Friday, October 3, 2014

Kaldor on Austrianism versus Friedmanite Monetarism

An interesting passage from Kaldor’s classic article “The New Monetarism” (1970):
“[sc. in Milton Friedman’s monetarism] Money cannot change ‘real’ things, except temporarily, and in the manner of throwing a spanner into the works—a ‘monkey-wrench into the machine’, to use Friedman’s more homely expression—at the cost of painful adjustments afterwards. There is a unique real equilibrium rate of real interest, a unique real equilibrium real wage, an equilibrium level of real unemployment. By monkeying around with money, these things can temporarily be made to change—interest reduced, unemployment cut, the real wage cut (or raised, I am not sure which)—only by making, in each case, reverse changes (abnormally high interest rates, abnormal unemployment, etc.) the inevitable sequel.

All this part of the Friedman doctrine is closely reminiscent of the Austrian school of the ’twenties and the early ’thirties—the theories of von Mises and von Hayek—a fact which so far (to my knowledge) has received no acknowledgment in Friedmanite literature. (Very few people these days know the works of the Mises-Hayek school; unfortunately, I am old enough to have been an early follower of Professor Hayek, and even translated one of his books, and there is nothing like having to translate a book, particularly from the German language, to force you to come to grips with an argument.) Friedman differs from Mises and Hayek in being more liberally spiced with the new empiricism. On the other hand, he misses some of the subtleties of the Hayekian transmission mechanism, and of the money-induced distortions in the ‘structure of production.’” (Kaldor 1970: 3).
This is an interesting point about the similarities and differences between Milton Friedman’s monetarism and the Austrian business cycle theory (ABCT).

In essence, the monetarist story was similar to the ABCT but
(1) without the assumption of the alleged unsustainable “lengthening of the structure of production”;

(2) without the hostility to fractional reserve banking, and

(3) with the assumption that flexible wages and prices will, in the long run, take care of any problems induced by money supply changes through a tendency to market clearing.
More importantly, Kaldor had arrived in England in 1927 and began to study at the London School of Economics (LSE), and, when Hayek arrived at the LSE in 1931, Kaldor fell briefly under his spell. From May to July 1931, Kaldor even spent time at the University of Vienna (Thirlwall 1987: 23; Klausinger 2012: 3).

As Kaldor says here, he had actually translated Hayek’s Geldtheorie und Konjunkturtheorie (1929) along with H. M. Croome, and this appeared as Monetary Theory and the Trade Cycle (1933) (which can be read in Hayek 2008: 1–130). Hayek also had other early supporters at the LSE such as John Hicks, Abba P. Lerner, Lionel Robbins, and George L. S. Shackle, so that some of the early founding fathers of Keynesianism – both the neoclassical and Post Keynesian varieties – had been well aware of Hayek’s business cycle theory and the Austrian tradition, but abandoned it because they found it unconvincing in light of Keynes’ work and other critiques. Kaldor, for example, had abandoned this flirtation with Austrian economics by the mid-1930s (King 2009: 17), and some of his earliest work (Kaldor 1939; 1940; 1942) involves criticisms of Hayek’s ABCT.

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.

Howson, Susan. 2011. Lionel Robbins. Cambridge University Press, New York.

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.

Kaldor, N. 1970. “The New Monetarism,” Lloyds Bank Review (July): 1–17.

King, J. E. 2009. Nicholas Kaldor. Palgrave Macmillan, Basingstoke and New York.

Klausinger, Hansjoerg (ed.). 2012. The Collected Works of F. A. Hayek. Volume 8. Business Cycles. Part II. University of Chicago Press, Chicago.

Thirlwall, Anthony P. 1987. Nicholas Kaldor. Wheatsheaf, Brighton.


  1. Excellent post.

    Have you, by any chance, written in detail about Kaldor's Professor Hayek and the Concertina Effect? I'm intrigued about what lies behind the online library's paywall.

    1. no, I've not properly written on that article yet.