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Rethinking the Keynesian RevolutionKeynes, Hayek, and the Wicksell Connection$
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Tyler Beck Goodspeed

Print publication date: 2012

Print ISBN-13: 9780199846658

Published to Oxford Scholarship Online: September 2012

DOI: 10.1093/acprof:oso/9780199846658.001.0001

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Pure Theory of Capital

Pure Theory of Capital

(p.118) Chapter 5 Pure Theory of Capital
Rethinking the Keynesian Revolution

Tyler Beck Goodspeed

Oxford University Press

This chapter tackles Hayek’s Pure Theory of Capital (1941), and various elucidations of the “Ricardo effect.” Here, the chapter examines how Hayek absorbed many of Sraffa’s criticisms and moved away from the “average period of production” concept to focus instead on time-rates of return on investment, which, we argue, bear a close resemblance to Keynes’s marginal efficiency of capital. Moreover, Hayek’s revision of the theory of capital presented in Prices and Production frees him from the post-Keynesian critique of Neoclassical capital theory, as exhaustively laid out in the Cambridge capital controversies. Freed of the dual albatrosses of reswitching and capital reversing, Hayek develops a theory of general equilibrium that, unlike modern intertemporal general equilibrium, points to a truly dynamic theory of economic change as a process in historical time. The chapter concludes by pointing out how this vision has inherent affinities with Keynes’s and suggests that Hayek failed to appreciate these affinities because he chose to conduct his analysis in strictly real terms and under the assumption of full employment. Relaxing these assumptions, we see that Hayek and Keynes were in many ways theorizing on opposite sides of the same, Wicksellian coin.

Keywords:   Hayek, reswitching, capital reversing, general equilibrium, Ricardo effect, Pure Theory of Capital, Prices and Production, economic change

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