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.
James, I think you miss the point of my paper, which throughout concerns the nature of Hayek's "ideal" policy. It is the ideal of constant MV that he shares with the other writers to whom I refer in my article, so there is nothing strange in fact about my having lumped them together (or about my saying, on the same basis, that Keynes' nearly put himself in the same group). I understand that these writers differed concerning how such an ideal could be best approximated in practice. But surely you cannot have imagined that I was unaware of the different degrees of faith that Hayek and Keynes, for example, had in discretionary central bankers!
ReplyDelete"But surely you cannot have imagined that I was unaware of the different degrees of faith that Hayek and Keynes, for example, had in discretionary central bankers!"
ReplyDeleteOf course I did not imagine that you are ignorant of this George. Still, even having that sense, I believe that your discussion is not entirely clear about Hayek's view. Keynes is off of my radar in regard to this post . After reading the article twice, I still did not think that you had clearly defined Hayek's position concerning policy as opposed to theory.
This is partly due to my perspective considering Hayek's "ideal policy." His ideal policy was, for a time, the gold standard. Theoretically, he understood that price level stabilization (choose your formulation of it) was an appropriate norm. I don't see his theoretical assessment as representing his "ideal policy." This leaves room for confusion that allows detractors to make comments like this: http://delong.typepad.com/sdj/2013/08/that-friedrich-von-hayek-was-not-consistent-or-coherent-does-not-redound-to-his-benefit-daniel-kuehn-smacks-down-larry-white.html
I value your work more than most. I only think that, on this point, we ought to be excessively clear, especially since I consistently find myself in arguments with even Austrians and Austrian sympathizers on this subject.
PS: I realize that the above link does not consider your article, but rather White's article. I do think it is representative of the problem that I discuss though.
ReplyDelete