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Recursive utility, increasing impatience and capital deepening: F.A. Hayek's 'utility analysis and interest'

Arash Molavi Vasséi

The European Journal of the History of Economic Thought, 2015, vol. 22, issue 6, pages 1000-1041

Abstract: This paper argues that F.A. Hayek anticipated the notion of 'recursive utility' and analytically reconstructs his informal exposition of the optimal saving process . The scope of analysis is restricted to Hayek's largely unrecognised contribution in Utility Analysis and Interest in 1936, restated as chapters 17 and 18 in The Pure Theory of Capital , first published in 1941. It is shown that Hayek characterised efficient dynamic choice as an infinite series of two-period optimality conditions by transforming an infinite-horizon optimisation problem into a perpetual confrontation of current and prospective utility, that he hinted at the axiomatic base of stationary and weakly separable dynamic preferences, and that he endogenised the subjective discount rate to substantiate his claim that the interest-rate path in a perfect-foresight equilibrium is unidirectionally determined by the marginal productivity of investment (and not by thrift). Hayek's vision of dynamic social efficiency and dynamic equilibrium is completely characterised.

Date: 2015
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