2012년 12월 31일 월요일

[책] Piero Sraffa: Critical Assessments

지은이: John Wood (발행: Routledge, 1995. 3. 1. - 1408페이지)
자료: [구글도서] Piero Sraffa: Critical Assessments

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※ 발췌: of which some passages on page 45 begins:

On Hayek's Prices and Production

Hayek's four lectures delivered at the London School of Economics in February 1931 were published as "Prices and Production" in 1931. It was most enthusiastically received at the London School and won quick recognition with most reviews considering it favourably as an analytically rigorous work attempting to deal with money within the Walrasian-Austrian framework. Keynes's "Treatise on Money" also had appeared and was reviewed by Hayek around the same time. A keen controversy was thus developing between the two rival schools of Cambridge and London. Sraffa's review of the book appeared in ^The Economic Journal^ in March 1932, providing a jolt to the secured place the work was about to acquire.

As a staunch general equilibriumist, Hayek accepted without doubt that existence and uniqueness of competitive equilibrium established through the operation of the demand and supply forces and the ever-active principle of substitution that ensured its attainment. Not only does exist in a non-monetary real economy but, whenever a disturbance occurs, a new equilibrium is established rapidly. The equilibrium so attained gives full sway to the voluntary decisions of producers and consumers and forces are set against any interference with these decisions so that disequilibrium will not be tolerated long. Given the inherent and inevitabl tendency toward equilibrium operating in a real economy, all disequilibria and cyclical phenomena are to be ascribed to monetary factors. Thence Hayek investigates the characteristics of 'neutral' money, i.e., a kind of money which levels produvtion and the relative price of goods including the rate of interest 'undisturbed', exactly as they would be if there is no money at all. Hayek therefore first investigates the properties of the real system and the new equilibrium that it can attain when the decision to save is volunatarily made. In contrast, the situation is analysed when savings are 'forced' through external actions of banks lending credit to producers or consumers. Hayek end by suggesting that the only 'neutral' money is a constant quantity of money (i.e. quantum of money multiplied by velocity of circulation).

Sraffa acknowledges the definite contribution of the book in emphasising the effects of monetary changes on the relative prices of commodities rather than movements of the general price level on which attention until then had been exclusively focused by the quantity theory. Also the approaching of isolating, via the notion of neutral money (which is in Hayek, identical to a non-monetary economy) the effects of money on production and prices could itself 'have someting to recommend' as it would have led to a useful comparison between the condition of a specific non-monetary economy and thoe of various monetary systems. Such a comparison of a moneyless economy and various monetary systems in terms of the effects of assumed cases of disturbances in equilibrium would have been worthwhile as it would have revealed the essential characteristics common to every kind of money as well as their difference and provided comparative merits of alternative policies.

However, Sraffa points out that Hayek completely forgets to deal with this task. He neither traces the repercussions of using any one monetary system nor does he deal with money in any other role than purely as a medium of exchange. Hayek initially goes into a detailed exposition of the structure of a real economy, modelled along Austrian lines, with land and labour as the only means of production and all goods arranged into stages of production. Hayek assumes the structure to be triangular with the base representing output of consumer good and the height representing time elapsing between the first and the final stage of production. As in the Austrian theory, there is presumed a positive relation between the degree of roundaboutness of methods and their productivity and an inverse relation between the former(=roundaboutness) and the rate of interest. Hayek then traces out, assuming an initial equilibrium, the repercussions of a voluntary decision by consumers to change the rate of savings. The new equilibrium occurs at higher flow of consumption at lower prices. This situation is contrasted with 'forced savings', induced by the monetary policy(i.e., when the banks lending rate falls below the natural rate or bank advance credits to producers). In such a case, producers are encouraged to lengthen the period of production without the 'real savings'. This leads to inflationary price rises as factors are bid away from the consumer goods industries.  The real consumption levels get depressed. However this situation created through the extraneous intervention of banks cannot be perpetuatedㅡthe brake operates either throught the non-feasibility of continuing credit operations by banks or due to the natural tendency for consumers to expand their consumption when their money receipts rise again. Thus cycles are caused when the natural movement of prices is disturbed by the movements of money supply or extension of credits by the banking system. Hayek blamed the 'elastic'currency for recurrent disasters and favoured a constant or invariant money as being 'neutral'. In his view a money supply is not neutral even if it keeps 'the general price level stable'. In fact Hayek not only criticises the neglect of relative prices by the quantity theorists but also rejects the meaningfulness or the use of the 'general price level'.

While Hayek's criticism of the vagueness of the notion of general price level (which was nothing more that one of many possible index numbers of prices) was well founded, Sraffa criticises him for going further and rejecting "not only the notion of the general price-level but every notion of the value of money in any sense whatever". Sraffa notes that Hayek reduces the function of money to being a medium of exchange alone, ignoring that money is also a store of value, and the standard in terms of which debt, and other legal obligations, habits, opinions, conventions, in short all kinds of relations between men are more or less rigidly fixed"(p. 43). Regarding it purely as a medium of exchange 'deprives money of its essence' and it should then be inevitable, argues Sraffa, that when Hayek considers alternatie monetary policies, money should be found 'neutral' and its effects identically immaterial in every case. But, paradoxically, "Dr. Hayek invariably finds when he comes to compare alternative policies in regulating the emasculated money, that there is an all important difference in the results, and that it is 'neutral' only if it is kept constant in quality[this readers finds this a misprint of 'quanity'], whilst if the quantity is changed the most disastrous effects follow"(p. 44).

The source of this paradox is more closely examined by Sraffa taking Hayek's analysis of the difference between 'voluntary' and 'forced' savings and their consequences. Hayek suggests that, in the former case, the changes brought about in the structure are permanent as they follow voluntary decisions of individuals; in the latter, it is 'forced' through inflation and therefore the consumers can be expected to re-establish the initial position as soon as inflation ceases and their freedom of action is restored. Sraffa, in this article, does not contest the existence or stability of equilibrium in the system but argues that the second situation of 'forced savings' could be equally stable. "In the case of inflation, just a sthat of saving, the accumulation of capital takes place through a reduction of consumption." Hayek's presumption that the economy would revert back to less capitalist methods and higher consumption levels can have no basis. Emphasising the distributive implications of the inflationary process, Sraffa argues: "One class has, for a time, robbed another class of a part of their incomes; and has saved the plunder. When the robbery comes to an end, it is clear that the victims cannot possibly consume the capital which is now well out of their reach. If they are wage eaners, who have all the time consumed every penny of their income they have no wherewithal to expand consumption. And, if they are capitalists who have not shared in the plunder, they may indeed be induced to consume now a part of their capital by the fall in the rate of interest but not more so thatn if the rate had been lowered by the 'voluntary saving' of other people. Thus there could be no reversion to the previous position.

Further Sraffa criticises the asymmetrical reasoning Hayek adopts in distinguishing between credits extended by the banks to producers and to consumers. He holds, [:]
  • on the one hand, that the artificial stimulant of inflation in the shape of producers' credits cannot do any good
  • On the other hand, when consumers decide to save and additional credit is issued to them, Hayek finds that it would frustrate the effect of saving or that, in short, inflation working through consumer's credit would be effective in decreasing capital
  • It is all the more surprising to have such asymmetry when one realises that the producer's volunatry decisions are treated differently from consumer's voluntary decisions
Summarising this paradox, Sraffa writes: "What has happened is simply that since money has been thoroughly 'neutralised' from the start whether its quantity rises, falls, or is kept steady, makes not the slightest difference; at the same time an extraneous element, in the shape of the supposed power of the banks to settle the way in which money is spent, has crept into the argument and has done all the work. As Volaire say you can kill a flock of sheep by incantations plus a little poison." Sraffa' acute criticism of Hayek for confining the role of money only to being a medium of exchange and equating implicitly a 'neutral' money economy with a non-monetary economy must be noted.

Sraffa, in connection with Hayek's criticism of Wicksell, also stressed the point that a 'non-monetary' economy could also be in disequilibrium, in contrat to Hayek's implicit notion that a divergence between the actual and the natural rate of interest is possible only in a monetary economy. Sraffa demonstrates that, in a barter economy, there could be as many natural rates of interest as there are commodities and each such rates will be equal to the equilibrium rate when the spot and forward prices coincide. Further, that "under free competition, this divergence of rates is essential to the effecting of this transition (to equilibrium) as is the divergence of prices from the costs of production" (p. 50). Sraffa also rejects Hayek's criticism of Wicksell that the natural rate of interest could not both keep the Price level stable and equate the demand and supply of capial in a growing economy. It is true that, in transition to a new equilibrium, there is no uique equilibrium rate of interest but a weighted average of natural rates can be suitably defined uing the same weights as for the general price level. This is, of necessity, not a unique average. In other words, there i for each composite commodity, a corresponding natural rate that can equalise purchasing power of savings and investment reckoned in terms of the composite commodity. Sraffa was also to point out that a non-monetary economy does not necessarily ensure a smooth transition to equilibrium through matching of savings and investment. Resources need to be matched and plans of consumers to save and investors to invest need to coincide so as to suitably direct resources from consumer goods to intermediate goods and vice versa. Sraffa's critique thus was important in clarifying the nature of the problem of money and in dispelling the pure monetarist arguments that all disequilibria situations are created by money whose operation is analysed purely in terms of an extraneous intervention. At thi juncture, we may note, Sraffa did not put out his critique of the Austrian treatment of 'capital' as period of production.

Ricardo volumes
(... ...)

