Keynes v. Hayek: Enough Already

First, it was the Keynes v. Hayek rap video, and then came the even more vulgar and tasteless Keynes v. Hayek sequel video reducing the two hyperintellectuals to prize fighters. (The accuracy of the representations signaled in its portrayal of Hayek as bald and Keynes with a full head of hair when in real life it was the other way around.) Then came a debate broadcast by the BBC at the London School of Economics, and then another sponsored by Reuters with a Nobel Prize winning economist on the program arguing for the Hayek side. Now comes a new book by Nicholas Wapshott Keynes Hayek, offering an extended account of the fraught relationship between two giants of twentieth century economics who eventually came to a sort of intellectual détente toward the end of Keynes’s life, a decade or more after a few years of really intense, even brutal, but very high level, polemical exchanges between them (and some of their surrogates) in the pages of England’s leading economics journals. Tyler Cowen has just reviewed Wapshott’s book in the National Review (see Marcus Nunes’s blog).

As I observed in September after watching the first Keynes-Hayek debate, we can still learn a lot by going back to Keynes’s and Hayek’s own writings, but all this Keynes versus Hayek hype creates the terribly misleading impression that the truth must lie with only one side or the other, that one side represents truth and enlightenment and the other represents falsehood and darkness, one side represents pure disinterested motives and the other is shilling for sinister forces lurking in the wings seeking to advance their own illegitimate interests, in short that one side can be trusted and the other cannot. All this attention on Keynes and Hayek, two charismatic personalities who have become figureheads or totems for ideological movements that they might not have endorsed at all — and certainly not endorsed unconditionally — encourages an increasingly polarized discussion in which people choose sides based on pre-existing ideological commitments rather than on a reasoned assessment of the arguments and the evidence.

In part, this framing of arguments in ideological terms simply reflects existing trends that have been encouraging an increasingly ideological approach to politics, law, and public policy. For an example of this approach, see Naomi Klein’s recent musings about global warming and the necessity for acknowledging that combating global warming requires the very social transformation that makes right-wingers oppose, on ideological principle, any measure to counter global warming.  Those are just the terms of debate that Naomi Klein wants.  Thus, both sides have come to see global warming not as a problem to be addressed or mitigated, but as a weapon to be used in the context of a comprehensive ideological struggle. Those who want to address the problem in a pragmatic, non-ideological, way are losing control of the conversation.

The amazing thing about the original Keynes-Hayek debate is not only that both misunderstood the sources of the Great Depression for which they were confidently offering policy advice, but that Ralph Hawtrey and Gustav Cassel had explained what was happening ten years before the downturn started in the summer of 1929. Both Hawtrey and Cassel understood that restoring the gold standard after the demonetization of gold that took place during World War I would have hugely deflationary implications if, when the gold standard was reinstated, the world’s monetary demand for gold would increase back to the pre-World War I level (as a result of restoring gold coinage and the replenishment of the gold reserves held in central bank coffers). That is why both Hawtrey and Cassel called for measures to limit the world’s monetary demand for gold (measures agreed upon in the international monetary conference in Genoa in 1922 of which Hawtrey was the guiding spirit). The measures agreed upon at the Genoa Conference prevented the monetary demand for gold from increasing faster than the stock of gold was increasing so that the world price level in terms of gold was roughly stable from about 1922 through 1928. But in 1928, French demand for gold started to increase rapidly just as the Federal Reserve began tightening monetary policy in a tragically misguided effort to squelch a supposed stock-price bubble on Wall Street, causing an inflow of gold into the US while the French embarked on a frenzied drive to add to their gold holdings, and other countries rejoining the gold standard were increasing their gold holdings as well, though with a less fanatical determination than the French. The Great Depression was therefore entirely the product of monetary causes, a world-wide increase in gold demand causing its value to increase, an increase manifesting itself, under the gold standard, in deflation.

Hayek, along with his mentor Ludwig von Mises, could also claim to have predicted the 1929 downturn, having criticized the Fed in 1927, when the US was in danger of falling into a recession, for reducing interest rates to 3.5%, by historical standards far from a dangerously expansionary rate, as Hawtrey demonstrated in his exhaustive book on the subject A Century of Bank Rate. But it has never been even remotely plausible that a 3.5% discount rate at the Fed for a little over a year was the trigger for the worst economic catastrophe since the Black Death of the 14th century. Nor could Keynes offer a persuasive explanation for why the world suddenly went into a catastrophic downward spiral in late 1929. References to animal spirits and the inherent instability of entrepreneurial expectations are all well and good, but they provide not so much an explanation of the downturn as a way of talking about it or describing it. Beyond that, the Hawtrey-Cassel account of the Great Depression also accounts for the relative severity of the Depression and for the sequence of recovery in different counties, there being an almost exact correlation between the severity of the Depression in a country and the existence and duration of the gold standard in the country. In no country did recovery start until after the gold standard was abandoned, and in no country was there a substantial lag between leaving the gold standard and the start of the recovery.

So not only did Hawtrey and Cassel predict the Great Depression, specifying in advance the conditions that would, and did, bring it about, they identified the unerring prescription – something provided by no other explanation — for a country to start recovering from the Great Depression. Hayek, on the other hand, along with von Mises, not only advocated precisely the wrong policy, namely, tightening money, in effect increasing the monetary demand for gold, he accepted, if not welcomed, deflation as the necessary price for maintaining the gold standard. (This by the way is what explains the puzzle (raised by Larry White in his paper “Did Hayek and Robbins Deepen the Great Depression?”) of Hayek’s failure to follow his own criterion for a neutral monetary policy, stated explicitly in chapter 4 of Prices and Production: stabilization of nominal expenditure (NGDP). However, a policy of stabilizing nominal expenditure was inconsistent with staying on the gold standard when the value of gold was rising by 5 to 10% a year. Faced with a conflict between maintaining the gold standard and following his own criterion for neutral money, Hayek, along with his friend and colleague Lionel Robbins in his patently Austrian book The Great Depression, both opted for maintaining the gold standard.)

Not only did Hayek make the wrong call about the gold standard, he actually defended the insane French policy of gold accumulation in his lament for the gold standard after Britain wisely disregarded his advice and left the gold standard in 1931. In his paper “The Fate of the Gold Standard” (originally Das Schicksal der Goldwahrung) reprinted in The Collected Works of F. A. Hayek: Good Money, Part 1, Hayek mourned the impending demise of the gold standard after Britain tardily did the right thing. The tone of Hayek’s lament is struck in his opening paragraph (p. 153).

There has been much talk about the breakdown of the gold standard, particularly in Britain where, to the astonishment of every foreign observer, the abandonment of the gold standard was very widely welcomed as a release from an irksome constraint. However, it can scarcely be doubted that the renewed monetary problems of almost the whole world have nothing to do with the tendencies inherent in the gold standard, but on the contrary stem from the persistent and continuous attempts from many sides over a number of years to prevent the gold standard from functioning whenever it began to reveal tendencies which were not desired by the country in question. Hence it was by no means the economically strong countries such as America and France whose measures rendered the gold standard inoperative, as is frequently assumed, but the countries in a relatively weak position, at the head of which was Britain, who eventually paid for their transgression of the “rules of the game” by the breakdown of their gold standard.

