“Goods are useful and scarce, and any increment in goods is a social benefit. But money is useful not directly, but only in exchanges. And we have just seen that as the stock of money in society changes, the objective exchange-value of money changes inversely (though not necessarily proportionally) until the money relation is again in equilibrium. When there is less money, the exchange-value of the monetary unit rises; when there is more money, the exchange-value of the monetary unit falls. We conclude that there is no such thing as ‘too little’ or ‘too much’ money, that, whatever the social money stock, the benefits of money are always utilized to the maximum extent. An increase in the supply of money confers no social benefit whatever; it simply benefits some at the expense of others, as will be detailed further below. Similarly, a decrease in the money stock involves no social loss. For money is used only for its purchasing power in exchange, and an increase in the money stock simply dilutes the purchasing power of each monetary unit. Conversely, a fall in the money stock increases the purchasing power of each unit” (Rothbard 2004 : 766).Rothbard clearly never heard of debt deflation or Irving Fisher’s debt deflation theory of depressions, or if he did never properly understood the process, and one cannot take seriously his view that “a decrease in the money stock involves no social loss.”
Hayek, to his credit, had a different view of the role of deflation in 1929–1933, at least later in life:
“There is no doubt, and in this I agree with Milton Friedman, that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation! So, once again, a badly programmed monetary policy prolonged the depression” (Pizano 2009: 13).Hayek, then, argued that a secondary deflation had negative effects on the US economy after 1929 and admitted that his earlier views had been wrong:
“Although I do not regard deflation as the original cause of a decline in business activity, such a reaction has unquestionably the tendency to induce a process of deflation – to cause what more than 40 years ago I called a ‘secondary deflation’ – the effect of which may be worse, and in the 1930s certainly was worse, than what the original cause of the reaction made necessary, and which has no steering function to perform. I must confess that forty years ago I argued differently. I have since altered my opinion – not about the theoretical explanation of the events, but about the practical possibility of removing the obstacles to the functioning of the system in a particular way” (Hayek 1978: 206).In saying that he agreed with Milton Friedman, however, Hayek presumably would have accepted a monetarist solution of stabilizing the money supply by open market operations and other interventions, but not a Keynesian solution of fiscal policy.
Despite the acknowledgement that some monetary intervention was necessary in situations like 1929–1933, Hayek still failed to see that mere monetary stabilization will not stop debt deflationary collapse.
Merely preventing a contraction of the money supply by itself will not prevent price deflation when it is caused by a severe contraction of aggregate demand, through deleveraging, shocks to business confidence, net negative changes in debt, and a slump in consumption and investment. To prevent such crashes, fiscal policy and more radical interventions to fix broken financial systems are necessary.
If monetary policy were really all that is needed to prevent price deflation, then why did Japan’s ZIRP in the 1990s not prevent the descent into price deflation in 1999? And why did price deflation persist in Japan for years after the beginning of quantitative easing in 2001?
I have a new post here related to this one on Rothbard’s view of deflation:
Hayek, F. A. 1975. A Discussion with Friedrich A Von Hayek, American Enterprise Inst., Washington.
Hayek, F. A. 1978. New Studies in Philosophy, Politics, Economics and the History of Ideas, Routledge & Kegan Paul, London.
Pizano, D. 2009. Conversations with Great Economists, Jorge Pinto Books Inc., New York.
Rothbard, M. N. 2004 . Man, Economy, and State: A Treatise on Economic Principles, Ludwig von Mises Institute, Auburn, Ala.
