From Keynes to Hayek: the Marvel of Thriving Macroeconomies

FROM KEYNES TO HAYEK 2 The implications for the Austrian theory are clear. Hayek’s critical contrast between the intertemporal coordination that can be achieved by the free play of the market and the intertemporal discoordination that results from the manipulation of a key market mechanism, namely, the interest rate, is strictly invalid. The rate of interest, in Shackle’s reckoning, cannot coordinate saving and investment decisions. (Hill, p. 71). With the interest rate intertemporally out of play, the Keynesian conclusions follow almost trivially. The price system can’t do its job; market economies are inherently dysfunctional; and periodic collapses into From Keynes to Hayek: depression are the norm. My summary here hardly does justice to Greg Hill. His article begins with a The Marvel of Thriving Macroeconomies reminder of some intriguing intellectual history. In the mid-1930s, Shackle was writing a thesis on capital theory at the London School of Economics. His supervisor was Hayek. But Shackle’s thinking took a turn when, a few months SDAE Presidential Address before the publication of Keynes’s General Theory, he heard Joan Robinson set out Southern Economic Association Meetings the principal themes of the Keynesian vision. Shackle was so deeply impressed that New Orleans, Louisiana he abandoned the principal themes of the Hayekian vision—though he managed November 22, 2004 to keep Hayek in service as his thesis supervisor. If we can get past the thought that it was Joan Robinson who paved the road Roger W. Garrison* from Hayek to Keynes, we can almost understand Shackle’s receptiveness to Keynesian ideas. Shackle doubted the legitimacy of abstracting from uncertainty while dealing with the time element in the production process. But that is exactly My message this evening is inspired in part by a recent article by Greg Hill in the abstraction that characterized Hayek’s Pure Theory of Capital, which was then Critical Review titled “From Hayek to Keynes: G. L. S. Shackle and Ignorance of in the making. As Hill (p. 71) puts the matter, “In the Austrian theory of capital, the Future.” Clearly, Hill is mimicking Ludwig Lachmann’s 1976 title, “From ‘time’ has been separated from its troublesome twin—ignorance of time-to-come.” Mises to Shackle....” Dealing with the Hill-Shackle perspective on Hayek and Drawing upon the subsequent contributions of both Hayek and Shackle, Hill Keynes will allow me to segue into some thoughts on the cogency and applicability (p. 59) envisions an all-encompassing economic theory based on the “twin of Hayekian theory—or what I’ve come to call “capital-based macroeconomics.” premises of dispersed knowledge [Hayek] and irreducible uncertainty [Keynes as According to the abstract of Hill’s article, Shackle draws Keynesian interpreted by Shackle].” Hill makes the case, though, that if a research agenda is conclusions from Austrian premises. More specifically, he argues that the to be based on only one of those twin premises, the Keynes-Shackle premise is the knowledge required for a General Equilibrium does not and cannot exist in a more appealing. The fact that some critical knowledge is simply lacking may have sufficiently complete and coherent form to justify the Austrian conclusions. The a greater claim on our attention than the fact that existing knowledge is dispersed. irreducible ignorance of the future, according to Shackle, provides a compelling On its own terms, Hill’s case for the Shacklian research agenda is a persuasive basis for our going with Keynes. one. At this point, then, let me make a recommendation. If you believe that the “For Shackle,” as reported by Hill (p. 61), “the very concept of equilibrium is fundamental economic problem is a knowledge problem, and if you see yourself logically incompatible with the notion of autonomous choice.” That is, market as sitting on the fence between Hayek and Shackle, then don’t read Hill. His article participants don’t know and can’t know what the future choices of others—or even could push you off in the direction of Keynesian Kaleidics. of themselves—will be. It is impossible, then, for these autonomous choices across Almost unavoidably, though, the economics that Hill sees on the Shackle side time to be coordinated on the basis of knowledge generated by current choices and of the fence is Keynesian fundamentalism: liquidity preference as the primary registered by the price system. demand-side determinant of the interest rate, the absence or near-absence of what Hill calls “expectations-independent reality”; waves of optimism and pessimism, * self-fulfilling prophecies, businesspeople who “follow the herd” and occasionally Roger W. Garrison, Professor of Economics at Auburn University in Alabama, is the author of Time and Money: The Macroeconomics of Capital Structure (London: Routledge, 2001). Helpful comments “lose their nerve.” by Lane Boyt and Sven Thommesen are gratefully