So what do we learn from this depressing tale? Hawtrey and Cassel did everything right. They identified the danger to the world economy a decade in advance. They specified exactly the correct policy for avoiding the danger. Their policy was a huge success for about nine years until the Americans and the French between them drove the world economy into the Great Depression, just as Hawtrey and Cassel warned would happen if the monetary demand for gold was not held in check. Within a year and a half, both Hawtrey and Cassel concluded that recovery was no longer possible under the gold standard. And as countries, one by one, abandoned the gold standard, they began to recover just as Hawtrey and Cassel predicted. So one would have thought that Hawtrey and Cassel would have been acclaimed and celebrated far and wide as the most insightful, the most farsighted, the wisest, economists in the world. Yep, that’s what one would have thought. Did it happen? Not a chance. Instead, it was Keynes who was credited with figuring out how to end the Great Depression, even though there was almost nothing in the General Theory about the gold standard and a 30% deflation as the cause of the Great Depression, despite his having vilified Churchill in 1925 for rejoining the gold standard at the prewar parity when that decision was expected to cause a mere 10% deflation.

But amazingly enough, even when economists began looking for alternative ways to Keynesianism of thinking about macroeconomics, Austrian economics still being considered too toxic to handle, almost no one bothered to go back to revisit what Hawtrey and Cassel had said about the Great Depression. So Milton Friedman was considered to have been daring and original for suggesting a monetary explanation for the Great Depression and finding historical and statistical support for that explanation. Yet, on the key elements of the historical explanation, Hawtrey and Cassel either anticipated Friedman, or on the numerous issues on which Friedman did not follow Hawtrey and Cassel — in particular the international gold market as the transmitter of deflation and depression across all countries on the gold standard, the key role of the Bank of France (which Friedman denied in the Monetary History and for years afterwards only to concede the point in the mid to late 1990s), the absence of an explanation for the 1929 downturn, the misplaced emphasis on the contraction of the US money stock and the role of U.S. bank failures as a critical factor in explaining the severity of the Great Depression — Hawtrey and Cassel got it right and Friedman got it wrong.

So what matters in the success in the marketplace of ideas seems to be not just the quality or the truth of a theory, but also (or instead) the publicity machine that can be deployed in support of a theory to generate interest in it and to attract followers who can expect to advance their own careers in the process of developing, testing, or otherwise propagating, the theory. Keynes, Friedman, and eventually Hayek, all had powerful ideologically driven publicity machines working on their behalf. And guess what? It’s the theories that attract the support of a hard core of ideologically motivated followers that tend to outperform those without a cadre of ideological followers.

That’s why it was very interesting, important, and encouraging that Tyler Cowen, in his discussion of the Keynes-Hayek story, felt the need to mention how Scott Sumner has shifted the debate over the past two years away from the tired old Keynes vs. Hayek routine. Of course Tyler, about as well read an economist as there is, slipped up when he said that Scott is reviving the Friedman Monetarist tradition. No, Scott is reviving the Hawtrey-Cassel pre-Monetarist tradition, of which Friedman’s is a decidedly inferior, and obsolete, version. It just goes to show that one person sometimes really can make a difference, even without an ideologically driven publicity machine working on his behalf. Just imagine what Hawtrey and Cassel could have accomplished if they had been bloggers.

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72 Responses to “Keynes v. Hayek: Enough Already”


  1. 1 Steve December 12, 2011 at 10:47 pm

    Great stuff, David. Now I know I need to read more Cassel and Hawtrey.

    This is a funny anecdote. When I was in school, I always thought it was strange that economics was taught as all mathematical models and little history. I opted to major in math for that reason; if I was going to spend all my time *doing* math, I should study math.

    I did take a few economics classes, though. One was taught by Alan Blinder, and the exam asked for a rote recitation of the Taylor Rule as well as an explanation. I believe I pointed out that the rule had two shortcomings: the potential growth was unobservable, and the zero bound was unspecified. Neither points were deep economics insights on my part. Rather, the former resulted from my science training and the latter from my mathematical training. I got marked wrong for that answer.

  2. 2 Greg Ransom December 12, 2011 at 10:47 pm

    David, you make a good case for a particular empirical assessment of things at a particular time in history, but you once again confuse a ejection of Hayek’s mistaken empirical assessment of the significance of events at the time — which even Hayek says was wrong — for a disproof of Hayek’s picture of how money / credit / leverage / asset value & liquidity fluctuations create the “loose joint” making for booms and depressions.

    It seems to me — and you self evidently do not show otherwise — that the empirical assessments and explanatory picture of Hawtrey & Cassel can be fairly well captured in Hayek’s theoretical / explanatory system as laid out in _Monetary Theory and the Trade Cycle_, e.g.

  3. 3 Marcus Nunes December 13, 2011 at 3:00 am

    David
    Great and enjoyable post. There are so many “gold nuggets” in the 30´s…

  4. 4 Kevin Donoghue December 13, 2011 at 3:47 am

    An interesting post, which makes me wish I knew more about Hawtrey and Cassel. But I think you sort-of miss the point about why Keynes won out:

    “…it was Keynes who was credited with figuring out how to end the Great Depression, even though there was almost nothing in the General Theory about the gold standard and a 30% deflation as the cause of the Great Depression….”

    The fact that Keynes ignored the question of how the slump came about is actually one of the strengths (rhetorical and analytical) of the GT. The question he poses is whether, given that an economy is operating far below potential, there are any equilibrating forces which will bring recovery. How we got here is beside the point.

  5. 5 Mike December 13, 2011 at 4:54 am

    So let me see if I got this straight.

    You start out by saying give the Hayek v. Keynes ideology thing a rest. Then go on to show why Keynes had valid points, but Hayek was wrong in many places like the gold standard, and so was Milton Freidman on monetary issues, but Hawtrey was right. It sounds like you are still trying to prove who was right and wrong, but you want people to recognize this Hawtrey guy as well in the debate. The guy who apparently inspired Keynes, as Mises did Hayek. This is a pretty hypocritical piece in my view. You’re not tired of the debate, it sounds like you are tired of being shown where your theory is wrong. And now you want the debate shifted to show a better view of your own ideology.

  6. 6 Daniel Kuehn December 13, 2011 at 5:03 am

    The bald vs. full head of hair things was one of the first things I mentioned to Russ Roberts when the first video came out!

    I’m glad that bothered someone else other than me!

    Agree with the rest of this too.

