A couple weeks ago I came across George Selgin’s work on Great Depression era monetary theory. In “Hayek vs. Keynes on How the Price Level Ought to Behave” Selgin notes many of the same issues that I have been recently reviewing. Of particular interest is Hayek’s changing views on deflation and price level stability. Hayek started in the 1920s with “a general indifference to deflation, whatever its cause” and did not began to change his views until after the onset of the Great Depression.
Throughout the second half of this piece, Selgin points out that Hayek grew to embrace the "productivity norm." This is true, but the claim requires qualification that, unless I have overlooked it, is lacking here. Selgin writes:
He [Hayek] therefore felt obliged to reformulate his major policy recommendation by stressing up-front what in the earlier edition appeared only as an afterthought, namely, that ‘any changes in the velocity of circulation would have to be compensated by a reciprocal change in the amount of money in circulation if money is to remain neutral toward prices.’
This is only half true. Hayek admitted this problem on theoretical grounds, but in practice saw a policy of this sort as an unworkable, utopian ideal since it would require money to be injected at a precise place and time in order for it to remain neutral (see my earlier post). Thus, Hayek’s reformulation was hardly a policy recommendation, but rather, a theoretical admission followed by hand waving that implied something like “oh well, we can’t do anything about that anyway!” The same follows for another claim by Selgin that, in his article "Saving", Hayek "emphasized the desirability of expanding the stock of money to offset 'hoarding.'" Again, Hayek's analysis is positive and does not include a policy prescription. Even in his later works where he does recommend specific policies, he emphasizes that any monetary policy ought to be subject automatic, not subject to the whims of policy makers.
With this in mind, I find it strange that Selgin lumps Hayek in with “Evan Durbin, Allen G. B. Fisher, Gottfried Haberler, Ralph Hawtrey, Eric Lindahl, Arthur Pigou, Dennis Robertson, [and] Gunner Myrdal” as supporting a “productivity norm.” As valuable as such a norm might be as a policy recommendation, Hayek did not support it as such.The confusion, I believe, is rooted in Hayek’s view toward price stabilization. Selgin admits that:
Hayek remained as opposed as ever to "the widespread illusion that we have simply to stabilize the value of money in order to eliminate all monetary influences on production" (ibid., 126). He also remained committed to the gold standard, which must have appeared to him even more acceptable than before (when he judged it insufficiently deflationary).
However, Hayek did not support a “productivity norm” prescription over one of price level stabilization. His comments must be viewed as only theoretical in nature as his policy suggestions did not change at least until 1937 as reflected in “Monetary Nationalism and International Stability” and waited until “A Commodity Reserve Currency” in 1943 for further elaboration. Even so, in 1937 Hayek was still advocating the gold standard as the appropriate monetary policy. Other policies, including a “productivity norm” would result in distortion of relative prices, presumably he believed worse than under a gold standard, because money is injected typically in financial markets rather than the point where a change in velocity is distorting prices.
*Note: I am not as familiar with Selgin’s work as I would like to be, so if he later corrected this I’d be happy if you let me know in the comments.