Finally, the LSE debate between Skidelsky and Selgin is available as a full video:
One of the things that stands out to me in this longer version is that the defenders of Hayek were quick to argue that Hayek wanted to stabilise the money supply by 1933 (at 24.51–29.07; and 32.54–34.41), that Hayek was not a “do nothing” economist, and that (like Keynes) he did not want spending to collapse.
Selgin quotes a passage from Hayek’s essay Savings:
“Unless the banks create additional credits for investment purposes to the same extent that the holders of deposits have ceased to use them for current expenditure, the effect of such saving is essentially the same as that of hoarding and has all the undesirable deflationary consequences attaching to the latter” (See Hayek 1975 [1939] for the complete essay).
Selgin also points to the comments in the second edition of Prices and Production (1935).
Skidelsky shot back that Hayek, by accepting this, just fell in line with the neoclassicals of his day, and that monetary stabilisation by open market operations is a highly ineffective way of doing this stabilisation, a very good point, to which no answer was given.
BIBLIOGRAPHY
Hayek, F. A. von. 1967 [1935]. Prices and Production (2nd edn.), Augustus M. Kelley Publishers, New York.
Hayek, F. A. von. 1975 [1939]. Profits, Interest and Investment, Augustus M. Kelley Publishers, Clifton, NJ.
This BBC audio file has been edited, and we do not have the whole debate here. The entire unedited podcast of the debate will be available next week on the LSE events website.
Professor George A. Selgin was the main defender of Hayek, which was a good choice by whoever organised this debate. I rather like Selgin’s work on fractional reserve banking; he is an intelligent libertarian, and is in a class of his own, over and above other Austrians, quite frankly.
Let’s review the debate below:
(1) Skidelsky’s Opening Remarks
Skidelsky’s makes some excellent points:
(i) Hayekian liquidationism was tried in Weimar Germany from 1931–1933: this caused a severe deflationary depression causing untold suffering and bringing the Nazis to power:
“Economic breakdown [sc. during the Great Depression] led to political upheaval which in turn destroyed the international status quo. Germany was the most striking example of this complex interaction. Without the depression Hitler would not have gained power. Mass unemployment reinforced all the resentments against Versailles and the Weimar democracy that had been smouldering since 1919. Overnight the National Socialists were transformed into a major party; their representation in the Reichstag rose from 12 deputies in 1928 to 107 in 1930. The deflationary policies of the Weimar leaders sealed the fate of the Republic” (Adamthwaite 1977: 34).
By failing to respond to these points in any coherent way, the apologists for Hayek in this debate clearly lost it in my mind. I think Skidelsky swept the floor in the first few minutes, and there was not much left for him to do but show why the Austrian business cycle theory (ABCT) is false to complete his demolition of them, though Skidelsky unfortunately failed to do this. Later in the debate Skidelsky (19.30) points out that without economic security, when millions of peoples’ lives are destroyed by deflationary depression, our political freedom is endangered: and he is right.
(2) Jamie Whyte’s Response to Skidelsky (7.02–)
Whyte’s talk is a feeble “rebuttal” to Skidelsky. Let’s take some of his outright errors:
“since Keynesian policies were last popular and unsuccessful in the 1970s…”
This strange statement demonstrates both ignorance and factual error: if Whyte means that Keynesian stimulus was unsuccessful during the severe negative supply shocks under the first and second oil crises, he has shown basic ignorance of what Keynesian policy even is. You do not use stimulus in a period where very severe supply shocks have occurred: in these circumstances demand contractions are in order. And when the oil crises ended Keynesian stimulus was used quite successfully in a number of countries, so even here Whyte is wrong. If Whyte wants a successful example of Keynesian stimulus after the second oil shock, he needed to look no further than Reaganomics after 1982.
“… as it did during the Great Depression, the Keynesian policies followed by the Hoover and Roosevelt administrations, which were supposed to shorten the length of the downturn, caused it to be the longest in known history” (10.11– )
This is one of the most pathetically false statements in the whole debate. Why? What we call the Great Depression in the US was technically the severe contraction that occurred from 1929–1933 under Hoover.
While it is true that Hoover was a proponent of a type of corporatism and adopted a number of limited interventions from 1929–1933, Hoover did not engage in any remotely effective Keynesian countercyclical fiscal policy, as I have shown here:
The idea that Hoover adopted “Keynesian policies” is pure nonsense, an insult to the intelligence.