2012년 12월 27일 목요일

[책: Great Thinkers in Economics Series] Piero Sraffa

자료(pdf): Piero Sraffa
지은이: Alessandro Roncaglia,
Palgrave Macmillan



1 Early Life and Writings: The Critique of Marshallian Theory
1.1 The early writings: Money and banking | 1.2 Friendship with Gramsci | 1.3 Critique of Marshallian theory | 1.4 Imperfect competition | 1.5 Criticism of the representative firm and the evolutionary side of Marshall’s analysis
2 An Italian in Cambridge
2.1 Cambridge | 2.2 Wittgenstein 25 | 2.3 Friendship with Keynes and criticism of Hayek | 2.4 The critical edition of Ricardo’s writings 
3 Production of Commodities by Means of Commodities
3.1 From Ricardo to Sraffa | 3.2 Production of Commodities by Means of Commodities | 3.3 Sraffa’s analysis and the classical approach: Critique of ‘cost of production’ theories, distinction between market and natural prices | 3.4 Socially necessary techniques | 3.5 The post factum wage payment and the period of production | 3.6 The Sraffian revolution 
4 Basic and Non-Basic Products
4.1 Basics, non-basics and wage goods: Sraffa and the classics | 4.2 The classical distinction between necessaries and luxuries | 4.3 The distinction between basic and non-basic products | 4.4 The wage–profit relationship | 4.5 Subsistence goods and the distinction between basics and non-basics | 4.6 The relation to von Neumann’s theory of proportional growth | 4.7 The effect of taxes on basic, non-basic and wage goods | 4.8 On the existence of positive prices for non-basic commodities
5 The Standard Commodity
5.1 The standard of measure in Smith and Ricardo | 5.2 Marx on Bailey on Ricardo | 5.3 Sraffa’s specific problem and its solution | 5.4 Standard commodity, labour commanded and the von Neumann system | 5.5 The relation of the standard commodity to the
average commodity
6 Critique of the Marginalist Approach
6.1 The analytical structure of the marginalist approach6.2 Critique of the Austrian theory | 6.3 Critique of capital as a factor of production | 6.4 Extensions of the critiques
7 Interpreting Production of Commodities by Means of Commodities
7.1 Interpreting Sraffa: The assumption of given quantities | 7.2 The clash between the classical and marginalist approaches | 7.3 Classical versus marginalist conceptions of competition | 7.4 The realisation problem | 7.5 Sraffa and Wittgenstein: The problem of method in economics | 7.6 Sraffa and Keynes | 7.7 Summing up
8 The Sraffa Legacy
8.1 Introduction | 8.2 The rediscovery of the classical approach | 8.3 The analytical contributions stemming from Sraffa | 8.4 The ‘Ricardian’ reconstruction: Pasinetti | 8.5 The ‘Marxian’ reconstruction: Garegnani | 8.6 The ‘Smithian’ reconstruction: Sylos Labini | 8.7 A preliminary evaluation of the three lines of enquiry
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※ references on Hayek in this book: 
Hayek F. von (1931a) Prices and Production, London: Routledge.
—— (1931b) ‘Reflections on the pure theory of money of Mr. J. M. Keynes’,
Economica, 11: 270–95 (reprinted in Hayek 1995, vol. IX).
—— (1932) ‘Money and capital: A reply’, Economic Journal, 42: 237–49.
—— (1995) Contra Keynes and Cambridge, ed. by B. Caldwell, Collected Works,
vol. IX, Chicago: University of Chicago Press.
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Excerpt of which: 2.3. Friendship with Keynes and criticism of Hayek

(... ...)

The fourth episode has to do with the development of an analytic construct, namely the own rate of interest that Keynes uses in chapter 17 of the General Theory (1936: 222ff). This analytical tool was utilized by Sraffa in an article published in the March 1932 issue of the Economic Journal which amounted largely to a markedly critical review of Prices and Production by Hayek (1931a). The following issue of the Economic Journal included a reply by Hayek(1932) and a brief rejoinder by Sraffa.

The review article came just six months after the publication of Hayek's workㅡa reaction as prompt as it was sever, justified by the need to stress as drastically as possible the difference between Keynsian analysis presented in the ^Treatise on Money^ and Hayek's theory of money and business cycle, which rests explicitly on the marginalist(Austrian, to be precise) apparatus of value theory. Sraffa's paper was thus part of a reaction, stimulated by Keynes himself, against attempts at reabsorbing Keynes's analysis into the general current of traditional marginalism, much as was to be successfully attempted by the exponents of the so-called neoclassical synthesis after the publication of the General Theory.[14] The incisiveness of Sraffa's criticism of Hayek had a significant role in deepening, at least for a time, the abyss separating Keynes from the more rigorous versions of the marginalist tradition, i.e. the continentalㅡand in particular Austrianㅡversion.[15]
[15] Significantly, it is precisely for this reason that a dim view is taken of these debates by a Keynsian of conservative bent like Roy Harrod(1900-78), who rejoiced when Keynes and Hayek subsequently drew closer together: cf. Harrod(1951). At the analytical level, in the ^General Theory^ Keynes was to adopt a framework differeing at least in part, the Kahnian marginalism of short period equilibrium, which can however be seem mainly a handy sort of sacffolding: cf. Tonveronachi(1983).
Hayek observes that 'monetary influences play a dominant role in determining both the volume and direction of production' (Hayek 1931a: 1). 
  • For traditional marginalist analysis, however, 'at a condition of equilibrium  [...] no unused resources exist' (1931a: 31), among other things because any fall or rise in the interest rate would bring about 'a transition to more or less "roundabout" methods of production' (1931a: 33). 
  • Thus Hayek sets himself the task of reconciling marginalist theory and reality.[16] 
[16] In this respect, Hayek followed a road already suggested by Marshall and Wicksell, attributing to real forces the determination of equilibrium, and to monetary forces the origin of (short run) disturbances. While Hayek referred mainly to Wicksell (and to Boehm-Bawerk, with respect to the determination of equilibrium), British economists such as Robertson(1915) and Hawtrey(1919) anaylsed trade cycles on Marshallian lines.
  • Evidently, Hayek's analysis of the influence of monetary factors on real variables cannot be a matter of 'static analysis': it only concerns 'fluctuations of production', 'to build on the foundations given by the concept of a tendency towards an equilibrium'(1931a: 31). 
  • In other words, Hayek elaborates an analysis of the 'dynamics of disequlibrium' with particular reference to situations where the 'monetary' rate of interest diverges from the 'natural' rate (as understood by Wicksell 1898), focusing on the effects of monetary perturbations on the relative prices of consumption goods and producer goods(cf. also Hayek 1932: 238).
Hayek's analysis, with its theory of real economic equilibrium, rests on (1) the concept of 'average period of production', as developed by Boehm-Bawerk(1889), and on (2) his proposition that the capital intensity of production processes is a decreasing function of the interest rate. This thesis is but a variety of the marginalist tenet of an inverse relation between the 'quantity of capital', however measured, and its price
  • As we shall see later(6.2), the concept of the average period of production comes in for destructive criticism from Sraffa in Chapter 6 and 12 of his 1960 book; 
  • in the 1932 article his attention focuses, instead, on Hayek's monetary analysis.
By characterising monetary phenomena as disequilibrating elements in the system, Hayek draws attention to bear on the 'forced saving' brought about by the deviation of the market interest rate from the 'natural' interest rate. Thus he purports to demonstrate how under sufficiently general hypotheses the capital accumulated through forced saving in the ascending phase of the cycle is economically destroyed in the descending phase, restoring the economy to its original equilibrium.

In short, the mechanism described by Hayek runs as follows: 
  • when (a1) the natural rate of interest is higher than the money rate, (a2) entrepreneurs are induced to apply for bank loans in order to cope with investment expenditures aiming at lengthening the period of production. This implies, at some stage, (b1) a decrease in the production of consumption goods, and hence (b2) an increase in their price, which provokes (b3) 'an involuntary reduction in consumption' (Hayek 1931a: 75). These elements constitute the ascending stage of trade cycle.
  • However, the increased incomes of the productive forces are transformed into  (c1) greater demand for consumption goods; hence, (c2) 'a new and reversed change of the proportion between the demand for consumers' goods and the demand for producers' goods, in favour of the former' (ibid.). (c3) The relative prices of consumption goods increase.
  • Thus (d1) it becomes more advantageous {for entrepreneurs} to shorten the average period of production, and (d2) the capital goods characterised by higher duration lose value. Hence the descending phase of the trade cycle.
Given the sequence of cause and effect linkages determining the latter stage, a policy in support of demand for consumption goods as proposed in under-consumption theories (which Hayek took to include Keynes's theory) proves counterproductive. Indeed, according to Hayek, the capital accumulated in the ascending stage of the trade cycle (corresponding to forced saving) is economically destroyed in the descending stage, so that the economic system returns to its original equilibrium. The only consequence of active anti-cyclical intervention is to postpone adjustment to full employment equilibrium.[17]
[17] ‘If the proportion [between the demand for consumers' goods and the demand for producers' goods] as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into a wrong direction and a definite and lasting adjustment is again postponed. [...] The only way permanently to "mobilise" all avaiable resources is, therefore, not to use artificial stimulants [...] but to leave it to time to effect a permanent cure by the slow process of adapting the structure of production to the means available for capital purposes.’ (Hayek 1931a: 87).
In his review Sraffa points out that Hayek's argument fails to take into account certain feature typical of a monetary economy, where money is not only a means of payment but also a unit of measurement in contract and a store of value, so that inflation (and monetary policy) affects income distribution (Sraffa 1932: 42-3 and 48). It can therefore by no means be taken for granted thatㅡin the presence of debts and money contracts, wage agreements  and rigid pricesㅡcapital accumulated with forced saving will be economically destroyed through the play of actions and reactions of market automatisms; in general the new capital will imply bringing about a new state of equilibrium in the economic system.

