Enjoy:
https://smilingdavesblog.wordpress.com/2013/02/14/how-mises-dismissed-that-whole-keynesian-thing-with-a-decisive-one-liner/
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It's easy to refute an argument if you first misrepresent it. William Keizer
Meh. I think that Misesian theory (not framework) doesn't really address Keynesianism. In Human Action he basically dismissed Keynesianism by talking excessively about capital goods and their accumulation (I've actually always found Mises' own focus upon the need for "more capital goods" as a means of ending the recession as focusing too intently and the lesser parts of his own theory and missing important aspects of the production structure) and how Keynesianism doesn't deal with the Austrian conception of the business cycle. While this is perfectly true, this does not in and of itself make Keynes' theses useless, and it requires a more thorough critique than Mises gave to it. The fact that Mises never did a decent critique of Keynesianism was one of his greatest failings as an intellectual and economist.
Catalan and I are in thorough accordance on the matter of some of Mises' most direct criticism of Keynes.
http://www.economicthought.net/blog/?p=3618
You say that like it's a good thing.
As for your assertions in the first paragraph, that's all they are. Assertions.
"You say that like it's a good thing."
I believe it to be so.
"As for your assertions in the first paragraph, that's all they are. Assertions."
That's fair.
If we divide it up into 1. Mises just dismissed Keynesianism in Human Action, I believe this to be perfectly obvious since he never really deals with underconsumption, Keynesianism, or the role of demand except in passing or in brief sections. Hell Mises doesn't even clearly explain Say's Law in the book The inability of Mises to adequately address Keynes is obvious from your own failure to effectively utilize Mises in criticizing Keynes. Just because savings is important for long term growth doesn't mean that large savings in the short run can't cause crisis as the price level and demand decrease dramatically in general.
2. Keynesianism and ABCT are compatible. Just because malinvestment is caused by credit expansion doesn't mean that a general lack of demand is incompatible to Austrian theory. De Soto states as much.
3. The fact that Mises never spent that long critiquing Keynes (even the offending article Catalan writes about mainly talks about Keynes the man and historical roots, not the philosophy) when Mises saw two decades of Keynesianism dominating the economics profession AND public policy, particularly when Keynesianism provided the clearest rival to the Austrian conception of the business cycle, indicates that someone was all too ready to cede malis.
A fall in consumer spending would be the best thing for the poor since they could buy things they couldn't afford before, it means lower prices. BTW Keynesianism and ABCT are incompatible because part of ABCT is that the increased consumption means less savings for completing risky projects, the overconsumption actually brings about depression. In fact if people consume less more resources are available to completing the risky long term projects so saving is actually the cure for a depression according to ABCT.
If you are saying it is not about consumer demand but just demand from investors the reason demand drops is because of a lack of resources to complete long term projects. There is actually a good reason for the idle resources and the government shouldn't stimulate them. In other words why would you want to stimulate a project that should have never been started in the first place
"A fall in consumer spending would be the best thing for the poor since they could buy things they couldn't afford before, it means lower prices."
Not if it decreases their wages and relative unemployment. This is irrelevant to the matter of business cycles.
"BTW Keynesianism and ABCT are incompatible because part of ABCT is that the increased consumption means less savings for completing risky projects, the overconsumption actually brings about depression. In fact if people consume less more resources are available to completing the risky long term projects so saving is actually the cure for a depression according to ABCT."
But the "overconsumption" is not the same in this instance as what is traditionally meant by the term, rather it's the continually shifting interest rates and corresponding alterations in relative prices that make certain projects impossible to complete. Firms will not produce in the future if they don't believe that demand in the future will be high enough to justify completing future investments. If consumption fell drastically then this would be fine with perfectly flexible prices, but this is exactly why underconsumption business cycle theories and Austrianism are compatible: prices are not perfectly flexible, and any drastic decrease in consumer spending will result in unemployment.
"There is actually a good reason for the idle resources and the government shouldn't stimulate them"
This is correct in practice, but the societal role of idle resources is to induce prices to fall. If the government could somehow speed the adjustment of prices in the absent of distortion, then this would be positive. It cannot, however.
