Sunday, January 1, 2012

When Did Hayek Renounce Liquidationism?

The short answer is: at some point after 1933. Certainly by the time of his 1937 essay “The Gold Problem” (“Das Goldproblem”; see Hayek 1999: 169–185, and 184), Hayek is found endorsing public works as a response to depression:
“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 [1937]: 184; see also Hayek 1978: 210–212).
I am assuming here that Hayek is thinking of deficit-financed public works in this passage.

Ludwig Lachmann in an Austrian Economics Newsletter (AEN) interview explains the change in Hayek’s thinking:
AEN: In the early 30’s there had been great interest among the profession in the ‘Austrian’ or Hayekian theory of the trade cycle. Yet as the 1930’s progressed even those who had been adherents seemed to have given up their belief in its correctness. What reasons do you think were behind this?

Lachmann: Well, you presumably know about the two different letters to the London Times that appeared in October, 1932. This, of course, was before I came to London. In one of them, Keynes and some Cambridge economists who were not, in general, his friends, like Pigou and Dennis Robertson, demanded that the government should take steps against unemployment. And three days later, Hayek, Robbins and Arnold Plant sent another letter saying that anything the government did by way of public works or similar methods would only make things worse and would not have the affect that Keynes claimed it would have.

That is to say, the ‘Austrians’ seemed to be committed to a policy of continuous deflation whatever happened. Yes, I’m quite sure that the apparent insistence of the ‘Austrians’ that the depression must run its course in the sense that both prices and wages in general must fall seemed to make it increasingly difficult for most other economists to support it, because it was by then obvious that wages didn’t fall, not in the Britain of the 1930’s anyway. That is to say, there was an obvious difference between the point of view expressed by Hayek, Robbins and their letter of October, 1932, and their willingness to admit the following year that a secondary depression was possible.”
Ludwig Lachmann, “An Interview with Ludwig Lachmann,” The Austrian Economics Newsletter, Volume 1, Number 3 (Fall 1978),
Lachmann was at the London School of Economics (LSE) as research assistant to Hayek in the 1930s, and he was in a position to know, as he conducted work for Hayek on secondary depressions. Hayek’s recantation was, as Lachmann says, related to his admission of the existence of “secondary depressions” or what he later called “secondary deflations.”

Curiously, the letter which Hayek signed with Lionel Robbins and others, printed in the Times (October 19, 1932) and which can be read here, although it rejects government spending, has this qualification:
“(1) On the first issue – whether to use one’s money or whether to hoard it – there is no important difference between us. It is agreed that hoarding money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.”
One can see how there was a fundamental contradiction between (1) the recognition that deflation in itself was not desirable and (2) the policy proposal of doing nothing of any substance (apart from capital account liberalisation and the absurd idea of more free trade, as if export-led growth would have cured the depression) in an economy hit by deflationary forces in 1932.

There is also a second issue: this was a letter signed by a number of other economists, and reflects the group’s view that they wished to see expressed in public. Hayek’s personal views might have been different. In fact, Hayek tells us explicitly that he did see deflation as desirable, not for its own sake, but for the sake of breaking the downward rigidity of wages:
“… 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.” (Hayek 1978: 210–211).
Hayek also indicated that he held a different view on the role of deflation during the depression from his later years:
“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).
A third point is that one might object that the Times letter above doesn’t really show Hayek as an explicit liquidationist, but, in my opinion, Hayek’s reputation for liquidationism was the result of his lectures at the LSE and his writings in Prices and Production (1st edn.; London, 1931), which must reflect his lectures. In particular, from passages like this:
“If the foregoing analysis is correct, it should be fairly clear that the granting of credit to consumers, which has recently been so strongly advocated as a cure for depression, would in fact have quite the contrary effect; a relative increase of the demand for consumers’ goods could only make matters worse. Matters are not quite so simple so far as the effects of credits granted for productive purposes are concerned. In theory it is at least possible that, during the acute stage of the crisis when the capitalistic structure of production tends to shrink more than will ultimately prove necessary, an expansion of producers’ credits might have a wholesome effect. But this could only be the case if the quantity were so regulated as exactly to compensate for the initial, excessive rise of the relative prices of consumers’ goods, and if arrangements could be made to withdraw the additional credits as these prices fall and the proportion between the supply of consumers’ goods and the supply of intermediate products adapts itself to the proportion between the demand for these goods. And even these credits would do more harm than good if they made roundabout processes seem profitable which, even after the acute crisis had subsided, could not be kept up without the help of additional credits. Frankly, I do not see how the banks can ever be in a position to keep credit within these limits.

