Honest Money

Amazon.com publishes my review of

Friedrich August von Hayek,
Contra Keynes and Cambridge: Essays, Correspondence (Collected Works of F. A. Hayek) ,
Indianapolis: Liberty Fund Inc.; 2009 new ed.
http://www.amazon.com/Contra-Keynes-Cambridge-Correspondence-Collected/product-reviews/0865977445/ref=cm_cr_dp_all_helpful?ie=UTF8&coliid=&showViewpoints=1&colid=&sortBy=bySubmissionDateDescending

the scientific method

How can we have any knowledge of the world around us?

We possess a tool, reason, which allows our intellect to expand our knowledge of things, to expand our judgements of objective “Truth” about “Reality”.

Reason is at work in any science when the practitioner of the science associates her existing judgements and concepts in order to expand her judgements. Logic studies the laws with which the tool of reason has to comply to arrive at valid expansions of knowledge.

Logic is the tool of all sciences. Logic is itself a science. Science is the knowledge of conclusions demonstrated on the basis of some principles which are either assumed as hypotheses or taken from the evidence of experience. The scientific method is the orderly way of arriving at Truth in a given scientific discipline.

Realism presupposes, and thus entails for all further judgements, that the real is given to the subject, i.e., given to the practitioner of any science, and that the real is knowable by the subject, knowable at least to some extent, even if that extent is very limited. The realist thesis accepts that the real can be caught by thought. The result of the thing being caught by the intellect is ad-equation between the thing and the intellect, which is Saint Thomas’ definition of Truth.

Once realism has been accepted as a starting point, once it has been accepted that the real can be caught by thought, one can and must trust discursive thought as a truthful representation of reality, to the extent that reason elaborates or expands its primary knowledge of the real through reasoning in accordance with its own laws. It is the task of the science of logic to describe the laws with which reason has to comply when it, reason, is reasoning in order to expand its knowledge of the Truth.

Hayek agrees and accepts the realist thesis.

For Hayek, knowledge is based on experience. As man’s experience is limited, Hayek has a profound epistemological pessimism which leads him to a kind of stoicism regarding policy. (page 48)

Whereas Hayek agrees with realism, John Maynard Keynes does not agree.

For Keynes, it is not reality but intuition (page 248) that is caught in knowledge, or that is caught by the intellect when it arrives at Truth through ad-equating itself to or with the thing. His intuitions lead Keynes to thinking in “measurable” aggregates such as total demand, investment or output and to thinking that empirically established values of these presumed “constants” would enable us to make valid predictions. (page 242) Such intuitions conceal all that really matters. (page 246) His theories thereby neglect more fundamental “real” phenomena (page 197) and displace micro-economics by macro-economics. (page 60)

Contrast this Keynesian displacement of micro-economics by macro-economics to Hayek’s admission that the schemata of micro-economics do not claim to achieve the quantitative predictions at which the ambitions of macro-economics aim. The science of economics should, for Hayek, nevertheless content itself with the more modest aims of the former because we can thereby gain more insight into at least the principle on which the complex order of economic life operates. (page 246)

Once Keynes has decreed that it is his intuitive aggregates, and not reality, that are caught by true knowledge, no judgement that the real thing can be caught by the thought of intellect, no judgement that Truth in the sense Saint Thomas defined it is present, is any longer presupposed in ulterior judgements which, the latter, can be based on any intuition, even on an intuition contradictory to the intuition which originally displaced reality.

One such intuitions led Keynes to the peculiar fallacy of believing that a general crisis can be averted by extension of credit (page 119), the fallacy of believing that the creation of additional money will lead to the creation of the corresponding amount of goods, although such belief was bound to lead to the revival of more naive inflationist fallacies which we thought economics had once and for all exterminated. (page 243)

Contrast this to Hayek’s fundamental point that the business cycle is an unfortunate but an unavoidable concomitant of a credit economy. Attempts to eliminate the business cycle are likely to only intensify its effects. Hayek therefore put barriers to what others have done to advance in a path rather than supplying new ideas opening a path to new development. (page 31)

Contrast this again to Keynes who knows that something can be done at the level of his intuitive aggregates and therefore believes that it is possible to adapt the amount of money in circulation to what is necessary for the maintenance of existing contracts without upsetting the equilibrium between saving and investing. (page 144)

In the long run, we are all dead, aren’t we, Mr Keynes?

Keynes was however never prepared to accept the implications of credit expansion. He never recognized that progressive inflation was needed in order that any growth in monetary demand could lastingly increase the employment of labour. (page 248)

How could, asks Hayek and I paraphrase, Keynes’s ideas continue to be accepted once it had become clear that the temporary gain in employment achieved by credit expansion had necessarily to be paid for by even more severe unemployment at a later stage? (page 248)

The answer has perhaps something to do with the fact once one gets, like Keynes, the opportunity to get away with the fallacy that it is intuition, not ad-equation between the thing and the intellect from which knowledge then has to be inferred, which gives us knowledge of the Truth concerning the world around us,
logic no longer provides the framework through which we filter common-sense data in order to arrive at an objective “Truth” about “Reality”.

At that stage, Keynes can get away with any new intuition even when the disastrous actual (long-term) results of the first intuitions become clear.

Science is then no longer the knowledge of conclusions demonstrated on the basis of some principles which are either assumed as hypotheses or taken from the evidence of experience. But the intuitive policy-recommendations of which Keynes had a-priori intuitive knowledge are then being presented as the conclusions from premises based on, or inferred from, principles which are fundamentally contradicted by experience.

The scientific method has thereby been repealed and, as a result, there is no more orderly way of arriving at Truth in a given scientific discipline, in this case in economics. The science of economics has thereby been displaced by “a” political economy, whatever the latter may be.

Ivo Cerckel
honestmoney@maktoob.com

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