I'm pretty sure in Austrian economics says a fall in consumption will probably actually help worker wages go up because it will make the price of capital goods rise vs. consumer goods so entrepreneurs will expand production in "goods of a higher order" and more roundabout process of production and everything. In order to get workers in these new industries they have to pay them higher wages than in consumer goods industries so capitalists are forced to pay them higher real wages (even if money wages don't go up). None of this can be made compatable with anything Keynes said, you can't combine the two schools of economics together
Now about business cycles. After a rise in consumption consumer prices go up this means it will be more expensive to pay workers even though the workers recieve less real goods they won't be able to sustain longer and more roundabout means of production. According to Hayek in "Prices and Production" an increase in consumption can actually raise unemployment because workers will be thrown out of work in the higher order goods industries.
I'm pretty sure Austrian economists say that the fastest way to get out of a depression is to save. How do you combine that with Keynes
How about the depression of 1920 depression which no one has ever heard of because it was so short vs. the 1929 depression that lasted a whole decade. In the one depression America saved its way out of depression, in the other depression the country spent and it became a Great Depression
Warren Harding:
"We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens, but because it will be an example to stimulate thrift and economy in private life. "
"I'm pretty sure in Austrian economics says a fall in consumption will probably actually help worker wages go up because it will make the price of capital goods rise vs. consumer goods so entrepreneurs will expand production in "goods of a higher order" and more roundabout process of production and everything."
This is most certainly true after prices have adjusted. If there is a radical decrease in consumer spending however, this can certainly cause problems because of the suddenness and the extent of the lack of demand which will in turn begin to feed on itself.
"Now about business cycles. After a rise in consumption consumer prices go up this means employers will have to pay more to workers so they can have less goods and they won't be able to sustain longer and more roundabout means of production. According to Hayek in "Prices and Production" an increase in consumption can actually raise unemployment because workers will be thrown out of work in the higher order goods industries."
Yup
"I'm pretty sure Austrian economists say that the fastest way to get out of a depression is to save
How about the depression of 1920 depression which no one has ever heard of because it was so short vs. the 1929 depression that lasted a whole decade. In the one depression America saved its way out of depression, in the other depression the country spent and it became a Great Depression"
Edit
Also it's important to know that extreme cases of what you describe here:
"an increase in consumption can actually raise unemployment because workers will be thrown out of work in the higher order goods industries"
is actually similar in many ways to what happens in ABCT, although there are of course differences. In practice ABCT is just the result of a sudden decrease in effective time preference in combintation with illusorary gains from inflation.
"This is most certainly true after prices have adjusted. If there is a radical decrease in consumer spending however, this can certainly cause problems because of the suddenness and the extent of the lack of demand which will in turn begin to feed on itself."
Under what circumstances woud that happen? If a drop in consumption happens because a bubble economy bursts then consumption actually needs to go down and the unsustainable projects need to be abandoned. What do you suggest be done with the mal-investments because the Austrian solution is of course just let them be abandoned. Do you think the government should support consumer spending?
"Under what circumstances woud that happen? If a drop in consumption happens because a bubble economy bursts then consumption actually needs to go down and the unsustainable projects need to be abandoned."
This doesn't mean it won't cause firm failure and further job loss. Any quick fall in demand leads to problems because the economy doesn't act perfectly swiftly. If we envision a massive and equal withdrawal of money from consumption and investment (which could indeed happen as the result of a change in consumer preferences is the answer to your first question) then there would be a general recession and all prices would need to fall.
You're looking at this in too simplistic a way. In ABCT investment and consumption needs to adjust to align with social time preference. The business cycle is not a perfect stage in which for this to happen. Spending will almost certainly fall below real time preference, and investment in nominal terms will likely decrease as well in response to this as well as to the same uncertainty that is decreasing consumption in the first place.
"Do you think the government should support consumer spending?"
