Keynes Does Not Study the Production Structure, But Suppresses It in the Concept of “Aggregate Investment”

From Hayek’s point of view, the major deficiency in The General Theory is that it is not based on a theory of capital (Hayek [1941] 1952). According to Hayek, the market is a network of millions of companies that complement and coordinate with each other intertemporally and synchronically, forming an extremely complex production structure. In order to understand how and why this structure is coordinated or discoordinated, we need to apply a theory allowing us to study the way it works. However, Keynes does not study this production structure, but suppresses it in the concept of aggregate investment. This is why Hayek thought that Keynes was not able to understand the causes of and the solutions to economic fluctuations.

According to Hayek, the absence of a theory of capital meant that in the model developed in The General Theory, time is not considered as a relevant variable. In the Keynesian world, when demand increases, a parallel increase in the supply of goods appears almost instantaneously. Therefore, for Keynes, the structure of production does not need a significant amount of time to produce the necessary additional final goods to meet additional consumer demand (Hayek [1941] 1952). Thus, The General Theory never considered that a shortage of supply may occur. In Hayek’s opinion, this approach is wrong.

According to him, time is a central variable in understanding any production process. The dynamic “balance” of any structure of production depends on an adequate coordination between the “ripening” of investments in the form of final goods and services and the income generated by such investments in the form of final demand. Thus, for Hayek, the biggest economic problem is that consumers should be willing to “wait” long enough to allow the consumer goods to emerge in final markets. Otherwise the phenomenon of inflation will appear, and, as it will be explained later, this phenomenon will seriously endanger the sustainability of the production structure. This is why, for Hayek, savings are so important.

—David Sanz and Juan Morillo, “Hayek's Hidden Critique of The General Theory,” Journal of Reviews on Global Economics 4 (2015): 214-215.