  7. 7 Chris December 13, 2011 at 5:17 am

    Writing in 1932, at a time when Robertson had come to realize the evils of stabilization, Hawtrey declared: “The American experiment in stabilization from 1922 to 1928 showed that an early treatment could check a tendency either to inflation or to depression. . . . The American experiment was a great advance upon the practice of the nineteenth century,” when the trade cycle was accepted passively.[11]

    http://mises.org/rothbard/agd/chapter6.asp

  8. 8 Marcus Nunes December 13, 2011 at 5:18 am

    Kevin
    “How we got here” is most certainly NOT beside the point. Ignorance can be very harmful to one´s health!
    That´s why Casesel (and Hawtrey) were much more insightful than Keynes or Hayek. They had the “complete picture”.
    Read this piece by Doug Irwin:
    http://www.dartmouth.edu/~dirwin/Cassel.pdf

  9. 9 Kevin Donoghue December 13, 2011 at 6:34 am

    I’m a bit surprised to see my comment interpreted as praise for ignorance.

    From your link:

    [Cassel] predicted that “the continued fall in the general level of prices . . . [would] cause a severe economic depression.” While he did not fully explain why falling prices would produce such economic problems, he pointed out that it would “in an immense degree aggravate the already oppressive financial burdens” of governments and debtors [my emphasis].

    In the GT, Keynes was very much concerned with that ‘why’ and he resisted the temptation to go exploring the policy errors which led to deflation. I think that was shrewd. The GT was long enough as it stood.

  10. 10 invisible Backhand December 13, 2011 at 8:06 am

    Austrian economics is a well funded (Koch, Volker, Earhart Foundation, GMU, Hoover.org, Cato.org, Mises.org etc.) propaganda campaign by the rich to convince the rest of us that’s what best for the rich is best for the rest of us.

    You can call it praxeology or neoliberalism or freshwater school or trickle down economics, but it’s still the same old BS that’s been handed down since the pharaohs.

  11. 11 Benjamin Cole December 13, 2011 at 9:01 am

    Interruption:

    My Market Monetarism Plan for USA:

    1. $100 billion a month in QE until NGDP targets are met
    2. A decrease in IOR
    3. This plan announced publicly.
    4. Support for less taxes and regulation on businesses

    Now go back to your terribly erudite economic debates…..

  12. 12 David Glasner December 13, 2011 at 10:13 am

    Steve, Thanks for the compliment and for the story. Did you ask Blinder why you got marked off for your answer?

    Greg, I happen to think that Hayek’s story has an element of truth in it as a partial explanation of mild business cycle fluctuations. I just think that it is not credible, for a whole host of reasons, for deep depressions. That said, I think all Hayek’s work on business cycles, whether or not it has an ounce of empirical validity, was more than worth it by enabling him to produce his extraordinary account of the meaning and conditions for interremporal equilibrium in his Economics and Knowledge paper.

    To say that the Hawtrey-Cassel account of the Great Depression can be accommodated by Hayek’s framework in Monetary Theory and the Trade Cycle is not the same as saying that their account could not be coherently stated independently of Hayek’s framework. It obviously could be and was stated independently of Hayek.

    Marcus, Thanks. G.L.S. Shackle wrote a wonderful book about economic theory in the late 1920s and 1930s, called Years of High Theory, though he also ignored Hawtrey and Cassel. It’s still a good (and very high level) read.

    Kevin, Fair point. I don’t say that Keynes should not have stated a model (largely) abstracting from price level fluctuations. But there was enough policy discussion and explanation for the Great Depression in the book to make the absence of any mention of the effects of deflation a significant and unfortunate omission. The take away from the GT was that monetary policy was ineffectual. That was the wrong message.

    Mike, Sorry, I don’t think that you do have it right. My point is that focusing just on rock stars like Keynes and Hayek is misleading because doing so crowds out other worthwhile explanations for why the Great Depression happened and was so intractable. I happen to think that the evidence is clear that Hawtrey and Cassel, two guys hardly anyone has ever heard of, had a better explanation than either one, and the consensus among modern economists and economic historians who have studied the Great Depression, people like Peter Temin, Barry Eichengreen and some guy named Ben Bernanke is that the dynamics associated with the gold standard were critical to what was going on, essentially the view of Hawtrey and Cassel. I also say that part of the reason why Keynes and Hayek get all this undeserved attention is because people buy into the ideologies they think Keynes and Hayek represent. So if you like government intervention Keynes is your guy and if you want the free market to reign you go with Hayek. That reduces the discussion to the level of, well, a rap video. I’ld like us to get past that.

    Daniel, Well, obviously great minds think alike.

    Chris, Thanks for the reference, but I don’t know what I am supposed to do with it or what you think it proves.

    Invisible Backhand, Listen, in a free country people get to give their money away to whomever they want to. Austrian economics has some wealthy benefactors, you can complain about it or you can argue against them (or do both). Good luck.

    Benjamin, Always good to hear from you. It’s sounds good to me.

  13. 13 MG December 13, 2011 at 10:48 am

    You are slipping into the poisonous “both sides do it” mindset, which leads to paralysis and even further polarization. It’s psychologically rewarding, to wag one’s finger at everyone else (“You children! Always with your arguing!”), and it might even make you look smart and fair-minded, but it doesn’t tend to get much done in the realm of policy.

    If you think Naomi Wolf, or anyone, or anything, else is the reason the right opposes doing anything about global warming besides greed, then the word “delusional” springs to mind. They oppose it because it is in their interests. Exxon-Mobile and the rest of them aren’t spending tens of millions of dollars on phony think tanks and the like because they are afraid of some socialist takeover of the government.

    Really, this was a disappointing post. The economics were fine, but as soon as you ventured out of your realm, you went splat.

  14. 14 PrometheeFeu (@PrometheeFeu) December 13, 2011 at 11:32 am

    @David: If I wanted to read Hawtrey and Cassel’s, account, theory and empirical evidence, what should I read?

  15. 15 Greg Ransom December 13, 2011 at 12:28 pm

    David, it’s clear to me that you have not acknowledging the half of “Hayek’s story”, as I’ve indicated repeatedly here.

    Hayek’s “story” is an monetary disequilibrium story — that is the guts of it, and Hayek spent much time on the microeconomics of the playing out of his main monetary disequilibrium story through relative prices and structures of production and consumption as any competent economist should do.

    NOTE WELL: Hayek in many places explains how the monetary disequilibrium could be set in motion by alternative institutional causal factors — AND HAYEK SPECIFICALLY IDENTIFIES CENTRAL BANK POLICY SETTING IN THE AFTERMATH OF GOING OFF THE GOLD STANDARD as _ONE_ of those causal scenarios.

    You are pretending that Hayek’s _Monetary Theory and the Trade Cycle_ doesn’t exist, and many of his other works, all of the monetary disequilibrium stuff that is not concerned with working out the logical microeconomics of adjustments in the structures of production and consumption.

    That simply isn’t a serious engagement with Hayek’s monetary disequilibrium economics.

  16. 16 Greg Ransom December 13, 2011 at 12:39 pm

    David, it’s clear to me that you mean by “the Hayek story” simply the part of Hayek where he works out the logic of the extension and contraction of the production structure.

    Hayek _explicitly_ says that there are other causal chains and institutional initial conditions for setting monetary discoordination in motion.

    And he explicitly _identified_ such a condition in Britain in the post-WWI period.

