Thursday, 16 August 2012

Hayek's Critique of Keynes' The General Theory

In an article in the Quarterly Journal of Austrian Economics posted on the Ludwig Von Mises Institute website titled  "Hayek’s Critique of The General Theory: A new View of the Debate between Hayek and Keynes", the author David Sans Baz summarises Friedrich Hayek's criticisms into four main areas as follows:

  1. The theory of capital and the role of time. Hayek argues the market is a network of millions of companies that forms an extremely complex production process and that Keynes was not able to understand the causes of and the solutions to economic fluctuations as he suppressed the production structure in the "concept of aggregate investment".
  2. Monetary analysis vs. real analysis. Hayek's opinion is that Keynes focuses his analysis mainly on the monetary surface of the market process while he neglects analysing the underlying real process.
  3. The macroeconomic approach. Hayek's opinion is that Keynes' macroeconomic model is wrong as it hides the fundamental mechanisms of change in the market from the economist and that in order to understand the market process, the economy needs to be studied from the point of view of the actors involved.
  4. Short-term vs. long-term. Hayek criticised Keynes as The General Theory model focused primarily on the short term. Hayek's opinion was that entrepreneurs have much to say in the short term while economists do not have much to contribute in this field. In addition, for Hayek the Keynesian philosophy of "in the long run we are all dead" is "the height of scientific irresponsibility and leads to policies which may give good results in the short term but can be extremely harmful in the long run. The authors then include these words from Hayek,
" is alarming to see that after we have once gone through the process of developing a systematic account of those forces which in the long run determine prices and production, we are now called upon to scrap it, in order to replace it by the short-sighted philosophy of the business man raised to the dignity of a science. Are we not even told that, "since in the long run we are all dead," policy should be guided entirely by short-run considerations? I fear that these believers in the principle of près nous le déluge may get what they have bargained for sooner than they wish". (Hayek, 1941, p. 410)
All these points are applicable to the many economic policies we have seen since the onset (and prior) to the financial crisis that started in 2007/2008 and which are still ongoing (e.g. money printing, see here and here), but that's perhaps for another post. It's time for politicians to start reading Hayek's work. Unfortunately, it would not be in their own personal interests to do so, which is much more important than the public's interests, as Hayek, an Austrian economist, does not endorse big government. Keynesian economics on the other hand suits politicians much better and give them the "academic foundation" they need to expand government spending as it advocates addressing market deficiencies through the control of aggregate spending.

1 comment:

  1. Hayek touted free enterprise but was himself concerned about his social security payments

    The Keynesian statement "in the long run we are all dead" was just a sarcastic comment and never meant to be taken seriously.

    Keynes never endorsed big Government. The Government does have a legitimate role to play and one can have a debate on the role.

    The interstate highway system, the Manhattan Project, the Man to the moon project are all good examples.

    Incidentally Keynesian or his followers never endorsed Hayekian view of Govt. as the owner of the means of production or capital as was the case was in the Soviet Union. The govt. through the tax system or borrowing merely helps the Private sector do the job

    Finally, the common argument made by people like Hayek was that the new deal did not end the depression but the Second World War did. But left unexplained is the fact that if the building of planes, tanks and the general mobilization for the war created jobs then why cannot the building or roads, bridges,etc create jobs.

    In the present debate on the role of Govt. the conservatives on the one hand argue that the Govt. cannot create jobs and then at the same time blame Obama for not creating jobs. Furthermore the critics of Govt. often jump to its defense when a a particular DOD contractor has to lay off people in city because of Govt. cutbacks