Lionel Robbins and the Myth of Hayek’s Prediction of the Great Depression

In the introduction to the original edition of Prices and Production (London, 1931), Lionel Robbins made a bold claim for Austrian economists and Hayek’s predictive power:

“... I cannot think that it is altogether an accident that the Austrian Institut für Konjunkturforschung, of which Dr. Hayek is director, was one of the very few bodies of its kind which, in the spring of 1929, predicted a setback in America with injurious repercussions on European conditions” (Hayek 1931: xi-xii).

Robbins refers here to the Österreichische Konjunkturforschungsinstitut (Austrian Institute for Business Cycle Research). This opened in 1927, and Hayek was appointed as the first director (Hayek 1991: 125, n. 1; Steele 2001: 8–9; for the foundation of the Institute by Mises, see Hülsmann 2007: 575-576). Hayek wrote nearly all the monthly reports (“Monatsberichte” in German) of the institute for four years, and only obtained the assistance of Oskar Morgenstern as his collaborator in 1929 (Hayek 1991: 125, n. 1; Ebenstein 2003: 44; cf. Hülsmann 2007: 576: “Hayek himself wrote the first, very lengthy report [sc. of the “Monatsberichte”] ... Over the years, [sc. Hayek] ... relied more and more on contributions from others”).

Hansjörg Klausinger, in an excellent chapter in an edited monograph on Austrian economics, has recently charged that, “browsing through the monthly bulletins of the institute, it is difficult to discover anything that comes close to corroborating Robbin’s statement” (Klausinger 2010: 227). I am rather gratified that a reading of Klausinger (2010) confirms my own analysis of this very question here:

“Hayek and the Stock Market Crash of 1929: So Much for His Predictive Powers,” December 28, 2011.

I wrote this before reading Klausinger.

Klausinger also notes that Hayek’s “Monatsberichte” made very significant use of the “Harvard Economic Service” (a publication of the Harvard University Committee on Economic Research) and the Harvard barometer, and rarely engaged in much more than an “eclectic interpretation of these” (Klausinger 2010: 227).

This is easily verified. In a report from November 1928, we have the following (with my translation of the German):

“Harvard Economic Service meint, daß, wenn nicht unerwartete, jetzt nicht erkennbare Faktoren zu einer Liquidation am Effektenmarkt führen sollten, die ersten Monate 1929 eine neue Anspannung am Kapitalsmarkt bringen dürften. Die Kreditsituation sei als heikel und schwierig, nicht aber als gefährlich zu bezeichnen. Doch wenn die Krediterweiterung weiter fortgesetzt wird, wird man in einem Jahr einer noch viel schwierigeren und heikleren Situation gegenüberstehen. Die Position der Federal Reserve-Banken ist allerdings stark genug, um noch längere Zeit Kreditexpansion betreiben zu können und die Zeit der großen Wirtschaftskrise dürfte noch recht weit entfernt sein, wenn dies auch vorübergehende kleinere Liquidationsperioden nicht ausschließt.”

“[The] Harvard Economic Service thinks that factors not now apparent/recognizable, if not unexpected/unforeseen, should lead to a liquidation effect on the market, [and] the first months of 1929 may be expected to bring a new strain in the capital market. The credit situation is to be described as awkward and difficult, but not as dangerous. But, if the credit expansion is continued, we will face in a year an even more difficult and awkward situation. The position of the Federal Reserve banks, however, is strong enough to be able to conduct credit expansion for quite some time, and a time of great economic crisis is likely to be still quite far away, even if this does not exclude periods of temporary smaller liquidation.”
Monatsberichte des österreichischen Institutes für Konjunkturforschung, 2. Jahrgang, Nr. 11. (26 November, 1928). p. 174.

As I have said before, what is clear is that American forecasters were predicting some kind of crisis in 1929. Hayek picked up on that, and noted it here.