    And Hayek repeatedly said the pattern was typical of and applicable to many 19th century booms and busts, but not to all 20th century disruptions.

    So the “Hayek Story” isn’t even Hayek’s story ….

    It’s a part of his monetary disequilibrium economics — and one that other economists should be embarrassed not to include in their considerations of how market coordination takes place — or fails to take place.

    But is only a part of Hayek’s monetary economics — and the expansion part of it is NOT a necessary part of it, as Hayek pointed out, and as his account of the post-WWI British situation makes self evident.

    At this point, getting this wrong would count as willful misrepresentation.

  17. 17 Warren December 13, 2011 at 12:52 pm

    Fascinating post on two economists who have been overlooked rather unfairly by history (I had never heard of either until I discovered your blog some months ago). Your calls for pragmatism and recognition of trade off’s in dealing with political problems is, unfortunately, far too adult for a lot of the discourse that happens on the internet.

    I thought I’d take the liberty of collecting two replies from bloggers I read in case you wished to respond:
    Pete Boettke has a reply from the Austrian point of view.

    Daniel Kuehn compliments your post from the perspective of someone who more generally supports Keynes here.

    Keep up the good work,

    Warren

  18. 18 David Glasner December 13, 2011 at 6:50 pm

    MG, Well, I don’t think that we are in the realm of arm-chair sociology now. I have no way of knowing what is motivating tea-partyers to be against doing anything about global warming, and I don’t think you do either. If you have any evidence, please share. I am not saying you’re wrong, but I have no basis for accepting your assertion.

    PrometheeFeu, For Hawtrey, my favorites are The Gold Standard in Theory and Practice, (it went through five or six editions and I am not sure how much later editions differ from the 3rd edition (1933) which is the edition that I read) and The Art of Central Banking. For Cassel, I suggest you look at Doug Irwin’s very fine paper, and consult the works that he lists.

    Greg, I am at a loss to know how to respond to your complaints. I am not engaging with Hayek’s business cycle theory, because the Great Depression, as I have repeated, was not a conventional business cycle in any way shape or form, but a pure monetary shock caused by a disturbance in the world gold market. Hayek’s policy recommendations about the Great Depression, as we all agree, or at least Hayek did, were just wrong, so if I have an alternative theory (that of Hawtrey and Cassel) to explain the Great Depression, there is no need for me to engage with Hayek’s business cycle theory in a discussion of the Great Depression beyond pointing out that his policy advice was mistaken. I am not making an assessment of the logical validity of his pure theory, I am just saying that it is not relevant to an understanding of the Great Depression. I also don’t know how to interpret your remark about willful misrepresentation. But since I don’t understand it, I will just ignore it.

    Warren, Thanks for your kind remarks. I saw both posts. I replied to Daniel’s post, and perhaps I will to Peter’s as well.

  19. 19 MG December 13, 2011 at 7:13 pm

    “MG, Well, I don’t think that we are in the realm of arm-chair sociology now. I have no way of knowing what is motivating tea-partyers to be against doing anything about global warming, and I don’t think you do either. ”

    Then how do know that the right opposes doing anything about global warming because they are worried about the “destruction of capitalism,” or however Klein worded it? You can’t say you know, and then you don’t know.

    By the way, I know pretty well what motivates the Tea Partiers. I deal with them about twenty hours every week of my working life, as clients and as co-workers. Been doing it for just over a decade. Listening to and humoring them is a big part of how I make my living. I daresay I know them as well as, perhaps even better than, just about anyone around (this is nothing to brag about, don’t get me wrong here). But I wasn’t really talking about the Tea Partiers, but the people who fund them, and who fund the institutions that make their movement possible. And I deal with some of those people, too. And they are motivated by little more than greed so naked they aren’t even aware it’s abnormal. It’s just an accepted part of the world they live in.

  20. 20 Mitch December 13, 2011 at 8:01 pm

    I have to say I have always found the discussions of Keynesianism on this blog perplexing. No Keynesian economist I know (and I know several, some personally) thinks that monetary policy is ineffective. To name one of the more prominent – Paul Krugman’s analysis of the situation in Europe puts their monetary policy first and foremost. He is impassioned about the failures of the ECB to bring about sufficient inflation in Germany and to act as a lender of last resort for Italy and Spain.

    Yet I see a form of “fiscal policy denialism” in this blog as in so many other places that feel the need to differentiate themselves from Keynesianism. An example was Clark Johnson’s virtually non-existent explanation for “Myth 5″ about the uselessness of fiscal policy, that for some reason won praise here.

    http://uneasymoney.com/2011/10/24/clark-johnson-explains-how-monetary-policy-works/#comment-1990

    It is therefore the other way around – it’s not the Keynesians who reject monetary policy, it’s the non-Keynesians who reject fiscal policy.

    It is perfectly plausible to believe that a deflationary shock of the sort you discuss could cause the Great Depression. It is also possible that other things played a role as well. (E.g. the current Great Recession was brought about in Europe by the collapse of speculative lending to the EU periphery, and it isn’t unreasonable to look at the speculative collapse in 1929 as bringing on a similar shock.) But yet the denialist point of view rejects the point of looking at the shortfall in aggregate demand and the inability of the overall market to clear.

    I am not sure why Hawtrey/Cassel and Keynes can’t both be right.

  21. 21 MG December 13, 2011 at 9:23 pm

    Along these lines, there are degrees of rightness. Some solutions work; some do not. Some might work better than others, while some might fail less completely than others. We have a pretty good idea of what these are, and outside of the bought-and-paid-for (from whom, I might add, the Keynes vs Hayek thing is a product — when the facts aren’t on your side, the confusion provided by a “he said, she said” controversy can work just as well) there is actually some consensus. Debating Keynes vs Hayek is paying attention to the sideshow when the main event — working our way out of this mess — is going on. Now isn’t the time to worry about how we got here, but to take steps to make sure we get out. Keynes’ steps will do that. However wrong he might have been about what caused the Depression, he was right, or more right (certainly more right than Hayek), about that.

  22. 22 Greg Ransom December 14, 2011 at 8:46 am

    David,

    I’m telling you in plain language that are _falsely_ identifying one part of Hayek’s business cycle theory as the whole of it.

    If that sentence is not clear, here are some details:

    At the core of Hayek’s monetary theory / business cycle theory is simply monetary discoordination — as he makes plain in many places, beginning in 1929.

    Hayek _in many places_ makes plain that monetary discoordination can be created in a number of ways, and will be shaped by institutions.

    Hayek _explicitly_ says that war finance and central banks going on and off the gold standard at different rates can create monetary discoordination creating economic discoordination and depressions/recessions.

    His book _Monetary Nationalism and International Stability_ is all about the way that economic discoordinations and ups and downs can be created depending on policies involving exchange rates, gold policy, etc.

    Hayek — as ALL OTHER ECONOMISTS _should_ — took into account the whole “microeconomic” significance of all of the different “loose joint” aspects of money, leverage, liquidity & asset value swings, credit, optimism, etc. on the “microeconomic” structure of production and consumption across time.