Here Sraffa adds a further critical observation. When relative prices as a whole are not constant in time, there is no single 'natural' interest rate to be compared with the money rate of interest: each commodity has its 'own interest rate', defined as the interest paid on the money necessary to buy spot a unit of the commodity added to the (positive or negative) difference between spot and forward prices of the commodity, in per cent. This happens even in barter economies, in phases of transition from one equilibrium to another, since relative prices change over time due, for instance, to differential technical progress in the various sectors.[18] Thus, apart from the highly unlikely case of invariance in technology or homothetic variations, growth phases are characterised by the impossibility of defining ^one^ equilibrium interest rate, whether in barter or monetary economies. Hayek's answer on this accountㅡthat ‘there might, at any moment, be as many "natural" interest rates as there are commodities, ^all^ of which would be ^equilibrium rates’(Hayek 1932: 245)ㅡmay be taken as one of the first signs of the appearance of a new analytic concept, namely that of intertemporal equilibrium (cf. Milgate 1979), but amounts to renouncing the idea of automatic mechanisms ensuring a tendency to a macroeconomic equilibrium of the economy.
[18] A point that Sraffa did not stress in his comment on Hayek is that not only are there multiple 'own rates of interest', but also that, due to the impossibility of foreseeing with a sufficient confidence the future path of technical progress for more than a very limited time span, it is impossible to rely on them for analysis of the structure of the economy, namely in the context of the theory of value and distribution. (... ...)
We may well imagine Hayek's dismay, faced with a position such as Sraffa's must have appeared to him.[19] Here we are in a world where monetary factors exert an evident influence on real variables, and where the marginalist theory of value is universaly accepted. What, then, could the outcome possibly be of rejecting what appeared as the only possible way to recocile faithfulness to the theoretcal foundations of marginalism with the realities of unemployment and cyclic trends in the economy? Today it appears quite clear that what to Hayek seemed like nihilism on the part of Sraffa was simply rejection of the marginalist approach (much like the attitude he showed towards Marshallian theory in the 1930 article)ㅡnot as a 'leap into the dark', but in favour of a reconstruction of political economy based on the alternative approach of the classical school.
[19] Hayek(1932: 238) perceives in Sraffa's article 'an extreme theoretical nihilism which denies that existing theories of equilibrium provide any useful description of the non-monetary forces at work'.

2.4 The critical edition of Ricardo's writings

The difficulties economists like Hayek and Robertson met in understanding just what Sraffa was getting at (and, generally speakin, the widespread opinion that Sraffa's critiques were destructive, but not constructive) shows the extent to which the marginalist approach had encroahed on the classical tradition in the first half of the 20th century, actually submerging it. Sraffa's critiques were considered as solely destructive simply because the possibility of an alternative approach was not recognised: hence the goal Sraffa set himself with critical edition of Ricardo's works, namely to clarify the framework that the classical economists had built for political economy, which was also the framework Marx had taken up and further developed. It was already clear to Sraffa, at the time, that the classical approach couldㅡalbeit with significant modificationsㅡprovide a better foundation for economic theorising than the marginalist one.

(... ...)

Excerpt of which: 6 Critique of the Marginalist Approach

6.1 The analytical structure of the marginalist approach

As already noted, Sraffa aims at a complete turnaroun in economic science, rejecting the dominant marginalist approach and proposing in its place the classical economists' approach, though modified so as to take Keynes's contribution into account. The first step he takes in the direction of his critique of the marginalist approach i to tackle the Marshallian variety that dominated the academic teaching of economics both in Italy and England (Sraffa 1925, 1926, 1930). The second stemp is taken with his critical edition of Ricardo's writings (Ricardo 1951-5). where the conceptual framework and the analytical scheme constituting the foundations of classical political economy are re-proposed, cleared from the misinterpretations superimposed on it in nearly a century of marginalism. Finally, the third and analytically decisive step is the publication in 1960 of ^production of Commodities by Means of Commodities^: an analysis of the relationship between relative prices and income distribution that provides both a solution to fundamental problems left unsolved by classical theorists and the basis for an internal critique of the traditional marginalist theories of value and distribution.

Traditionally, the marginalist approach conceive the problem of value as concerning the determination of equilibrium prices and quantities, such as to ensure equality between supply and demand. Such equilibrium values stem from confrontation between, on one side, the endowment of resources and, on the other side, the preferences of economic agents.

This interpretation of how the economic system works remains unchanged when, having considered pure exchange model (where productive activities are ruled out and the endowments consist of final consumption goods), we go on to models concerning both exchange and production. In the latter case, endowments include productive resources; the relationship between endowment and consumers' preferences is mediated by productive activity, which comes into play side by side with exchange and consumption activities. Three groups of givens are here considered: preferences of economic agents, initial endowments and technical knowledge. This basic model can then be further extended when produced means of production are included among the initial endowments, and it is recognised that they can be increased in amount over time through an accumulation process, the pace of which depends on investment decisions on the part of economic agents.

Thus, Sraffa is pointing to central features of the marginalist approach when referring, in the very first lines of his book (Sraffa 1960: v) to 'anyone accustomed to think in terms of the equilibrium between supply and demand', as well as when referrng, at the end of his book(Sraffa 1960: 93), to 'a one-way avenue that leads from "Factors of production" to "Consumption goods" '.

These central characteristics hold whatever variety of marginalism we conside. Scarce endowments and final consumption (or satisfaction of the needs and desires of economic agents) are confronted and connected by market mechanisms acting in such a way as to bring out a balance between the two opposite sides, so that for each commodity supply is equal to demand. Differences in specification of this basic scheme may be seen, for instance, in the extent of the role attributed to the subjective element, which may underlie the demand side alone, or the supply side as well, as in Jevons's analysis of the producer's equilibrium, based on the distutility of working, or in Wicksteed's opportunity cost approach. Other differences are to be found in the specification of the original resources: either a detailed list of commodities in general equilibrium models, or the usual textbook list of 'factors of production'ㅡland, labour and capital. In the latter case income distribution between rent, wages and profits[1] is not conceived as a separate issue, but as an aspect of the general question of value, with distributive variables being simply the prices of a particular kind of commodities, namely the 'factors of production'. Still other differences may emerge in aggregation (for instance, with the use of the category of 'industries' as intermediate entities between the individual producer and the economy as a whole), or the way of dealing with the elements of time (as we shall see in 6.2 below when dealing with the notion of the average period of production).

Now, it is obvious that no critique can have direct and immediate application to all varieties of marginalist theory. Notwithstanding, as we shall endeavour to show, Sraffa's analysis can be attributed with general impact on the marginalist approach as a whole. Indeed, unless it is defined in such general terms (as in Debreu's axiomatic general equilibrium model) as to be inapplicable to the interpretation of any real issue,[2] then Sraffa's criticism, suitably modified, will apply. This is due to the very basic structure of the marginalist approach, where original resources are taken as given, unlike the classical approach, which represent 'the system of production and consumption as a circular flow' (Sraffa 1960: 93).

(...) Of course, any theory requires abstraction; the point to be considered is whether the specific abstractions involved(for instance, the idea of a single price for each commodity, or that of a uniform rate of profits), though far from being perfectly and systematically realised, are admissible simplifications for the purpose of the specific analysis under consideration. This requires, among other things, that, whenever a main feature of the model utilised in our analysis simplifies away the compliexities of the real world, such complexities can be introduced in our model as successive approximation analysis. For instance, the aggregate income multiplier in its simplest form is based on the assumption of a closed system, with no external trade, and no government sector; but a generalised multiplier can easily be constructed without substantive modifications to the results of our first-approximation theory. On the contrary, generalisations of one-commodity models into multi-commodity models imply drastic changes in the analytical results; for instance, the monotonically inverse relation between the rate of profits (the price of the factor of production capital) and the 'quantity of capital' per worker no longer holds, as we shall see below.

Secondly, the theory must provide some results in terms of delimiting the scope of possible events. For instance, as we have seen earlier in Chapter 4, Sraffa's analysis brings out the distinction between basic and non-basic products with a number of interesting implications. Conversely, general equilibrium analysis, notwithstading certain very restrictive assumptions (such as the convexity of productive sets), does not provide definite results: we can have mulitiple equilibria (which rules out comparative static analysis), instability (which rules out the 'invisible hand of the market' thesis, together with the possibility of indicating the direction of change whenever there is a change in endowments, preferences or technology) and even no univocal relationship between the available quantity of individual original resources and their price (Montesano 19950). As a matter of fact, whenever the so-called 'general equilibrium models' are employed to say something about specific features of the real world, new restrictions are introduced within the model(a one-commodity world, a single representative agent, and so on) in order to obtain some definite results.[3]

(... ...)

Sraffa's criticisms concerns, in various ways, the main attempts at building marginalist theories aiming at robust results in interpretation of the real-world economy. Such is the case of the Marshallian theory of the firm and the industry, in the 1925, 1926, and 1930 articles; such is the case of the Austrian theory, based on the average period of production, in Chapter 6 of the 1960 book; and, more generally, such is the case for all theories interpreting 'capital' as a 'factor of production' the demand for which is inversely related to its price (Chapter 12 of his 1960 book). In the following sections of this chapter we shall briefly illustrate the latter criticisms, the case of the Marshallian theory of the firm and the industry having been considered already(1.3-1.5). Viewed in its general outline, Sraffa's point is that the marginalist representation of the economy encounters difficulties because we are confronted with a multi-commodity world in which 'capital' cannot be conceived, together with natural resources, as part of the given data of the problem.

6.2 Critique of the Austrian theory

As we have seen, Sraffa's 1960 book provides not only a theory of prices of productin within the framework of the classical conception of the economic system but alo the tools for a radical critique of the traditional marginalist theory of value, aiming at its very foundations. In this respect we can focus our attention on two chapter: the sixth, on the average period of production, will be considered in this section, while the final, twelfth chapter, on the choice of techniques, will be discussed in the next section.

The concept of the average period of production was first proposed by Jevons(1879, Chanpter 7), to be later taken up and developed within Austrian marginalist theory, and in particular Boehm-Bawerk(1889), as a measure of the capital intensity of production.[4] Capital is here interpreted as 'waiting' measured in terms of time, and more precisely as the length of the average period of time between the employment of (direct and indirect) inputs of labour and the completion of the process of production.

