The context of the first passage is clearly Hayek’s response to the charge that he advocated deflationary depression as a solution in the early 1930s:
“… a ‘secondary depression’ caused by an induced deflation should of course be prevented by appropriate monetary counter-measures. Though I am sometimes accused of having represented the deflationary cause of the business cycles as part of the curative process, I do not think that was ever what I argued. What I did believe at one time was that a deflation might be necessary to break the developing downward rigidity of all particular wages which has of course become one of the main causes of inflation. I no longer think this is a politically possible method and we shall have to find other means to restore the flexibility of the wage structure than the present method of raising all wages except those which must fall relatively to all others. Nor did I ever doubt that in most situations employment could be temporarily increased by increasing money expenditure. There was one classical occasion when I even admitted that this might be politically necessary, whatever the long run economic harm it did.A more striking statement by Hayek on public works can be found in another passage in Hayek’s essay “The Gold Problem” (originally published in 1937 as “Das Goldproblem,” but available in an English translation in Hayek 1999: 169–185):
The occasion was the situation in Germany in, I believe, 1930 when the depression was beginning to get quite serious and a political commission—the Braun Committee—had proposed to combat it by reflation (though that term had not yet been coined), i.e., a rapid expansion of credit. One of the members of the committee, in fact the main author of the report, was my late friend, Professor Wilhelm Röpke. I thought that in the circumstances the proposal was wrong and wrote an article criticising it. I did not send it to a journal, however, but to Professor Röpke with a covering letter in which I made the following point:‘Apart from political considerations I feel you ought not—not yet at least—to start expanding credit. But if the political situation is so serious that continuing unemployment would lead to a political revolution, please do not publish my article. That is a political consideration, however, the merits of which I cannot judge from outside Germany but which you will be able to judge.’Röpke’s reaction was not to publish the article, because he was convinced that at that time the political danger of increasing unemployment was so great that he would risk the danger of causing further misdirections by more inflation in the hope of postposing the crisis; at that particular moment this seemed to him politically necessary and I consequently withdrew my article.
To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations, and not by directly stimulating particular kinds of investment or similar kinds of public expenditure which will draw labour into jobs they will expect to be permanent but which must cease as the source of the expenditure dries up.” (Hayek 1978: 210–212).
“Even though there are many concerns about organizing public works ad hoc during a depression, everything speaks in favour of having public agencies perform during a depression whatever investment activities need to be carried out in any case and can possibly be postposed until then. It is the timing of these expenses that presents a problem, since funds are often extremely hard to raise in the midst of a severe depression and the accumulation of reserves in good times generally faces the objections mentioned above. There is little question that in times of general unemployment the state must intervene to mitigate genuine hardship either by disbursing unemployment compensation or, as in earlier times, by legislation to help the poor. (Hayek 1999 : 184).I would be curious to see other discussion of these passages in the scholarly literature, and especially the last one. Ebenstein, for example, maintains that Hayek was still disinclined to support public works though he conceded that they might work (Ebenstein 2003: 70–71; cf. Guest 1997: 59).1 In The Road to Serfdom (1944), Hayek appears to accept the possibility of public works spending even if “in experimenting in this direction we shall have carefully to watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure” (Hayek 2001 : 126).2
If fact, if Hayek really meant what he said in “The Gold Problem” all the rubbish one sees in Russ Roberts and John Papola’s Keynes vs. Hayek rap videos should be doubly embarrassing to them. In these videos they try and smear Keynesian countercyclical policy as “central planning,” yet it would appear that Hayek may actually have supported such a policy in a depression. Evidently the good Professor Roberts and Mr Papola should have read their Hayek more carefully. Perhaps they should make a new video exposing Hayek as a “wicked” and “evil” central planner, himself advocating policies that would take us down the dreaded road to serfdom.
