But now I have just seen a new “Keynes versus Hayek” debate held in New York on November 8, and moderated by Sir Harold Evans (Reuters editor-at-large) that can be viewed here:
“Conversations with Harry Evans: Keynes vs. Hayek: An Economics Debate,” November 8, 2011.Speaking for the Keynesian side were James Galbraith, John Cassidy, Sylvia Nasar, and Steve Rattner. The Hayekians were Edmund Phelps, Lawrence White, Diana Furchtgott-Roth and Steve Moore.
There is a nice introductory talk by Nicholas Wapshott, the author of Keynes Hayek: The Clash That Defined Modern Economics. I have to say this debate is not as good as the previous one. I will review the speakers’ comments below.
I. James Galbraith’s Opening Remarks
James Galbraith makes some good points about the changes in Hayek’s views in the first minutes of his talk. As I have pointed out myself, Hayek later approved of monetary stabilisation and even limited fiscal policy.
Hayek even thought that political considerations justified government interventions to prevent the type of deflationary depression in Weimar Germany in 1932–1933. Galbraith makes the point that Keynes’s economics is still very much relevant for today.
II. Edmund Phelps’s Opening Remarks
Edmund Phelps defends the monetary interventions of the Fed in 2008–2009. Frankly, I don’t see much in Phelps’s subsequent remarks criticising Keynesianism derived from Hayek. Instead, Phelps just worries about excessive public debt and the effectiveness of stimulus.
III. John Cassidy’s Remarks
Cassidy tips his hat to Hayek over the socialist calculation debate, but goes on to dismiss Hayek’s other economic theories. Cassidy mentions the Austrian business cycle theory, which is Hayek’s major economic contribution, and dismisses it, though not with a proper critique. For critiques of the Austrian business cycle theory, see my posts here:
“Austrian Business Cycle Theory: The Various Versions and a Critique,” June 21, 2011.IV. Steve Moore’s Remarks
“Austrian Business Cycle Theory (ABCT) and the Natural Rate of Interest,” June 18, 2011.
“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.
“Vaughn on Mises’s Trade Cycle Theory,” June 29, 2011.
“Hayek on the Flaws and Irrelevance of his Trade Cycle Theory,” June 29, 2011.
“ABCT and Full Employment,” July 1, 2011.
Steve Moore claims that Keynesianism hasn’t worked, defending that by merely pointing to the fact that the US stimulus has not reduced unemployment significantly and created a great boom. That shows simple ignorance of the level of stimulus needed to do this, and of course the current problem of debt deflation and the issue of balance sheet recessions. Moore then makes the ridiculous claim that Reaganomics was the opposite of Keynesianism: the truth is that Reaganomics was nothing but a conservative version of Keynesianism.
V. John Cassidy’s Refutation
Cassidy points out that Obama’s stimulus was only about $780 billion, not large relative to the size of the US economy. He also refutes Moore’s claim that Reaganomics was not Keynesianism.
VI. Sylvia Nasar’s Remarks
Sylvia Nasar remarks were the most interesting in the whole debate. Nasar challenges the view that Hayek predicted the 1929 crash. She cites a German biographer of Hayek (does anyone know who this is?) who looked over Hayek’s “monthly forecasts” issued in Austria in 1929. In April 1929, Hayek’s forecasts hinted at the “unpleasant consequences” because of credit growth. In October 1929, however, Hayek wrote something very different in the newsletter, as follows:
“there is no reason to expect a sudden breakdown of the New York stock exchange.” [He added:] “A pronounced crisis need not be feared.”If true, this is a savage blow against the “predictive” power of Hayek. It bears further investigation.
Nasar also states that Hayek was opposed to interest rate cuts in the early 1930s.