In order to compute the average period of production, each commodity input in the production process is substituted by the labour directly required for its production, plus its commodity inputs; the operation is then repeated on the latter, until we have a series  (as long as we like) of dated labour inputs and a residuum (as small as we like) of commodities. Sraffa(1960: 34) calls this procedure 'reduction to dated quantities of labour'. We can then compute the average period of production by taking a weigted average of the intervals of time between the date of each direct labour input and the date on which the output is obtained, where for each interval the corresponding amount of direct labour input is utilised as weight, once the total amount of labour directly or indirectly required to obtain the commodity under consideration ha sbeen set equal to one.[5] Austrian capital theory then interprets the average period of production as a measure of the quantity of capital employed in the production process thus considering 'time'. together with labour, as the factors of production.
[5] For an algebraic treatment cf. Kurz and Salvadori(1995: 437).
The rate of interest is thus obtained by balancing of two forces.[:]
  • On the one hand we have the supply of capital, namely waiting, corresponding to the readiness of economic agents to postpone consumption: the length of time agents are willing to wait is assumed to be a positive function of the rate of interest. 
  • On the other hand, we have the demand for capital, namely the relationship between additional waiting (increased lengthe of the average period of production) and additional product; the postulate of decreasing marginal productivity implies a decreasing relation between the average period of production and the rate of interest. 
  • Thus, the rate of interest can be considered as the price of 'capital', determined by the usual mechanism of equilibrium between supply and demand.
This construction is criticised by Sraffa(1960: 37-8). The point is that the average period of production is computed without allowing for compound interest; when it is considered, the results may change dramatically. Thus Sraffa shows that if the inputs of the various productive processes are reduced to dated quantities of labour, when the rate of profits changes we can have 'complicated patterns of price-movements with several ups and downs'. This is shown with an example, where the price of product a('old wine') at first rises, then falls, then rises again relatively to product b('oak chest') as the rate of profits increases from zero to its maximum value. The reversals in the direction of the movement of relative prices, in the face of unchanged methods of production, cannot be reconciled with ^any^ notion of capital as a measurable quantity independent of distribtion and prices'.[6] The difficulty had already been sensed by Wicksell(1901), but later exponents of the Austrian school went on utilising the notion of the average period of production. In particular, Hayek(1931a) built his analysis of employment and the trade cycle on it. 
[6] A critique similar to Sraffa's was developed by Garegnani(1960), with a direct analysis of the theories of the various authors who made similar attempts to construct a theory of distribution based on this conception. The criticisms of the average period of production are now generally accepted. Cf. for example Samuelson(1966).

The full implications of Sraffa's criticism were not immediately grasped. In a review of Sraffa's book, Harrod(1961) tried to defend the average period of production by pointing out that it can alway be calculated, given the rate of profits. Apprarantly, Harrod failed to realise that in such conditions the average period of production can no longer be used to explain the distribution of income, for its very defintion depends on an exogenously given rate of profits, as Sraffa(1962) pointed out in a short reply to Harrod. This, of course, is precisely the import of Sraffa's orignial criticism of the Austrian method of measuring 'capital'.

The difficulties illustrated above must be borne in mind also when evaluating later attempts at utilising dated quantities of labour for the analysis of dynamic issues. References here is to the so-called 'neo-Austrian' approach proposed by Hicks(1973) for the analysis of such issues as the transition between different technologies.
In fact, Hicks's model involves bothe the use of a static framework for the analysis of dynamic issues and a serious underevaluation of the capital theory difficulties mentioned above. Let us consider this issue in somewhat more detail.

Sraffa's analysis makes it clearㅡand indeed the point was denied neither by Boehm-Bawerk nor by Hayekㅡthat the reduction to dated quantities of labour is a theoretical construct, simply presenting in a different way the technology which underlies the Sraffian system of simultaneous equations illustrated earlier(3.2) and not a historical reconstruction of the way in which the different means of production have actually been obtained. Marginalist capital theory aims at determining static equilibrium solutions, hence marginalist analysis of techincal change refers to static substitution between capital and labour; technological changes over historical time are not considered. This should be borne in mind for two reasons. First, it is clear that the difficulites in capital theory stemming from the existence of a multiplicity of commodities cannot be overcome by shifting to a presentation of technology in terms of dated labour inputs: if no new restrictive assumption is in one way or another introduced in the shift, such difficulties cannot but reappear in the latter presentation as well.[7] Second, what is analysed with the reduction to dated quantities of labour are the implications of a given technology, ruling at a given moment in time: the presence of dated quantities is an analytical construct, which does not correspond to periods of historical time. Comparison between two different technologies is simply an exercise in static comparative analysis.[8]

Analysis of what Hicks calls 'traverse', namely the transition between two different technologies, involves either historical analysis, leaving aside any attempt at theoretical construction, or an exercise in comparative static analysis: the comparison, that is, between an initial and a final equilibrium. The latter case implies that there must be a unique equilibrium both in the initial and in the final position. Also, analysis of the 'out of equilibrium' transition between the two techniques requires specific assumptions concerning the 'laws of movement' of the variables out of the equilibrium position, which in turn can give definite results only under restrictive assumptions. Typical in this respect is the (usually tacit) assumption of no basic commodities in the modelㅡan assumption even more restrictive than that of a one-(basic)-commodity world.

Even if the presence of just one basic commodity, the series of labour inputs is potentially infinite: the residuum of commodities, though small as we like, can never be fully eliminated; however small, it becomes all-important in the determination of the price system when the rate of profits is at its maximum. This leads us to conclude that, while the simultaneous equation method and the series of dated labour inputs can be considered as equivalent ways of representing technology,[9] the former method is safer. In other words, no result derived under the second method that cannot also be reached by the simultaneous equations method can be accepted as having full generality in a multi-commodity world with baic commodities.

2012년 12월 26일 수요일

Dic: spoil (in archaic senses)

  5) [archaic] to strip (a person or place) of (property or goods) by force or violence

  8) any treasure accumulated by a person: this gold ring was part of the spoil.
  9) [obsolete]

  1. the act of plundering
  2. a strategically placed building, city, etc., captured as plunder

[Excerpt] Piero Sraffa's Non-Economics: An Introduction, part I

자료: Piero Sraffa's Non-Economics: An Introduction, part I

※ 발췌:

* * *

(... ...)

(...) Sraffa, it turned out, was one of the few English-speaking economists equiped to mediate between the two theoris, being intimately familiar with the work of Keynes (...) as well as "being familiar with both Vilfredo Pareto's theory of general equilibrium and the Austrian theory of capital and interest of Boehm-Bawerk and Wicksell"(Kurz, 2000: 283). What resulted was a trenchant critique of Hayek's book ^Prices and Production^, one still considered to be one of the most formidable critiques of the Austrian school, and it remains unrefuted.

The Sraffa-Hayek debate is the most technical and difficult to understand part of Sraffa's oeuvre, despite its being limited to a 12-page review, a 13-page reply, and a three-page rejoinder. Frank Knight is hardly alone in the sentiment he shares in a letter to a colleague (quoted in Kurz, 257): "I wish that he [Hayek] or someone would try to tell me in a plain grammatical sentence what the controversy between Sraffa and Hayek is about. I haven't be able to find anyone on this side who has the least idea." Lawler and Horn(318) delineate how "[a]ccording to which of the authors one reads, the Sraffa-Hayek debate may resemble any of the following:
  1. A difficult to interpret and ambiguous way-station between Sraffa's early work on the distributional aspects of monetary policy, and his later full-blown critique of orthodox economic theory (Panico, 1988)
  2. The analytical basis of Keynes's most elaborate ^General Theory^ analysis of the 'essential properties of interest and money' (Deleplace, 1986; Majewski, 1988; Kregel, 1982; Mongiovi, 1990; Potestio, 1986; Rymes, 1978).
  3. The opening shots by Sraffa of a planned counter-revolution against subjectivism which culminated 30 years later with the ^Production of Commodities by Means o Commodities^ (Lachmann, 1986; Caldwell, 1986).
  4. An early discussion of the true problems associated with the attempt to integrate money into a Walrasian general equilibrium model, and the forerunner of the modern mathematical treatment of the issue (Desai, 1982; McCloughry, 1982)
Such divergent interpretations are largely due to the combination of Sraffa's taciturn style of writing and Hayek's tendency to often change his position: in the former case, it is necessary to supply "motivations and implications he never provided"; in the latter case it is necessary to fit this particular argument within Hayek's inconsistent oeuvre. (...)

Hayek's argument centers on the relation between interest rates and the amount of capital used by firms. Following the work of Wicksel, Hayek adopts the notion of the 'natural rate of interest'ㅡan equilibrium rate which will equalize the supply of capital with the demand for the products it creates.

  • If the rate of interest set by the bank is lower than the natural rate, Hayek proposes, producers will have an incentive to borrow money from the banks to invest into capital, since they will pay less on interest than they would normally. 
  • This increase in capital allows the firm to improve its production capacity, but since demand has not significantly changed, an extra goods that it produces will not be purchased unless it lowers the price, which would reduce the firm's profit. Therefore, the firm instead uses its extra capital to produce higher-quality goods which require more capital for their production, and which the firm will correspondingly be able to sell for a higher price. 
  • This also, Hayek (following Boehm-Bawerk) points out, requires a  "lengthening of the period of production," and in the interim where no goods are being sold, consumers have no choice but to save their money. Hayek refers to this as "forced saving," and denounces it for interfering with individual freedom. There are other, more insidious results of 'forced saving', however:
Eventually incomes will rise; and since preferences of agents have not changed, consumption demand will go up. Prices of consumer goods will rise, indicating to producers that it is profitable to adopt less ‘roundabout [i.e., time- and capital-intensive]’ processes of production. As a consequence, capital has to be reduced againㅡa process that "necessarily takes the form of an economic crisis" (Hayek, ^Prices and Production^, p. 53). After a costly roundtrip, and on the assumption that the banking system will eventually correct its error, the system is bound to return its original equilibrium. [Kurz (1999)]
Kurz, H. (1999). “Sraffa’s Reception of the German Economics Literature: A Few Examples.” Storia del Pensiero Economico, (37).
Kurz, H. “The Hayek–Keynes–Sraffa Controversy Reconsidered,” in Kurz, H. (Ed.). (2000). Critical Essays on Piero Sraffa’s Legacy in Economics. Cambridge, UK: Cambridge University Press.
As a result, Hayek advocate a policy where banks keep the interest rates equal to the 'natural rate', both in order to preserve individual freedom (i.e., 'voluntary saving') and to prevent economic crisis.

