Not too long ago I had a run in with some of the Hayekian True Believers on Twitter.
One of them cited the second part of Hayek’s review of Keynes’ Pure Theory of Money (see Hayek 1932; the first part of the review is Hayek 1931), in order to prove that Hayek was definitely in favour of monetary stimulus and was not a nasty liquidationist.
Well, I checked this out and – lo and behold! – Hayek gives us his opinion:
“I do not deny that, during this process [viz., the slump], a tendency towards deflation will regularly arise; this will particularly be the case when the crisis leads to frequent failures and so increases the risks of lending. It may become very serious if attempts artificially to ‘maintain purchasing power’ delay the process of readjustment – as has probably been the case during the present crisis. This deflation is, however, a secondary phenomenon in the sense that it is caused by the instability in the real situation; the tendency will persist so long as the real causes are not removed. Any attempt to combat the crisis by credit expansion will, therefore, not only be merely the treatment of symptoms as causes, but may also prolong the depression by delaying the inevitable real adjustments. It is not difficult to understand, in the light of these considerations, why the easy-money policy which was adopted immediately after the crash of 1929 was of no effect.Ouch!!
It is, unfortunately, to these secondary complications that Mr. Keynes, in common with many other contemporary economists, directs most attention. This is not to say that he has not made
valuable suggestions for treating these secondary complications. But, as I suggested at the beginning of these Reflections, his neglect of the more fundamental ‘real’ phenomena has prevented him from reaching a satisfactory explanation of the more deep-seated causes of depression.” (Hayek 1932: 44).
That is very explicit: “Any attempt to combat the crisis by credit expansion will, therefore, not only be merely the treatment of symptoms as causes, but may also prolong the depression by delaying the inevitable real adjustments.” Crystal clear. As late as the second edition of Prices and Production (1935), Hayek was still saying that “we can do nothing to get out of ... [sc. a depression] before its natural end” (Hayek 2008 : 274–275).
Hayek is defending the Austrian Business Cycle Theory (ABCT) here, and its liquidationist solution to depressions.
In the same year (1932), Hayek signed a letter opposing British government intervention in the economy, as explained by Ludwig Lachmann:
“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?So Hayek changed his mind after he started to believe in the existence of “secondary depressions,” and then came to advocate monetary and eventually even fiscal interventions as a correct response to “secondary depressions” or “secondary deflations,” particularly when he came to accept the severity of downwards nominal wage rigidity in modern capitalist nations.
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)
We know this because Hayek explicitly said so later in life:
“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).And by the time of Hayek’s 1937 essay “The Gold Problem” (“Das Goldproblem” in German; see Hayek 1999: 169–185, and 184), Hayek is found actually endorsing, not just MV stability, but deficit-financed public works as a response to depression (see here).
I don’t think people appreciate the full extent of Hayek’s humiliation, volte face and capitulation to Keynes on these issues today (even if this was only a strategic move by Hayek at the time).
But Hayek clearly wasn’t saying these things in 1930, or 1931 or 1932. At that time, Hayek was indeed a liquidationist in any meaningful sense of the term.
“Hayek was originally a Liquidationist: Free Bankers are Wrong!,” August 13, 2013.
“Hayek the Stable MV Theorist?,” August 13, 2013.
“The Evidence for Hayek the Stable MV Theorist is still Feeble,” August 21, 2013.
Hayek, F. A. von. 1931. “Reflections on the Pure Theory of Money of Mr. J. M. Keynes,” Economica 33: 270–295.
Hayek, F. A. von. 1932. “Reflections on the Pure Theory of Money of Mr. J. M. Keynes (continued),” Economica 35: 22–44.
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.
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