Contra Keynes and Cambridge: Essays, Correspondence (The Collected Works of F.A. Hayek)
F.A. Hayek | 1995-04-20 00:00:00 | Routledge | 288 | Economics
This volume reproduces all of the significant contributions including Keynes' and Sraffa's replies to Hayek. One major piece by Hayek, The Economics of the 1930s as seen from London is published for the first time.
Reviews
How can we have any knowledge of the world around us?
We possess a tool, reason, which allows our intellect to expand our knowledge of things, to expand our judgements of objective "Truth" about "Reality".
Reason is at work in any science when the practitioner of the science associates her existing judgements and concepts in order to expand her judgements. Logic studies the laws with which the tool of reason has to comply to arrive at valid expansions of knowledge.
Logic is the tool of all sciences. Logic is itself a science. Science is the knowledge of conclusions demonstrated on the basis of some principles which are either assumed as hypotheses or taken from the evidence of experience. The scientific method is the orderly way of arriving at Truth in a given scientific discipline.
Realism presupposes, and thus entails for all further judgements, that the real is given to the subject, i.e., given to the practitioner of any science, and that the real is knowable by the subject, knowable at least to some extent, even if that extent is very limited. The realist thesis accepts that the real can be caught by thought. The result of the thing being caught by the intellect is ad-equation between the thing and the intellect, which is Saint Thomas' definition of Truth.
Once realism has been accepted as a starting point, once it has been accepted that the real can be caught by thought, one can and must trust discursive thought as a truthful representation of reality, to the extent that reason elaborates or expands its primary knowledge of the real through reasoning in accordance with its own laws. It is the task of the science of logic to describe the laws with which reason has to comply when it, reason, is reasoning in order to expand its knowledge of the Truth.
Hayek agrees and accepts the realist thesis.
For Hayek, knowledge is based on experience. As man's experience is limited, Hayek has a profound epistemological pessimism which leads him to a kind of stoicism regarding policy. (page 48)
Whereas Hayek agrees with realism, John Maynard Keynes does not agree.
For Keynes, it is not reality but intuition (page 248) that is caught in knowledge, or that is caught by the intellect when it arrives at Truth through ad-equating itself to or with the thing. His intuitions lead Keynes to thinking in "measurable" aggregates such as total demand, investment or output and to thinking that empirically established values of these presumed "constants" would enable us to make valid predictions. (page 242) Such intuitions conceal all that really matters. (page 246) His theories thereby neglect more fundamental "real" phenomena (page 197) and displace micro-economics by macro-economics. (page 60)
Contrast this Keynesian displacement of micro-economics by macro-economics to Hayek's admission that the schemata of micro-economics do not claim to achieve the quantitative predictions at which the ambitions of macro-economics aim. The science of economics should, for Hayek, nevertheless content itself with the more modest aims of the former because we can thereby gain more insight into at least the principle on which the complex order of economic life operates. (page 246)
Once Keynes has decreed that it is his intuitive aggregates, and not reality, that are caught by true knowledge, no judgement that the real thing can be caught by the thought of intellect, no judgement that Truth in the sense Saint Thomas defined it is present, is any longer presupposed in ulterior judgements which, the latter, can be based on any intuition, even on an intuition contradictory to the intuition which originally displaced reality.
One such intuitions led Keynes to the peculiar fallacy of believing that a general crisis can be averted by extension of credit (page 119), the fallacy of believing that the creation of additional money will lead to the creation of the corresponding amount of goods, although such belief was bound to lead to the revival of more naive inflationist fallacies which we thought economics had once and for all exterminated. (page 243)
Contrast this to Hayek's fundamental point that the business cycle is an unfortunate but an unavoidable concomitant of a credit economy. Attempts to eliminate the business cycle are likely to only intensify its effects. Hayek therefore put barriers to what others have done to advance in a path rather than supplying new ideas opening a path to new development. (page 31)
Contrast this again to Keynes who knows that something can be done at the level of his intuitive aggregates and therefore believes that it is possible to adapt the amount of money in circulation to what is necessary for the maintenance of existing contracts without upsetting the equilibrium between saving and investing. (page 144)
In the long run, we are all dead, aren't we, Mr Keynes?