Rothbard had, in fact, heard of the theories of Irving Fisher and called him a "pre-Keynesian Keynesian" and the supposed source of monetarist views.ReplyDelete
He made a reference to Fisher's one particular paper on business cycles in this piece: http://www.lewrockwell.com/rothbard/rothbard43.html
It says, "Friedman harks back not only to the Chicagoans, but, like them, to Yale economist Irving Fisher, who was the Establishment economist from the 1900s through the 1920s. Friedman, indeed, has openly hailed Fisher as the "greatest economist of the twentieth century," and when one reads Friedman’s writings, one often gets the impression of reading Fisher all over again, dressed up, of course, in a good deal more mathematical and statistical mumbo-jumbo. Economists and the press, for example, have been hailing Friedman’s recent "discovery" that interest rates tend to rise as prices rise, adding an inflation premium to keep the "real" rate of interest the same; this ignores the fact that Fisher had pointed this out at the turn of the twentieth century.
In keeping with this outlook, Irving Fisher wrote a famous article in 1923, "The Business Cycle Largely a ‘Dance of the Dollar’ " – recently cited favorably by Friedman – which set the model for the Chicagoite "purely monetary" theory of the business cycle. In this simplistic view, the business cycle is supposed to be merely a "dance," in other words, an essentially random and causally unconnected series of ups and downs in the "price level." The business cycle, in short, is random and needless variations in the aggregate level of prices. Therefore, since the free market gives rise to this random "dance," the cure for the business cycle is for the government to take measures to stabilize the price level, to keep that level constant. This became the aim of the Chicago School of the 1930s, and remains Milton Friedman’s goal as well."
Of course, Rothbard had a bit of mischievous nature and loved poking for fun at people, so all that may be a generalization just to get some laughs.
"Rothbard had, in fact, heard of the theories of Irving Fisher and called him a "pre-Keynesian Keynesian"...ReplyDelete
Interesting, but still no evidence that Rothbard knew “The Debt-Deflation Theory of Great Depressions,” Econometrica 1 (October 1933) by Fisher.
Hayek also supports fiscal policy actions -- e.g. public work projects..ReplyDelete
"Hayek presumably would have accepted a monetarist solution of stabilizing the money supply by open market operations and other interventions, but not a Keynesian solution of fiscal policy."
"Hayek also supports fiscal policy actions -- e.g. public work projects."ReplyDelete
Do you have a chapter and verse citation of Hayek to support this?
Secondary deflation, you say ?ReplyDelete
Hayek was wrong.
And this article by P. Bagus you refer to (2003. “Deflation: When Austrians Become Interventionists,” Quarterly Journal of Austrian Economics 6.4: 19–35) shows Rothbard contradicting himself on the issue of deflation:
I'm well aware that Prof. Hayek had a habit of "leaking".ReplyDelete
That does not change the gist my Hayek quote. Further, Hayek's policy prescriptions appear to concern how to fix (or appear to be trying to fix) the prior interventionist-caused mess considering political realities, such as the rise of Nazis when things are not repaired ASAP in the eyes of the masses. Considering political realities, it may be simpler to just surreptitiously lower wage rates through money dilution than deal with stubborn labor unions and the rise of the Nazis. This does not make these proposals particularly smart policies absent these special circumstances.
Further, the Austrian Business Cycle Theory still holds that it is Keynesian-style policies that cause the boom/bust cycle. Hayek did not back off from that and the Keynesians NEVER directly address or confront that analysis. Instead, like you, they will merely try to undermine Hayek's character for consistency instead of engaging in a direct refutation of the ABCT.
Finally, as Prof. Ebeling noted, Hayek did not "leak" on Meet the Press in 1975.
"Further, the Austrian Business Cycle Theory still holds that it is Keynesian-style policies that cause the boom/bust cycle. Hayek did not back off from that and the Keynesians NEVER directly address or confront that analysis."ReplyDelete
Kaldor and Sraffa shot Hayek's ABCT down in flames in the 1930s and 1940s.
Kaldor, N. 1939. “Capital Intensity and the Trade Cycle,” Economica n.s. 6.21: 40–66.
Kaldor, N. 1940. “The Trade Cycle and Capital Intensity: A Reply,” Economica n.s. 7.25: 16–22.
Kaldor, N. 1942. “Professor Hayek and the Concertina-Effect,” Economica n.s. 9.36: 359–382.
Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.