Monday, July 24, 2017

David Glasner — Hayek, Deflation and Nihilism

At least Hayek later admitted he was wrong about deflation being useful in breaking rigidities.

Uneasy Money


Bob Roddis said...

He was right originally. He noted that strong and violent labor unions violently interfered with a proper re-pricing of labor in the real world. In fact, he claimed that the reason why Keynes wrote his Ad Hoc "General Theory" was so that real union wages could be surreptitiously reduced through monetary dilution.

Andrew Anderson said...

Deflation is no more moral than the inflation caused by government subsidies for private credit creation.

It's a pity (actually a disgrace) that the misery loving Austrians can't see this but greed has a way of blinding them as does certain shiny metals.

Hint: The remedy for a barbed arrow is NOT to pull it out!

AXEC / E.K-H said...

Forget Hayek
Comment on David Glasner on ‘Hayek, Deflation and Nihilism’

There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Theoretical economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics had been hijacked from the very beginning by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Keen.

Political economists have achieved NOTHING of scientific value in the past 200+ years. Hayek was a political economist and utterly incompetent scientist. His foundational error/mistake/blunder consisted the assumption that the economy is inherently stable and heals itself. This has never been more than an assertion. No proof has ever been given. Worse, it can be proved that the market economy is inherently unstable.

Economics is a system science. Accordingly, the correct approach is not microfoundations but macrofoundations. The elementary version of the correct (objective, systemic, behavior-free, macrofounded) employment equation is shown on Wikimedia:#1

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. Fact is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what microfounded economics teaches.#2

Hayek’s vacuous theoretical blather in the 1930s boiled down to the proposal of flexible wage cuts: “Hayek viewed deflation as potentially beneficial if it would break the rigidities obstructing adjustments in relative prices.”

Hayek obviously had no idea how the market system works. The correct employment equation shows that a reduction of the wage rate W reduces employment L. This means that the market economy is inherently unstable. The commonsensical reaction to unemployment is a fall of the wage rate, but this increases unemployment.

The lethal methodological blunder of microfounded employment theory consists in the Fallacy of Composition, i.e. the illegitimate transfer of truths that hold for one firm/market onto the economy as a whole. False theory leads to false policy guidance. Scientifically incompetent economists bear the intellectual responsibility for the social devastation of mass unemployment.

“Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

Hayek was one in the long line of scientifically incompetent political economists who actively participated in the dustification of the market economy. He will find his ultimate proto-scientific resting place in the close neighborhood of flat-earthers.

Egmont Kakarot-Handtke

#1 For details see ‘Essentials of Constructive Heterodoxy: Employment’

#2 For details see cross-references Employment