The Relationship Between Full Employment and Structural Adjustment

Hoisted from the Archives: Tyler Cowen Defines John Maynard Keynes Is the Only True Austrian Economist

In Which I Demonstrate That John Maynard Keynes Is the Only True Austrian Economist…: I wrote:

Department of “Huh?!”: Tyler Cowen calls me a semi-pseudo Hayekian:

Assorted links: 5. Brad DeLong, slouching toward recalculation…

But that’s not it at all!

The point of my Anatomy of Slow Recovery is to build on Dan Kuehn’s use of Steven Horwitz’s jigsaw-puzzle metaphor to argue that Hayek and Schumpeter were completely and totally wrong. Monetarist and Keynesian policies to stabilize aggregate demand do not (as they claimed) interfere with structural adjustment. Rather, they are essential if structural adjustment is to proceed.

Tyler Cowen responds:

There is nothing in the recalculation story which requires hostility (or indifference) to AD stabilization, though some Austrians bundle the two positions. Early Hayek, by the way, wanted to stabilize nominal GDP. In any case, you are saying that a recalculation has to proceed.

I think that Tyler’s “though…” clause would be more accurate if the words “though some…” were replaced by “though nearly all if not every single one of the…”

I cannot bring to mind a single Austrian–either in the past few years or in the Great Depression–who does not bundle the “recalculation” story with hostility to policies–all policies: monetary, fiscal, and banking–to return nominal effective demand to its pre-crisis growth path.

For example, Joseph Schumpeter:

[There is a] presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future…. [D]epressions are not simply evils, which we might attempt to suppress, but forms of something which has to be done, namely, adjustment to change…. [This creates] the chief difficulty… most of what would be effective in remedying a depression would be equally effective in preventing this adjustment…

For example, Friedrich Hayek:

[It is] still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed. The only way permanently to ‘mobilise’ all available resources is, therefore to leave it to time to effect a permanent cure by the slow process of adapting the structure of production….

[I]nflation pushed far enough [would] undoubtedly turn depression into the sham prosperity so familiar from European postwar experience, [and]… would, in the end, lead to a collapse worse than the one it was called in to remedy…. [R]ecovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead…

The only True Austrian in Tyler’s “True Scotsman” sense that I have found is… John Maynard Keynes:

The General Theory of Employment, Interest, and Money: [If we] succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own…. [T]hen there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them…. [T]here is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect… competition…. [T]here is no more reason to socialise economic life than there was before….

[T]he result of [our] filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production…. Within this field the traditional advantages of individualism will still hold good. Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency–the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed….

But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty…. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.

Whilst… the enlargement of… government… in the task of adjusting… the propensitv to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it… as the only practicable… condition of the successful functioning of individual initiative.

For if effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

The authoritarian state systems of to-day seem to solve the problem of unemployment at the expense of efficiency and of freedom…. [T]he world will not much longer tolerate the unemployment… associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom…