Tuesday, November 9, 2010

Paul Samuelson on Hayek and "Prices and Production"

From "A few remembrances of Friedrich von Hayek (1899–1992)," Journal of Economic Behavior & Organization 69, pp. 1–4. This selection on Prices and Production is quite harsh, but Samuelson has better things to say about other work that Hayek had done later in the article. Nevertheless, that other work is not the subject of our reading group!:

"Rise and Fall of 1931 Prices and Production

There were good historical reasons for fading memories of Hayek within the mainstream last half of the twentieth century economist fraternity. In 1931, Hayek’s Prices and Production had enjoyed an ultra-short Byronic success. In retrospect hindsight tells us that its mumbo-jumbo about the period of production grossly misdiagnosed the macroeconomics of the 1927–1931 (and the 1931–2007) historical scene.

When a centrist like me says this about an extremist like Hayek, readers have a right to reserve judgment. More weighty was the later opinion to the same effect of the conservative Lionel Robbins. It was Robbins who had brought Hayek out of Austria to the LSE. It was Robbins who wrote a 1934 Hayekian book entitled The Great Depression. Not so very long after 1934, Robbins repudiated his own early take, saying in effect, I must have been a bit loony at the time.
Aside from the substance of Hayek’s (1931) text, part of his short-lived popularity came from the fact that many in England, annoyed by Maynard Keynes’s unorthodox testimonies before the 1930 Macmillan Committee, hoped that Hayek would be the White Knight to slay the Black Dragon.

Productivity and reputation of Keynes itself fluctuated in Kondratief waves. His 1930 two-volume Treatise on Money posterity judged to have been an anti-climatic flop. But the deeper the drop into the 1929–1935 Great Depression, the more rapidly came the recognition of Keynes as top dog in the twentieth century. (In 1932 as a 16-year-old freshman, I asked my Chicago tutor, Eugene Staley: “Who is the world’s greatest economist?” He answered, “John Maynard Keynes.” For once I never became tempted to question the authority of my many great teachers.)

Gentle Charles Darwin had Thomas Huxley to be his bulldog for evolution. Sraffa (1932) must have been editor Keynes’s bulldog to annihilate Prices and Production, and its author. I never much admired Sraffa’s methodological contentions in that debate but at least his item did have the merit of introducing for the first time Sraffa’s novel concept of “the own rate of interest” in terms of corn or rye or caviar.

For my money more to the point was Richard Kahn’s simple oral 1932 statement:

"If Hayek believes that the spending of newly printed currency on employment and consumption will worsen our current terrible depression, then Hayek is a nut."

Alas, one fatal error eclipses a few elementary true truths á la Mises and Hayek: Easy money now often does entail tighter money later which will come as a surprise to uncompleted projects and new contingent contemplated investment projects. Hayek himself, naively, diagnosed the fall of his 1931 opus as due to the fact that his period-of-production mutterings there did not do full justice to the not-yet-completed Austrian theory of capital (Menger, Böhm et al.). Therefore, heroically but hopelessly, he wasted years on a task that he was grossly under-equipped to handle. Hayek’s (1941) The Pure Theory of Capital was not stillborn. But it was a pebble thrown into the pool of economic science that seemingly left nary a ripple
."

I share this to (1.) note the thoughts of a giant in modern economic thought on the subject of our studies, and (2.) to demonstrate that I'm not the harshest critic of Hayek out there!

Richard Kahn, by the way, is credited with shoving Keynes towards thinking more about employment than he had previously in the years between the Treatise on Money and the General Theory.

41 comments:

  1. As usual, Samuelson says nothing of substance. Most criticisms of Hayek have been similar to Samuelson's, in the sense that they do little to actually address Hayek's theory and instead opt to call Hayek "looney", because his theories go against what is already accepted by the mainstream.

    But, to be honest, I can't blame Samuelson too much, because I myself am too tempted to call Samuelson a second-rate intellectual.

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  2. I don't think that was actually the reason given for thinking Hayek was a looney.

    The rest of the article is more positive.

    Let me challenge you on this then - Hayek is not ridiculed for his position on the socialist calculation debate. He's celebrated for that. If this is all just Hayek-hate, then why didn't Prices and Production ever win Hayek the acclaim that the SCD position did?