Only if Deep Thought is economic czar
"I think that Misesian theory (not framework) doesn't really address Keynesianism. In Human Action he basically dismissed Keynesianism by talking excessively about capital goods and their accumulation (I've actually always found Mises' own focus upon the need for "more capital goods" as a means of ending the recession as focusing too intently and the lesser parts of his own theory and missing important aspects of the production structure) and how Keynesianism doesn't deal with the Austrian conception of the business cycle. While this is perfectly true, this does not in and of itself make Keynes' theses useless, and it requires a more thorough critique than Mises gave to it. The fact that Mises never did a decent critique of Keynesianism was one of his greatest failings as an intellectual and economist."
Here is a possible explanation for the absence of such a critique from Mises:
In Mises's theoretical system as far as he was able to develop it, the epistemological basis for economic laws of aggregates is unresolved. In Mises's system, economic laws are a function of individual action, and these laws do not apply to aggregates or to groups.
For example, a law of individual action would be: If I walk toward a location (phenomenon A), I must necessarily also walk away from a different location (phenomenon B). But Mises was not able to devise a way to comprehend laws of aggregates or groups. For example, if I walk toward a location (phenomenon A), this says nothing necessary about what another person, or a group of other people, must do. In Mises's system there are laws of individual action but no laws of interpersonal action. The laws hold "within" but not "between" individuals.
This is the stated basis for Hayek's critique of praxeology; his conclusion that praxeology was of limited use, and his conclusion that praxeology was not applicable to study of the market (because the exact laws in Mises's system do not apply to the interactions of a number of people).
"I have long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of different individuals."
"...the sense in which we use the concept of equilibrium to describe the interdependence of the different actions of one person does not immediately admit of application to the relations between actions of different people."
(Hayek, "Economics and Knowledge")
Hayek's essay was directed at Mises and his conception of praxeology:
"What I see only now clearly is the problem of my relation to Mises, which began with my 1937 article on the economics of knowledge, which was an attempt to persuade Mises himself that when he asserted that the market theory was a priori, he was wrong; that what was a priori was only the logic of individual action, but the moment that you passed from this to the interaction of many people, you entered into the empirical field."
Further, it seems Mises was aware of this unresolved issue in his theory:
"Curiously enough, while Mises was very resentful of any criticism by his pupils and temporarily broke both with Machlup and Haberler because they had criticized him, he took my critique silently and even approved the article as if he had not been aware that it was a criticism of his own views. I cannot explain this."
(Book: Hayek on Hayek, 1994, p. 72)
Thus, it seems Mises was aware that, as his theory had been conceived, it was difficult to see how the laws of individual action could be applied to group phenomena or aggregate phenomena.
Hayek had actually provided an analytical method by which the laws of individual action could be applied to aggregate phenomena, which you can read about in this post: http://mises.org/daily/6248/Hayek-and-Praxeology But Hayek himself did not realize that the analytic method he had written about provided a way to apply the laws of individual action to market phenomena.
What does this have to do with Keynes and his system? The issue is that if I cannot demonstrate an adequate epistemological basis for the laws of aggregate phenomena I assert, then this severely undermines my ability to critique the laws of aggregate phenomena that others assert. If I want to uphold and defend the Austrian Theory of the Busienss Cycle (ATBC) as a theory of aggregate market phenomena, against a competing theory of aggregate market phenomena, I need to show why the relationship between market phenomenon A and market phenomenon B (the economic law) must necessarily hold for the ATBC, but does not necessarily hold in/for the competing theory.
Mises isn't interested in empirical laws or historical relationships---relationships between phenomena that hold only sometimes, or that have held only at various times in the past. He is only interested in exact laws---laws that must be universally valid such that whenever phenomenon A happens, then phenomenon B must necessarily also happen.
Mises was prevented from putting forth a strong or detailed critique of Keynes's theory, because he did not have an established epistemological basis for claiming universal validity for his economic (i.e., aggregate) laws, and for demonstrating that, by contrast, the economic aggregate laws Keynes asserts are merely empirical or historical correlations.
