The Assumption that Consumption and Investment Move in the SAME Direction Over the Business Cycle Is Fundamental to Keynesian Macroeconomics

Hayek emphasized the trade-off between consumption today and consumption tomorrow (via saving and investment today): “The physical quantity of consumer goods per capita can only be increased by consistently devoting a larger part of productive resources to capitalistic investment rather than to immediate consumption.” One can illustrate the trade-off by drawing a production possibilities frontier between consumption and investment, as Roger Garrison has done in his important work developing Hayekian macroeconomics, particularly in the book Time and Money. Although the trade-off derives directly from the assumption of scarcity, and is today taken for granted by economists in the context of growth theory, Hayek noted that it is implicitly denied by all those economists who “assume that the demand for capital goods changes in proportion to the demand for consumer goods.” The most prominent such economists in 1932 were the “underconsumption” theorists of economic depressions, including John Maynard Keynes in his Treatise on Money  of 1930, which Hayek cited in this connection. Keynes amplified the underconsumption theme in his General Theory of 1936. The assumption that consumption and investment move in the same direction over the business cycle (by contrast to the trade- off acknowledged in the analysis of long-run growth) has been fundamental to Keynesian macroeconomics up to the present day.

—Lawrence H. White, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 11, Capital and Interest, by F. A. Hayek (Chicago: University of Chicago Press, 2015), xxi.