    When people disparage Keynes's Treatise on Money or his Economic Possibilities for our Grandchildren, the standard Keynesian response is that these are disparaged because Keynes got it wrong in those cases. I'm not sure why so many Hayek fans find it hard to embrace the same prospect when the weight of opinion holds the same disaparaging reaction to certain pieces by Hayek.

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  3. Anyway - I have both critiques and praise for Hayek and I don't want people to mistake this for being unfair to Hayek. I'm sharing this because it's a specific discussion of the reaction to Prices and Production by a very important peer of Hayek's. That's worth documenting and sharing. I mean no ill-will towards Hayek (and I genuinely don't think Samuelson did either - I think he's simply being blunt).

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  4. I've read the article, Daniel. Samuelson actually writes that the Austrians lost the socialist calculation debate, namely to Lerner (I can partially agree, because by that time there was still no complete theory on the price mechanism, and so there was no complete theoretical alternative to socialist calculation). Hayek's contributions to the socialist calculation debate go well beyond Samuelson's simplistic interpretation of Hayek's knowledge problem (I suggest reading Hayek's Socialism and War for a better picture of Hayek's opinions on the socialist calculation debate). In short, Samuelson is not doing justice to "Hayek's contributions" (most of which were actually Mises's).

    In any case, his entire criticism of Hayek's Prices & Production is an appeal to authority, as he provides little substance in his criticism of Hayek's capital theory (he does mention the concept of the "average period of production", which was an obsolete theoretical notion proposed by Böhm-Bawerk and significantly rejected, or altered, by Mises) and instead refers to comments by his mentors and other contemporary economists.

    But, again, I think Samuelson's own economic beliefs say enough about his intellectual capability to decide how much weight to give to his criticism of Hayek.

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  5. "But, again, I think Samuelson's own economic beliefs say enough about his intellectual capability to decide how much weight to give to his criticism of Hayek."

    Well we agree on that at least... although perhaps in different ways.

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  6. Compare Hicks:

    “I can date my own personal ‘revolution’ rather exactly to May or June 1933. It was like this. It began . . with Hayek. His Prices and Production is one of the influences that can be detected in The Theory of Wages; it could not have been otherwise, for 1931 was a Prices and Production year at the London School of Economics . . I did not in fact find it all easy to fit in with my own ideas. What started me off in 1933 was an earlier work of Hayek’s, his paper on ‘Intertemporal Equilibrium’, an idea which I found easier to reduce to my preferred (Paretian or Wicksellian) pattern.” (John Hicks, The Theory of Wages, 2nd Edition,1963, p. 307)

    “.. it was from Hayek that I began [the breakthrough essay "Equilibrium and the Cycle" (1933), the original beginnings of Hick's influential work on the topics of intertemporal equilibrium, monetary theory, and trade cycle phenomena] “. (John Hicks, Money, Interest and Wages, Cambridge: Harvard U. Press, 1982, p. 28).

    “There were four years, 1931-1935, when I was myself a member of [Hayek's] seminar in London; it has left a deep mark on my thinking.” (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 97).

    B. Ingrao & G. Israel, “Hicks elaborated the concept of temporary equilibrium, perhaps the most original contribution of Value and Capital, following the path laid down by Hayek and the Swedish school.” (B. Ingrao & G. Israel, 1990, p. 239)

    “Hayek was making us think of the productive process as a process in time, inputs coming before outputs ..”. (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 359).

    “I did not begin from Keynes: I began from Pareto, and Hayek (footnote 10: There is evidence for this, in the paper ‘Equilibrium and the Cycle’) ..”. (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 359).

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  7. Compare Harrod:

    John Hicks, “It is not so well known that it [Keynes's and my own move from thinking in terms of price-levels and the rate of interest to thinking in terms of inputs and outputs] is matched by a movement from Hayek to Harrod. I once asked Harrod what had put him on to the construction of his so-call ‘dynamic’ theory; he said, to my surprise, that it was thinking about Hayek.” (J. Hicks, 1982, pp. 340-341)

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  8. Compare Alchian:

    “ALCHIAN: Two things you [Hayek] wrote that had a personal influence on me, after your Prices and Production, were ‘Individualism and Economic Order’ [sic -- Alchian certainly has in mind Hayek's 'Economics and Knowledge'] and ‘The Use of Knowledge in Society.’

