Hayek, Marx and crises

Sam Bowman and George Selgin say that Hayek deserves more credit than he’s getting, because the Austrian theory of the business cycle seems to fit the boom and bust of recent years rather well.
But it’s not just Hayek who had a theory that roughly fits the recent facts. So did Marx. He too described how a lack of real profit opportunities leads to what Austrians call malinvestments: “The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises.”
And in a chapter entitled “Credit and Fictitious Capital” he describes the boom of the mid-1840s. This was founded in part upon what we’d now call irrational exuberance. He cites a Mancunian manufacturer rejoicing in the opening up of Chinese markets after the Opium War: How can we ever produce too much? We have to clothe 300 million people."
And he describes how over-expansion was founded upon cheap and easy credit:

The enticingly high profits had led to far more extensive operations than justified by the available liquid resources. Yet there was credit-easy to obtain and cheap…Why then allow this splendid opportunity to escape? Why not go in for all one was worth? Why not send all one could manufacture to foreign markets which pined for English goods?…
Thus arose the system of mass consignments to India and China against advance payments, and this soon developed into a system of consignments purely for the sake of getting advances…which led inevitably to over-flooding the markets and a crash.

Now, I don’t say this to make any sectarian claim about whether Marx had a better or equal theory of cycles than Hayek, or who was the greater thinker. I believe - sometimes, I fear, uniquely - that we can learn a lot from both.
Instead, I do so to note that, in one sense, Hayek and Marx were on the same side of the fence - the fence being between those who think in terms of equilibrium and those who don’t. 
In the 19th century, this distinction took the form of Marx (and before him Malthus) arguing against Say’s law. Now, it takes the form of Austrians and various Minskyans and Keynesians arguing against (some) DSGE models.
Plus ca change, as Say would have said.

Comments

[Leigh Caldwell]

Duncan noticed something similar yesterday:

http://duncanseconomicblog.wordpress.com/2011/08/30/bank-failure-macroeconomics-keynes-hayek-marx-minsky/

[Duncan]

Excellent post.

I got 'a bit Marxist' on the US a year ago.

http://duncanseconomicblog.wordpress.com/2010/08/11/the-us-economy-a-crisis-of-capitalism/

D

[vimothy]

I'm not sure I agree whether Marx would be on one side of the "equilibrium thinking" fence and DSGE models on the other. For a start, equilibrium in the context of a DSGE means roughly what stock-flow consistency means in Godly and Lavoie's PKE models. Equilibrium simply means that resources don't appear or disappear: they are all accounted for at all times. What people used to think of as "disequilibrium" would still be called equilibrium in the context of a DSGE. Instead, "disequilibrium" would imply that something logically impossible or inconsistent is happening.

Also, AFAIK, plenty people have put Marx into both static and dynamic GE models, e.g. Boldrin, Roemer, etc.

[Jimmy Hill]

Shorter version: "Two great thinkers both had something interesting to say".

It's a testament to how firmly gripped some people are by their ideology that this post even had to be written.

[CahalMoran]

ABC doesn't fit the crisis well at all, because it was a story of excess consumption and asset price inflation. Austrian theory is based around malinvestment in capital goods. Hayek tried to get around this by redefining consumer durables as capital goods, but, erm, you can't do that.

I believe Jean-Baptiste Say would have said 'I agree with Marx, Malthus and Keynes':

http://delong.typepad.com/sdj/2011/04/hoisted-from-the-archives-macroeconomics-is-not-hard.html

Right now he'd be saying 'how the hell can you idiots believe general gluts are impossible when there's clearly one in front of you?' Or something.

[BT]

Bingo. The very concept of equilibrium is fine for chemistry but useless for economics.

Say's law, IS-LM, DSGE are all flawed thinking.

Economics needs to aquire a mechanistic understanding - how the bank credit system works and how it can cause bubbles and other phenomena like business cycles.

This is what Austrians try (and fail) to do and what post-Keynesian circuitists/ chartalists (aka Modern Monetary Theory types) actually achieve.

[BenP]

"Instead, "disequilibrium" would imply that something logically impossible or inconsistent is happening."

Not even wrong then.

[vimothy]

No, it is obviously quite possible for DSGE output to be wrong, if, e.g., you are interested in predicting the time path of some aggregate in response to a change in govt policy.

Equilibrium just means that everything that comes from somewhere goes to somewhere; that everything that happens is accounted for rigorously. It's directly analogous to stock-flow consistency.

Would you also describe SFC models as "not even wrong"? Even though we're told that they were one of the few to predict the crisis?