In that Rediff.com item, Sudhir Mulji tells the following story: “That during the period of sustained unemployment Kahn asked Hayek the question: ‘Is it your view that if I went out tomorrow and bought a new overcoat, it would increase unemployment?’ Hayek: ‘Yes, but it would take a very long mathematical argument to explain why.’”
This is the story as told by Joan Robinson in her Ely Lecture (published in the AER in 1971). Bruce Caldwell deals with the episode in his introduction to Vol. 9 of the Collected Works: Contra-Keynes and Cambridge. Kahn’s question was asked in the context of a boom-bust cycle--at the point where increased consumer spending cuts against the prior forced saving. Caldwell writes that “It is hard to imagine that Hayek was unable to explain the link between rising consumer prices and the slump, a link that was central to his theory.”
Caldwell goes on in a footnote (p. 25) to suggest the answer that Hayek might have given. “Your individual actions do not, of course, matter. However, if the government provides consumers with credit to expand their demand for raincoats and other consumer goods, firms will try to shorter the structure of production that much more quickly, causing unemployment in the captial goods industries to rise further. In addition, if consumption demand reaches an unsustainably high level, the structure of production will be shortened too much, ensuring additional readjustment problems in the future.”
Note: Hayek Lecture series begins May 27 at the London School of Economics.