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  9. More Hicks:

    “I remember Robbins asking me if I could turn the Hayek model into mathematics .. it began to dawn on me that .. the model must be better specified. It was claimed that, if there were no monetary disturbance, the system would remain in ‘equilibrium’. What could such an equilibrium mean? This, as it turned out, was a very deep question; I could do no more, in 1932, than make a start at answering it. I began by looking at what had been said by .. Pareto and Wicksell. Their equilibrium was a static equilibrium, in which neither prices nor outputs were changing .. That, clearly, would not do for Hayek. His ‘equilibrium’ must be progressive equilibrium, in which real wages, in particular, would be rising, so relative prices could not remain unchange .. The next step in my thinking, was .. equilibrium with perfect foresight. Investment of capital, to yield its fruit in the future, must be based on expectations, of opportunities in the future. When I put this to Hayek, he told me that this was indeed the direction in which he had been thinking. Hayek gave me a copy of a paper on ‘intertemporal equilibrium’, which he had written some years before his arrival in London; the conditions for a perfect foresight equilibrium were there set out in a very sophisticated manner.” (John Hicks, Money, Interest and Wages, Cambridge: Harvard U. Press, 1982, pp. 6-7).

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  10. Compare Coase:

    “I will be discussing what happened in economics in England, but these were times when, to a very considerable extent, this was what happened in economics. The first episode I will discuss is local, but the economists involved were among the best in the world. In February 1931, Friedrich Hayek gave a series of public lectures entitled ‘Prices and Production’ at the London School of Economics . . They were undoubtably the most successful set of public lectures given at LSE during my time there, even surpassing the brilliant lectures Jacob Viner gave on international trade theory. The audience, notwithstanding the difficulties of understanding Hayek, was enthralled. What was said seemed to us of great importance and made us see things of which we had previously been unaware. After hearing these lectures, we knew why there was a depression. Most students of economics at LSE and many members of the staff became Hayekians or, at any rate, incorporated elements of Hayek’s approach in their own thinking. With the arrogance of youth, I myself expounded the Hayekian analysis to the faculty and students at Columbia University in the fall of 1931.” (Ronald Coase, “How Should Economists Choose?”, Essays on Economics and Economists, Chicago: U. of Chicago Press, 1994, p. 19).

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  11. Note that his is pure ad hominem and there is NO substantive engagement or argument of any kind offered"

    "If Hayek believes that the spending of newly printed currency on employment and consumption will worsen our current terrible depression, then Hayek is a nut."

    This is typical of Samuelson's smears against Hayek -- there is not factual, theoretically substantive argument offered -- instead there are massive and laughable misrepresentations, and character assassination.

    Samuelson was a bully, a bullshit artist, and an ideological knifesman, when it came to addressing Hayek and his work.

    He wasn't a scientist or a scholar.

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  12. Greg -
    1. Please don't do the kind of defensive trolling here that you do elsewhere. We're holding a reading group on Prices and Production and that kind of commenting can really disrupt the flow.

    2. You have absolutely no need to defend Hayek. I don't know a single person here, myself included, that doesn't have a deep respect for him. You also don't have to point out that Hicks thought very highly of him as well and was influenced by both the Austrian school and Keynes. I'm quite sure everyone here is aware of that as well.

    3. You really should not interpret every critique as a "smear" or "ad hominem". And if you expect to make a dent on my perspective, don't accuse Samuelson of doing those things in the same breath that you smear him. You lose all credibility.

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  13. Except what Samuelson wrote is crap -- and there is really NO "critique" here from Samuelson.

    And what Hicks wrote refutes part of what Samuelson very falsely assets.

    I don't buy your defense in posting this -- Samuelson is not writing from a position of good faith and honesty, and your defense doesn't acknowledge this, put covers for it, in a way that also lacks honesty and good faith (e.g, your uncredivle remarks on Hicks -- leading historians of econ thought don't know this history).

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  15. Could you clarify what Hicks refutes? Maybe I glossed over something. Samuelson doesn't seem to me to be trying to offer a critique here so much as describe the way Prices and Production was received. Kahn is the harshest, but he's quoting Kahn as an example of the reaction to Hayek.