Because of his familiarity with the theories of Wicksell, the economist who invented the concept of a 'natural rate of interest', Sraffa knew that one of the properties of the 'natural rate' was that it was the rate that would obtain in a non-monetary barter economy. Hayek explicitly had this property in mind throughout his argument, but as Sraffa points out, it contains an inherent blunder: Hayek had reduced the role of money to solely serving as a means of exchange, leaving out its crucial property as a store of valueㅡHayek has thus equated the role of money in his economy with that of any other commodity, meaning that his model was formally identical with a non-monetary barter economy. Since Hayek's 'emasculated money' was presupposed from the start, his model should have provided different results than a monetary model, but for some reason it did not. Therefore, Sraffa proposes, something extraneous must have been introduced into the model to account for Hayek's results.[:]

  • One such element is “the alleged permanence of the capital accumulated in the voluntary [saving] case as opposed to the ‘inevitable’ destruction of that accumulated in the forced saving case” (Lawler & Horn, 326). Hayek thus assumes a mechanism that will re-establish the proportion of money income saved and consumed after the expansion to the level they were before the expansion. 
  • Sraffa, for the sake of critique, supposes that such a mechanism did exist. He then finds a problem in distinguishing the results of forced saving from those of voluntary saving: “[f]or Sraffa, one income has been redistributed by...inflation and saved in the form of capital assets, [and] there is nothing to distinguish those assets from 'voluntarily' accumulated assets” (Ibid, 327).
  • This, as Hayek himself admits, is the central point of his theory: if the capital accumulated by the firm does not dissipate due to an 'inevitable' economic crisis, then 'forced saving' will bring about just about the exact same results as will voluntary saving. Such dissipation would need to happen as a result of redirection of income from producers to consumers through an increase of spending on the consumer's part, and a decrease in the producer's part, the quantity of money being held constant. 
  • Sraffa then notes that "[i]f the essential element of the story is the change in  proportions of the spending stream, it cannot be monetary expansions themselves that account for the crisis," showing that "something other than monetary effects are in fact responsible for Hayek's conclusions"  (ibid, 328). Sraffa concludes that the mechanism directing the proportionate spending of consumers and producers is "the supposed power of the banks to settle the way in which money is spent ... As Voltaire says, you can kill a flock of sheep by incantations, plus a little poison" (Sraffa, 49).
Lastly, Sraffa goes on to show the problem inherent in the concept of a 'natural rate' of interest. Recalling that  Hayek's model is formally identical with a non-monetary barter economy, it follows that any commodity could conceivably be used as the 'standard' by which everything else is valued. What this means in practice, however, is that as many different rates of interest could obtain in that economy as there are commoditiesㅡand these would all by definition be 'natural rates', though they would not be equilibrium rates. Consequently, Hayek is incorrect in automatically identifying the 'natural rate' with the equilibrium rate. In fact, in an expanding economy there will be no one equilibrium rate, since 'natural rates' of interest will be different for different commodities. Accordingly, the idea that 'forced saving' is caused by an interest rate (set by the banks) below the natural rate makes no sense, since there is no single natural rates with which the bank rate should (optimally) be equal.

This leads to the death blow for Hayek's theory:
In his reply Hayek admitted that "there would be ^no single rate^ which, applied to all commodities, would satisfy the conditions of equilibrium rates, but there might, at any moment, be as many "natural" rates of interest as there are commodities, ^all^ of which would be ^equilibrium rates^" (1932, p. 245). In his rejoinder, Sraffa noticed Hayek's admission with satisfaction, but he asked him to draw the consequences for his ideal maxim for monetary policyㅡthe proposition that they "all [...] would be equilibrium rates". Sraffa commented: "The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all the divergent natural rates" (1932, p. 251). [Kurz (1999)]
Though such an esoteric debate may seem largely inconsequential to the contemporary reader, according to Ludwig Lachmann, Hayek' graduate assistant at the time of the debate, Sraffa's blistering refutation played a critical role in eclipsing Hayek from the spotlight of economic theory during the 1930s. The encounter forced Hayek to rethink his positions, which eventually led to the publication of his ^Pure Theory of Capital^, but Sraffa's critique stuck so deeply into the core of Austrian doctrine that even contemporary Austrian economists (most notably Robert Murphy) are forced to work around the flaws in their concepts, which to some extent even affect their theory of business cycles.

(... ...)

2012년 12월 24일 월요일

[자료] Hayek Translated: Some Words of Caution

자료: http://www.hetsa.org.au/pdf/37-A-4.pdf
지은이: Hansjörg Klausinger (Department of Economics, Vienna University of Economics and Business Administration)

[자료목록] Bibliography on the Sraffa-Hayek Debate

자료: Bibliography on the Sraffa-Hayek Debate
출처: http://socialdemocracy21stcentury.blogspot.kr/

Followings are a copy of the writer of the above source:

* * *

If we want to understand why Hayekian versions of the Austrian business cycle theory (ABCT) fail, the Sraffa-Hayek debate is the place to start. I will start a bibliography here and update it.

The exchange itself began with Sraffa’s (1932a) review of Hayek’sPrices and Production (London, 1931), then Hayek’s (1932) reply, and Sraffa’s (1932b) response.

Lachmann (1994: 154) is an Austrian attempt to answer Sraffa on the multiple natural rates issue, but Murphy (in “Multiple Interest Rates and Austrian Business Cycle Theory”) has essentially admitted defeat on the issue of the existence of an unique natural rate of interest.

Many other Austrians, however, continue to use the unique natural rate concept in discussions of ABCT, and this is one of the major flaws in the theory.


Bellofiore, R. 1998. “Between Wicksell and Hayek: Mises’ Theory of Money and Credit Revisited,” American Journal of Economics and Sociology 57.4: 531–578.

Burger, P. 2003. Sustainable Fiscal Policy and Economic Stability: Theory and Practice, Edward Elgar, Cheltenham, UK.

Caldwell, B. 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek, University of Chicago Press, Chicago and London.

Cottrell, A. 1993. “Hayek’s Early Cycle Theory Re-examined,”Cambridge Journal of Economics 18: 197–212.

Harcourt, G. C. and P. A. Riach. 1997. A “Second Edition” of The General Theory (Vol. 1), Routledge, London.

Hayek, F. A. von, 1931. Prices and Production, G. Routledge & Sons, Ltd, London.

Hayek, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249.

Hayek, F. A. von, 1935. Prices and Production (2nd edn), Routledge and Kegan Paul.

Hicks, J. R. and J. C. Gilbert. 1934. Review of Beiträge zur Geldtheorie by F. A. von Hayek, Economica n.s. 1.4: 479–486.

Kyun, K. 1988. Equilibrium Business Cycle Theory in Historical Perspective Cambridge University Press, Cambridge. p. 36ff.

Kurz, H. D. 2000. “Hayek-Keynes-Sraffa Controversy Reconsidered,” in H. D. Kurz (ed.), Critical Essays on Piero Sraffa’s Legacy in Economics, Cambridge University Press, Cambridge. 257-302.

Lachmann, L. M. 1986. “Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect,” in W. Grassl and B. Smith (eds.),Austrian Economics: Historical and Philosophical Background, Croom Helm, London. 225–242. [reprinted in Lachmann 1994: 141-158.]

Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London. 141-158.

Lawlor, M. S. and Horn, B. 1992. “Notes on the Hayek-Sraffa exchange,” Review of Political Economy 4: 317–340.

Lawlor, M. S. 1994. “The Own-Rates Framework as an Interpretation of the General Theory: A Suggestion for Complicating the Keynesian Theory of Money,” in J. B. Davis (ed.),The State of Interpretation of Keynes, Kluwer Academic, Boston and London. 39–90.

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”

Myrdal, G. 1965 [1939]. Monetary Equilibrium, Augustus M. Kelly, New York.

Milgate, M. 1979. “On the Origin of the Notion of ‘Intertemporal Equilibrium,’” Economica n.s. 46.181: 1–10.

Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

[책, F.A. Hayek] Prices and Production and Other Works

자료: http://mises.org/books/hayekcollection.pdf
출처: Ludwig von Mises Institute

2012년 12월 22일 토요일

Some readings on Piero Sraffa (and F. A. Hayek)

Piero Sraffa’s Non-Economics: An Introduction, part I

Sraffa and Keynes on the definition of commodity-rate of interest (Nerio Naldi)

Multiple Interest Rates and Austrian Business Cycle Theory (Robert P. Murphy, Adjunct Scholar, Ludwig von Mises Institute)

Hayek's Transformation (Bruce J. Caldwell, History of Political Economy, Winter 1988 20(4): 513-541) .. subscription required, no free accession possible.

Critical Essays on Piero Sraffa's Legacy in Economics (Cambrdige Univ. Press 2000. Heinz D. Kurz eds., University of Graz, Austria)


2012년 12월 21일 금요일

Dic: on someone's part, on someone's behalf

1. on someone's part (or on the part of someone)

 △If you talk about a feeling or action on someone's part, you are referring to something that they feel or do.