VII. Diana Furchtgott-Roth’s Remarks
Diana Furchtgott-Roth shows utter ignorance when she points to the size of the deficit as a percentage of GDP, in her claims that these high deficits somehow show that Keynesianism doesn’t work. The fact is that a government can be running a deficit and actually be engaging in contractionary fiscal policy. For example, Ireland has also been running large deficits as a percentage of GDP for some years, one of the largest in the Eurozone, but it was not practising Keynesian stimulus. Why? The reason is that Keynesian stimulus requires increases in discretionary spending to offset the contraction in private consumption and investment spending and spending by foreigners on a nation’s exports. Ireland and other nations have deficits because their tax revenues severely collapsed. They have in fact cut government spending. That is not Keynesian stimulus. This is the reverse: contractionary fiscal policy. The US also has a large deficit as a percentage of GDP because its tax revenue has collapsed, not because the government engaged in massive increases in discretionary spending.
VIII. Steve Rattner’s Remarks
Rattner reviews the auto rescue program, and then the financial sector. Rattner makes a mistake in defending the crony capitalist bailout of the financial sector, in my view.
IX. Lawrence White’s Remarks
White drags up the moribund Austrian business cycle theory. He states that Keynesians have no theory of the boom or bust; that is nonsense. He utterly ignores Minsky’s financial instability hypothesis. Lawrence White refers to Hayek’s Prices and Production, and claims that Hayek there wanted to maintain nominal spending. I see no such evidence of this. Hayek supported monetary stabilisation and limited fiscal policy later in life, but not in Prices and Production.
It's such a shame nobody cited Piero Sraffa, or noted that Keynes was perfectly able to explain downturns by high interest rates.
ReplyDeleteSteve Moore claims that Keynesianism hasn’t worked, defending that by merely pointing to the fact that the US stimulus has not reduced unemployment significantly and created a great boom. That shows simple ignorance of the level of stimulus needed to do this
ReplyDeleteHahaha, the inflation and spending is, to the vulgar as opposed to enlightened Keynesian, ALWAYS less than what is needed to "do this."
No matter what happens, the vulgar Keynesian will claim to be right. Unemployment improves, it's because past Keynesian project X succeeded. Unemployment worsens, it's because past Keynesian project X was not large enough, thus rescuing vulgar Keynesianism in theory.
The more people wait for the government to solve their problems, the less they will solve their own problems, and hence the less problems that get solved. This is because all problems are individual problems.
Keep printing and spending money to help the unemployed, and the unemployed will simply stop looking for work as hard and become dependent on the printing and spending.
http://i.imgur.com/XPCzl.jpg
Theoretically this makes sense, and it's consistent with history.
White drags up the moribund Austrian business cycle theory. He states that Keynesians have no theory of the boom or bust; that is nonsense. He utterly ignores Minsky’s financial instability hypothesis.
Minsky's theory is not a theory of booms and busts. It's just an ex post rationalization for busts. He doesn't clearly explain why debt should accumulate in the first place. He chalks it all up to "it just happens".
Lawrence White refers to Hayek’s Prices and Production, and claims that Hayek there wanted to maintain nominal spending. I see no such evidence of this. Hayek supported monetary stabilisation and limited fiscal policy later in life, but not in Prices and Production.
*Sigh*.
"It is quite conceivable that a, distortion of relative prices and a misdirection of production by monetary influences could only be avoided if, firstly, the total money stream remained constant..." - pg 131, "Prices and Production."
The meaning of "total money stream" is aggregate spending. White is right. Better get back to the books! LOL
A quick comment, since I know this is mentioned repeatedly on your blog.
ReplyDeleteThe famous criticism of Sraffa where he criticizes Hayek for relying on a single natural rate of interest concept is overrated as a serious charge against Austrian Business Cycle Theory. While this might have been a problem for Hayek, who did not utilize a pure time preference theory of interest, this is no problem for Misesians/Rothbardians who believe in such a concept. As you know, Mises slowly moved away from the Wickstellian natural rate of interest towards his own originary rate of interest. Rothbard later integrated Mises’s pure time preference theory with the Hayek’s graphical/structural analysis of capital. Thus an Austrian who is well read in Mises/Rothbard knows how to adequately deal with such a problem. This does not include Murphy (I have read his paper you cited on this blog earlier) who disagrees with such a time preference concept (the evidence is his dissertation and the above paper).