acknowledged. Hill hasn’t provoked me into countering piecemeal these and other supposed 3 SDAE PRESIDENTIAL ADDRESS (NEW ORLEANS, NOVEMBER 2004) FROM KEYNES TO HAYEK 4 perversities of the market system. But the very notion of failure-prone market Arkansas firm, bumblebees fly and chickens get packaged. economies inspires my own take-off on Lachmann’s 1976 title. Mangan, if we accept the folklore version of his message, was way off the mark in 1934. But so too was Keynes in 1936. Bumblebees fly and market From Mandeville to Magnan: Keynes and the Failure of the Market Economy economies thrive. For an Austrian audience, I hardly need mention the countless We are all familiar with Bernard Mandeville’s early eighteenth century Fable of the instances of markets-gone-right or summarize the findings of James Gwartney and Bees, which carried the alternate title Private Vices; Public Benefits. Mandeville Robert Lawson’s latest annual report on Economic Freedom of the World. was not an economist and certainly not a laissez fairist, and he The implicit claim here that savings tend to get invested and technological was too quick to categorize self interest as a vice. But he gave innovations tend to get exploited need not be based on some skilled messaging of early exposure to the idea that decisions made by individuals on the macroeconomic data. Neither the enormous increase in prosperity of the United the basis of their own self interest can have favorable States from colonial times to the present nor the enormous differential between consequences for society as a whole. Of course, it would take today’s living standards in the United States relative to the living standards in Cuba Adam Ferguson, Adam Smith, and a number of other classical can be explained without recourse to some notion of market-governed liberal thinkers to turn the fable into a formula for economic coordination. Decentralized economies are characterized by more prosperity. We can note Hayek’s bow to Mandeville in his 1966 ‘Lecture on a coordination—including intertemporal coordination—than can be attributed Mastermind’ and can remind ourselves that it was Hayek (1967) who built on directly to “accident or design,” to use the Keynesian phrase. Adam Ferguson’s expression, “The Results of Human Action but not of Human Before further exploiting my idea of the bumblebee as an apt metaphor for the Design,” to anchor his ideas in the classical liberal tradition, showing how the market economy, let me save poor old Antoine Magnan from the implicit claim that market economy can in principle deal with the knowledge problem. he was Keynes’s counterpart in the field of entomology. The truth is that Magnan The pairing of Mandeville with Magnan in my mock title gives us a sharp never claimed that bumblebee flight is impossible or even that understanding contrast between the fable of the bees and the failure of the bees. It was Antoine bumblebee flight is beyond the abilities of entomologists and aeronautical Magnan, a French entomologist, whose 1934 book Le Vol des Insectes inspired a engineers. Nor is the bumblebee’s “will and determination” at issue here. What is Keynesianesque conclusion. The bumblebee is technically incapable of flight. Even at issue is the distinction between mobile wings and stationary wings. Magnan was a casual reading reveals that Magnan actually made no such claim, but folklore simply noting the significance of an equation set out by aeronautical engineer tracing to his book has it that the bumblebee in flight is inherently unstable and Andre Sainte-Lague. If the bumblebee’s wings were stationary (as are the wings prone to crash. on a conventional airplane), then it could not maintain level flight except at speeds While googling around to get the Magnan story straight, I came across plenty much higher than a bumblebee normally flies. Unfortunately for Magnan, the of living lore about the bumblebee. For instance, an Arkansas-based firm, subjunctive clause in his claim was ignored by dullards and jokesters, and the idea Packaging Specialties, Inc., has adopted the bumblebee as its logo to symbolize the that bumblebees somehow defy the laws of physics spread through the popular idea of actually achieving the impossible—packaging chickens, in this particular media. case. PSI’s blurb about its logo, accessible at http://www.psi-ark.com/bee.htm, is We can imagine that in the 1930s some insightful Swedish or Austrian true to the Magnan legacy: macroeconomist might have penned a statement analogous to Magnan’s: If the interest rate is held at some target level (as is typically done by the central bank), The bumblebee's ability to fly has long perplexed scientists. Its proportions and then the market economy cannot achieve sustainable growth except in the unlikely aerodynamics make flying technically impossible. Scientists have no explanation case in which the target rate happens to be the natural rate.

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