  • There is no need for any further instructions on my part.
 △made or done by somebody
  • It was an error on my part.
.... Cobuild, OALD

2. behalf: Interest, support, or benefit.
  • in behalf of: For the benefit of; in the interest of.
  • on behalf of: As the agent of; on the part of.

3. on something/someone's behalf (or on behalf of something/someone)

 _1. as a representative of, representing, in the name of, as a spokesperson for
  • She made an emotional public appeal on her son's behalf. 
  • On behalf of my wife and myself, I'd like to thank you all.
 _2. for the benefit of, for the sake of, in support of, on the side of, in the interests of, on account of, for the good of, in defence of, to the advantage of, for the profit of
  • The honour recognizes work done on behalf of classical theatre. 
  • The pupils were enthusiastic in their fund-raising efforts on the charity's behalf.
 _※ Usage: On behalf of is sometimes wrongly used as an alternative to on the part of. The distinction is that [:]
  • on behalf of someone means ‘for someone's benefit’ or ‘representing someone’,
  • while on the part of someone can be roughly paraphrased as ‘by someone’.

4. behalf:

 _ 1. As the agent of or on someone's part (usually expressed as "on behalf of" rather than "in behalf of");
  • the guardian signed the contract on behalf of the minor child. 
  • this letter is written on behalf of my client.[Wordnet] 
 _ 2. For someone's benefit (usually expressed as `in behalf' rather than `on behalf' and usually with a possessive);
  • in your behalf
  • campaigning in his own behalf
  • spoke a good word in his friend's behalf".[Wordnet] 
 _ 3. Advantage; favor; stead; benefit; interest; profit; support; defense; vindication.

.... http://www.websters-online-dictionary.org/definitions/behalf

... Sep. 18, 2011, & Dec. 21, 2012 again

5. “In behalf of” vs. “on behalf of”
Q: Which is proper, “on behalf of” or “in behalf of”? 
A: Both expressions are correct, but they mean slightly different things. I discuss this in my book Woe Is I.

“In behalf of” means “for the benefit of” or “in the interest of.”
“On behalf of” means “in place of” or “as the agent of.”
So I might give a donation, “on behalf of” my gardening club, to be used “in behalf of” tree restoration in the park.


2012년 12월 20일 목요일

Dic: take someone to task

  • The country's intellectuals are also being taken to task for their failure to speak out against the regime.
  • He was taken to task for not reporting the problem earlier.
  • She took her assistant to task for/over her carelessness.

△If you take someone to task, you criticize them or tell them off because of something bad or wrong that they have done. (= rebuke)

△to criticize or reprove

△take someone to task (for): to strongly criticize somebody for something they have done

△to criticize or speak angrily to someone for something that they have done wrong.

■ take (call, bring, hold) to task: To reprimand or censure / to severely criticize someone

... COBUILD, COLLINS, LDOCE, CALD, The American Heritage/MacMillan

Dic: an idea (as a general understanding based on knowledge)

  • Could you give me an idea of how bad his injuries are? 
  • You must have some idea (=have at least a little knowledge) of what happened to the money.
  • Don't worry if you don't understand it right now - you'll get the idea (=begin to understand or be able to do something) .
■ idea [U & C] △a general understanding of something, based on some knowledge about it.
  • She doesn't have any idea where they've gone. [have no idea/not have any idea]
  • Can you give me a rough idea of how much the repairs will cost? [a general/rough idea(=a not very exact idea)]
  • I don't have the faintest idea what to get Rachel for her birthday. [not have the faintest/slightest/foggiest idea(spoken)]
.... LDOCE

2012년 12월 19일 수요일

Dic: awe (as an uncountable noun & a verb)


  • 1) overwhelming wonder, admiration, respect, or dread. 2) (archaic) power to inspire fear or reverence.
  • [N-UNCOUNT] Awe is the feeling of respect and amazement that you have when you are faced with something wonderful and often rather frightening: She gazed in awe at the great stones. 
  • If you are in awe of someone or if you stand in awe of them, you have a lot of respect for them and are slightly afraid of them. 
  • be/stand in awe of sb (also hold sb in awe): to admire someone and have great respect for them and sometimes a slight fear of them: All of the neighbours were a little in awe of my motherThe villagers hold them in awe and think of them as gods.
  • to inspire with reverence or dread. 
  • If you are awed by someone or something, they make you feel respectful and amazed, though often rather frightened: I am still awed by David's courage... The crowd listened in awed silence.

Synonyms: revere(1), worship, venerate, adore, idolize

Dic: wood vs. trunk (and, perhaps, flesh vs. body)

■ wood

  • △Wood is the material which forms the trunks and branches of trees: ex) Their dishes were made of wood... There was a smell of damp wood and machine oil.  ..a short piece of wood.
  • △the hard fibrous substance consisting of xylem tissue that occurs beneath the bark in trees, shrubs, and similar plants. (Related adjs: ligneous, xyloid)
■ trunk (of a tree)

  • △The trunk of a tree is the large main stem from which the branches grow.
  • △the main stem of a tree, usually thick and upright, covered with bark and having branches at some distance from the ground.


CF. flesh and (something like a) body
CF. 몸통(trunk, torso). 몸통을 보호하다: protect one's trunk[torso]
CF. tree trunk: 나무둥치, 수간(樹幹)
CF. 둥치(큰 나무의 밑동), 둥치(the base of a tree trunk)

2012년 12월 15일 토요일

[Excerpt of R. Skidelsky] Hayek versus Keynes: The Road to Reconciliation

자료: Hayek versus Keynes: The Road to Reconciliation, by Robert Skidelsky, 

in The Cambridge Companion to Hayek, edited by Edward Feser, (Cambridge University Press, 2006)

※ This reader thanks to the author for his kindly offering an insightful writing on the Internet.

* * *

(... ...)

i. Introduction

(... ...) Yet the brief encounter of 1944 discloses the common terrain on which they[Keynes and Hayek] might have fruitfully argued out their differences. This is the grounds on which, and the methods by which, liberalism could most successfully be defended. For both men were liberals in all important senses of the term. They both repudiated central planning Russian style. They disagreed about whether liberal values could best be protected by more or less state intervention in the economy, but neither gave a very clear indication of 'where to draw the line'.

The common ground was created by the run-up to the war, and by the war itself. The war clarified for both men the values they shared. 'Our object in this mad, unavoidable struggle', Keynes declared on 12 December 1939, 'is not to conquer Germany, but ... to bring her back within the historic fold of Western civilisation of which the institutional foundations are ... the Christian Ethic, the Scientific Spirit and the Rule of the Law. It is only on these foundations that the personal life can be lived'. The full employment which the war produced also whittled away their differences in economics. Hayek praised Keynes's anti-inflationary pamphlet How to Pay the War: 'It is reassuring to know', Hayek wrote to Keynes after reading his anti-inflationary pamphlet How to Pay for the War, 'that we agree o completely on the economics scarcity, even if we differ on when it applies'. In turn, Keynes cordially welcomed Hayek's Road to Serfdom: 'It is a grand book ... Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement, but in deeply moved agreement'.

This essay charts the path to their reconcilation.

ii. Different Temperaments, Different Backgrounds

Hayekians argue that Keynes represented the impatient, Hayek the patient, version of liberalism. [Hayek thought that Archilocus's famous line 'the fox knows many things, but the hedgehog knows one big thing' summed up the difference between Keynes and himself.] One 'big' thing which Hayek 'knew' was that all state intererece in the market system is evil.. The Fox, Hayek implied, knew this too, but felt he was clever enough to evade the trap, conjuring up new theories, arguments, policie for each occasion. Hayek, it might be said, was all of a piece; Keynes a man of many pieces. It is a self-serving Hayekian image, for the hedgehog wins the race in the end. Hayek was infuriated by the rapidity with which Keynes changed his theories. This seemed to show he lacked scientific principles. Statesmanship without principle, Hayek would have said, is the slippery slope to totalitarianism. Statemanship without prudence, Keynes would have replied, is the royal road to disaster.

The contrast between the fox and hedgehog suggest another: that between the administrator/politician and the scholar/scientist. Keynes came from an activist tradition: the ancient universities saw themselves as part of the British ruling class, pushing their graduates into the highest civil service. Keynes himself had three spells in Whitehall. As an emigre, Haye had scholarly detachment forced on him. His thinking was never tested by the reality of prospect of action. However, Hayek was not quite so detached as he made out. His fear of inflation, linked to the destruction of his own family fortune and the Viennese middle class by post-war hyperinflation, coloured all his supposedly Olympian economics. He went on warning against the dangers of inflatin in the 1930s long after deflation had become the problem.

The essential difference between them as theorists was that Hayek's economics was reverential, Keynes's was revolutionary. Hayek added important clarifictions to the Austrian school of Boehm-Bawerk, Menger and Mises; Keynes saw himself as overturning 'classical' economics, including those of his 'master', Alfred Marshall. Hayek was much more learned than was Keynes in the history of economic thought: he is right to say that Keynes disliked the 19th century and lacked knowledge of its economics and economc history. Hayek thought about economic theory within the framework of a tradition; for Keynes the important thing was to get the argument right on the page (or on the day). Keynes was the more creative thinker. This was partly the result of an innate quality of mind; but it was also partly because his training in economics was so superficial. Keynes had no difficulty in seeing his ideas as original; to Hayek they were simply the latest installment of age-old fallacies.

A final difference was one of intellectual manners. By the early 1930, Keynes and his followers felt a sense of urgency, almost of desperation, to get the idea accepted. It became the hallmark of Keynes's coterie to regard every economist outside Cambridge as mad or stupid; argumentative good manners were sacrificed to world salvation. On the other hand, there i near unanimous testimony to Hayek's intellectual hospitality. For example, when Robert Bryce, one of Keynes's students, decided, in 1935, to do some missionary work at the LSE, 'Hayek very courteously gave me several sessions of his seminar to expose [the new Keynesian ideas] to his students'. Hayek was much impressed by Menger's remark that the final victory of a scientific idea could only be secured by letting every contrary proposition run a free and full course. (... ...) The optimism of Cambridge confronted the fatalism of Vienna.