The ultimate problem with Sraffa's analysis is that it is not realistic (it relies on an imaginary developed "barter" economy) and it does not treat money as the aggregating present good. Firstly, while it can be useful to utilize imaginary constructs (the ERE) for the sole purpose of analyzing the effects of a single outcome, it is very dangerous to analyze properties of imaginary constructs that have no bearing on the real world. A barter economy, with no medium of exchange, yet many rates of return in different goods, is impossible, as shown through the calculation problem. There is no way to rationally allocate these resources without monetary calculation, hence profits and losses, and without these business tools you cannot economically calculate. Such a barter economy where individuals conduct hundreds of exchanges in varying interest rates is impossible, and not a good mental tool, unless to show its unfeasibility. Trying to analyze economic changes in rates of return through changing factors in such an economy, as Murphy, Lachmann, Hayek, and Sraffa have done, is prone to disaster because it cannot conceivably exist.
However, more importantly relating to the concept of time preference, and something that Murphy et al. fail to understand (in my view), is that on the time market money is the present good that aggregates all an individual's "discounts" on individual present goods with everyone else’s. Money is a good itself and thus time preference affects it directly. It is the present good par excellence because it can be spent on all consumer goods. The interest rate in the economy is the premium on present goods, money that can be spent on a variety of consumer goods, over future goods, money that is earned from investment and can be spent on a variety of consumer goods in the future. Money is not a nonneutral good that is then tapered over an array of varying returns in a fictitious barter economy to calculate a “natural” rate of interest. Anyone who believes in such an approach is gravely mistaken.
Since the natural interest rate is conducted in terms of a single aggregating unit, money, the problem of “multiple” interest rates on varying goods is taken care of. In monetary exchanges, time preference exerts itself as a discount on money, not as a discount on individual goods that indirectly affect the discount on money. Although money is the single aggregating unit, in the real world there always exists an array of interest rates due to constantly changing conditions and uncertainty. However, in the absence of continual changes, these interest rates, meaning all rates of return in an economy along with varying loan market rates, would all converge to a single interest rate through arbitrary and entrepreneurs maximizing monetary profits. Whenever there is a change in one of these rates (such as credit expansion that affects the federal funds rate), the excess supply of money that lowers that interest rate percolates throughout all of the other loan market rates. The fact that we may never see a fully arbitraged economy is not a problem for Austrian analysis.
ReplyDeleteI hope to keep this discussion cordial as I think it is a very important topic to discuss.
"It is quite conceivable that a, distortion of relative prices and a misdirection of production by monetary influences could only be avoided if, firstly, the total money stream remained constant..." - pg 131, "Prices and Production."
ReplyDeleteThat is Hayek's advice for preventing "a misdirection of production", not his advice for what should be done when the bust happens. Your quote proves nothing.
"In monetary exchanges, time preference exerts itself as a discount on money, not as a discount on individual goods that indirectly affect the discount on money"
ReplyDeleteThat is not a pure time preference theory of interest rates at all, in the sense of saying that interest is the discount of future goods against present goods. You have adopted a monetary theory of the interest rate.
Yet the pure time preference theory of interest rates is the basis of the ABCT in Mises and Rothbard's work.
You say:
Whenever there is a change in one of these rates (such as credit expansion that affects the federal funds rate), the excess supply of money that lowers that interest rate percolates throughout all of the other loan market rates.
And why would that cause an ABCT? You must assume Hayek's assumption of an economy at full employment equilibrium here, and all the other unrealistic assumption he requires.
"Minsky's theory is not a theory of booms and busts. "
ReplyDeleteAnd black is white. The sky is red on a clear day. Tell us another fable.
"That is not a pure time preference theory of interest rates at all, in the sense of saying that interest is the discount of future goods against present goods. You have adopted a monetary theory of the interest rate."
ReplyDeleteI also said this:
"The interest rate in the economy is the premium on present goods, money that can be spent on a variety of consumer goods, over future goods, money that is earned from investment and can be spent on a variety of consumer goods in the future."
