Garrison Orally On Reswitching

The following is from the Question and Answer session for Roger Garrison's recent lecture, "Macroeconomics: The Boom and Bust Cycle" (starting at about 59:29):

Audience member: "Can you reconcile using Hayekian triangles with reswitching and [unclear]?"

Garrison: "Yeah. The question is, 'How do you reconcile the Hayekian triangle with the Cambridge Capital Controversy, which involves capital-reswitching and technique reversing. I got that backwards - isn't it technique reswitching and capital reversing. Let me just take a poll here. How many have heard of the Cambridge Capital Controversy and know about technique reswitching and capital-reversing? Good, OK, good. One guy.

Let me just give you a standing-on-one-foot explanation. Capital theorists in Cambridge - this is Cambridge, England - argued that Böhm-Bawerk didn't have it quite right. His math was too simple, and if you allow for inputs and outputs to be expressed by polynomials, instead of rectangles or linear inputs, you find that the production process could lengthen or shorten with the change in the interest rate. If the interest rate falls, maybe it will shorten, or maybe it will lengthen. And you don't know. You have to look at the math and see how it turns out.

And the way the math turns out, there are only trivial exceptions - very small exceptions to the proposition that a low interest rate encourages long-term investment. You can come up with counterexamples, but even Cambridge capital-theorists, like Joan Robinson - she wrote an article, "The Unimportance of Reswitching" - just the magnitude doesn't amount to anything. If you read Hayek's Pure Theory of Capital, he acknowledges that, yes, yes, you can have funny profiles that seem to run counter to the general proposition that a low interest rate encourages long-term production. But those are very trivial. I've published articles on this. I can give you a link to one. But one thing I observed is that to get numbers where the reswitching is visible to the naked eye, you have to have the interest rate changing from 100% to 50%, or something like that, which itself suggests how minor that distinction is.

There are actually more fundamental criticisms that are based on how the Cambridge capital theorists measure roundaboutness. And the Austrians don't really measure it. They don't need to measure it. It's enough to show you the pictures. You saw the picture of the Research and Development chemist. You saw the picture of the retail clerk. That's what we are talking about, however you describe that mathematically. So I think, economically, that just doesn't work.

There are economists - Post Keynesians are the main ones - who throw up that Cambridge Capital Controversy as a killer of Austrian Business Cycle theory. They see that as the basis for just dismissing Austrian Business Cycle theory, but I think with very little justification."

References:

• Roger M. Garrison (1979) "Comment: Waiting in Vienna", in Time, Uncertainty and Disequilibrium: Exploration of Austrian Themes (ed. by M. J. Rizzo), D. C. Heath and Company
• Roger M. Garrison (2006) "Reflections on Reswitching and Roundaboutness", in Money and the Markets: Essays in Honor of Leland Yeager (ed. by R. Kopl), New York:Routledge.