Keynes Versus Hayek
I've been thinking that the fundamental difference is that, in Keynes's story, people make quantity adjustments, whereas in Hayek's they make price adjustments.
Does that seem correct?
Does that seem correct?
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I think it's that for Hayek price adjustments lead to quantity adjustments, while for Keynes the lack of the necessary price adjustments means that people can't make the necessary quantity adjustments.
ReplyDeleteI think that there's also a much deeper incongruity. Hayek thought that a fall in consumption and increase in savings would lead to an increase in investment. Keynes saw the relationship between consumption and investment as direct -- which is why a lot of economists today mock that commonly cited excerpt where Hayek claims that an increase in consumption will lead to an increase in unemployment, but proving it would require a lecture full of math (this is Hayek's Ricardo Effect). Keynes' opinion is evident in the fact that he thought investment (D2<) would fall as greater amounts of wealth were accumulated, since he postulated that the marginal propensity to consume falls as income grows.
"Keynes the lack of the necessary price adjustments means that people can't make the necessary quantity adjustments."
DeleteSee my comment to unknown below.
"Keynes saw the relationship between consumption and investment as direct..."
And that is because increased savings does not result in the price adjustment that it does for Hayek -- the interest rate does not fall prompting more investment.
It's not just about the rate of interest. The rate of interest is not the 'price' that Hayek is referring to (if interest is a price at all ,even); he refers to profits, or intertemporal differentiations between the prices of outputs.
Delete"It's not just about the rate of interest."
DeleteWho said it was "just" about the rate of interest?
"The rate of interest is not the 'price' that Hayek is referring to"
I did not think there was a single price he was referring to at all!
"(if interest is a price at all ,even)"
You don't do *that*, do you?
Could you maybe give a concrete example for each to show what you mean? Sounds like it might be an intereting theory, but I am confused as to what, exactly, you mean...Thank you.
ReplyDeleteYes, unknown: Faced with a drop in orders, the Hayekian firm lowers its prices, while the Keynesian firm reduces output and lays off workers.
DeleteAlso, here is Victoria Chick on this topic, from her 1983 book Macroeconomics After Keynes, p. 271 (in response to the Leidjonhufvud thesis),
ReplyDelete"It is held that in Keynesian economics prices are assumed to be unaffected by expansion until full employment and then only prices will be affected; allowance for bottlenecks modifies this proposition. The current conventional wisdom is that Keynes 'nullifies the Marshallian adjustment by means of prices' and proposed quantity adjustment instead. Any reader who has got this far must realise that simply is not so."
"It is held that in Keynesian economics prices are assumed to be unaffected by expansion until full employment and then only prices will be affected..."
DeleteBut Jonathan, I was talking about the focus of Keynes's story versus the focus of Hayek's.