Moreover, Hayek thought that a “great economic crisis is likely to be still quite far away” (“großen Wirtschaftskrise dürfte noch recht weit entfernt sein”). “Still quite far away” (“noch recht weit entfernt”) sounds like a number of years to me, not one year. This is yet another problem for the view that Hayek was some kind of prescient oracle.

There is a second relevant passage in an October 26, 1929 issue of the Monatsberichte (my translation follows):

“Jedoch besteht derzeit kein Grund, einen plötzlichen Zusammenbruch der New Yorker Börse zu erwarten. Allerdings ist es nicht ausgeschlossen, daß nunmehr das Ende der geradezu phantastischen Kurssteigerungen gekommen ist und das Niveau langsam abbröckeln dürfte.

Die Kredit Möglichkeiten sind jedenfalls augenblicklich noch sehr große und es erscheint daher die Gewähr gegeben, daß eine ausgesprochen krisenhafte Zerstörung des jetzigen hohen Niveaus nicht befürchtet werden müßte. Zur Zeit werden europäische Gelder bereits in großen Beträgen abgezogen, so daß der Dollarkurs gedrückt ist.”

“However, at present there is no reason to expect a sudden crash of the New York stock exchange. However, it is not impossible that the end of the absolutely amazing price increases has arrived, and [that] the [price] level should slowly crumble. The credit possibilities/conditions are, at any rate, currently very great, and therefore it appears assured that an outright crisis-like destruction of the present high [sc. price] level should not be feared. At the moment, European funds are already being withdrawn in large amounts, so that the value of the [US] dollar is down.” Monatsberichte des österreichischen Institutes für Konjunkturforschung, 3. Jahrgang, Nr. 10 (26 October, 1929), p. 182.

There is a strong likelihood that Hayek wrote this, or possibly as a co-author with Oskar Morgenstern (it is clear from p. 186 of the issue that Hayek is listed as the editor: “Verantwortlicher Schriftleiter: Dr. Friedrich A. Hayek”).

So here a few days before the historic stock market crash of October 28, 1929 (Black Monday) and October 29 (Black Tuesday), a crash which continued until November 13, 1929, we have Hayek predicting

(1) no “sudden crash of the New York stock exchange”;
(2) the possibility of a slow fall in stock market prices, and
(3) an “outright crisis-like destruction of the present high [sc. price] level should not be feared.”

All wrong.

Hansjörg Klausinger (2010: 227) concludes that we still lack “convincing evidence of a prediction that conformed to what Robbins suggested in his foreword.”

And Klausinger is entirely correct. The Austrians’ predictive powers regarding the Great Depression are grossly exaggerated, and Hayek’s in particular.


BIBLIOGRAPHY

Ebenstein, A. O. 2003. Friedrich Hayek: A Biography, University of Chicago Press, Chicago and London.

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

Hayek, F. A. von. 1991. The Collected Works of F. A. Hayek. Volume 3. The Trend of Economic Thinking: Essays on Political Economists and Economic History (ed. W. W. Bartley and S. Kresge), Routledge, London.

Hayek, F. A. von. 1994. Hayek on Hayek: An Autobiographical Dialogue (eds. S. Kresge and L. Wenar), Routledge, London.

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.

Klausinger, Hansjörg. 2010. “Hayek on Practical Business Cycle Research: A Note,” in H. Hagemann, T. Nishizawa, Y. Ikeda (eds.), Austrian Economics in Transition: From Carl Menger to Friedrich Hayek, Palgrave Macmillan, Basingstoke. 218–234.

Steele, G. R. 2001. Keynes and Hayek: The Money Economy, Routledge, London and New York.

Hayek and the Stock Market Crash of 1929: So Much for His Predictive Powers

In 1927, the Österreichische Konjunkturforschungsinstitut (Austrian Institute for Business Cycle Research) was opened and Friedrich August von Hayek was appointed as the first director (Hayek 1991: 125, n. 1; Steele 2001: 8–9; for the foundation of the Institute by Mises, see Hülsmann 2007: 575-576). Hayek wrote nearly all the monthly reports (“Monatsberichte” in German) of the institute for four years, and only obtained the assistance of Oskar Morgenstern as his collaborator in 1929 (Hayek 1991: 125, n. 1; Ebenstein 2003: 44; cf. Hülsmann 2007: 576: “Hayek himself wrote the first, very lengthy report [sc. of the “Monatsberichte”] ... Over the years, [sc. Hayek] ... relied more and more on contributions from others”).