    As for Hicks - maybe leading historians don't know this, but I've pointed it out here on several occasions and I know other bloggers that readers here follow have pointed it out as well - all I'm saying is that it's not the ace in the whole you may think it is. We are generally aware of it, and I'm not sure what it really changes to know that Hicks liked Hayek. I do too.

    btw - many of those reactions of Hicks to Hayek are very similar to points I was making when I was discussing the difference between Hayek and Wicksell in the immediately prior post. You may be interested in that.

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  16. P&P changed the way economics was done in the English speaking world -- you can't call that a "Byronic" success.

    And people like Hicks and Harrod never considered the "period of production" stuff "mumbo-jumbo".

    The Harrod intervention directly led to modern "growth theory" -- which has it's own pathologies because it lacks heterogeneous capital goods, just the stuff subtracted from Hayek.

    Samuelson wrote:

    "There were good historical reasons for fading memories of Hayek within the mainstream last half of the twentieth century economist fraternity. In 1931, Hayek’s Prices and Production had enjoyed an ultra-short Byronic success. In retrospect hindsight tells us that its mumbo-jumbo about the period of production .."

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  17. I can name names of prominent historians of economic thought who have written long papers and published books on the evolution and history of the economic of Hicks, who never mention role of Hayek in that story.

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  18. The point is that Samuelson is NOT offering critical analysis here. He's not in the role of a critic, he's in the role of someone out to marginalize his scientific and ideological rival via Keynes style insult and ridicule.

    He's doing what has been done to Hayek and his P & P for more the 50 years -- he's using Hayek as a punching bag, and "P&P" as a punching bag, as a strategy for dismissing work that is NOT engaged.

    It's disreputable.

    And it has been common across the past half century, and Samuelson has set the tone for the profession.

    Daniel said,

    "to demonstrate that I'm not the harshest critic"

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  19. Greg -

    I'm sure you can. That wasn't what we were talking about - we were talking about readers here. And who knows - maybe many of those haven't fully digested the point either.

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  20. Greg, what I am struggling to understand is why you think criticism, or simply a failure to come to the same conclusion you have come to, amounts to being insulting or ridiculing.

    Samuelson was not convinced by Hayek, and many others haven't been. Many have been convinced by Hayek. I have been semi-convinced.

    You need to deal with that, Greg. You like to call out "bullshiters" on your blog. There ARE bullshiters out there. But you've gotta grow up and learn to differentiate the unconvinced from the bullshiters - the critics from the insulters.

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  21. Daniel -- I find it hard to understand how you believe ridicule without substance can be counted as "criticism".

    Samuelson shows himself again and again to be ignorant of Hayek's work -- I see little evidence he even read most of it.

    Here are some choices. Samuelson didn't really know the stuff, he didn't understand the stuff, or he lied about the stuff.

    I've identified a number of these Samuelson misunderstandings on my blog and email lists over the years -- many of them are core, fundamental mistakes.

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  22. For this to matter we have to have evidence that Samuelson engaged the science.

    We have lots of evidence that he didn't.

    We have almost no evidence that he did.

    Daniel wrote,

    "Samuelson was not convinced by Hayek"

    If he didn't know or understand or seriously study the science, who cares what he thought of it, especially when Samuelson's scientific and political rivalry with Hayek shines through, and the substance just isn't there.

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  23. The way you talk about Keynes and Keynesians on your blog, I am not surprised in the slightest that you and I have different understandings of criticism and smearings.

    You will find criticisms of the Austrian school on my blog. You'll probably even find misconceptions that oughta be addressed. You will not find smears and if there were anything resembling a smear I wouldn't expect you to be the first to be able to identify it.

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  25. Samuelson didn't engage the science?!?!?! How do you expect anyone who did not agree with you from the beginning to take you seriously and professionally when you say things like that?

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  26. Daniel, you will find substantive criticisms of Hayek's work of the most serious kind on my blog.

    Samuelson's pot shots at Hayek don't count among them.

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  28. Daniel, show me were he did engage Hayek's work on a serious plane, other than in an off-hand remark about Hayek's knowledge problem in a paper on Schumpeter.

    Daniel writes,

    "Samuelson didn't engage the science?"

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  29. I'm sure you're fair to Hayek.