    What Hayek called “the 19th century pattern” of booms & busts via the lengthening and contraction of the structure of production was _NOT_ the only pattern or institutional set up Hayek recognized as instantiating his monetary disequilibrium causal explanation of economic discoordination, as Hayek made clear time and again, across the course of 60 years.

    Enough already on pretending that Hayek’s monetary economics / business cycle work was applicable only to a single pattern that Hayek identified as a pattern typically found in the 19th century, but often is not the pattern one finds in many 20th century episodes. Hayek meant his explanatory scheme to capture all monetary / dissequilibrium phenomena AND THERE IS NO REASON WHATEVER to think that it cannot. Certainly no one has even hinted at why it cannot.

    My plea is simply “Enough Already” and not seriously engaging what Hayek actually produced in _over all_ picture of monetary economics / monetary dissequilibrium economics.

    David writes,

    “Greg, I am at a loss to know how to respond to your complaints. I am not engaging with Hayek’s business cycle theory, because the Great Depression, as I have repeated, was not a conventional business cycle in any way shape or form, but a pure monetary shock caused by a disturbance in the world gold market.

  23. 23 Greg Ransom December 14, 2011 at 8:56 am

    David, all I am saying is that to call Hayek’s use of a part of his monetary disequilibrium economics, formulated to account for only _some_ of what Hayek took to be a typical _19th_ century pattern, as the whole of Hayek’s macroeconomics/discoordination economics is effectively to tell a falsehood, it puts something false across and into the head of your readers.

    I say “Enough Already” with all of these false accounts of Hayek spread in the peer reviewed journals and in the blogosphere.

    I’ve been a Hayek “myth” buster for going on 2 decades and the work never ends.

  24. 24 David Glasner December 14, 2011 at 10:36 am

    Greg, Would you mind quoting the offending passage?

  25. 25 Greg Ransom December 14, 2011 at 12:07 pm

    The implication communicated to the reader is that this is all that Hayek’s monetary disequilibrium economics would allow on his plate, i.e. that it’s he’s got:

    “Hayek, along with his mentor Ludwig von Mises, could claim to have predicted the 1929 downturn as well, having criticized the Fed in 1927 for reducing interest rates to 3.5%, by historical standards far from a dangerously expansionary rate, as Hawtrey demonstrated in his exhaustive book on the subject A Century of Bank Rate, when the US was in danger of falling into a recession. But it has never been even remotely plausible that a 3.5% discount rate at the Fed for a little over a year was the trigger for the worst economic catastrophe since the Black Death of the 14th century.”

    And of course this is all in the context of what you have written in your comments section as well.

  26. 26 Greg Ransom December 14, 2011 at 12:19 pm

    Isn’t Hayek here simply saying that the original mistakes began with Britain? Isn’t that true?

    “it was by no means the economically strong countries such as America and France whose measures rendered the gold standard inoperative, as is frequently assumed, but the countries in a relatively weak position, at the head of which was Britain”

  27. 27 David Glasner December 14, 2011 at 1:40 pm

    MG, You said:

    “Then how do know that the right opposes doing anything about global warming because they are worried about the “destruction of capitalism,” or however Klein worded it? You can’t say you know, and then you don’t know.”

    You’re right, I don’t know, I was taking Klein’s word for it after spending a lot of time with right-wing anti-global warming activists, and she is not normally considered to be an apologist for the right wing.

    Mitch, I don’t deny that fiscal policy can be effective in a state of depression. But there are questions about how effective it can be if monetary policy is not supportive. Krugman has been inconsistent about monetary policy, sometimes favoring it and sometimes dismissing its effectiveness. The significance of the liquidity trap in Keynesian theory is that it is supposed to demonstrate that there are conditions in which monetary policy cannot be effective because the channel by which it is supposed to operate — reducing the rate of interest — is blocked. My main bone to pick with Keynes on the Great Depression is that there was already a perfectly fine explanation for what had happened, and he invented a whole new theory to explain it, causing everyone to lose sight of what had just happened. As a matter of macroeconomic theory, Keynes’s theory has its good points and its bad ones. Those points can be assessed theoretically and empirically. But as a historical matter, it was unnecessary to explain what happened in the 1930s and contributed little, if anything, to the recovery from the Great Depression.

    MG, Well on the question of getting out of our current mess, I think that Hawtrey and Cassel have more to tell us than Keynes. I don’t dismiss Keynes, but the idea of using monetary policy to stimulate a recovery is not a uniquely Keynesian idea.

  28. 28 David Glasner December 14, 2011 at 2:17 pm

    Greg, I am only going to address your response to my query asking you to quote an offending passage of mine and your follow-up query. I have nothing to say about your three earlier comments.

    You said:

    “The implication communicated to the reader is that this is all that Hayek’s monetary disequilibrium economics would allow on his plate, i.e. that it’s he’s got:

    “Hayek, along with his mentor Ludwig von Mises, could claim to have predicted the 1929 downturn as well, having criticized the Fed in 1927 for reducing interest rates to 3.5%, by historical standards far from a dangerously expansionary rate, as Hawtrey demonstrated in his exhaustive book on the subject A Century of Bank Rate, when the US was in danger of falling into a recession. But it has never been even remotely plausible that a 3.5% discount rate at the Fed for a little over a year was the trigger for the worst economic catastrophe since the Black Death of the 14th century.””

    For the life of me, I have no idea how you inferred that implication from what I wrote. I made no reference to Hayek’s monetary disequilibrium economics except to note that he chose not to follow his own criterion for neutral money in recommending the toleration of deflation rather than abandon the gold standard. As you have pointed out yourself many times, he later admitted regretfully that he had been wrong in giving that advice, as did his friend Lionel Robbins. The only Austrian who never changed his view the right policy to follow in the Great Depression was von Mises. My criticism of Hayek is that he had made a bad empirical and policy call in thinking that the Fed’s 3.5% discount rate was reckless and in being excessively committed to the gold standard. There is nothing — repeat nothing — communicated about his monetary disequilibrium economics.

    You asked:

    “Isn’t Hayek here simply saying that the original mistakes began with Britain? Isn’t that true?

    “it was by no means the economically strong countries such as America and France whose measures rendered the gold standard inoperative, as is frequently assumed, but the countries in a relatively weak position, at the head of which was Britain””

    That Britain made a mistake in rejoining the gold standard at the pre-war parity cannot absolve America and France from their responsibility for rapidly accumulating gold in 1928-29, triggering the subsequent deflationary spiral, as Hayek does at length in that essay. His defense of the Bank of France (at around page 158 or so) is especially egregious. To say that does not detract from the quality of his theoretical contributions, but he gave really bad policy advice.

  29. 29 Mitch December 15, 2011 at 9:12 am

    I think there are two points with which I disagree in your response.

    (1) The explanation you posit regarding what *caused* the Great Depression may be all, most, or some of the answer. (Certainly it is not really an explanation as to what caused the current Great Recession.) However, you still need Keynes and not the classical economists to determine what *sustained* the Great Depression.