But let’s turn to more serious points that emerge from these passages above:
(1) Hayek appears to have opposed deflationary depression in Weimar Germany in the early 1930s because of the political harm it would do, which presumably refers to the rise of Hitler and his Nazi party. He showed great astuteness there, a quality lacking in many of his modern Austrian progeny. Hayek’s solution was apparently increasing employment temporarily “by increasing money expenditure.”Of course, it really doesn’t matter to me whether Hayek advocated quasi-Keynesian policies in a depression in some circumstances. I think his economics is mostly wrong. But the sight of Hayek advocating public works spending is certainty of historical interest. It certainly puts Hayek in a different category from the hordes of Rothbardian Austrians urging liquidationism as the right solution in cases of recession or depression in all circumstances.
(2) If Hayek really wanted to provide “employment through public works at relatively low wages so that workers … move as soon as they can to other and better paid occupations” by government deficit financing or by money creation, then how is his solution to secondary deflation fundamentally different from a Keynesian one? The answer is that it would not be: Hayek comes very close here to advocating a Keynesian solution to the depression, if (and I emphasise this) the political considerations warrant it. This is still quite a startling insight.
(3) This statement from Hayek shows a side to him that should be driven home to modern Austrians:“There is little question that in times of general unemployment the state must intervene to mitigate genuine hardship either by disbursing unemployment compensation or, as in earlier times, by legislation to help the poor.”That should warm the heart of any social democrat. We should reclaim the Hayek who wrote that sentiment. Hayek was a Classical liberal who accepted the argument for a minimal state and here even state welfare for people in distress. If Hayek was pressed, how would he have justified such government welfare in ethical terms? I suspect he would have appealed to some utilitarian/consequentialist ethical theory, a theory which Mises also adhered to. Hayek was really far from the insanity of modern Rothbardian anarcho-capitalists with their natural rights propertarian ethical theory, which, when taken to its logical conclusion, would entail the destruction of our species.
George Selgin in his recent LSE debate with Skidelsky took Keynesians to task for (allegedly) smearing Hayek as a supporter of liquidationism in the early 1930s. But now it looks like Keynesians could turn the tables on Selgin: it was not mere monetary stabilisation that Hayek urged but fiscal policy. Is that what Selgin would support in a deep depression or to stop a deep depression from happening?
It is relevant here to note that the Austrian radical subjectivist Ludwig Lachmann also believed that a Keynesian solution to a deep depression could have worked:
“Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials.” (Lachmann 1973: 50).Notes
(1) Ebenstein says: “Hayek became considerably more integrated with the rest of economic academia, at least with respect to practical policy and personal comity—though not with respect to emerging mathematical method—after his initial grand entry at the London school of Economics. While he did not backtrack from his fundamental analyses, he countenanced and even advocated that activist monetary policies could be appropriate policy and that even public works might have a role to play in evening out the vagaries of the business cycle— though he was disinclined to take the latter direction because it ‘might lead to much more serious restrictions of the competitive sphere.’” (Ebenstein 2003: 70–71).
(2) I would also note that Hayek’s support for monetary stabilisation in his earlier writings is inconsistent with his call for monetary denationalisation later in life. How would the state prevent a collapse in the money supply when it had no control over it?
Ebenstein, A. O. 2003. Hayek’s Journey: The Mind of Friedrich Hayek, Palgrave Macmillan, New York and Basingstoke.
Guest, C. 1997. “Hayek on Government: Two Views or One?,” History of Economics Review 26: 51-67.
Hayek, F. A. von. 1937. “Das Goldproblem,” Österreichische Zeitschrift für Bankwesen 1.9 (September): 255–271. [English translation in Hayek 1999].
Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.
Hayek, F. A. von. 1999. “The Gold Problem” (trans. G. Heinz), in S. Kresge (ed.), The Collected Works of F. A. Hayek. Volume 5. Good Money, Part 1. The New World, Routledge, London. 169–185.
Hayek, F. A. von. 2001 . The Road to Serfdom, Routledge, London.
Lachmann, L. M. 1973. Macro-Economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences, Institute of Economic Affairs.