Due to this situation, Mises chose to remain largely silent. As he quotes Wittgenstein in The Ultimate Foundation of Economic Science, p.56:
"Whereof one cannot speak, thereof one must remain silent."
Mises does not produce a strong critique of Keynes because the precise epistemological basis of economic laws remains unresolved in his own system.
******
To substantiate this last claim, let's take a passage from Epistemological Problems of Economics, 1976, p. 163. For clarification I'll add some bolded text. Mises writes:
"For example, we deduce from our theory that when the price of a commodity rises (phenomenon A), its production will be increased (phenomenon B). However, if the expansion of production (phenomenon B) necessitates new investment of capital, which requires considerable time, a certain period of time will elapse before the price rise brings about an increase in supply. And if the new investment required to expand production (phenomenon B) would commit capital in such a way that conversion of invested capital goods in another branch of production is altogether impossible or, if possible, is so only at the cost of heavy losses, and if one is of the opinion that the price of the commodity will soon drop again, then the expansion of production (phenomenon B) does not take place at all."
Here is a clear illustration of the problem which Hayek wrote about and which Mises was almost certainly aware. Above, Mises assumes a given situation, (A), that the price of a commodity rises. He then explains that given A, then B (increased production of that commodity) may or may not happen. But this is an empirical, not an exact, law. If phenomenon B may or may not follow, or may or may not coexist with, phenomenon A, then the relationship in question is, by definition, an empirical one, not an exact one. Whether or not B occurs upon the occurrence of A will have to be established empirically, since we have agreed in principle that B may or may not happen when A happens.
Given this conception of the nature of economic laws, then it is not possible to criticize another theory based on the claim that the laws of that theory are only empirical or historical in character and not a priori or exact. The obvious reply would be that the economic laws as described in the passage above (Mises's system) are not a priori or exact either.
Thus, a plausible explanation of why Mises did not provide a thorough and direct critique of Keynes, is that he lacked the epistemological basis necessary to undertake it.
"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)
Adam,
The only problem I have with your argument is that Mises still wrote about the market and business cycles. He was obviously confident enough in his writings to apply them to the market, so why did he not bother applying it to the works of Keynes?
An insightful post as always, however.
Neodoxy:
"The only problem I have with your argument is that Mises still wrote about the market and business cycles. He was obviously confident enough in his writings to apply them to the market, so why did he not bother applying it to the works of Keynes?"
I can't answer that definitively. But as one who is familiar with his method, I can put forth a plausible conjecture.
Mises's methodology is controversial, not only outside of libertarian circles, but within it as well. Both mainstream and libertarian social theorists will consider Mises's radical subjectivism as unacceptable:
"...most peculiarities of [Mises's] views which at first strike many readers as strange and unacceptable trace to the fact that in the consistent development of the subjectivist approach he has for a long time moved ahead of his contemporaries." (Hayek quoted on page xvi of Money, Method, and the Market Process)
The same goes for Mises's utilitarianism:
Doubtless it did not happen altogether without the fault of Epicurus and his school that the concepts of pleasure and pain were taken in the narrowest and coarsely materialistic sense when one wanted to misconstrue the ideas of hedonism and eudaemonism. And they were not only misconstrued; they were deliberately misrepresented, caricatured, derided, and ridiculed. Not until the seventeenth century did appreciation of the teachings of Epicurus again begin to be shown. On the foundations provided by it arose modern utilitarianism, which for its part soon had to contend anew with the same misrepresentations on the part of its opponents that had confronted its ancient forerunner. Hedonism, eudaemonism, and utilitarianism were condemned and outlawed, and whoever did not wish to run the risk of making the whole world his enemy had to be scrupulously intent upon avoiding the suspicion that he inclined toward these heretical doctrines. This must be kept in mind if one wants to understand why many economists went to great pains to deny the connection between their teachings and those of utilitarianism. Even Böhm-Bawerk thought that he had to defend himself against the reproach of hedonism. (Mises, Epistemological Problems of Economics)(emphasis added)
The extension and refinement of Mises's system require conceptions of subjectivism and utilitarianism that are considered outside the bounds of acceptability in both mainstream and traditional libertarian social theory. For example, who in mainstream or in libertarian economics is taking or would take the following conception as the starting point of their social theory, and build upon it in order to try to explain economic or social phenomena that are still not clearly understood?