The present money forsaken represents present goods forsaken, and the future money earned represents future goods consumed in the future. Time preference measures present consumption to future consumption, and money aggregates all present consumption to future consumption. Each "discount" on each good does not "indirectly and individually" affect the discount on money.
"And why would that cause an ABCT? You must assume Hayek's assumption of an economy at full employment equilibrium here, and all the other unrealistic assumption he requires. "
I am not going to get into a discussion about the Austrian Business Cycle Theory. It does not require full employment (see Mises' section in Human Action). Don't try and switch the topic. All I'm trying to do right now is show how a natural rate of interest determined by time preference is possible, and that even though it may never visibly exist in the economy, the market is always tending towards it via arbitrage by eliminating profits and losses.
"The present money forsaken represents present goods forsaken, and the future money earned represents future goods consumed in the future. "
ReplyDeleteAnd as pointed out elsewhere, there is NO necessary reason why the goods forsaken will be the ones required for capital goods investment. In an
Once money is used for loans there is no necessary connection between money/credit available for loans and whatever real commodities are available for investment purposes in the community. There is no guarantee that borrowers will have the necessary real goods at all for investment purposes in a non-inflationary manner.
Whether there are real comodities available for investment purposes in an economy at any one time in a non-inflationary manner when that eocnomy has a FR banking system is an empirical matter. They may be available, they may not be.
"It does not require full employment"
ReplyDeleteThe Hayekian verison does. Hayek in his own words:
"Nor need there [be] at any but the initial stage an overall equilibrium between the different markets ..."
http://socialdemocracy21stcentury.blogspot.com/2011/09/hayek-and-equilibrium-as-starting-point.html
And as is well known Hayek's ABCT uses equilibrium theory:
ReplyDeleteThe answer to that has been known for a long time:
“Hayek’s changing assessment of the importance of equilibrium theory has some consequences for our story. The most telling of these concerns Hayek’s trade cycle theory, a paradigmatic example of equilibrium theory, one that Witt (1997, 48) describes as ‘an impressive example of allied price theoretical reasoning that may even delight a Chicago equilibrium economist.’ But, as Witt goes on to observe, if one rejects the usefulness of equilibrium analysis, then Hayek’s step-by-set story of how the cycle unfolds, one in which ‘each single stage necessarily had to be followed by the next one’ (46), can no longer be maintained. Witt concludes that Hayek’s cycle theory may well be incompatible with his later theory of spontaneous orders, a concern that others have voiced” (Caldwell 2004: 228).
"All I'm trying to do right now is show how a natural rate of interest determined by time preference is possible, and that even though it may never visibly exist in the economy, the market is always tending towards it via arbitrage by eliminating profits and losses. "
ReplyDeleteYou have not shown anythingabout a "natural rate". You have in fact abandoned that very concept.
What you are saying is that monetary rates of interest in a real world banking system would tend to converge in a spread because of competition and arbitrage.
A monetary rate(s) of interest is NOT a natural rate. The natural rate of interest is a real theory of the interest rate, not a monetary one.
The natural rate is the rate of interest that would prevail if savings and investment were made in natura (in real goods).
I really acknowledge the fact that a natural rate of interest DOES NOT exist, and as such it depends an a quite strong concept of equilibrium, even between markets, a very difficult concept to graps if you acknowledge how the real-world economy works and a quite impossible concept to happen in the real-world.
ReplyDeleteEven so, the ABCT does really shows us something. It's not possible to intervene in the monetary market and not distort in the structure of production. I acknowledge that even "natural" distribution of resources via market outcomes influence the structure of production in a distorsive way, but it's no strange fact that lowering short-term interest rates will, almost surely, affect the entire production through time, fueling speculation and creating new bubbles in its way. So there exists a rationale for the "monetary equilibrium" concept, even if it's not as strong or precise as the Wicksellian one.
"And as pointed out elsewhere, there is NO necessary reason why the goods forsaken will be the ones required for capital goods investment."
