The Hayek-Keynes Debate: Lessons for Current Business Cycle Research [Hardcover]

John P. Cochran (Author), Fred R. Glahe (Author)

Book Description

ISBN-10: 0773479708 | ISBN-13: 978-0773479708 | Publication Date: September 1999 | Edition: 1st

This work examines the Hayek-Keynes debate on business cycle theory and argues that the key issues at the heart of the controversy in the areas of money, interest and capital theory are much neglected in current macroeconomic modelling.

Product Details

• Hardcover: 221 pages
• Publisher: Edwin Mellen; 1st edition (September 1999)
• Language: English
• ISBN-10: 0773479708
• ISBN-13: 978-0773479708
• Product Dimensions: 9.3 x 6.2 x 0.9 inches
• Shipping Weight: 1.2 pounds
• Average Customer Review: 2.0 out of 5 stars  See all reviews (1 customer review)
• Amazon Best Sellers Rank: #3,070,179 in Books (See Top 100 in Books)

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2.0 out of 5 stars 1.5 stars-Neither Cochran nor Glahe have any idea about what Keynes 's theory entails, July 5, 2010

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Michael Emmett Brady "mandmbrady" (Bellflower, California ,United States) - See all my reviews
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This review is from: The Hayek-Keynes Debate: Lessons for Current Business Cycle Research (Hardcover)

This book is an expanded version of an article that first appeared in the academic journal,History of Political Economy(HOPE),in 1994.The first edition of the book came out in 1999.This review also applies to the 2010 second edition version since not a single sentence has been changed in the second edition from the first edition.
The authors have no idea about what the primary variables are in Keynes's theory of investment and capital formation over time in the GT which Keynes also uses to explain the business cycle.This is due to the fact that they never read the A Treatise on Probability (TP,1921) or chapters 12 and 13 of the GT .They substitute the confused Lerner- Hansen-Klein-Solow-Modigliani-Heller-Tobin discretionary ,demand management interpretation of Keynes, based on the continual use of expansionary and contractionary fiscal(changing tax rates)policy and monetary(changing interest rates) policy to " fine tune " the economy. Keynes's own theory completely rejected any such approach.Keynes's rejection of this approach is explicitly specified in chapter 10 in footnote 1 on pp.128-129,p.164 and in chapters 22,23 and 24 of the GT.The complete rejection of this approach can be found on pp.225-410 of Volume 27 of the Collected Writings of John Maynard Keynes.

The Hayek-von Mises theory of the business cycle is practically identical to the loanable funds theory that postulates that investment and capital goods spending is an inverse function of one single variable,the real rate of interest.Only changes in the quantity demanded of capital goods,ceteris paribus,are considered.Hayek always starts his analysis from the boundary of the Production Possibilities Frontier (Curve).Two types of goods are considered ,consumption goods and capital(producer) goods.Hayek claims that the central bank,controlled completely by government bureaucrats and not by the private commercial banking industry,attempts to artificially increase spending in the private capital goods industry by increasing the supply of money so that the rate of interest will be artificially decreased below its natural rate.Given that capital goods spending is an inverse function of only one variable,the real rate of interest,an artificial boom/bubble is set off as businessmen are induced to spend more than they would have on capital goods.Note that none of the loans are flowing into the purely speculative financial money and stock markets under this theory.The result is malinvestment in the intertemporal structure of capital goods .This will later lead to a movement inside the PPF ,a bust, as businesses stop spending on capital goods once they realize that they were tricked by government bureaucrats into investing in capital goods that ultimately lead to losses.This process repeats over and over again.Government bureaucrats trick the businessmen into malinvestment again and again and again.A boom -bust cycle is generated throughout time.This is Hayek's and L von Mises's business cycle theory .This theory is obviously false.Note that there can be no role in the von Hayek-von Mises business cycle theory for expectations,uncertainty and the optimism/pessimism of businessmen.
Keynes's theory is presented below.

Capital formation is a function of four(five) variables.The first is the real rate of interest.The second is the marginal efficiency of capital(MEC).This incorporates businessmen's expectations of future profits/losses.This variable alone invalidates the von Hayek -von Mises theory since expectations of future losses [Keynes's third variable,lack of confidence in expectations and Keynes's fourth variable, pessimistic-optimistic animal spirits,will lead to insurmountable problems for the Hayek-Mises theory] will cause the investment demand schedule for capital goods to shift in sharply to the left ,irrespective of any decreases in the real rate of interest made by the central bank.The only way of fixing the von Hayek and von Mises theory is to assume that businessmen ALWAYS have positive expectations of future profits,ALWAYS are confident about the future and are ALWAYS optimistic about the future.Both von Hayek and von Mises implicitly assume this based on their theory of what makes the entrepreneur tick.Entrepreneurs are always confident,optimistic and expect future gains/profits ALL OF THE TIME.
Keynes's third variable comes for his TP.Keynes's degree of confidence in the expectations underlying the MEC calculations is explicitly derived from his index to measure the weight of the evidence,w.Keynes integrates w into an original decision approach based on integrating nonlinearity and non additivity into the expected value and expected utility rules used by neoclassical economists.I have appended a discussion of this after my review of the earlier edition of this book for the interested reader.The problems raised by Keynes in this respect are simply ignored by Hayek .Keynes's fourth variable is specified in his discussions of " animal spirits " and refers to the optimism-pessimism of the entrepreneur.A fifth variable,the reliance by businessmen on conventions and crowd or group behavior in the case of low confidence,is excluded by Hayek and von Mises based on their methodological individualistic approach which disallows any impact by crowd -group behavior on individual decision making.
The authors of this book needed to completely revise/change their presentation from 1999,which is practically identical to the 26 page presentation made in 1994 in HOPE .The authors could have presented their argument as an attack on a particular variate/ version of " Keynesian " economics.However,this is not what they have done.They have completely misrepresented the economics of Keynes as presented in Keynes's original arguments and analysis in his 1936 General Theory .I can't recommend this book even for Austrian true believers.