Keynes was however never prepared to accept the implications of credit expansion. He never recognized that progressive inflation was needed in order that any growth in monetary demand could lastingly increase the employment of labour. (page 248)
How could, asks Hayek and I paraphrase, Keynes's ideas continue to be accepted once it had become clear that the temporary gain in employment achieved by credit expansion had necessarily to be paid for by even more severe unemployment at a later stage? (page 248)
The answer has perhaps something to do with the fact once one gets, like Keynes, the opportunity to get away with the fallacy that it is intuition, not ad-equation between the thing and the intellect from which knowledge then has to be inferred, which gives us knowledge of the Truth concerning the world around us,
logic no longer provides the framework through which we filter common-sense data in order to arrive at an objective "Truth" about "Reality".
At that stage, Keynes can get away with any new intuition even when the disastrous actual (long-term) results of the first intuitions become clear.
Science is then no longer the knowledge of conclusions demonstrated on the basis of some principles which are either assumed as hypotheses or taken from the evidence of experience. But the intuitive policy-recommendations of which Keynes had a-priori intuitive knowledge are then being presented as the conclusions from premises based on, or inferred from, principles which are fundamentally contradicted by experience.
The scientific method has thereby been repealed and, as a result, there is no more orderly way of arriving at Truth in a given scientific discipline, in this case in economics. The science of economics has thereby been displaced by "a" political economy, whatever the latter may be.
Reviews
The 1930's were a time when a major research program reached its peak. Late 19th century economists had grappled with capital theory, money, and interest (i.e. Wicksell, Bohm Bawerk). Those who followed (Mises and Lindal) developed capital/interest theory along different lines. But it was Hayek and Keynes who squared off before all other economists to see which line of theorizing could explain The Great Depression.
This volume reprints original writings of Hayek, Keynes and Sraffa during the early 1930's. At this time Hayek held the upper hand with professional opinion. Hayek's lectures at the London School of Economics (published as Prices and Production) won him many adherents. Keynes and Sraffa advanced forceful counterarguments, but little changed at this time. The fact of the matter is that both Keynes and Hayek went on to refine their views. Hayek published his Pure Theory of Capital in 1941, where he made penetrating insight (some would say impenetrable) into capital theory. Keynes went on to win over professional opinion with his General Theory of Employment, Interest, and Money (1936).
Hayek was in one sense more fortunate than Keynes. Keynes won a hollow victory in 1936, as Keynesians (i.e. Hicks, Samuelson, Solow...) quickly forgot about what Keynes actually wrote and recast `his' theory almost beyond recognition. Hayekians (i.e. Lachmann, Garrison, White) have remained truer to their namesake. It is in this history where this volume has value. Those interested in the history of economics can gain much insight from this book. This time period was critical in the development of modern economics.
Somehow the two most prominent economists of the 1930's managed both to lose public opinion as postwar economists turned to a theory of stationary equilibrium that both Hayek and Keynes rejected, and in the name of the latter. Do not read this book to understand the views of Hayek or Keynes. Read this book to see the early development of Hayekian and Keynesian economics. There is a real historical puzzle to solve here.
Reviews
The (pretty much) complete take on the Hayek-Keynes feud.
The fact that Hayek was himself off track as to monetary policy was in no way a boost to Keynes's views on the subject.
He may not be at his clearest head here, as in the Constitution of Liberty, or Economics and Knowledge, but it's still interesting to see where he was coming from, as they now say.
I couldn't agree more with Mr. Mueller in saying that Caldwell's intro is a superb, almost stand-alone essay itself.
Reviews
The reviewer Mr. Brady attempts to dismiss the work of Hayek because of his failure to adequately distinguish between fixed and circulating capital, in addition to paying insufficient attention to the role of uncertainty.