ReplyDeleteYou misunderstand what I wrote. When an individual saves present money buy purchasing factors or loaning it out, he could have spent it on consumer goods that satisfy his wants now. Present money given up, represents present goods. The money an individual expects to earn from an investment represents future goods, since it can be spent on future consumption. Present money commands a premium on future money because present money can be spent on present satisfaction, and present satisfaction commands a premium on future satisfaction. It still is a pure time preference theory of interest.
"Once money is used for loans there is no necessary connection between money/credit available for loans and whatever real commodities are available for investment purposes in the community. There is no guarantee that borrowers will have the necessary real goods at all for investment purposes in a non-inflationary manner.
Whether there are real comodities available for investment purposes in an economy at any one time in a non-inflationary manner when that eocnomy has a FR banking system is an empirical matter. They may be available, they may not be. "
Yes, but when individuals decrease consumption and "free" up resources, they invariably release complimentary factors (nonspecific labor, relatively nonspecific capital tools, land, etc) that can be used for the construction of different types of goods. When people save, the types of investments capitalists make obviously depends on the empirical data involved, and the relative costs/prices of individual factors play a role in the capitalist's plans.
"The Hayekian verison does. Hayek in his own words:"
See Mises on this point.
"There are in the changing economy always unsold inventories...unemployed workers, and unused capacity of inconvertible production facilities. The system is moving toward a state in which there will be neither unemployed workers nor surplus inventories. But as the appearance of new data continually diverts the course toward a new goal, the conditions of the evenly rotating economy are never realized...the course of the boom is not substantially affected by the fact that at its eve there are unused capacity, unsold surplus inventories, and unemployed workers...The existence of unused capacity and unemployment is not a valid argument against the correctness of the circulation credit theory." (HA 577-578)
"And as is well known Hayek's ABCT uses equilibrium theory:"
This is not a problem. Even though all the price spreads in the economy are not equal, they are always tending towards equilibrium. Equilibrium is an imaginary construct that allows the economist to analyze the effect of a single change in data, something that is not possible in the real world because we cannot hold factors constant. Its similar to analyzing the effect of a change in supply in demand in an equilibrium market.
Hayek's later views on disequilibrium are wrong. See Rothbard "The Present State of Austrian Economics"
"You have not shown anythingabout a "natural rate". You have in fact abandoned that very concept.
ReplyDeleteWhat you are saying is that monetary rates of interest in a real world banking system would tend to converge in a spread because of competition and arbitrage.
A monetary rate(s) of interest is NOT a natural rate. The natural rate of interest is a real theory of the interest rate, not a monetary one.
The natural rate is the rate of interest that would prevail if savings and investment were made in natura (in real goods). "
I said "a natural rate of interest determined by time preference". And I have explained why the premium on present money compared to future money is inextricably linked to time preference. I am defending Mises' originary rate of interest. My whole point is Hayek could not adequately reply to Sraffa because he did not utilize such a concept.
Patch,
ReplyDeleteI appreicate your comments, especially as you appear rather more polite and serious than other Austrians/libertarians leaving comments here.
That being so, I will try one last time to explain why I find your analysis unsatisfactory.
(1) You say:
"I said "a natural rate of interest determined by time preference". And I have explained why the premium on present money compared to future money is inextricably linked to time preference."
Fair enough, but this must be a monetary theory of interest rate you are taking about here. Saying that interest is the "discount of future money as against present money" is the same as Robert Murphy's definition in his PhD, where he says that interest is:
“quite simply the price of borrowing money or (what is the same thing) the exchange rate of present versus future money units” (Robert P. Murphy, 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University. p. 176).
(2) You say:
I am defending Mises' originary rate of interest.
Mises' "originary rate of interest" is a real theory of the interest rate, involving commodities, not money:
“Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. [N.B. note "goods" not money, LK] It is a ratio of commodity prices, not a price in itself. There prevails a tendency toward the equalization of this ratio for all commodities. In the imaginary construction of the evenly rotating economy the rate of originary interest is the same for all commodities” (L. von Mises, 1998. Human Action: A Treatise on Economics, Mises Institute, Auburn, Ala. p. 523).
