Economics Questions

Re: Hayek & The Pure Theory of Capital

Esuric — Mon, 23 Nov 2009 18:48:01 GMT

Jonathan M. F. Catalán:
I. Fisher, F. A. Fetter, and particularly L. v. Mises, emphasised the ” time preference” factor, while Wicksell and F. H. Knight tended to stress almost exclusively the productivity factor.

I thought Wicksell built upon the Bohm-Bawerkian framework in Interest and Prices, incorporating the time-preference element?

Re: Hayek & The Pure Theory of Capital

thelion — Mon, 23 Nov 2009 18:07:05 GMT

Yes, I think I see what you mean. Pure Capital is somewhat of a contrast to Menger and Mises. Why? It follows Bohm-Bawerks productivity theory of time-discounting:

Since more-roundabout methods of production cause greater quantities of lower-order goods to exist later rather than soon, greater scarcity now rather than later. Goods are more valuable now rather than later.

This is opposed to Menger's and Mises time-preference (temporal disposal) theory of time-discounting.

Bohm-Bawerk called time-preference a psychological error common to humans, but often supported by productivity theory of time-discounting for greater effect of time-discounting. Menger regarded temporal disposal an economic good (i.e. time is valuable). So did Mises and Fetter.

In effect, Hayek's Pure Capital never discusses time-preference. If you keep that in mind, you'll have a simpler time reading his book, because this is an assumption implicit to his model.

Bohm-Bawerk's explanation of interest (and by extension Hayek's explanation) is thus only a product of the production process.

Mises considered interest always exists, such that Bohm-Bawerk's criterion only strengthens this preference. This is a more complex theory, and Hayek mentions he intentionally avoids it in his explanation, instead directing the reader to Mises 1912 book for that. Hayek considered his own theory a more simplified business cycle model, with Mises' theory being more complex and an applied theory.

Hayek, as he says in Prices and Production, wanted to introduce an in-between third level of abstraction, which is more definite than the first level (Cantillon and Gossen, concept of different circulations of money for different goods) and less definite than the forth level (Mises, fully operational applied model).

Hayek & The Pure Theory of Capital

Jonathan M. F. Catalán — Mon, 23 Nov 2009 16:35:36 GMT

It is oftentimes said that one of the major weaknesses of most mainstream schools of economic thought is a lack of a robust theory of capital. Indeed, this is perhaps one of the strongest features of the Austrian school (it allows them to see the effects of interest rates and production). F.A. Hayek wrote The Pure Theory of Capital as a major theoretical work on the subject, and perhaps the decisive boook on the topic. Although I own it, I admit that I have only read the first chapter (it is a bit complex, and I feel that if I were to seriously begin to read it I would have to take notes, and for that I would need some time off of school; so, I'm waiting until vacation), and so I don't much of what he says. But, from what I've gathered from "third sources" (namely, Jesús Huerta de Soto), he critiques the mainstream and especially Frank Knight.

However, I found this article on JSTOR, published originally by Economica. I copy and pasted it onto my website: Time-Preference and Productivity: A Reconsideration. He wrote:

It will be remembered that on the whole the ” Austrians “, that is Boehm-Bawerk and his followers like I. Fisher, F. A. Fetter, and particularly L. v. Mises, emphasised the ” time preference” factor, while Wicksell and F. H. Knight tended to stress almost exclusively the productivity factor. In my Pure Theory of Capital I sided with the latter group, largely persuaded by Professor Knight’s arguments.

I thought The Pure Theory of Capital was where Hayek introduced his "triangle"?

In any case, the article is extremely interesting and makes we wish I had read The Pure Theory of Capital already.