    (2) I find it odd that you say that Keynesian policies “contributed little” to the recovery from the Great Depression. Do you disagree with the broadly accepted view that the true end of the Depression in the US didn’t come about until the huge fiscal stimulus from spending brought about by the need to fight WWII?

    I don’t know of anyone who thinks that fiscal policy will work if the wrong monetary policy is followed. I don’t see Krugman as being inconsistent on this point, but perhaps you have in mind something specific he said that I may not be aware of.

  30. 30 David Glasner December 15, 2011 at 7:03 pm

    Mitch, Obviously, the gold standard didn’t cause the 2008 downturn. But monetary policy turned deflationary in 2008, so there is a parallel.

    I think the Great Depression in the US and elsewhere was sustained by remaining on the gold standard as long as the US (1933) and France (1936) did. In the case of the US a very powerful recovery, beginning in 1933 after suspension of the gold standard, was aborted by FDR’s misguided NIRA. The recovery was resumed in 1935 after the NIRA was declared unconstitutional by the Supreme Court. The second recovery was aborted by a severe tightening of monetary policy (and fiscal policy too) in 1937. Keynes does not really figure in that story, except that he tried to warn FDR not to propose the NIRA. The real big fiscal stimulus came after the third US recovery was already under way, stimulated by rising prices and increased foreign demand for US products in 1939-40. The war-time spending was largely redundant from the standpoint of restoring full employment.

    On Krugman, in 2008-09 I believe that he was overly dismissive of monetary policy as a means of achieving recovery.

  31. 31 Philo December 15, 2011 at 9:50 pm

    This statement of yours is accurate and important: “So what matters in the success in the marketplace of ideas seems to be not just the quality or the truth of a theory, but also (or instead) the publicity machine that can be deployed [really, that *actually get deployed*] in support of a theory to generate interest in it and to attract followers who can expect to advance their own careers in the process of developing, testing, or otherwise propagating, the theory.” Of course, it is reminiscent of complaints about the market for consumer goods, by J. K. Galbraith and other elitist would-be dirigistes. The validity of both sorts of criticism suggests that consumers, of theories as well as of ordinary goods, have more complex motives than simply obtaining explanatory value (for theories) or utilitarian serviceability (ordinary goods). What would Robin Hanson say?

  32. 32 MG December 15, 2011 at 10:29 pm

    Re: Getting out of this mess.

    That’s perfectly OK, but the point, for me, isn’t that Hawtrey and Cassel, and anyone else, is more right than Keynes. For my purposes — getting out of this mess — Keynes is good enough. All of them, though, are better than Hayek, or the Hayek that people think they know. That’s really the point here. I think it’s interesting that Hayek is a great thinker and a great economist and so on and so on — but he was disastrously wrong about the most important economic even of his time, and his name, and some of his, oh, we’ll call it philosophy, is being used to make our current situation even worse, or to justify not doing anything, thus making things fester. Frankly, I have a hard time squaring that with being a great thinker. But then, I acknowledge Marx as a great thinker, and he set a new standard for wrong thinking, so maybe it’s just my perspective here.

    BTW there are advantages to going with Keynes, because he has credibility from a couple of generations having versions of Keynesian economics drummed into them in Econ 1 and Econ 2 classes. Nobody’s heard of these Hawtrey and Cassel fellows, by contrast. It’s a bigger picture than just whose theory is (more) right. Eventually, you have to be able to get that theory into actual policy, and Keynes’ name recognition is an asset there. Because of decades of propaganda, and garbage like the “Keynes vs Hayek” stuff, it’s a controversial asset, but it’s probably better than starting over.

  33. 33 Mitch December 15, 2011 at 11:36 pm

    David -

    I don’t know why I can’t reply to your reply above, I am not seeing the “reply” link there, so I’ll put it here.

    I am perplexed by what you say. Unemployment never fell below 10% until 1941, so the “recoveries” of which you speak were pretty weak tea indeed. And while NIRA was certainly a bad idea, it goes rather far to hang the performance of the the entire economy on it. (And it would have sunset a few weeks later had the court not killed it.)

    For the unemployment rate in the 1930′s see here:

    http://www.bls.gov/opub/cwc/cm20030124ar03p1.htm

    though note the caveats here:

    http://edgeofthewest.wordpress.com/2008/10/10/very-short-reading-list-unemployment-in-the-1930s/

    As for 2008, sure, there was some monetary tightening. Big Deal. The collapse was brought about (in the US) by the reckless over-leveraging of the major banks and the speculative frenzy in real estate. I don’t see an argument that a somewhat looser monetary policy in 2008 would have done much to improve matters, since bursting bubbles behave more or less the same way always, and a few basis points difference in the interest rates was not likely to make much difference.

  34. 34 Matt December 16, 2011 at 7:04 am

    I love you! It is about time someone said this! I have friends who argue about this all the time and I’ve always take the position that, you know, there were Keynesians first, then Friedman and his lot revolutionized monetary policy and now we have the best of both worlds! I think it is a key problem of American policy debates that we use ideology and ideologues rather than having a more open mind.

  35. 35 David Glasner December 16, 2011 at 9:43 am

    Philo, Actually Galbraith was just channeling Thorstein Veblen, and I think that Frank Knight expressed similar reservations about the effects of advertising on consumer choice without expressing an anti-market bias. But it is one thing to identify problems with consumer choice, it is another very different thing to suggest eliminating that problem without replacing it with other problems that are even worse.

    Mitch, Yes unemployment didn’t fall below 10% until 1941,but it started falling rapidly in 1939 after having reached 20% in 1938. On the causes of the 2008 crash, you apparently aren’t familiar with everything written by Scott Sumner, Robert Hetzel and Earl Thompson showing that monetary policy was tight during the spring and summer of 2008 because of worries about rising headline inflation driven by rising energy and food prices. That produced a a downturn in nominal GDP in the third quarter which combined with the fragile state of the financial system to produce the crash. If the Fed had adopted an easier policy stance in time, the crash would have been averted entirely or at least would have been manageable.

    Matt, Thanks, but don’t get carried away.

  36. 36 Greg Ransom December 16, 2011 at 9:56 am

    I am not disputing this:

    “he gave really bad policy advice”

  37. 37 Mitch December 16, 2011 at 6:29 pm

    While I find your arguments interesting, I think you’re stretching the evidence far beyond what it supports.

    1) Regarding the end of the Depression: if you look at the graph here:

    http://edgeofthewest.wordpress.com/2008/10/10/very-short-reading-list-unemployment-in-the-1930s/

    which ends in 1940, you’d be forgiven if you failed to see that things were about to clear themselves up. Now I don’t have month by month data, but between 1939 and 1940, unemployment fell by 2.5% (a figure which does not stand out relative to the rest of the decade – and was under 10%, but just barely), but it fell by 5% in each of 1941 and 1942, to become a complete non-issue thereafter. Now I have to say that to my untrained eye, the simplest explanation for this is that the government drafted and otherwise employed lots and lots of people – activities which fall in the realm of fiscal rather than monetary policy.