And, if we pass from the moment of actual crisis to the situation in the following depression, it is still more difficult to see what lasting good effects can come from credit expansion. The thing which is needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production to the proportion between the demand for consumers’ goods and the demand for producers’ goods as determined by voluntary saving and spending. If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into a wrong direction and a definite and lasting adjustment is again postponed. And, even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises. The only way permanently to “mobilize” all available resources is, therefore, not to use artificial stimulants—whether during a crisis or thereafter—but to leave it to time to effect a permanent cure by the slow process of adapting the structure of production to the means available for capital purposes.

(10) And so, at the end of our analysis, we arrive at results which only confirm the old truth that we may perhaps prevent a crisis by checking expansion in time, but that we can do nothing to get out of it before its natural end, once it has come.” (Hayek 2008: 274–275).
Now I have quoted the second edition of Prices and Production here, but I’ve not seen any evidence that this passage was absent from the first edition.

There is an important issue open for debate: where are these alleged passages in the first edition of Prices and Production (1931) that supposedly show Hayek wanting to stabilize MV during depressions by monetary policy?


Hayek, F. A. von, 1931. Prices and Production, G. Routledge & Sons, Ltd, London.

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, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala.


  1. Why Mises and not Hayek?

    FA Hayek on government and social evolution

    1. Christof I fail to see the point of your comment. This post is about Hayek's economic ideas. Ideas Hoppe himself says "deserves great praise".

      Then you come in with links attacking Hayek's political & social ideas that no one mentioned. What exactly is your motivation for this. Were you trying(unsucessfully)to distance yourself from Hayek? Or do you just go round forums trashing him for fun? If the former what you would need is a Misean article or quote on the subject of the 'secondary deflation' to do the job properly.

  2. "Why Mises and not Hayek?"

    That article exaggerates the fundamental differences between Mises and Hayek: Mises was a supporter of a limited state, with a monopoly on on violence and coercion - just like Hayek.

    Mises also supported utilitarianism and allowed for (if not always approved of) restrictions on output by a democractic process using utilitarian arguments:

    “Economics neither approves nor disapproves of government measures restricting production and output. It merely considers it its duty to clarify the consequences of such measures. The choice of policies to be adopted devolves upon the people. But in choosing they must not disregard the teachings of economics if they want to attain the ends sought. There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule” (Mises, L. 1998 [1949]. Human Action: A Treatise on Economics, Ludwig von Mises Institute, Auburn, Ala. p. 741).

    This type of reasoning leads directly to Hayek's "social democratic" positions.

    Mises and Hayek's views are radically different from Rothbard's anarcho-capitalism.

  3. The younger Mises advocates for unlimited secession, down to the individual, and the older Mises never repudiated that position.

    Hayek did not advocate for unlimited secession.

    That is a large enough difference to put Mises in the same camp as Rothbard and Hoppe, and NOT Hayek.

    The passage you cited from Mises does not necessarily require a monopoly state. One group of people imposing fire regulations on those unwilling to do so, for "the greater good", can be consistent with a fully private property society where laws are enforced by private agencies.

    Though that is not something I would personally advocate, and although it is in violation of the rules of private property rights, "fire regulations" do not necessarily imply a state is present, or required.

  4. "The passage you cited from Mises does not necessarily require a monopoly state."

    (1) That isn't the issue: I am NOT considering the passage in isolation. I am considering it in light of Mises well know support for a minimal state, which he never repudiated.

    (2) "One group of people imposing fire regulations on those unwilling to do so, for "the greater good", can be consistent with a fully private property society where laws are enforced by private agencies. "

    I doubt it. That is not ocnsistent with natural rights ethics.

    The argument that negative externalities which impose costs on people other than the 2 parties concerned in a private transaction can lead to coercive violation of their property and freedom would be consequentialist.

    There is no inherent fraud involved in not adhering to fire regulations: what I do on my own private property is NONE of your business.

    1. According to Haberler, in the 1970s, Hayek, after Robbins, ‘changed his mind’ on the
      nature of the Great Depression, and drew closer to Keynes.
      In this paper, I have tried to explore the issue

    2. That is a fascinating and enjoyable paper, thank you for drawing my attention to it.

      I have commented on it here:

      Are you the author of that paper?

    3. Yes, I am (and thanks for your comments)

    4. Prego.

      I think you might find Hayek’s essay “The Gold Problem” interesting (originally published in 1937 as “Das Goldproblem,” but available in an English translation in Hayek, Friedrich 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), where Hayek appears to approve of the fiscal policy recommendations of Lionel Robbins’s 1937 paper “How to Mitigate the Next Slump”.

  5. Thanks, I am going to read the essay. Ciao