(... ...)

iii. Starting Positions 

Hayek believed hat the market economy was a smoothly-adjusting machine in the absence of credit creation by the banking system. Keynes saw monetary 'management' by the central bank, which could include credit creation, as the only way to keep it stable. This was the pith of their debate. Keynes won it, because he made the more relevant statements.

Hayek came to their debate in 1931 equipped with an 'Austrian' inter-temporal theory of value which Keynes lacked. This sought to demonstrate that an unimpeded market systemㅡone in which relative prices were free to adjust demand and supply simultaneously in all marketsㅡsecured the full employment of resources not jut at any moment of time but over time. The theory of capital and interest, which showed how this came about, rounded off neo-classical value theory, substituting the notion of dynamic for static equilibrium. The Austrian thus told a much more complete, and confident 'market' story than any available in Anglo-American economics.

In the Hayek story, the rate of interest was the price which adjusted decisions to save to decision to invest, in line with individual time-preferences. A high rate of saving was key to a progressive economy, ensuring that increasing quantities of machinery, and decreasing quantities of labour, were applied to the production of consumer goods.

The only problem was that the situation in the 1930 did not fit Hayek's story. There was massive unemployment of resources. So Hayek had to introduce money as the 'loose joint' in his theory in order to explain the phenomenon of the trade cycle. Monetary theory should concern itself with the question of 'how and when money influences he relative values of goods and under what conditions it leaves these relative values undisturbed'. The main conclusion he drew from this analysis was that a credit-money economy will only behave like a barter-exchange economy if banking policy can keep money 'neutral'ㅡthat is, provide a constant supply of money per unit of output, and above all prevent inflation. This wa difficult and almost impossible. So the trade cycle was inevitable. The best way of mitigating itㅡof limiting credit expansionㅡwas by rigid adherence to a full gold standard. In Hayek' view, the grea depression was the direct result of failing to follow this precept. Credit creation in the 1920s had distorted the system of relative prices, producing depression. There was no alternative to liquidating the inflation even though this might well deepen the depression for a time.

Keynes approached the same phenomena from the standpoint of the quantity theory of money. This states that the price level changes proportionately to the quantity of money. As such it si purely a theory of the value of money, when the level of output is taken as given. As such it could not explain fluctuations in output. However, there was a tradition, going back to Hume, and latterly reinforced by Irving Fisher, which held that it took time for a change in the money supply to have its full impact on the price level, and that during the interval when prices were rising or falling the economy could either expand or contract. This was the approach Keynes used in his Tract on Monetary Reform(1923).To get his 'transitional' results he introduced uncertain expectations. When the price level was changing, uncertainty about future prices prevented the instant adjustment of nominal interest rates and wages necessary to validate the quantity theory of money. Businessmen made 'windfall' profits in the inflationary upswing and windfall losses in the deflationary downswing. 'The fact of falling prices injures entrepreneurs; consequently the fear of falling prices causes them to protect themselves by curtailing their operations'. From the Tract comes his best-known phrases. Having agreed that QTM was 'probably ture' in 'the long run', he went on: 'But in the long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again'. This expresses, in typically striking language, his main requirement for a serviceable economic theory: it must be able to account for 'tempestuous' as well as 'flat' seasons, and prescribe prevention and cure for the former.

The institutional culprit in the Tract was the international gold standard, with sacrificed domestic price stability to exchange-rate stability. The policy conclusion was obvious: active monetary policy was needed to stabilise the domestic price level. This required abandonment, or at least severe modification, of the gold standard.

Both economists suffered from the handicap of using models to explain phenomenoa which could not occur if the models were correct. The models could be adjusted to reality only by means of ad hoc additions: Hayek's 'loose joint' theory of money, Keynes's 'stickness' of key prices. Keynes's approach was more politically attractive because it pointed to policies of prevention and cure, whereas Hayek's enjoined stoicism. He rejected Keynes's policy of stabilising the price level: a stable price level could disguise inflationary tendencies when prices ought to be falling. 'The bank could either keep the demand for real capital within the limits set by the supply of saving; or keep the price level steady; but they cannot perform both functions at once'. Questions to do with the role of the state in the economy, of rules versus discretion in monetary policy, of knowledge and ignorance in economics, of prescribing for the long term or the short term, all of which were to become the battleground between the Hayekians and the Keynesians, had been posed, though not yet sharply.

iv. Different Domains?

The main issue between Hayek and Keynes comes out in their explanations of the Great Depression. Both could claim to have predicted it. Hayek argued in the sping of 1929 that a serious setback to trade was inevitable, since the 'easy money' policy initiated by the US Federal Resere Board in July 1927 had prolonged the boom for two years after it should have ended. The collapse would be due to overinvestment in securities and real estate, financed by credit creation. For Keynes, looking at the situation in the autumn of 1928, the danger lay in the 'dear money' policy initiated by the Fed in 1928 in an effort to choke off the stock market boom. Savings, Keynes argued, were plentiful; there was no evidence of inflation. The danger was the opposite to the one diagnosed by Hayek. It was that of under-investment. 'If too prolonged an attempt is made to check the speculative position by dear money, it may well be that the dear money, by checking new investment, will bring about a general business depression'. For Hayek the depression was threatened by 'investment running ahead of saving'; For Keynes by 'saving running ahead of investment'.

Hayek's attempt to integrate 'monetary' and 'real' theories of the business cycle, as expounded in his book, Prices and Production(1931), has six main elements:

1. Volutary savings by individuals are decisions to give up a certain amount of consumption now in order to secure a greater quantity of consumption in the future.

2. New acts of saving cause the rate of interest to fall, thus reducing the cost of producer(or investment) goods relative to consumer goods. They thus send a signal to producers to switch from making consumer goods to making producer or investment goods. Capital and labour flow out of the consumer good to making goods into the producer goods sectors, leading to capital deepening. (Hayek variously calls this process lengthening the 'period of production', increasing the 'roundaboutness of production', or switching to 'more capitalistic methods of production'.) When completed, the elongated structure of production will make possible a greater amount of consumer goods per unit of capital and labour, ie., the price of consumer goods will be lower than before and the savers' real capital income will have gone up.

3. Following the Swedish economist Wicksell, Hayek called the price which secures a balance between saving and investment the 'natural' rate of interest. The economy will be in equilibrium when the market, or actual, rate of interet equals the 'natural' rate.

4. The equilibrium condition is continually secured in a barter economy. It may be satisfied in a money economy in which money is kept 'neutral'. Only a change in the 'effective' quantity of money could generate a disequilibrium process. When the banks create credit, a source of funds additional to voluntaty savings becomes available to finance new investment. The market rate of interest falls, the money value of investment rises, and resource are attracted to the producer goods industries as before. But now the market rate is below the 'natural' rate. The signals producers get to invest in new productive facilite do not correspond to the willingness of consumers to forego consumption. Instead, these consumers are 'forced to save' by the rise in the prices of consumer goods.

5. The result is an unsustainable structure of production. As the incomes of wage earners 'catch up' with the reise in prices, they will seek to restore their previous standards of consumption, thus liquidating the 'saving' needed to complete the roundabout processes. The turning point comes when the banks have to restrict credit (or raise interest rates) to protect their cash reserves. The crisis has to run its courses, as the structure of production returns to its old proportions. Hayek describes this retrorgressive movements as 'capital consumption'. It necessarily produces an economic crisis, with unemployment appearing quickly in the investment goods sector and only gradually being re-absorbed in the 'shorter' processes. Pumping more money into the economy may help temporarily but will make matters worse in the end.

The situation [Hayek writes] would be similar to that of a people in an isolated isalnd, if, after, having partially constructed an enormous machine which was to provide them with all necessities, they found they exhausted all their savings and available free capital before the new machine could turn out its product. They would then have no choice but to abandon temporarily the work on the new process and to devote all their labour to producing their daily food without any capital'.

6. In an elastic money supply banking system, the business cycle can never be entirely avoided. 'Money', wrote Hayek, 'will always exercise a determining influence on the course of economic events...'. There are both technical and political difficulties in keeping money 'neutral'. The 'natural' rate is unknowable; price stability is no proxy, since it can conceal inflationary tendencies. The only practical maxim is that the banks should be overcautious in supplying credit in the upswing. However the risks of mismanagement can be mitigated by rigid adherence to the gold standard. Hayek rejected fractional reserve banking. All banks should hold 100% gold reserve against deposits. This would rapidly reverse credit creation, limit 'malivestment', and ensure that the crisis is shallow and short-lived.

It is a very peculir story.[:]

(1) Hayek was never able to explain why the new structure of production made possible by credit creation was any less permanent than one which reflected voluntary decisions to save. As Keynes's colleague Priero Sraffa pointed out,[:]
  • 'One class has, for a time, robbed another class of part of their incomes; and has saved the plunder'. The 'forced' savings of the losers become the voluntary savings of the gainers; 
  • and if wage earners benefit in due course from the increased flow of consumption goods made possible by the more roundabout processes, the gainers do not thereby lose the additional real capital they have created. 
Few rejoinders show up more crushingly the limitations of Hayek's analysis.

