A Reply to Aguilar
Robert P. Murphy
Part I: The Legacy of Friedrich Hayek
Section III: Sideways and Backwards?
In this section Aguilar criticizes Hayek for originally depicting the structure of production flowing downwards, i.e. for placing time on the vertical axis. It seems that Aguilar can find no reason for this decision on Hayek's part, except that Hayek isn't familiar with mathematical conventions (of placing the independent variable on the horizontal axis) and/or did not fully understand the implications of the subjectivist revolution. Rothbard and Skousen are then faulted for carrying on with this initial mistake, even though "their master had himself rejected it" (Aguilar p. 8).
Rather than go through a sentence by sentence response, let me instead offer a completely different interpretation of what happened, one that casts the Austrian diagrams (as well as the quotations Aguilar uses in this section) in a much more positive light. First, it was perfectly natural for Hayek, and then Rothbard in MES, to place the higher order stages (terms used by Menger and B’hm-Bawerk, as Aguilar points out in an attempt to demonstrate the confusion in Hayek) higher on the diagram. Yes, this approach conflicts with the competing appeal of having time flow left to right on the horizontal axis (as Garrison's triangles work in his Time and Money 1), but it certainly is defensible to place "higher order stages," well, higher on the graph. 2
Second, Rothbard does not have "the numbers one through six on his graph printed backwards" (Aguilar p. 7). Those numbers aren't representing units of time, but rather the stages of production. Following Menger, the lowest order (consumer good) stage is the 1st order, the next highest stage is the 2nd order, and so forth. Had Rothbard followed Aguilar's advice, one could imagine a different critic lambasting the silly Austrian for labeling the 6th order stage with a 1, the 5th order stage with a 2, and so forth.
This raises the obvious question: Why not call the highest order stage the first, the next lowest the second, and so forth? There are (at least) two reasons for this. One is that we'd have to continually change the numbering based on what we included in the process. Menger's approach avoids this difficulty; the consumer's good is always the 1st order, regardless of how far back we push the analysis, even if we go back to axes carved by prehistoric men. A second benefit of Menger's numbering decision is that it reinforces the very subjectivist revolution that Aguilar accuses Hayek and Rothbard of abandoning. The consumer good is the first stage, i.e. the most important or fundamental one. Menger's scheme was designed for conceptual organization, not as a mechanical timeline of production.
My last objection to this section is Aguilar's treatment of Hayek's misgivings about the definition of capital. As Aguilar quotations Hayek, "The definition of capital as the produced means of production’is a remnant of the cost of production theories of value’Bygones are bygones in the theory of capital no less than elsewhere in economics. And the use of concepts which see the significance of a good in past expenditures on it can only be misleading" (Hayek qtd. in Aguilar, pp. 7-8).
Now in context, Aguilar thinks that here Hayek is finally recognizing his faulty decisions regarding the zero point of the time axis in Prices in Production. I think it is nothing of the sort. Hayek is here talking about the very definition of capital; his target is a much broader one than the choice of units on a Hayekian diagram.3
It is true that the use of Hayekian (or Rothbardian or Garrisonian) diagrams can lead to such (literally) backwards thinking, especially when the results are always couched in terms of the evenly rotating economy. Indeed I spend much of my dissertation chapter's critique of the pure time preference theory on just this issue.
Even so, I don't see how this subtlety relates to Aguilar's point in this section. Ironically, I think what has happened is that Aguilar accuses Hayek et al. of (a) failing to properly label time the way a mathematician should and (b) forgetting the insights of the subjectivist revolution. But really these criticisms cancel out! Precisely because they weren't arranging the diagram in the way Aguilar wants, their approach didn't commit them to backward-based definitions.
Hayek's main concern remains valid: If one wants to maintain a perpetual flow of consumption goods (however we define that), going forward, then one must have a currently existing stock of various capital goods and must maintain this stock over time. As I conceded above, it is certainly true that Hayek's and subsequent expositions sometimes glossed over the fact that the "biographies" of the currently existing capital goods are irrelevant, and that what is really important is how the capital structure must adapt starting now. But this is an understandable slip, since all of these complicated analyses assume that technology and other factors are held fixed. In any event, I do not find nearly the same ignorance or contradiction in the diagrams of Hayek, Rothbard, and Garrison as Aguilar perceives.
1 It's true that in the 1978 piece that Aguilar cites, Garrison had time flowing from right to left. To repeat, he switched it for his later book. For what it's worth, Garrison (in an email) said that there were no theoretical issues involved, it was just a matter of convenience of exposition. So I think Garrison would agree with Aguilar that the right-to-left flow of time was confusing, but he fixed the problem himself before (I presume) reading Aguilar's Critique.
2 By the same token, apparently Alfred Marshall chose the familiar axes for price and quantity not because of mathematical ignorance, but because he thought quantities were the independent variable to which prices adjusted.
3 As a side note, Rothbard does give a better, forward definition of capital’it really should be the reproducible factors of production, the ones that earn no net rent in the evenly rotating economy.