Human knowledge is conditioned by the structure of the human mind. If it chooses human action as the subject matter of its inquiries, it cannot mean anything else than the categories of action which are proper to the human mind and are its projection into the external world of becoming and change. All the theorems of praxeology refer only to these categories of action and are valid only in the orbit of their operation.(HA, 3rd rev. p. 36)
Who in mainstream or libertarian economics takes this seriously and applies it in their daily theorizing?
Mises is aware that his methodology is considered unacceptable. A strong case for his system and a strong case against a competing system would require intensive reference to methodology in order to validate the various knowledge claims. In the court of public opinion (not only of the mainstream, but including also libertarian intellectual opinion) Mises's methodology is considered unacceptable, and thus he is prevented from presenting evidence obtained by his methodology in the court of public opinion. He knows that it is useless to try to persuade those who have already formed their methodological convictions to change them.
However, he is not prevented from putting forth his own theories in his own books, and letting history ultimately decide whether his method and theories are correct. And he is not prevented from presenting his methodological ideas in his books in order to pass this knowledge on to future generations, such as ours. And so this is what he did.
"Mises is aware that his methodology is considered unacceptable. A strong case for his system and a strong case against a competing system would require intensive reference to methodology in order to validate the various knowledge claims. In the court of public opinion (not only of the mainstream, but including also libertarian intellectual opinion) Mises's methodology is considered unacceptable, and thus he is prevented from presenting evidence obtained by his methodology in the court of public opinion. He knows that it is useless to try to persuade those who have already formed their methodological convictions to change them.
However, he is not prevented from putting forth his own theories in his own books, and letting history ultimately decide whether his method and theories are correct. And he is not prevented from presenting his methodological ideas in his books in order to pass this knowledge on to future generations, such as ours. And so this is what he did."
Do you truly believe this to be the case? Mises seemed more than happy in attacking socialism using his method.
Furthermore it would seem that Hayek's conclusions and Mises' methods are entirely compatible, and the methods themselves, as we have discussed, are not all that different in practice. It has long seemed to me that while Mises was the superior in his ability to construct a general "system" of economics and the social role of the markets various processes (this system was then clarified by Rothbard), Hayek was clearly superior in addressing specific processes of the market, particularly the precise nature of the business cycle and of how changing time preference/interest rate causes the economy to adapt.
So why couldn't Mises A. Avoid directly employing praxeology and B. Utilize the methods/conclusions of Hayek in critiquing Keynes? Keynes' own methodology was a priori, and indeed before American academia in particular got a hold of economics the entire science had been a mixture of informal empirical evidence in combination with informal logical models. A huge step of what is necessary to destroy Keynesianism, along with current macroeconomics, is merely to de-aggregate the system and to outline the true role of the interest rate and the nature of the capital structure. While no Austrian Economist (in my view) has yet adequately dealt with this, I believe that I have shown repeatedly in recent threads that fiscal policy without inflation is ineffective (something Keynesians generally agree on) and is incompatible with free market growth in the long run, while monetary policy is ultimately incompatible with sustainable recovery because it distorts the capital structure and price relations. The former observation is merely an extension of Austrian theory to places that Mises never actually took it, while the latter is just utilization of ABCT. It would seem that pointing out the true microeconomic foundations of the macroeconomy would be well within an Austrian's abilities.
Finally I have also heard it said that Mises was in a general state of "despair" in the post war world. It is obvious from his observations at the end of Human Action that he overestimated the destructiveness of statist policies, so I tend to think that it was much more likely to be due to Mises' own despair at the modern world due to his personal experiences (E.G Nazis and Communists). I have couple of other pet theories, but I thought I'd throw that out there.