My question to you now is: how are you actually "defending Mises' originary rate of interest"??
You're not. You have abandoned it or misunderstood it. Your definition cited above is not how Mises defines the "originary rate of interest".
"Patch,
ReplyDeleteI appreciate your comments, especially as you appear rather more polite and serious than other Austrians/libertarians leaving comments here."
Thank you.
While I do not agree with your conclusions, I also appreciate much of the work you do. Your empirical work on this blog is well cited (Depression 1920,1893,Hoover years) and full of very good research points.
Now, on to time preference!
"Fair enough, but this must be a monetary theory of interest rate you are taking about here. Saying that interest is the "discount of future money as against present money" is the same as Robert Murphy's definition in his PhD, where he says that interest is:"
To reiterate, time preference expresses itself through a discount on future money compared to present money. This discount is not, much like other monetary theory interest rates, the price of "holding money", or the opportunity cost of money. The discount occurs because money that can be spent on consumer goods (present money) is forsaken for money in the future (future consumption). The interest rate exists because there is a premium on present consumption as opposed to future consumption. This is facilitated through money.
"(2) You say:
I am defending Mises' originary rate of interest.
Mises' "originary rate of interest" is a real theory of the interest rate, involving commodities, not money:
“Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. [N.B. note "goods" not money, LK] It is a ratio of commodity prices, not a price in itself. There prevails a tendency toward the equalization of this ratio for all commodities. In the imaginary construction of the evenly rotating economy the rate of originary interest is the same for all commodities” (L. von Mises, 1998. Human Action: A Treatise on Economics, Mises Institute, Auburn, Ala. p. 523)."
Mises does say the ratio of "value" assigned to want satisfaction in the immediate future, and the "discount" of future goods against present goods. The value of want satisfaction in the near future is the amount of money we must be compensated with (in the future) in order to forgo want satisfaction in the present (the present money we forsake).
And future and present goods definitely can refer to money. Rothbard explains it clearer:
"The capitalist who buys the services of land and labor in year one to work on a product that will eventually become a consumers' good ready for sale in year two is advancing money (a present good) in exchange for a future good-for the present anticipation of a yield of money in the future from the sale of the final product. A present good is being exchanged for an expected future good. . (p.347)
"In the monetary economy, the present-future market, or what we may all the "time market," is expressed completely in terms of money. Money is clearly the present good par excellence ...It is the open sesame to exchange for consumption goods at any time that its owner desires. It is therefore a present good ...Because money is the general medium of exchange, for the time market as well as for other markets, money is the present good, and the future goods are present expectations of the future acquisition of money.. It follows from the law of time preference that present money is worth more than present expectations of the same amount of future money. In other words, future money (as we may call present expectations of money in the future) will always exchange at a discount compared to present money...This discount on future goods as compared with present goods..is the rate of interest...This is the time-discount rate of future to present money . (p376)
Lord Keynes, have you received my reply?
ReplyDelete-Patch
"To reiterate, time preference expresses itself through a discount on future money compared to present money. This discount is not, much like other monetary theory interest rates, the price of "holding money", or the opportunity cost of money. "
ReplyDeleteSo you are now conceding that this is a monetary theory of the interest rate?
"Mises does say the ratio of "value" assigned to want satisfaction in the immediate future, and the "discount" of future goods against present goods. The value of want satisfaction in the near future is the amount of money we must be compensated with (in the future) in order to forgo want satisfaction in the present (the present money we forsake)."
It does not need to be money. It could be done measured in natura (in real goods).
"And future and present goods definitely can refer to money. Rothbard explains it clearer:"
We are not talking about Rothbard. The original issue was Mises' originary rate of interest.
"So you are now conceding that this is a monetary theory of the interest rate?"
ReplyDeleteNo, I'm just saying that in the catallacy (monetary sphere), time preference exerts itself through money, just like all exchanges occur through money. There is a premium on present money because money is the medium of exchange that can be spent on all consumer goods. Money in the future suffers a discount because present money (that could be spent on consumption) must be forgone in the meantime. There is a price on present money because there is a price on present consumption. And there is a price on present consumption because of time preference.
