severe stumbling blocks to Hayek’s theory.”

[Questfortruth86]

[continued]

This, as you mention, became problematic, and Hayek attempted a more rigorous treatment later in his career. My position is that the whole issue is overstressed and I don’t think that the elegance present in his earlier work is sufficient grounds to discard it. Indeed, Lachmann further elaborated, included expectations and uncertainty, and reached almost identical conclusions.

[Questfortruth86]

@zsylvana

It is true that Hayek’s conception of equilibrium did indeed evolve or at least change over time. It is also true that he employed static general equilibrium analysis in his earlier works, i.e., ignored the role of expectations and uncertainty altogether, but I tend to think he did this primarily for pragmatic purposes. He wanted to demonstrate a fundamental concept in a manageable way. His triangles, for example, were never meant to accurately depict the real macroeconomy.

[zsylvana]

@Questfortruth86 14) And by the way it is as always interesting to read your comments,all the best to you! 

[zsylvana]

@Questfortruth86 13) "But,as Witt goes on to observe,if one rejects the usefulness of equilibrium analysis,then Hayek’s step-by-set story of how the cycle unfolds,one in which ‘each single stage necessarily had to be followed by the next one’,can no longer be maintained..Witt concludes that Hayek’s cycle theory may well be incompatible with his later theory of spontaneous orders a concern that others have voiced”

(Bruce Caldwell-An Intellectual Biography of F.A. Hayek,2004 )

[zsylvana]

@Questfortruth86 12) “Hayek’s changing assessment of the importance of equilibrium theory has some consequences for our story. The most telling of these concerns Hayek’s trade cycle theory, a paradigmatic example of equilibrium theory, one that Witt (1997, 48) describes as ‘an impressive example of allied price theoretical reasoning that may even delight a Chicago equilibrium economist ” (Bruce Caldwell, 2004: 228).

[zsylvana]

@Questfortruth86 11) Hayek needed to free himself from the stationary equilibrium approach and construct a dynamic approach suitable for his trade cycle theory (Donzelli 1993: 5) others like Myrdal, Ohlin, Lindahl, and Hicks also freed themselves from the stationary equilibrium approach in the 1930s, and rediscovered the Walrasian instantaneous equilibrium approach.) Hayek had revived his “intertemporal equilibrium” idea,“a temporary equilibrium notion with perfect foresight”

[zsylvana]

@Questfortruth86 10)

In fact, Hayek delivered a lecture called “Price Expectations, Monetary Disturbances and Malinvestments” on December 7, 1933 in Copenhagen (first published in German in 1935; English trans. Hayek 1939) where he responded to Myrdal’s criticisms. Here he began to modify his ideas on the equilibrium interest rate and the concept of equilibrium more fully developed in his paper “Economics and Knowledge” (Hayek 1937).

[zsylvana]

@Questfortruth86 9)Gunnar Myrdal had already levelled this criticism against Hayek in a paper in 1933 and Hayek’s famous paper “Economics and Knowledge”(1937) can be seen as the beginning of his attempt to answer these criticisms.Lachmann heard of the work of the Stockholm school from Rosenstein-Rodan:the Stockholm school at this time was being influenced by Myrdal’s incorporation of Knightian uncertainty into economic theory and Lachmann came to examine the role of expectations