    2) Regarding Sumner, Hetzel and Thompson: I had heard a bit about their work from some other economics blogs I read, but I have to say in looking at one or two papers in greater detail I find it somewhat underwhelming. For example, one of the papers you are doubtless referring to is this:

    http://www.richmondfed.org/publications/research/economic_quarterly/2009/spring/hetzel2.cfm

    You and he are claiming that the recession of 2008 was caused by tight money supply and not the precarious situations of the banks and mortgage-holders. The fed funds rate had been at 5.5% for more than a year (and nearly as high for a while before that). Are either of you claiming that Lehman wouldn’t have collapsed if the rate had been lower? Or that this wouldn’t have triggered the panic that required TARP? Or that banks would then proceed to make the loans that they are to this day hesitant to make?

    Now his argument is worse than yours. He claims:

    “It follows that the fundamental reason for the heightened decline in economic activity in 2008:Q4 and 2009:Q1 was inertia in the decline in the funds rate relative to a decline in the natural rate produced
    by the continued fall in real income from the housing price and inflation shock reinforced by a dramatic quickening in the fall in equity wealth.

    “In 2008, all the world’s major central banks introduced inertia in their
    interest rate targets relative to the cyclical decline in output.”

    As can be seen here:

    http://www.moneycafe.com/library/fedfundsrate.htm

    the funds rate was falling off a cliff in 2008, and by October of that year the fed had lowered it to 1%. A cut from 5.5% to 1% in just 14 months hardly seems inertial. Maybe they should have lowered it faster, but if his vision of how a central bank is supposed to work requires that much clarity and responsiveness, it seems as though we’d all better look elsewhere for economic stability.

    (I should add that in reading the introduction to that paper, his explanation of the “Keynesian” version of events – which he more or less simply abandons discussing without producing much in the way of evidence – seemed to me to describe the situation as it obtained in 2008 rather well.)

  38. 38 stearm74 December 18, 2011 at 6:19 am

    Amusing.

    Keynes wrote General Theory not for explaining the Great Depression or how to avoid something similar in the future, but in order to explain how to end the Great Depression.

    And his point is that leaving the Gold Standard and expansionary monetary policy -although the right things to do- were not enough. Fiscal policy has to step in.

    What Keynes would have done to prevent the Great Depression?
    He created the Bretton Wood system of fixed, but adjustable exchange rates.

    I mean, Keynes was right indeed. He was not alone, but he was right on both: what caused the Great Depression? What to do during a deflationary spiral?

    Ane Keynes also predicted WWII.

    I know that it is hard in the US to be taken into consideration for grants, fellowships, and academic positions if you tell the truth about Keynes.

    But I prefer to tell the truth. And the truth is that Keynes was right on almost everything he wrote about.

  39. 39 David Glasner December 18, 2011 at 7:53 am

    Mitch, Thanks for the link to the data. One problem I have with the data is that I can’t tell whether the unemployment rate is an average for the whole year or the rate for a given month during the year. Aside from that problem, however, it does look as if my memory was slightly faulty in thinking unemployment was falling faster than it appears to have fallen in 1939-41 period before Pearl Harbor. But even so unemployment was falling pretty rapidly and I believe would have continued to do so even without the war time stimulus if prices kept rising. I don’t deny that war time spending hastened the recovery. I have never argued that fiscal policy is ineffective in a depression.

    On the 2008 downturn, my view is the crash was the result of the coincidence of a weakened financial system in the aftermath of the housing bubble with a tight money policy deliberately pursued by the Fed because the FOMC was concerned that high headline inflation driven by rising food and energy prices in the spring and summer of 2008 would cause inflation expectations to become unanchored. Read the minutes of FOMC meetings in 2008 and you will see that the FOMC repeatedly disregarded signs of economic weakness and rapidly rising unemployment, refusing to cut the FFR even the week after Lehman collapsed because of concerns about inflation even when inflation expectations measured by the TIPS spread were clearly headed into negative territory. Even in October 2008, when the crisis had entered into its most intense phase the FOMC cut FFR by only half a point. On top of that the Fed instituted interest payments on reserves which largely negated the stimulative effect of reducing the FFR. So I think that Fed monetary policy was a key element in the explanation of the 2008 crash. But obviously so was the housing bubble that undermined confidence in the financial system.

    Greg, OK, but you seem to be disputing something and I can’t really figure out what.

    stearm74, Keynes was really smart and had many great insights, and we can still learn a lot from him. But I guess I am not quite as impressed with him as you are.

  40. 40 stearm74 December 18, 2011 at 1:15 pm

    But that’s the whole point. I am not impressed by anyone. But surely not by an ideological misrepresentation of what Keynes wrote and thought.

    The greatness of Keynes is that, after 70 years, nobody has been able to criticize him fairly. Only ideological attacks, and this post is another one.

    But ok, I understand. Economists in the USA have families.

  41. 41 I Miss Nixon December 19, 2011 at 2:13 am

    Your comments come to late, far far too late.

    Economists having been playing a very reckless game since Friedman arrived on the scene. Everyone thought there would never be another Depression in their life time so they could engage in every possible act of intellectual dishonesty, all to make the big bucks, gain fame, etc.

    The Queen rightly put your profession in its place. You are in a hole and you cannot dig your way out.

    Economists had a choice. They could have cleaned their own house and throw out the Friedmans and Hayeks but they kept the camel nose under the tent.

    It is all coming down now on Hayek, with first the Koch letter and now (and this is really really important) the Thatcher/Pinchot letter. The man has been exposed for being a fraud and thug facist.

    The Right Wing has been jamming a thug facist down people’s throats. People who are living in cars and boxes, for whom the American Dream is Gone with the Wind. (Don’t you know anything?)

    Having sold its soul, economics now finds that, as we move toward the end game, events are going to be a pretty black and white. That means it is going to get ugly for eveyone who tolerated Friedman Hayek.

    Either you are for us or you are against us. The Keynes Hayek spilt is merely the badge of the rival gangs. Every economist has stood silent while Glen Beck took up Road to wherever and for a long time before. Not acting, as Alan Greenspan learned, can have horrible consequeces. Complicity is going to have a long tail.

    We all know what is going to happen. We are going to have austerity and the mobs and worse that go with such. Will it be 2012? Ask China and Europe. 2013, for sure.

    Your clever litte attempt to tone things down want play

  42. 42 Anon December 19, 2011 at 10:20 am

    That reduces the discussion to the level of, well, a rap video. I’ld like us to get past that.

    With the Kochs in the rap video game, exactly how do you propose, as you desire (I’d like) “to get past that.”

    In case you haven’t noticed the issues are moving into the streets and will move into the streets more and more, as austerity and underinvestment bite more and more

  43. 43 Anon December 19, 2011 at 10:54 am

    Amusing.

    how charitable

    It is also amusing to me to read economists who don’t know and cannot agree upon what causes a Recession or Depression. It is not high interest rates. Its collective psychology.

    People get up, go to the shop, notice that there are fewer or no customers, and collectively realize that people don’t have as much money to spend, that aggregate demand has collapsed.