    What I'm refering to is going to your blog and reading "Zandi and Blinder - garbage in and garbage out" with no semblance of a developed argument or professional respect.

    I am not an Austrian. I have critiques of the Austrian school here. But I don't put up crap like that and I'm not hostile to my Austrian readers and I show a genuine interest in mutual dialogue with the Austrian school.

    Samuelson said Hayek was wrong. Samuelson may be wrong. On more than a few points I think he was. But until Samuelson trashes Hayek as a person I'm not going to have patience for you trashing Samuelson - particularly with absolutely nothing offered to back it up.

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  30. What science are you talking about? I assumed you were talking about economic science, but now you seem to be talking about Hayek's work specifically.

    Look Greg - let me put it this way - I have no time for trash talk and trash talk eats up too much space on here. You will not be posting trash talk on here, and I'm concerned about the prospect because almost everywhere else on the blogosphere I see you do it. Even on sympathetic blogs you post largely trash talk with very little constructive.

    You run a nice Hayek clearinghouse, and I appreciate that and I visit the site fairly regularly. But even there you vilify people who see things differently from you. I really don't want that on here.

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  31. Read Kling's argument. That's a fair summary of his argument.


    "Zandi and Blinder - garbage in and garbage out"

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  32. Of course I was talking about Hayek's science.

    That's the topic here.

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  33. I've read Kling on Zandi and Blinder - I'm pretty sure we discussed it extensively here (either him, or Russ Roberts making fundamentally the same point). His description of their method is fine. He raised concerns - I wasn't under the impression he called it "garbage" or said they were "bullshitting" us. I think he just said that their models used empirical estimates from past multiplier studies and applied it to the current stimulus package to give a sense of the counter-factual.

    Kling isn't under the microscope here - your treatment of people who disagree with you is. And generally speaking I've found that treatment off-putting.

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  34. Often my blog is a link blog -- I link to other people's arguments.

    One of my ARGUMENTS is that academic economists deserve far less respect from the public as "sciences" than they are given.

    Another theme is that the problem of bullshit is a real one (read Harry Frankfurt), and bullshit needs to be countered and exposed.

    Over the decades there has been a lot of bullshit aimed at Hayek.

    Samuelson has been at the head of the line.

    And I've documented it.

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  35. I have no problem with calling out bullshit - I thought we've already been over this.

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  36. In the sense that Harry Frankfurt describes, and as Kling represents their "science" and the fact that they don't disclose to the reader what is really going on, the concept of "bullshit" does seem apply to Zandi and Blinder.

    I can't go into details here, and I don't think you've well characterized Kling's contribution.

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  37. What have I mischaracterized? Zandi and Blinder make their methdology perfectly clear in the paper.

    My problem with you is you call people "garbage" and "bullshitters" without explaining your logic. It's a trivial task to highlight where Z&B describe their methodology in their paper - and this isn't some secret or suspect methodology either.

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  38. For anyone wanting a little more than "bullshiters and garbage" on Zandi and Blinder, this is from the paper itself:

    "Estimating the economic impact of the policies is not an accounting exercise, but an econometric one. It is not feasible to identify and count each job created or saved by these policies. Rather, outcomes for employment and other activity must be estimated using a statistical representation of the economy based on historical relationships, such as the Moody’s Analytics model. This model is regularly
    used for forecasting, scenario analysis, and quantifying the impacts of a wide range of policies on the economy. The Congressional
    Budget Office and the Obama Administration
    have derived their impact estimates for policies such as the fiscal stimulus using a similar approach."...

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  39. "The modeling techniques for simulating
    the fiscal policies were straightforward, and have been used by countless modelers over the years. While the scale of the fiscal stimulus was massive, most of the instruments
    themselves (tax cuts, spending) were conventional, so not much innovation was required on our part. A few details are provided
    in Appendix B."

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  40. I'm not going to post the three page appendix B on their methodology here, but you can find it here: http://www.economy.com/mark-zandi/documents/End-of-Great-Recession.pdf

    Please don't believe people who tell you this work is bullshit but conveniently don't elaborate.

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  41. You'll find Zandi and Blinder essentially explain exactly what Kling explains - Kling just has a little less faith in it than they do, which is perfectly fine.

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