This observation is admittedly partly true. When Hayek began his work on business cycle theory, he paid very close attention to equilibrium analysis, believing that any explanation of downturns would have to include equilibrium statics if it hoped at all to be tenable. Hayek brought this belief over with him to the LSE and used it to criticize the theories of Maynard Keynes, who failed to incorporate a robust theory of capital structure into his account of economic disruption(according to Hayek). But if Mr. Brady bothered at all to read the excellent introduction to this volume by Bruce Caldwell, all of this would be clear. Hayek increasingly came to abandon equilibrium analysis in favor of a theoretical view that consistently embraced subjectivism and uncertainty. It is on this point that I wish Mr. Brady would have extended his last sentence into a fuller discussion of the fundamental differences of Mr. Keynes and Mr. Hayek with respect to their overall economic outlook given their beliefs in ineradicale uncertainty. Hayek does seem to place excessive faith in the capabilities of the market system, but Keynes, while justifiably remaining sceptical, demands repeated acts of government intervention as the means of avoiding the errors that attend the arena of uncertainty. These two positions are interesting, if only because their discovery of the uncertainty principle led them to adopt positions that occupied two extremes. I believe Keynes was right in attacking neoclassical economics and its program of economic efficiency in the absence of government regulation. But it in no way follows that a theory of chaos and confusion (uncertainty) should commit us to a position or policy of rigid rule-making. Such activity may very well exacerbate this perpetual state of ignorance that we find ourselves in daily. Keynes, with his emphasis on uncertainty, cannot have his cake and eat it too. A consistent application of uncertainty would, in my view, seem to distance us from both a commitment to laissez-faire and government regulation.
Anyway, if the above paragraph interests anyone, then this is a book that is worth reading. The debates between Hayek, Keynes and Sraffa are fascinating, and shed considerable light on some of the most fundamental questions of economic theory. Bruce Caldwell's introduction is worth the price of the book alone.
Reviews
This particular volume of Hayek's collected works covers the very important exchanges between Hayek and Keynes over Keynes's theories of investment and capital originally put forth in 1930 in the Treatise on Money(two volumes).Keynes's General Theory(1936) approaches to investment and capital are the same as in the TM except for Keynes's decision to greatly emphasize the importance of the uncertainty of the information and knowledge base(or,in Ellsberg's terminology,the ambiguity of such information and knowledge) in economic decision making concerning future events(about investment in fixed capital subject to technological change and obsolescence) where the probabilities are both unreliable and unclear.Keynes and Hayek have completely opposite positions concerning the differences between fixed capital,subject to the impact of uncertainty in decision making,and circulating capital,subject to the impact of risk,but not uncertainty.Hayek is very clear-there is no fundamental difference between fixed capital and circulating capital:"To over-emphasize the distinction between fixed and circulating capital,which is, at best,merely one of degree,and not by any means of fundamental importance,is a common trait of English economic theory and has probably contributed more than any other cause to the unsatisfactory state of the English theory of capital at the present time".(Hayek,p.177;see also pp.86,99-100,103-108,168-170,etc.).Hayek's misbelief that he could present a theory of capital that abstracts from uncertainty is in direct contradiction to Keynes's theories that argue[for a modern ,mathematical treatment of Keynes's theories,see any article or book by Dixit and Pindyck on the "real options" approach to investment projects that are fixed(sunk ,durable capital)]that uncertainty and/or ambiguity is fundamental and any attempt to abstract from it can only result in a very special theory applicable in conditions where there is no uncertainty.This book shows the immense gulf that separated Keynes and Hayek intellectually.While Hayek would later acknowledge the importance of uncertainty after the appearance of the General Theory,uncertainty has NO impact at all in the final conclusions reached by Hayek concerning investment and the business cycle.Since uncertainty makes absolutely no difference in the final decision outcome,there is no difference at all between Hayek and a neoclassical economics based on the Ramsey,De Finetti,and Savage subjective approach to decision making.
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