"It does not need to be money. It could be done measured in natura (in real goods)."
And it could be done in money :). It seems like we disagree on the quote.
"We are not talking about Rothbard. The original issue was Mises' originary rate of interest. "
Yes, which Rothbard extended, and he clearly makes the case for my argument above. Worst case scenario, if Mises did not agree with Rothbard, then Rothbard just enhanced Mises' theory. But I believe that Mises in Human Action had a similar idea of Rothbard on time preference in this regard.
@ LK
ReplyDeleteAbout Sylvia Nasars claim about Hayeks predictions:
"If true, this is a savage blow against the “predictive” power of Hayek. It bears further investigation."
I can help you on the investigation. Hayek did predict a bust in contrast to Fisher and Keynes, but he did not predict when it has to happen. Yet on the timing he was wrong. However Sylvia left important parts out when paraphrasing Hayek and also twisted its meaning by adding words like "permanent", implying Hayek did suddenly believe in a permanent high NYSE as the others.
In this newsletter of 1929 in October Hayek says that in 1929 a huge inflow of capital from Europe supports the NYSE, and that a stronger "Deroute" of the NYSE would result in fast outflow of this capital, which would be devastating. But... [in German]
... "Jedoch besteht derzeit kein Grund, einen
plötzlichen Zusammenbruch der New Yorker Börse
zu erwarten. Allerdings ist es nicht ausgeschlossen,
daß nunmehr das Ende der geradezu phantastischen
Kurssteigerungen gekommen ist und das Niveau
langsam abbröckeln dürfte. Die Kreditmöglichkeiten
sind jedenfalls augenblicklich noch sehr große
und es erscheint daher die Gewähr gegeben, daß
eine ausgesprochen krisenhafte Zerstörung des
jetzigen hohen Niveaus nicht befürchtet werden
müßte."
Translated (by me):
"But at the moment there is no reason to believe in a sudden crash of NYSE. However it is not ruled out that we finally see the end of the fantastic price increases of stocks and that from now on they will start to crumble slowly. At present the credit situation is still very good, and therefore it seems that a very crisis like destruction of current high stock values need not be feared."
Judge for yourself. You don't need to drive to Austria, you find all "Monatsberichte" online for free:
http://www.wifo.ac.at/bibliothek/archiv/MOBE_HTML/index.html
Also a much clearer part in which Hayek shows what he thinks of the FED's credit expansion was in November's 1928 newsletter:
"Die Position der Federal Reserve-Banken ist allerdings stark genug, um noch längere Zeit Kreditexpansion betreiben zu können und die Zeit der großen Wirtschaftskrise dürfte noch recht weit entfernt sein, wenn dies auch vorübergehende kleinere Liquidationsperioden nicht ausschließt."
Translated: "The position of the FED is strong enough to keep credit expansion going for quite a long time. Therefore it seems the time for the big crisis is still far ahead in the future. However this does not rule out smaller periods of liquidation."
Summarized: Prediction of event right, he even somehow called the top, but he expected at this point in time the NYSE to go sideways/down slowly instead to crash instantly because he still saw a fine credit market. That was obviously wrong. But the essence of the argument was if there could be a bust at all, which people like Fisher and Keynes denied.
"He utterly ignores Minsky’s financial instability hypothesis."
ReplyDeleteI dont think the debaters on the "Hayekian" side are really Austrian with the exception of Lawrence White.
However one cannot defend Keynes and Keynesianism with a reference to Minsky. Minsky strayed a long way from Keynesian economics, even though he classified himself otherwise, furthermore he came to somewhat the same theory of Austrians just without the capital theory and with a more heavy emphasis on aggregates.
Minsky did not "stray" from Keynesian theory. That is an utterly absurd statement.
DeleteMinsky was clearly a heterodox Keynesian.
Also, I see no evidence he ever adopted/used/accepted any Austrian theories.