Sunday, March 27, 2011

The New Critics of F. A. Hayek

Any serious student of Austrian economics should be familiar with the arguments made by its critics. A sustained and honest attempt at intellectual engagement should be made in addressing their arguments, and efforts should be taken in effecting a possible synthesis between different views. As an example, I will use the work of three important critics of F. A. Hayek of late, and show that Austrian economics has failed to confront their criticisms directly.

1.) Ted Burczak. Ted Burczak has published in many areas related to Austrian economics (Keynes and uncertainty, Kirznerian entrepreneurship, and Hayekian subjectivism), but I think his most important contribution has been his critique of Hayek's incomplete subjectivism. Burczak describes Hayek as a postmodernist, but criticizes him for *failing* to extend his subjectivism to the area of law and jurisprudence. Burczak shows that Hayek's own subjectivism prevents him from defending the principle of the rule of law. Common law is, according to Burczak, non-neutral, and depends on subjective knowledge and interpretation of the facts. Moreover, rules are indeterminate and do not invariably follow the rule of precedent.

Austrians have not addressed this argument. And it is an important argument. It is true that the SDAE has recognized this book as important, but no serious discussion has taken place. Steven Horwitz wrote a review of the book for Reason, but the central themes are not addressed. Horwitz instead makes a libertarian defense of what he sees as the free society. Austrians need to decide whether Hayek's subjectivism is incomplete and flawed, or complete and immune from this criticism. As yet, no serious discussion has occurred.

2.) Fiona Maclachlan. Professor Maclachlan's book "Keynes' General Theory of Interest" is one of the best books on Austrian interest rate theory I have ever read. Maclachlan is the economist responsible for taking me into the fascinating field of Post Keynesian economics. She is a serious scholar, and is deeply knowledgeable about both Austrian and Post Keynesian economics. It is a shame she is not more widely recognized. Two basic points are made in her book: (1) the stock vs. flow debate is important to Austrian economics; and (2) Hayek's Ricardo Effect theory is seriously flawed. On the first point, Professor Maclachlan shows that the link between new savings (flows) and movements in the natural interest rate is impeded by the movement of existing bonds (stocks). Any new addition of savings will influence existing bonds in ways that overwhelm the effects new savings would have on the interest rate. This is an important criticism of Austrian economics. On the second point, Maclachlan shows that while increases in consumer demand lead typically to a fall in investment, decreases in consumer demand will not lead to an increase in investment.

I am not aware of any Austrian attempt to address these concerns.

3.) And finally I come to the economist who has done more than any other in attacking Austrian economics: Greg Hill. Greg Hill has published several important articles in Jeffrey Friedman's Critical Review. Students of Austrian economics must read his two articles "G. L. S. Shackle and the Economics of Ignorance" and "Keynes' Moral Critique of Capitalism" (these are not the exact titles), in addition to the two exchanges he had with Professor Horwitz. Greg Hill follows Shackle in showing that radical uncertainty prevents markets from achieving intertemporal coordination. Greg Hill has been influenced by Paul Davidson and Victoria Chick (and also, I would argue, Fiona Maclachlan), and has used this to great effect in challenging Austrian economics. The exchange he had with Steven Horwitz will show readers how far behind Austrians are in coming to grips with these important criticisms. For example, Professor Horwitz spends most of the space in his replies making the distinction between neo-classical economics and Austrian economics, while it is clear that Professor Hill already recognizes this distinction. He thus fails to address the more important criticisms of Professor Hill. Greg Hill attacks Austrian economics on the subject of capital and time, and also attacks both neo-classical and Austrian economics on the areas in which they are similar (loanable funds model and marginal productivity theory).

Three Austrian critics to read:

1.) Ted Burczak
2.) Fiona Maclachlan
3.) Greg Hill

Am I missing anyone?

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