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Mainstream Macroeconomists Grapple with Hayek and Keynes


A new NBER Working Paper by Paul Beaudry, Dana Galizia, Franck Portier uses a contemporary modeling technique (a kind of decentralized trading model popularized by Robert Lucas) to compare "Hayekian" and "Keynesian" accounts of the business cycle. The authors have only a cursory understanding of the Austrian literature -- despite the title, "Reconciling Hayek's and Keynes Views of Recessions," the paper contains no references to anything written by Hayek or Keynes -- but is interesting nonetheless.

The authors apparently got their understanding of Hayek from Nicholas Wapshott's wildly inaccurate book Keynes Hayek: The Clash that Defined Modern Economics, so they characterize malinvestment as overinvestment ("capital over-accumulation"), reduce Hayek's complex and subtle views to "liquidationism," and so on. Still, the authors are trying to get at the fundamental idea that capital structure matters, and that the bust is somehow related to actions taken during the preceding boom. In this sense they depart from most modern macroeconomic treatments. Also, before introducing their model, they include a section with "Some motivating facts," pointing out that their measure of capital over-accumulation (cumulative investment over 10 years divided by total factor productivity and detrended) is positively correlated with recession depth and length of recovery for the US postwar period. Their model includes both consumption goods and durable investment goods and it is possible for agents to have "too much" of the durable good (so that "liquidation" can be beneficial). In other words, the authors recognize the drawbacks of conventional Keynesian models in output and employment are systematically (and simplistically) driven by aggregate demand, with no role for capital and production and no possibility of capital misallocation.

In other words, while the paper doesn't particularly advance the Austrian understanding of the business cycle, the fact that the authors are thinking along these lines (and disseminating their thoughts through the NBER working paper series) tells us there may be some hope for modern macroeconomics.

Here is the abstract for those who want the gory details:

Reconciling Hayek's and Keynes Views of Recessions Paul Beaudry, Dana Galizia, Franck Portier NBER Working Paper No. 20101, May 2014
Recessions often happen after periods of rapid accumulation of houses, consumer durables and business capital. This observation has led some economists, most notably Friedrich Hayek, to conclude that recessions mainly reflect periods of needed liquidation resulting from past over-investment. According to the main proponents of this view, government spending should not be used to mitigate such a liquidation process, as doing so would simply result in a needed adjustment being postponed. In contrast, ever since the work of Keynes, many economists have viewed recessions as periods of deficient demand that should be countered by activist fiscal policy. In this paper we reexamine the liquidation perspective of recessions in a setup where prices are flexible but where not all trades are coordinated by centralized markets. We show why and how liquidations can produce periods where the economy functions particularly inefficiently, with many socially desirable trades between individuals remaining unexploited when the economy inherits too many capital goods. In this sense, our model illustrates how liquidations can cause recessions characterized by deficient aggregate demand and accordingly suggests that Keynes' and Hayek's views of recessions may be much more closely linked than previously recognized. In our framework, interventions aimed at stimulating aggregate demand face the trade-off emphasized by Hayek whereby current stimulus mainly postpones the adjustment process and therefore prolongs the recessions. However, when examining this trade-off, we find that some stimulative policies may nevertheless remain desirable even if they postpone a recovery.

Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University's Hankamer School of Business.

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