You can find PDFs of the Monatsberichte here:

Monatsberichte, Historisches Volltextarchiv ab 1927.

Now it is said that in a report from November 1928 Hayek predicted a great economic crisis (“großen Wirtschaftskrise”) in America. Let’s turn to the relevant passage, with my translation of the German following:

“Harvard Economic Service meint, daß, wenn nicht unerwartete, jetzt nicht erkennbare Faktoren zu einer Liquidation am Effektenmarkt führen sollten, die ersten Monate 1929 eine neue Anspannung am Kapitalsmarkt bringen dürften. Die Kreditsituation sei als heikel und schwierig, nicht aber als gefährlich zu bezeichnen. Doch wenn die Krediterweiterung weiter fortgesetzt wird, wird man in einem Jahr einer noch viel schwierigeren und heikleren Situation gegenüberstehen. Die Position der Federal Reserve-Banken ist allerdings stark genug, um noch längere Zeit Kreditexpansion betreiben zu können und die Zeit der großen Wirtschaftskrise dürfte noch recht weit entfernt sein, wenn dies auch vorübergehende kleinere Liquidationsperioden nicht ausschließt.”

“[The] Harvard Economic Service thinks that factors not now apparent/recognizable, if not unexpected/unforeseen, should lead to a liquidation effect on the market, [and] the first months of 1929 may be expected to bring a new strain in the capital market. The credit situation is to be described as awkward and difficult, but not as dangerous. But, if the credit expansion is continued, we will face in a year an even more difficult and awkward situation. The position of the Federal Reserve banks, however, is strong enough to be able to conduct credit expansion for quite some time, and a time of great economic crisis is likely to be still quite far away, even if this does not exclude periods of temporary smaller liquidation.”
Monatsberichte des österreichischen Institutes für Konjunkturforschung, 2. Jahrgang, Nr. 11. (26 November, 1928). p. 174.

The first thing that sticks out like a sore thumb is the opening clause:

“Harvard Economic Service meint, daß, …” or “[the] Harvard Economic service thinks that … .”

Hayek is quoting from “The Harvard Economic Service,” a publication of the Harvard University Committee on Economic Research: this committee published a quarterly journal on economic statistics, and from 1922 began to provide business forecasting through a weekly newsletter with economic data and analysis.

Apparently, it was a forecast by the American Harvard Economic Service that Hayek is quoting in predicting that some problems would emerge on the US capital market in the first months of 1929. Indeed, Hayek himself on a trip to the US in 1923 had been impressed with empirical business cycle research at Columbia University, and this may have inspired the founding of the Austrian Institute for Business Cycle Research later in 1927 (Overtveldt 2007: 341; Hayek 1994: 6-8, 59; Ebenstein 2003: 43).

So are Hayek’s subsequent statements also derived from information he read in the Harvard Economic Service? If so, Hayek has no great predictive power here: he was relying on American research.

Here is the crucial statement:

“The position of the Federal Reserve banks, however, is strong enough for the credit expansion to be conducted for some time, and a time of great economic crisis is likely to be still quite far away, even if this does not exclude periods of temporary smaller liquidation.”

Was this Hayek’s own prediction? Until we look at the weekly (or perhaps quarterly) issues of the Harvard Economic Service, we can’t know. What is clear is that American forecasters were predicting some kind of crisis in 1929. Hayek picked up on that, and perhaps made this inference. Let’s assume that it was Hayek’s own prediction: in November, 1928 – about a year from the most devastating economic collapse seen in the US and the world – Hayek thought that a “great economic crisis is likely to be still quite far away” (“großen Wirtschaftskrise dürfte noch recht weit entfernt sein”). “Still quite far away” (“noch recht weit entfernt”) sounds like a number of years to me, not one year. This is yet another problem for the view that Hayek was some kind of prescient oracle.

