Friedrich August von Hayek, A Rejoinder to Mr. Keynes (November 1931)

Hayek’s journal rejoinder intervenes in his exchange with Keynes over the Treatise on Money. Written before he could complete the second part of his more systematic criticism, it confines itself to Keynes’s immediate reply and postpones several issues, including the natural rate of interest. Its central contention is that Keynes has neither clarified his fundamental concepts nor explained the economic processes behind his equations. The argument moves from demands for definitional precision to a critique of the saving–investment discrepancy, then to a defence of interest-rate adjustment grounded in capital theory. Beneath its sharp polemical tone lies a methodological objection: an accounting relationship cannot, by itself, explain disequilibrium or establish how to remedy it.

Hayek first protests that Keynes has answered detailed objections with general accusations against another work rather than identifying particular errors. He then restates the ambiguities that, in his view, obstruct substantive discussion. Does investment include changes in the value of existing capital, or should those changes count as profit? Does the remuneration of productive factors include interest? How can the same symbol represent both current income and the production costs of current output when expenditure and the sale of its resulting product occur in different periods? These are questions about the connection between monetary accounts and production through time, not merely disputes over terminology.

Is it not the least we can ask from him that at any rate at this stage he should commit himself to a definite and unequivocal definition of his concepts?

For Hayek, definitions must establish what the equations actually describe before those equations can carry explanatory weight. The temporal discrepancy between expenditure and receipts is especially important: current costs need not equal current income, and changes in capital values complicate any inference about profits drawn from their difference.

The central dispute concerns whether saving can exceed investment without a change in the effective quantity of money. Hayek had interpreted Keynes as ultimately requiring such a monetary change; Keynes’s reply now appears to treat savings used to cover entrepreneurial losses as an independent explanation. Hayek tests this through an entrepreneur who earns less than his expected normal remuneration, reduces personal consumption accordingly, but maintains expenditure on production. Under Keynes’s terminology, the reduction counts as saving without corresponding new investment. Hayek accepts that this follows from the definitions but denies that it explains the losses or the discrepancy.

To say that the excess of saving over investment is the cause of the losses (or the reverse) has no sense whatever.

The force of this objection is causal. The example begins by assuming windfall losses and then redescribes those losses as an excess of saving over investment. It does not identify the disturbance that produced them, and therefore does not show why additional bank lending to investors would remove it. Hayek also asks how aggregate windfall profits or losses in Keynes’s sense can arise if money continues to circulate, none is hoarded, and no new money enters. He distinguishes this problem from ordinary profits associated with changes in existing capital values, which he considers neglected in Keynes’s analysis. Likewise, selling securities to a bank and hoarding the proceeds need not increase the effective quantity of money.

Hayek next shifts from aggregate accounting to the allocation of production. If saving increases, consumption-goods production becomes less profitable while falling interest makes investment-goods production relatively more attractive. Continuing to produce both kinds of goods in unchanged proportions therefore requires explanation. Keynes’s denial of an automatic mechanism equating saving and investment seems to Hayek to overlook the broader price mechanism through which production responds to altered demand.

I begin to wonder whether Mr. Keynes has ever reflected upon the function of the rate of interest in a society where there is no banking system.

This deliberately provocative question separates interest’s coordinating role from banking arrangements. Hayek argues that monetary analysis must rest on an account of the underlying structure of capitalistic production. Although he concedes that capital theory is imperfect, he regards Böhm-Bawerk and Wicksell as providing a substantially better foundation than Keynes’s treatment. His defence of their framework supplies the rejoinder’s positive conceptual move: saving changes relative demand and interest rates, thereby influencing the composition of output.

This is an entirely arbitrary assumption.

The immediate target is Keynes’s presumed assumption that increased saving and lower interest leave current investment-goods output unaffected. Hayek maintains that, absent special impediments, investment should respond in the same direction as saving; hoarding or changes in the money supply can interrupt that adjustment. He also disputes the inference that total income, including profits, must fall when consumption producers maintain output and borrow savings to cover their losses.

A substantial footnote qualifies this position. Hayek defines saving in relation to maintaining existing capital and explains that some current savings must replace losses in declining firms. Only savings beyond that replacement requirement constitute net savings and add to demand for producers’ goods. The clarification prevents his argument from reducing every act of saving to an equal addition to productive capacity. The rejoinder’s lasting significance lies in this conjunction of definitional scrutiny, causal criticism, and capital-theoretic adjustment: it identifies what Hayek believes Keynes’s monetary equations leave unexplained while reserving a fuller treatment for the continuing exchange.