I have begun a study of Hayek where I
am concentrating not as much on Hayek’s claims about his own work as his claims
about his opponents. I am hoping that it will help clarify his position
concerning the international monetary system during the 1920s and 1930s.
In the process of promoting his and
Mises's theory of the business cycle, Hayek’s star rose as he eventually earned a
position at the LSE. Not coincidentally, his influence as an economist reached
a pinnacle in the early thirties. It is not without irony that Hayek later lost
this influence precisely because his theory of the trade cycle could not
explain the severity of the downturn, nor was its suggestion of government
inaction relevant since central banks and governments were certainly not doing
nothing during the downturn. These problems needed to be confronted.
Eventually, even Hayek left the
original Hayekian position. I am by no means the first to notice this. At the
end of his article, “Hayek’ Monetary
Theory and Policy: A Critical Reconstruction,” Lawrence White makes
a similar observation:
As he was logically compelled to do if he were to embrace
consumer price-level stabilization, Hayek here essentially repudiated his
earlier business cycle theory and all that rested on it, most importantly his
explanation for the onset of the Great Depression (hardly ‘a problem of minor
practical significance’) as the necessary consequence of central bank
stabilization experiments in the 1920s. He did not indicate what cycle theory
should be put in its place. In this key respect Denationalisation of
Money breaks radically with Hayek’s earlier work. Hayek’s
transformation into supporter of price-level stabilization presents a puzzle
for future research.
In this post I am interested in
considering the significance of Hayek’s early view that business cycles are
caused by changes in M, but never in V. As noted above, this was not his final
position. I do think, however it is not unreasonable to claim that Hayek’s loss
of influence owed in large part to his original unwillingness to consider the
importance of MV stabilization.
The difficulty that confronts this
narrative is confusion between different types of price level stabilization. In
the introduction of Monetary Theory and the Trade Cycle Hayek
writes:
It is probably to this experiment, together with the attempts to
prevent liquidation once the crisis had come, that we owe the exceptional
severity and duration of the depression. We must not forget that, for the last
six or eight years, monetary policy all over the world has followed the advice
of the stabilizers. It is high time that their influence, which has already
done harm enough, should be overthrown.
These policies were supposed to
stabilize demand for gold – total reserves held by central banks – so that the
percent increase in holding would not outpace the percent increase in the gold
stock itself. This is different than stabilizing MV. The policies were in a
part a consequence of the activism of Ralph Hawtrey and Gustav Cassel. What was
either a lack of understanding or outright disregard for Cassel’s actual
position (for the most part Hawtrey’s work avoids this level of disdain)
appears throughout this work as Hayek only concerns himself with arguments
about stabilization of MV. He never confronts the more interesting and
pertinent case of stabilization of gold demand. Cassel certainly wanted to
stabilize the price level, but he was most concerned about changes in the value
of gold. As he noted in “Further
Observations on the World’s Monetary Problem”:
The decrease in the monetary demand for gold in comparison with
the more and more abundant supply of paper money has brought the value of gold
down to about half its prewar level, with the consequence that, as is seen in
the United States, the prices of commodities in gold have risen to about double
what they were before the war. Though this enhancement of prices has certainly
been a most injurious process, the inverse process of bringing prices down
again to their old level would probably be still more disastrous. The prospect
of a long period of falling prices would kill all enterprise and impede that
reconstruction of the world which is just now so very urgent.
The above argument was not an
argument for stabilizing MV, and it was this argument that dominated policy.
Unfortunately for Hayek, his concentration on changes in broader measures of M
put him on the losing side of the intellectual battle – not to claim that his
theory is invalid, only inadequate given the environment.
By the early 1930s, Hayek began to
concede ground to the promoters of price stabilization, but this was too little
too late. This is not to say that Hayek was an inferior economist, only that
the slowness of his change in views cost him and the Austrian school much
esteem. In coming posts, I will be looking for more comments by Hayek
concerning the interwar gold standard and the issue of the price of gold. Of
particular interest will be the lectures in Prices and Production Monetary
Nationalism and International Stability. I hope to break down his position
on gold – which is complicated! I close by noting that Hayek did have something
to say concerning gold demand in Prices and Production Monetary
Nationalism and International Stability. At one point in the final lecture
he notes that:
The policy on the part of those countries which are already in a strong position … should have been … to reduce the price of gold in order to direct the stream of gold to those countries which are not yet in a position to resume gold payments. Only when the price of gold has fallen sufficiently to enable those countries to acquire sufficient reserves should a general and simultaneous return to a free gold standard be attempted.
Here he sounds suspiciously like
Hawtrey and Cassel. More to come as I dissect his arguments over the next week.
Out of curiosity James Caton, have you seen this recently uploaded piece in The European Journal of the History of Economic Thought? I believe you might be interested in it.
ReplyDeletehttp://dx.doi.org/10.1080/09672567.2013.792373
Looks promising. Thanks for the suggestion.
ReplyDelete