Hayek vs. Keynes: "Fear the Boom and Bust"

This is a very nicely done video that, while entertaining, covers the key differences between the Austrian and Keynesian business cycle theories.

What Does a Trillion Dollars Look Like?

From www.cnbc. com's slideshow:

"With several big spending plans brought up in the past few months, including Federal Reserve program to buy Treasury Securities as well as the Public-Private Investment Program, the total cost of these individual plans has been estimated to be as much as $1 trillion. This stack of cash - in $1 bills - would measure 67,866 miles, stretching approximately 2.72 times around the Earth’s equator.

"If denominated in $100 bills, $1 trillion would be enough to fill 4.5 Olympic-sized swimming pools, with a total volume of 398,000 cubic feet. For comparison, there is only about $625 billion worth of $100 bills currently in circulation, according to the US Treasury bulletin, which would fill about 2.8 Olympic swimming pools."

The US is now projecting a budget deficit of $1.4 trillion and the National Debt is over $12.3 trilllion.

Stock Taking on the Cambridge Capital Debate

With a new semester, comes a lot of driving for me (I teach at multiple locations for MOC) and that means I have time to listen to the podcasts of lectures that I haven’t had time for earlier. One of these was Roger Garrison’s excellent lecture on “Macroeconomics: The Boom and Bust Cycle.” The video and mp3 are found here.

During the question and answer period, a question came up on the Cambridge Capital Debate. The debate was started by neo-Ricardian economists like Joan Robinson and Piero Sraffa who argued that there was a mathematical flaw in the Austrian conception of capital. They argued that there could be “capital reswitching.” At a low interest rate, a producer would use method A, but as interest rates rise they would switch to method B—so far, so good. However, they argued that if the interest rate went even higher, then the producer would switch back to method A, hence “reswitching.”

The Austrians debated the neo-Ricardians’ points and this debate is called the “Cambridge Capital Debate.” Why Cambridge? Well, that is where Robinson taught and it was from there that the controversy was launched.

A few years ago, after the article by Cohen and Harcourt (2003) came out I did a little stock taking about the debate and found that there were few very answers to the modern Austrian responses. I have not published them, but kept them for a handy reference. After listening to the question posed to Garrison, I figure that a blog might make an excellent source to cite simply because this controversy has a tendency to come up without any regard for the state of the debate, especially if you are arguing with a Post-Keynesian.

So here are 10 issues that I think the “reswitchers” need to address before the debate can continue:

1. Yeager’s (1979) argument on “waiting” as a component in the production process;
2. Garrison’s (1979) species-reswitching parody;
3. Garrison’s (1979) and Robinson’s (1975) observation that the reswitching differences are very small;
4. Yeager’s (1979) and Garrison’s (1979) observation that there is really no reswitching occurring, but the problem only appears because when we are comparing two static states;
5. Yeager’s (1979) observation that there is no mechanism to “move” the interest rate independently and without a causal factor;
6. Lachmann’s (1978) observation that the debate consists more between the neo-Classicals and the neo-Ricardians, not the Austrians;
7. Lachmann’s (1978) insistence that the problem is with macroeconomic formalism that ignores microeconomic foundations;
8. Lachmann’s (1978) emphasis that there is no single rate of profit or return in the real world;
9. Lachmann’s (1978) observation that the neo-Ricardians do not adequately deal with expectations; and finally
10. Yeager (1979), Garrison (1979) and Lachmann’s (1978) observations that the problem really stems from the fact that the production function is presented as a relationship between physically defined capital inputs.

This last issue is of particular importance. Usually the neo-Ricardian will create an input/output table and shows how much steel, etc. is used in each stage of production. Then the neo-Ricardian assumes that any unit of steel is perfectly substitutable with any other unit of steel. This sort of analysis is not how an Austrian sees the Structure of Production. A ton of steel in an early stage of production is not necessarily substitutable with a ton of steel at a later stage of production. In fact, the same applies to labor and every other type of resource in the production process. Inputs and Capital, in particular, are not transferable homogeneous blobs. There are degrees of complementarity and substitutability that varies with each production process.

In order to bring back the debate, the neo-Ricardians need to respond to the Austrian replies to the reswitching debate. By simply reviewing the literature I have found 10 unanswered issues. I know that there are more. I know that this post is sort of odd, but here are the articles that I have referred to above. I hope that this might help anyone who is stuck in one of these too often recurring debates.

References:
Cohen, A. J. and G. C. Harcourt (2003). “Whatever Happened to the Cambridge Capital Theory Controversies”, Journal of Economic Perspectives. V. 17, N. 1, Winter: 199-214.

Garrison (1979) “Waiting in Vienna”, in Time, Uncertainty, and Disequilibrium, edited by Mario Rizzo.

Garrison (2001) Time and Money: The Macroeconomics of Capital Structure.

Lachmann (1978 [1973]) “Macro-Economic Thinking and the Market Economy”, Studies in Economics No. 6, Institute for Humane Studies.

Robinson (1975) “The Unimportance of Reswitching”, Quarterly Journal of Economics, 89(1), pp. 32-39.

Yeager (1979) “Capital Paradoxes and the Concept of Waiting”, in Time, Uncertainty, and Disequilibrium, ed by Mario Rizzo.