When Roosevelt came into office a weak recovery was just beginning. Roosevelt’s policies stabilised the financial system, created employment for considerable numbers of people and, to the extent that he tried countercyclical fiscal policy, he was successful. Of course, not all aspects of the New Deal were constructive. It was, to some extent, the result of the corporatist mentality that had permeated the American business elite in the 1920s. But it also had very beneficial aspects, and fiscal policy was one of them. The US experienced a recovery and falling unemployment in every year of Roosevelt’s administration until 1937, when Roosevelt foolishly listened to the advocates of austerity and tried budget balancing. The effect was to plunge the economy back into recession in 1937. The real failure of Roosevelt’s New Deal was simply that expansionary fiscal policy was not great enough to stimulate the economy back to full employment. Roosevelt was too timid.
Whyte’s claim that Keynesian macroeconomic policy has insufficient empirical evidence is rubbish. Virtually every Western country on earth used Keynesianism from 1945–1973, and we had the most prosperous period in modern human history in terms of unparalleled real GDP growth, productivity growth, and real wage growth.
(3) Selgin’s Remarks
Curiously, Selgin concedes that Hayek eventually supported quantitative easing and monetary stabilisation as a policy needed in the early 1930s. What, then, becomes of the need to liquidate malinvestments required by Hayek’s trade cycle theory? Did Hayek think that the malinvestments had cleared by 1930? Was, then, all the suffering after 1930 unnecessary?
Selgin presents a caricature of Keynes at 17.20 onwards, claiming that Keynes advocated injecting money into an economy by building pyramids or digging holes in the ground. Keynes, of course, did not seriously advocate this: he said that if you could find nothing else of use to do with the money, then (facetiously) said you might do those things.
Selgin’s main point in his talk is little more than an attempt to revive the moribund Austrian business cycle theory (ABCT). This theory in the form developed by Hayek relies on the Wicksellian natural rate of interest, and posits that when the bank rate of interest falls below the unique natural rate of interest, unsustainable malinvestments occur that lead to a bust (for a summary of ABCT, see Garrison 1997).
However, Piero Sraffa had already demonstrated in 1932 that outside of a static equilibrium there is no single natural rate of interest in a barter or money-using economy, and Hayek never really addressed this problem for his trade cycle theory.
There is in fact one Austrian honest enough to admit how damaging Sraffa’s critique of Hayek was: Robert Murphy. Murphy points out the following:
“In his brief remarks [in Hayek 1932], Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.
Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).
But even Lachmann’s (1994: 154) proposed solution does not work:
“Lachmann’s demonstration—that once we pick a numéraire, entrepreneurship will tend to ensure that the rate of return must be equal no matter the commodity in which we invest—does not establish what Lachmann thinks it does. The rate of return (in intertemporal equilibrium) on all commodities must indeed be equal once we define a numéraire, but there is no reason to suppose that those rates will be equal regardless of the numéraire. As such, there is still no way to examine a barter economy, even one in intertemporal equilibrium, and point to ‘the’ real rate of interest.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 14).
The Austrian business cycle theory is false, as I have shown here in numerous posts:
With the recognition that a Hayekian trade cycle theory explanation of the Great Depression is a worthless explanation, most of Selgin’s arguments also collapse.
I had a brief exchange with Selgin on the issue of Sraffa’s critique of Hayek on the Cobdencentre.org blog here:
This is not, however, any “refutation” of Sraffa. I don’t deny that Hayek’s business cycle theory uses Wicksellian monetary equilibrium theory, nor did Sraffa. Sraffa already admitted that a unique natural rate would exist in an imaginary, fantasy world of static equilibrium or what Mises later called his Evenly Rotating Economy [ERE]. But a unique natural rate in static equilibrium is irrelevant to the real world. The “unique natural rate of interest” in a growing money-using economy or even a growing barter economy does not exist. Therefore, in the former case, there is simply no natural rate the bank rate can equal to allegedly prevent the cycle effects from happening.
What is particularly peculiar is that Selgin is an advocate of free banking: a financial system where banks have the power to create fiduciary media over and above the stock of commodity money. On a purely logical level, if Selgin advocates the Austrian business cycle theory (ABCT), then his support for a free banking system would (on the logic of ABCT) be a recipe for perpetual malinvestment!