Now Hayek is said to have predicted an economic crisis in the US in a February 1929 report (Steele 2001: 9; Huerta de Soto 2006: 429, n. 28 speaks of a 1929 prediction in the Monatsberichte, but gives no month). However, I cannot as yet find any such prediction. The report is here:

Monatsberichte des österreichischen Institutes für Konjunkturforschung, 3. Jahrgang, Nr. 2. (26 February 1929).

Let’s turn to the second relevant passage. This can be read in the 26 October 1929 issue of the Monatsberichte (my translation follows):

“Jedoch besteht derzeit kein Grund, einen plötzlichen Zusammenbruch der New Yorker Börse zu erwarten. Allerdings ist es nicht ausgeschlossen, daß nunmehr das Ende der geradezu phantastischen Kurssteigerungen gekommen ist und das Niveau langsam abbröckeln dürfte.

Die Kredit Möglichkeiten sind jedenfalls augenblicklich noch sehr große und es erscheint daher die Gewähr gegeben, daß eine ausgesprochen krisenhafte Zerstörung des jetzigen hohen Niveaus nicht befürchtet werden müßte. Zur Zeit werden europäische Gelder bereits in großen Beträgen abgezogen, so daß der Dollarkurs gedrückt ist.”

“However, at present there is no reason to expect a sudden crash of the New York stock exchange. However, it is not impossible that the end of the absolutely amazing price increases has arrived, and [that] the [price] level should slowly crumble. The credit possibilities/conditions are, at any rate, currently very great, and therefore it appears assured that an outright crisis-like destruction of the present high [sc. price] level should not be feared. At the moment, European funds are already being withdrawn in large amounts, so that the value of the [US] dollar is down.” Monatsberichte des österreichischen Institutes für Konjunkturforschung, 3. Jahrgang, Nr. 10 (26 October, 1929), p. 182.

There is a strong likelihood that Hayek wrote this, or possibly as a co-author with Oskar Morgenstern (it is clear from p. 186 of the issue that Hayek is listed as the editor: “Verantwortlicher Schriftleiter: Dr. Friedrich A. Hayek”).

So here a few days before the historic stock market crash of October 28, 1929 (Black Monday) and October 29 (Black Tuesday), a crash that continued until November 13, 1929, we have Hayek predicting

(1) no “sudden crash of the New York stock exchange”;
(2) the possibility of a slow fall in stock market prices, and
(3) an “outright crisis-like destruction of the present high [sc. price] level should not be feared.”

All utterly wrong.

All in all, I don’t see any great miracles of prediction here. There also remains the possibility that Hayek’s November 1928 prediction of a “great economic crisis … likely to be still quite far away” (“großen Wirtschaftskrise dürfte noch recht weit entfernt”) was something he read in the Harvard Economic Service, or that he inferred this from their own prediction of some kind of market liquidation in 1929.


BIBLIOGRAPHY

Ebenstein, A. O. 2003. Friedrich Hayek: A Biography, University of Chicago Press, Chicago and London.

Hayek, F. A. von. 1991. The Collected Works of F. A. Hayek. Volume 3. The Trend of Economic Thinking: Essays on Political Economists and Economic History (ed. W. W. Bartley and S. Kresge), Routledge, London.

Hayek, F. A. von. 1994. Hayek on Hayek: An Autobiographical Dialogue (eds. S. Kresge and L. Wenar), Routledge, London.

Huerta de Soto, J. 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala.

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.

Overtveldt, J. van. 2007. The Chicago School: How the University of Chicago Assembled the Thinkers who Revolutionized Economics and Business, Agate, Chicago.

Steele, G. R. 2001. Keynes and Hayek: The Money Economy, Routledge, London and New York.