Myopia and Optimal Growth: A Rational Reconstruction of F.A. Hayek's Capital Theory
Posted: 30 Oct 2011 Last revised: 14 May 2014
Date Written: October 23, 2011
This paper translates F.A. Hayek’s informal capital theory into a dynamic equilibrium model. The focus is restricted to Hayek’s largely unrecognized contribution in "Utility Analysis and Interest", published by The Economic Journal in 1936, being restated in "The Pure Theory of Capital", first published in 1941. The underlying premise is that Hayek adopts infant versions of modern analytical tools during his time at the London School of Economics (LSE) such that a rational reconstruction of his capital theory by established neoclassical tools is admissible. The major result is that Hayek’s capital theory contains a generalization of the Ramsey-Cass-Koopmans model. In concrete, Hayek provides the solution to an infinite-horizon deterministic social planner optimization problem in a one-sector economy such that the rate of pure time preference encapsulated in the discount factor increases in prospective utility. With respect to stability properties, he emphasizes that the system converges even in the special case of constant returns to per-capita accumulation.
Keywords: Hayek, capital theory, time preference, Mackey topology, recursive utility, optimal growth
JEL Classification: B21, B22, B31, B41, D90
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