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In response to James Ahiakpor:
As to the question of Keynes's monetary theory (James mentioned
savings rates, interest, and investment), one might want to note the
existence of a German version of Mises Theory of Money and Credit
(1913), which was available during the Hayek-Keynes debates. Keynes
wrote a review of that book but later admitted that he did not
understand German well enough to be able to comprehend new
arguments in that language. Apparently, Keynes and many of his
followers did not understand that book. Many of Hayek's critiques of
Keynes's monetary theory are based on reasoning that is present in that
book. Incidentally, it should be noted that the Hayek-Keynes debates
were about Keynes's book on money, not his General Theory, and that
Keynes claimed after the debates that he had changed many of the
views expressed in the Money book anyway. So there was no Hayek-
Keynes debate about the General Theory. The Hayek-based critiques
of the General Theory came largely from his students. Henry Hazlitt
(1960) collected a number of such critiques.
Regarding the concept of aggregate demand and the macroeconomics
based on it, it appears, James, that your message is a kind of bait to the
Austrians. I'll take the bait, although the term "Austrian economics"
today refers to an eclectic group and I am not sure whether I would fit
into it.
The question raised by macroeconomics, based on the concept of
aggregate demand, is whether economics ought to be applied statistics
or a theory of action, or choice. In my view, no one can competently
interpret aggregate statistics without a detailed image, or model, of
action or choice. If this is true, an argument against a macroeconomics
that is based on aggregate demand is that it has diverted the attention of
many great minds away from the theory of action and toward the
analysis of the statistic relationships among aggregates. It has helped to
promote what Hayek in his Nobel lecture called a "pretense of
knowledge."
The problem with Keynes's interpretation of Say's law was that he
disconnected the theory of statistical aggregates from the choice of
_each_ of the actors. For example, his theory of the cycle focused
only on a particular class of actors, the speculators, thereby ignoring
the detailed investigation of the "supply-creates-its-own-demand"
actions in the market economy (i.e., ignoring the the propensity to
"truck, barter, and exchange"). The question raised by a deep and
prolonged cycle in an unrestricted economy is why money does not
perform its function of facilitating trade among the separate specialists
in a modern capitalist system. By focussing on speculation, Keynes
ignored the demand by traders for a form of money that will enable
them to trade. Thus they were not led to ask "what the governments
had done to our money."
We must presume that the separate individual actions of the numerous
specialists in a market economy is imaginative, inventive, and largely
beyond the purview of a single economist or a single model. Hayek's
1937 and 1945 papers on knowledge give one the kind of
understanding of specialization that leads to this hypothesis. The study
of statistical aggregates does not. It tempts one to think that he has
answers to economic problems. The best example of this today is in
growth theory, where people unceasingly try to build mathematical
models of human activities that are impossible to quantify. Because a
statistical relationship of the past (for example the "consumption
function)" has been discovered, the macroeconomist of this type thinks
that he has reason to believe that this relationship will exist in the
future
and that, because it will, he can not only predict the effects of a broad-
based policy but that those effects will occur if the policy is adopted.
The self-assured, even arrogant, Keynesian policy maker -- who
disregards (1) the complexity of individual decisions and their
relationship, (2) the fact that statistical data is always data from the
past, and (3) that policy in a democracy requires consensus -- is born.
This was the kind of crass Keynesianism that was being taught in the
early macro textbooks and that is still taught in some measure today.
The answer to Greg's question about why these obviously false ideas
persist is that the models give students and professors what they want --
the belief that understanding the market economy is a simple process
of working out a mathematical model. The textbooks not only nurture
this view; they rely on it as a selling point. It sells because teachers
find
it worthwhile to give students the impression that by reading the
material, they will learn, with a minimum of work, to understand and
control the economy. Moreover, because there is no end to the
complexity of mathematical models, the mathematical approach helps
separate the teachers from the students and to create a demand for
more sophisticated models that only the teachers can satisfy.
Hazlitt, Henry (ed.), The Critics of Keynesian Economics, Lanham,
Maryland: University Press of America, 1983. (originally published in
1960)
Hayek, F. A. (1937). "Economics and Knowledge." Economica:
February. Reprinted in F. A. Hayek (1948). Individualism and
Economic Order. Chicago: University of Chicago Press.
Hayek, F. A. (1945). "The Use of Knowledge in Society." American
Economic Review. 35 (4): 519-30.
von Mises, Ludwig (1935). The Theory of Money and Credit. New
York: Harcourt Brace. (originally published in German in 1912).
Pat Gunning, Sultan Qaboos University, Oman
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