----------------- HES POSTING ----------------- James Ahiakpor writes: >>Hayek also appears to have been quite unhelpful where the Say's Law debate is concerned.<< Let's grant first that "Say's Law" is an essentially contested notion. If one must come out on one side of the debate to be helpful, then any position can be attacked as 'unhelpful' from the point of view of an opposing position. Of course, this verbal play merely begs the question. The questions "What does Hayek contribute to the debate over Say's Law?" is an interesting question in its own right. Hayek's contribution is to think of Say's Law as defining feature of particular kind of logical construction -- i.e. the defining feature of a general equilibrium construct. The relevant discussion can be found on pages 31-32 of _The Pure Theory of Capital_: ".. where analysis aims directly at a causal explanation of the economic process as it proceeds in time, the use of the concept of a money-less exchange economy is misplaced. [Sidebar: "Real term analysis [i.e. logical analysis in terms of ratios between quantities] is legitimate only within equilibrium construction"] It is self-contradictory to discuss a process which admittedly could not take place without money, and at the same time to assume that money is absent or has no effect. In the case of our ideal position of equilibrium, which we construct as a guide to interpretation, and in which all parts are assumed to be perfectly matched, the case case is different. Here analysis in real terms is not only in place, but is almost essential. Since at each point money is in the strict sense only an intermediary between definite quantities of certain goods, all the essential relations in this system are relations between goods (rates of substitution between certain quantities of goods determined by the total quantities of these goods). Or, in other words, it will be true of this system -- what has sometimes been asserted to be true in the real world -- that the total supply of goods and the total demand for goods must be identical. (This so- called 'Law of Markets' of J. B. Say is indeed one of the first formulations of the modern concept of equilibrium)." James Ahiakpor continues: >>His [Hayek's] touting of the Austrian Capital theory, following the work of Bohm-Bawerk, helped to suppress the classical "capital" supply and demand theory of interest in the debate, just as Keynes had done.<< Hayek found reason to reject aspects of Bohm-Bawerk's theory of capital and interest as early as 1927. In the rush to put together his 1931 LSE lectures, Hayek used what he considered to be the flawed aggregated version of Bohm-Bawerk's account of the logic of capital valuation / interest (the 'average-period' of production construct -- known today, but not to Hayek, as the "Austrian" theory of capital). Hayek left this aspect of his own work as a still flawed "black box" which had to be replaced. In 1936 Hayek explicitly condemned and rejected the so-called "Austrian" theory of capital (i.e. Bohm-Bawerk's aggregated version of the logic of capital valuation). Hayek points out also that neither Menger, Wieser or even Schumpeter accepted Bohm-Bawerk's work on capital. In Hayek's view his own effort to replace Bohm-Bawerk's "average period" construct using real term analysis as a means of understanding interest and/or capital goods valuation thru time represented a move to restore elements of analysis which can be found earlier in Ricardo, Mill, Rae and others. Hayek writes: "Economists have often felt the need for some such analysis in real terms, and in fact a considerable part of classical economics, explicitly or implicitly, makes use of this idea" (Hayek, 1941, p. 30); and "All that is claimed is that in the [current] 'Anglo-American' treatment of [of capital and interest theory] the aspects stressed [in common] by [Menger, Bohm-Bawerk, Wieser] have in recent times(1) been neglected. fn 1: It may perhaps be mentioned here that the classical English economists since Ricardo, and particularly J. S. Mill (the latter probably partly under the influence of Rae), were in this sense more 'Austrian' than their successors." [Hayek, 1941, pp. 46-47] James Ahiakpor continues: >>Without the link between savings, interest rates, and investment spending entailed in Say's Law (classical economics), Keynes appeared to his audience to have been correct in claiming that the economic process, as described by the classics, was incomplete.<< Hayek's purpose just is to show this link, in real terms, using marginalist principles of valuation, and without the old muddles and confusions -- and without Keynes' new ones. James Ahiakpor continues: >>One had to import a central bank's money supply role in order to complete the picture, one of the fundamental claims Hayek also opposed as being unhelpful to an efficient economic management. Any wonder that Hayek lost his following at LSE?<< I'm lost here. It seems as if theoretical issues are being muddled with policy recommendations, or perhaps that Hayek's work of the 1970's is being taken to replace his work of the 1930s and 1940s. Clarification needed. James Ahiakpor continues: >>Hayek also gave the impression that he had little use for aggregate analysis, although he also discussed business cycles -- an aggregate analysis, even if it traces sectoral adjustments. Indeed, Say's Law is about aggregate analysis.<< The language of "aggregation" used to critique particular explanatory strategies can be ambiguous. The issue Hayek raises involves consistency with a universe made up of individual planners, valuers and adaptive learners. In Hayek's view, some sorts of analysis are neither logically or causally consistent with such a universe. This way of saying it puts a point on the fact that it is the level of aggregation, and the causal and logical role of aggregation which is at issue. Of course, Hayek himself uses aggregates of different sorts in his analysis -- at a particular level and of a particular kind. Hayek sees these as compatible with a world made up of individual planners, valuers and adaptive learners. The problem with Keynes as Hayek saw it is that Keynes' work was logically and causally _not_ compatible with such a world. Hayek's point is that in Keynes these aggregates interact directly, and in a way incompatible logically and causally with an underlying world of individual valuers, adaptive learners, and planners. It is aggregate analysis in this sense that Hayek rejects. James Ahiakpor continues: >> Thus those who followed Hayek in dismissing the usefulness of aggregate analysis and believed that Marshallian supply and demand analysis (microeconomics) legitimized the modern aggregate demand and supply framework in macroeconomics had little to contribute towards salvaging the logic of Say's Law as fundamental to sound macroeconomic analysis.<< Hayek himself uses aggregate analysis, at his own level and in a way he saw as compatible with individual adaptive learners, planners, and valuers. On the other hand, Hayek considered Marshallian supply and demand analysis as a throwback to classical value theory, with value determination looking backward from the past at aggregates without significance to individual valuers & planners, -- unlike marginalist microeconomics which looks prospectively into the future just as a planning & valuing individual does. That is, for Hayek built within Marshallian supply and demand analysis are objective elements incompatible with subjective marginalist economics -- similar in their logical status to the problematic aggregates in 'bad' macroeconomics. James Ahiakpor continues: >>Unfortunately, there are still modern Austrian economists who hold this unhelpful view of macroeconomics. I have heard some of them declare that there is no such useful thing called macroeconomics!<< The problems here are merely semantic ones. Hayek uses aggregates -- yet if aggregates are only understood as they are used in Keynesian economics, then Hayek is opposed to aggregate analysis (e.g. when "aggregate analysis" = Keynesian economics & a Keynesian approach to the explanatory strategy of economics). Similarly, much of Hayek's work is in trade cycle theory, monetary theory, etc. -- which everyone calls "macroeconomics". So, since Hayek clearly thought that there was such a thing as trade cycle theory, monetary theory, etc. he clearly thought that there was useful macroeconomics. Yet when "macroeconomics" = Keynesian economics & a Keynesian approach to making sound sense of how the real world works, Hayek would say that there is no such thing -- there is no sound way to do this if one tries to do it using aggregates the way Keynes did. Doing so is logically and causally incompatible with a world of individual planners, valuers and adaptive learners -- and there is no such thing as a world in which it is. Greg Ransom ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]