Selgin also complains that low interest rates in the US fuelled the bubbles in the 1990s and 2000s: but he totally ignores the role of effective financial regulation in preventing the flow of credit to speculative investments which cause bubbles. When many nations dismantled the previous system of effective financial regulation in the 1980s and 1990s, this is precisely when asset bubbles and financial instability emerged again in Western economies.
Selgin makes the truly absurd claim that “there’s been no episode of a depression cured by fiscal expansion” (33.09). Jamie Whyte makes the same ignorant statement: he claims “the Keynesians’ position has been tried many times and it doesn’t work” (39.11). Really?
What on earth do Selgin and Whyte think happened in the US, and many other countries, in 1939–1945? Now in these years we were driven by the crisis of WWII to have wasteful command economies driven into massive fiscal expansion by war, but this episode showed us beyond any shadow of a doubt that massive fiscal expansion cures depression.
What is a tragedy is that in the 1930s and even now we are unable to have government spending on the same scale required, in constructive public works programs, infrastructure and social spending, jobs programs, and R&D outlays, to stimulate our economies back into full employment.
When Selgin complains that the banks are dysfunctional, he is of course right. Selgin is also right in railing against the crony capitalist bailout of America’s banks by Bush in 2008. What he ignores is that progressives, Post Keynesians, and even many New Keynesians did not support the form in which the bailout took: instead, they proposed a very different type of bailout to clean the financial system up and re-regulate it effectively.
What was badly needed in his debate was a clear Post Keynesian set of policy solutions. First, Post Keynesians already have a theory to explain the type of cycle that plunged us into the crisis in 2008: this is Hyman Minsky’s financial instability hypothesis, a far more convincing explanation of many business cycles, where asset bubbles and excessive private debt are driving the boom. Hyman Minsky’s financial instability hypothesis theory has been developed by the Post Keynesian Steve Keen, and by the heterodox economist Richard C. Koo (in the context of Japan’s lost decade).
What was required in 2008-2009 was a bailout that also cleared the banks of bad assets and non-performing loans without collapsing the economy, as in, for example, the Swedish model of fixing their financial system in the early 1990s:
In comments below (on this post), Selgin endorses a similar type of intervention to stabilise the financial system that could have been used in 2008, and in this he might very well agree with James Galbraith. In this video below (from 1.50 minutes), Galbraith tells us what should have been done in 2008: a pass-through receivership for the major banks by federal regulators.
Post Keynesians would go further: we also need to reduce the unsustainable level of private debt. This might even require writing off or restructuring a great deal of mortgage debt, credit card debt, and personal and business debt (the central bank’s power to create money can be used to protect depositors and other creditors, where necessary, to prevent catastrophic bankruptcies of creditors). After the issue of excessive private debt has been addressed, more Keynesian stimulus on a large scale is needed, as well as employment programs to deal with unemployment directly.
All in all, a good debate, but there were many issues that could also have been raised. In my view, the Keynesians won.
Selgin tells us that the solution he wanted in 2008 was to “liquidate Bear Stearns, liquidate Fannie Mae and Freddie Mac. Liquidate, in short, the whole sub prime apparatus … and, yes, that would have meant letting insolvent banks … go bust.”
In other words, he wanted to see the financial sector collapse, and this would have plunged the world into a deflationary depression. Since Selgin’s Austrian trade cycle theory (ABCT) is incoherent, his economic justification for such a collapse is non existent ...
I was wrong. Due apologies to Professor Selgin.
George Selgin has corrected me in comments below: he did not support a financial sector collapse in 2008 by these remarks, but instead advocates a policy something like the Swedish bailouts of early 1990s, as well as the normal method by which the FDIC deals with insolvent banks: allowing deposits to be “guaranteed by the government, the banks are then liquidated, shareholders wiped out, senior management fired, assets than sold off to pay for the losses. Whatever is left over goes to the bondholders.”
In urging this, I can only agree completely. In fact, I note that James Galbraith supported almost the same policy, in the video above.
BIBLIOGRAPHY
Adamthwaite, A. P. 1977. The Making of the Second World War, Allen & Unwin, London and Boston.
Garrison, R. W. 1997. “Austrian Theory of Business Cycles,” in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York. 23–27
Hayek, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249.
Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London.
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.
Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.