(2) Even worse, Hayek provides no explanation of why a change in the quantity of money should have any effect on the structure of production at all. [:]
  • His story presupposes that changes in money worked themselves slowly and unevenly through the price system. 
  • But this is inconsistent with his assumption of perfect foresight and perfectly flexible prices. On this assumption, he has not explained the genesis of the cycle, he has simply confirmed the quantity theory of money! 
(3) A third fallacy was pinpointed by Keynes in his General Theory. This was the confusion of the rate of interest with the 'marginal efficiency' or expected profitability of capital.
  • An increased desire to save does nothing in itself to improve profit expectations. 
  • Au contraire, by lowering the prices of consumer goods, it depresses the profit expectations of all producers. This leads to a fall in aggregate income and a fall in actual saving. There is nothing to cause the rate of interest to change
  • Yet Hayek never renounced his early cycle theory and was still using it to explain 'stagflation' of the 1970s.
Keynes's Treatise on Money appeared six months before Hayek's Prices and Production. The following summary of the Treatise brings out the points of convergence and divergence in the two theories:
  1. Voluntary savings by individuals represent decisions to give up a certain amount of consumption now in order to secure a greater quantity of consumption in the future.
  2. The economy will be in (full employment) equilibrium when saving equals investment. This is equivalent to the market rate of interest being equal to the 'natural' rate.
  3. Saving and investment can diverge for expectational reasons unconnected with changes in the quantity of money.
  4. When 'saving runs ahead of investment' (the case which particularly concerned Keynes in the Treatise on Money) the economy goes into a 'free fall' till something 'turns up'.
  5. Keynes outlines the sequence in his 'banana parable'. He envisages an economy which only produces and eats bananas. He supposes an increase in saving ('for old age') with no increase in investment in new banana plantations. The prices of bananas must fall:
Well, that is splendid, or seems so. The thrift campaign will not only have increased saving, it will have reduced the cost of living. ... But unfortunately that is not the end of the story; because, since wages are still unchangedㅡand I assume for the moment that the selling price of bananas will have fallen, but not their costs od productionㅡthe entrepreneurs who run the banana plantantions will suffer an enormous loss...equal to the new savings of those peope who have saved...The continuance of this will cause entrepreneurs to tray and reduce wages, and if they cannot reduce wages they will [put] their employees out of work.. [Italics put by the author is not shown]

Keynes then discloses the 'full horror of the situation':

However much they [reduce wages] it will not help them at all, because..the buying power to purchase bananas will be reduced by that amount; and so long as the community goes on saving, the businessmen will always get back from the sale less than their cost of production, and however many men they throw out of work they will still be making a loss.

No position of equilibrium is possible until one of four things has happened: either everyone is out of work and the population starves to death, or entrepreneurs combine to keep up prices, or the thrift campaign falls off or peters out, or investment is increased.

6. It was the task of monetary policy to prevent or offset this dire sequence of events by pumping money into the economy; it was, in fact, the only balancer in the system.

Keynes explained:

Those who attribute sovereign power to the monetary authority on the governance of prices do not, of course, claim that the terms on which money is supplied is the only influence affecting the price level. To maintain that the supplies in a reservoir can be maintained at any required level by pouring enough water into it is not inconsistent with admitting that the level of the reservoir depends on many other factors besides how much water is poured in.

One can see that the two models diverge with Keynes's the third point. Whereas for Hayek savings are smoothly translated into investment, for Keyne there is nothing to align the two except stabilisation policy. Hayek was puzzled:

But what does it actually mean if part of current savings is used to make up for losses in the production of consumption goods...? It must mean that though the production of consumers's goods has become less profitable, and that though at the same time the rate of interest has fallen so that the production of investment goods has become relatively more attractive than the production of consumption goods, yet entrepreneurs continue to produce the two types of goods in the same proportion as before. Mr. Keynes's assertion that there is no automatic mechanism in the economic sytem to keep the rate of saving and the rate of investing equal might with equal justification be extented to the more general contention that there is no automatic mechanism in the economic system to adapt production to any other shift in demand. [Italics put by the author is not shown]

The italicised passage shows that Hayek had misunderstood the key point in Keynes's theory. But his conclusion about the nature of the theory was correct: there was no automatic stabilising mechanism to be found in it.

Both men confronted the world depression with severely dysfunctional theories.
  • Hayek was right to claim that Keynes had not shown saving and investment could diverge within the model of the Treatise, unless there had been a prior change in the quantity of money. 
  • Hayek had not shown why credit creation should start a cumulative process bound to end in depression. 
  • But whereas Keynes's policy of pumping purchasing power into a deflating system offered a hope of recovery, Hayek was still warning against Keynes's reflationary remedies. This was to earn him a savage retrospective rebuke from his erstwhile disciple Lionel Robbins : 
‘Assuming the original diagnosis of excessive financial ease and mistaken real investment was correctㅡwhich is certainly not a settled matterㅡto treat what developed subsequently in the way in which I then thought valid was as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating. I shall always regard this aspect of my dispute with Keynes as the greatest mistake of my professional career...’

One can see how Hayek's intransigent methodological individualism (or Caldwell calls his 'profound espistemological pessimism') hampered his economics. It led him to repudiate Keynes's espousal of macroeconomic remedies for depression, and indeed macroeconomics itself. He claimed that only subjective valuations count as causes: total quantities can exert no influence on individual decisions. This claim pinpoints the weakness in the Austrian economics of the day: the lack of a theory of expectations. Keynes understood that collective expectations entered into individual valuations, and that by controlling aggregates, governments can influence individual expectations. In reviving the neo-classical approach, Milton Friedman never repudiated macroeconomics. Today's 'inflation targeting' depends crucially for its success on 'managing' expectations, much as Keynes advocated in the Tract.

Keynes's (eventual) position was also problematic. He shared much of Hayek's epistemology (wholes have only a fictitious existence, social science is a moral, not natural, science, econometrics is philosophically flawed) yet still believed in macroeconomic policy which depends on national income accounts, econometric modelling, and government manipulation of aggregates. He thought government could manage total spending power only in a rough and ready way which would still be an improvement on laissez-faire. But the next generation carried this project much further. They thought the problem of limited knowledge facing the central manager was a contingent one, and that as statistics improved, so would the possibility of control. This reached its apogee in the 'fine-tuning' approach of the 1960s.

Hayek's repudiation of macroeconomics was proclaimed as a methodological principle; but one suspect it stemmed more from his exaggerated pessimism about the result of macroeconomic policy; in contrast, Keynes's embrace of macroeconomics derived from his eagerness to equip governments with the tools of economic management, even before his theory was really up to it. Keynes erred on the right side. He may have exaggerated the wisdom and integrity of governments. But he was surely right to believe that enough collective knowledge existed to improe the working of economies.

His rejoinder to Hayek's attack on his Treatise on Money, Keynes noted that 'our theories occupy...different terrains', Hayek's being a theory of dynamic equilibrium, his own being a disequilibrium theory. Both theories subsequently changed, but brought no meeting of minds. Ironically, Hayek dropped Walarsian equilibrium theor at exactly the moment Keynes embraced it. In his 1936 lecture 'Economics and Knowledge', he redefined equilibrium as a situation in which there exists a mutual coordination of plans. But given its impossible knowledge requirements, on which Hayek laid increasing stress, it became a purely fictional construction, of no predictive value. His eventual position seems to have been tht though an unmanaged market system had no strong tendency to full employment, monetary policy designed to improve the situation would only make matters worse as well as being inflationary. He came to regard his most important contribution to economics as his depiction of the market order as a discovery technique rather than a determinate system.

In Keynes's General Theory of Employment, Interest and Money(1936) the economy was always in equilibrium, but this need not be, and mostly was not, a full employment one. Keynes's adoption of the equilibrium method can be seen as the culmination of his attempt to provie a theoretical rationale for activist government. (...)

(... ...)

iv. How to Pay for the War

A war economy is faced not by inadequate but by excess demand, by inflationary, not deflatinary, pressure. At the same time it needs a high level of saving to effect the transfer of production from consumer to war goods. This transfer can be effected either by inflation-induced 'forced saving' or by heavy taxation, and other controls on civilian consumption. This is classic Hayekian territory. Keynes sought to avert the twin evils of inflation and confiscaion by an imaginative plan for 'compulsory saving' or 'deferred pay'.

His plan was announced in two articles in The Times on 14 and 16 November 1939, later expanded into a pamphlet 'How to Pay for the War'. His analysis of the problem was quite 'Austrian'. The government had started pumping money into the economy to expand war production. This was equivalent to extra investment in more 'roundabout processes' whose aim was to produce a greater quantity of a particular kind of consumption goodsㅡguns, tanks, aircraft. However since this extra investment did not represent any willingness of the public to reduce its consumption of civilian goods, the price level was pushed upwards. In Hayekian terms consumers were 'forced to save' by rising prices. But, after a lag, incomes too would start to rise and consumers would want to restore their previous consumption standards. Civilian consumption could then be suppressed only at tha cost of further and increasing inflation, or by price controls and rationing, or a mixture of both.

Keynes proposed an ingenious alternative. Consumers would be 'forced to save', not by inflatin or rationing but by means of a temporary, graduated surcharge on their post-tax incoms the proceeds of which would be made available as post-war credits. They would be left free to spend their reduced incomes as they pleased. The great advantage of compulsory saving, as Keynes saw it, over orthodox taxation or inflation, was that workers would not lose the benefit of their higher wages, only be obliged to postpone their spending. This was the plan which Hayek enthusiastically endorsed in The Spectator of 24 November 1940, without pointing out that the calculation of how much 'money' to take out of the economy was highly dependent on putting numbers to the aggregative analysis of the General Theory, one which repudiated on methodological grounds.

In the expanded pamphlet, How to Pay for the War, published on 27 February 1940, Keynes was forced to add sweeteners for the trade unions in the form of family allowances and 'iron raions' at subsidised prices; and a concession to the orthodox (including Hayek) in the form of a capital levy to discharge the liability created by the deferred pay. His plan (as opposed to the arithmetic underpinning it) was adopted only in part by Kingsley Wood in his budget of April 1941: in practice, Keynes lost the argument to the central planners, and regulation of aggregate spending tool second place to manpower planning, physical allocation of inputs, and rationing of consumer goods. The legacy of his plan, though, was a technique of macroeconomic management, which was not tied to these wartime expedients.

It is the underlying philosophy rather than the details of the scheme that concerns us here, and which won Hayek's approval. (...)