From: Robert.Vienneau@launchpad.unc.edu (Robert Vienneau)
Subject: Re: Keynes VS Hayek
Organization: University of North Carolina Extended Bulletin Board Service
Date: Sun, 22 Nov 1992 02:55:35 GMT

In article <1992Nov21.130227.322@genie.slhs.udel.edu> starr@genie.slhs.udel.edu (Tim Starr) writes:
>In article <1992Nov20.164853.5887@b30.ingr.com> craig@jido.b30.ingr.com writes:
>}In article <1992Nov20.105710.845@genie.slhs.udel.edu> starr@genie.slhs.udel.edu (Tim Starr) writes:
>}   In article <MDL.92Nov19114005@ak.cypress.com> mdl@cypress.com (Matt Landrum) writes:
>}   }
>}   }What is Hayek's solution to unemployment?
>}
>}   A market free enough to exclude even such well-entrenched interventions as
>}   central banking so that stable currency could prevent business cycles.
>}
>}Aha! That's what I subscribed to this group for! Can you sketch the
>}proof for the (intuitively appealing) proposition that "stable
>}currency could prevent business cycles"?
>}
>}Thanks,
>}
>}-- Craig Presson <pressonc@ingr.com>
>}  There is not a man in the country that can't make a living for himself and his
>}  family.  But he can't make a living for them AND the government, too, the way
>}  his government is living.  What the government has got to do is live as cheap
>}  as the people.					    -- Will Rogers
>
>I'll sure try, Craig.  The austrian theory of business cycles, for which
>Hayek got the Nobel Prize in 1974, as I understand it, is that booms are

As I understand it, Hayek's Nobel Prize was more for methodological
ideas than any specific theory.

>caused by an expansion of credit, which fools borrowers into thinking that
>the low interest rates mean that the time-value of money has actually lowered.
>They then borrow and malinvest in projects that are too long-term than what
>will clear the market.  Busts come when this is realized, and the malinvestment
>must be liquidated.
>
>Hope this helps.
>
>Tim Starr - Renaissance Now! - Think Universally, Act Selfishly
>starr@genie.slhs.udel.edu
>
>"True greatness consists in the use of a powerful understanding to enlighten
>oneself and others." - Voltaire

This theory of business cycles was not original with Hayek, but grew out
of earlier work by von Mises, and more originally, Wicksell. It was
criticized I think convincingly by the "Stockholm School," especially
Gunnar Myrdal in his _Monetary_Equilibrium_, which had something to do
with Myrdal sharing the Nobel Prize in 1974. Interestingly enough,
Myrdal's theory is very Keynes-like, and Hayek edited the volume that
Myrdal's theory first appeared in.

One problem is that Hayek's capital theory has problems. There's no
reason to assume that a lower rate of interest will cause investors to
undertake more roundabout production processes. Hayek's defense might be
that he changed the theory of equilibrium to be a short-run theory in a
revolutionary way. Perhaps under his notion of equilibrum, Hayek's
capital theory works.

But the problem Hayek's contemporaries focused on was something else.
One can describe an equilibrium in a barter economy. The question is
whether the introduction of monetary institutions changes that
equilibrium in any essential way. This was Hayek's stated problem, but
he entirely forgets to deal with it.

And even those who most remained Hayek fans later decided his political
influence on British policy during the depression was a hindrance. Hayek
developed these ideas while at the London School of Economics (LSE). One
of the best economists at the LSE was Lionel Robbins. In his
autobiography, he states that Hayek's theory is not as general as he
thought at the time, and that Hayek's politics were mistaken in the
context of the thirties.

Of course, those who are arguing here for the Austrian business cycle
theory don't derive their politics from the theory. Rather they accept
the theory because they think it supports their politics. Thus, they are
uncritical anyways. 
                                  Robert Vienneau
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