    Keynes didn’t spend much time worrying about why because he knew that was a game of pick up sticks—the last straw might break the camel’s back, but, in actuality, many too straws was the real cause.

    The 1929 Depression wasn’t caused by Gold, alone. There were lots of causes.

    The Lesser Depression—there were lots of causes: shifts in income to labor, under investment, the Internet, China trade, fraud in our real estate markets, the loss of the 9/11 war, low taxation (lots and lots of reasons). Those of us who are honest with the facts know that, as the sum, of all this, about 2005 any sane business person said, “I want out.” There is no aggregate demand here, when the credit cards are maxed, this is going to drop like a lead balloon.

    It has.

    I have talked to a lot of people since 2005 and not one would borrow 50 cents. They see no opportunity save in special, narrow cases. Look at the demand for bank loans–no one wants to borrow.

    The answer why we have not recovered is that there is no future here in the go ole USA.

    You got a bunch of smart people making comments here. Ask them, if given $100 million, would they invest in anything or put it in cash. (Forget playing in financial instruments). I mean signing a lease, putting up signs, hiring people, selling to the public. A hot franchise in a select area. Yes. A factory that made widgets. No, I don’t think so.

  44. 44 stearm74 December 19, 2011 at 12:58 pm

    @ I miss Nixon:

    you are perfectly right. There are at least three reasons for negating the evidence and downplay Keynes’ contribution to a better understanding of short-term macroeconomic stabilization under a deflationary enviroment (because this is the topic of General Theory).

    1) Economists are men too and they have to survive. To downplay Keynes is worth a fellowship or an academic position.

    2) Keynes is British, hence a socialist, hence he must be wrong. And by the way, slavery is the best economic system ever invented, if it were possible to introduce slavery in a free-market economy, it will be the best possible world (if you need a brutal dictatorship first, well, let’s have a brutal dictatorship first, it is no coincidence: who is the most famous Austrian ever lived, after Mozart I guess)

    3) You make a lot of money if the recession becomes deeper and deeper: that is, you have invested in gold and you’ll make even more money if a deflation with more millions of unemployed sets in.

    I mean, complicity is going to have a long tail, this post is a piece of the tail.

    Do you know who got it right before of all of us? Go to youtube and find a song called “The Ghost of Tom Joad”, it was written in 1996 by one of the greatest philosophers of our time.

  45. 45 David Glasner December 19, 2011 at 6:06 pm

    stearm74, I am not sure whom or what you are referring to when speak about otherwise unidentified misrepresentations of Keynes, so I can’t respond to that one. And have you mastered the entire literature on Keynes and Keynesian economics sufficiently to state flatly and confidently that no one in the last 70 years has been able to criticize him fairly. That’s a pretty breathtaking statement. And please explain to me in what way “this post” constitutes an ideological attack on Keynes. Your final remark reeks of sarcasm, but otherwise I have no clue what it is supposed to mean.

    Anon, This blog functions pretty much without rules (except that I don’t like profanity) and I rely on commenters to use their good judgment and good manners to keep a civil conversation going without engaging in any personal attacks. I don’t think that it is good practice to post anonymously, though it seems to be fairly acceptable to adopt a moniker which at least allows a person to adopt a consistent persona on a blog. “Anon” is too close to anonymous to be acceptable, so I would request that if you want to continue commenting on this blog you identify yourself with a more easily identifiable name. I agree that strictly speaking the gold standard was not the only factor causing the Great Depression, but it by far overshadows everything else combined. Actually, a lot of people are making money in this economy, which is far from being a basket case, but it is operating below capacity because the price level is too low. When the price level rises, the country will prosper.

    I Miss Nixon, You seem to be very, very angry, and I hope the opportunity to express yourself makes you feel a little less hostile. Aside from dissociating myself completely from your ugly remark about Hayek, I have nothing more to say.

    stearm74 II, You and I Miss Nixon seem to be made for each other.

  46. 46 Aman December 20, 2011 at 5:17 pm

    Rather misinformed to say that:
    “for reducing interest rates to 3.5%, by historical standards far from a dangerously expansionary rate”

    By which historical standards ? Up until 1920s ? FED had just been created ? The same is said of the ECB, but the Spanish housing bubble was still MASSIVE! Why ? Because it creates a bubble somewhere.

    ANy way “far from” is rather subjective and random, how much credit was produced under this policy is what is interesting NOT the particular interest rate, the particular interest rate is relative.

    If interest rates WOULD have been 8 or 10 % then 3,5 % is hugely expansionary.

    “Keynes, Friedman, and eventually Hayek, all had powerful ideologically driven publicity machines working on their behalf.”

    Agreed, But Keynes had the government and its huge demand for keynesian economists on staff.

    Friedman similiarly and was integrated into almost all public university curriculum.

    But Hayek really ? Did have “powerful publicity machines” ? I think the only reason it is spreading is because John Papola FOR FREE made a video about it and it went viral. It went viral because it was a quality piece.

    “Scott Sumner has shifted the debate over the past two years away from the tired old Keynes vs. Hayek routine.”

    Tired old routine ?

    You give the impression that the Austrian proposal has been tried. Thats deeply dishonest for your readers.

    Its rather Keynes that is a tired old routine. While Hayek a breath of fresh air, and honesty.

    Tell us the Austrians are wrong, when they institute 100 % Gold banking and then I will give you a listen.

    Until those last paragraphs I really wanted to read Hawtrey, I still probably will but alot more skeptically and negatively.

  47. 47 David Glasner December 21, 2011 at 9:04 am

    Aman, The historical comparison was to Bank of England’s bank rate over the period 1838-1938 documented by Ralph Hawrtrey in his classic A Century of Bank Rate. Based on his survey of the period he classifies rates at or below 3% as easy money, so 3.5% is not quite in the easy money category according to Hawtrey, whose judgment I regard as authoritative in such matters.

    I agree that for most of his life Hayek had no or at most a minimal publicity machine operating on his behalf, but that changed toward the end of his life, and Austrian economics, despite its limited penetration of academic economics has become a thriving presence in intellectual and ideological and financial discourse.

    You said,

    “You give the impression that the Austrian proposal has been tried. Thats deeply dishonest for your readers.”

    I really don’t know what you are talking about, and your accusation is deeply offensive.

    “Tell us the Austrians are wrong, when they institute 100 % Gold banking and then I will give you a listen.”

    As I have pointed out, Hayek eventually rejected the gold standard, so I am very content to be on Hayek’s side on that issue.

    “Until those last paragraphs I really wanted to read Hawtrey, I still probably will but alot more skeptically and negatively.”

    You needn’t do me any favors. If you choose not to read Hawtrey, it’s entirely your loss.

  48. 48 Mitch December 27, 2011 at 1:36 pm

    I once asked an economist of my acquaintance which president had the worst economic policies. Nixon won that prize – for his absurd attempt to reduce inflation via the imposition of price controls during peacetime. I don’t know anyone of any ideological stripe who thinks that was a good idea.

  49. 49 Mitch December 27, 2011 at 1:52 pm

    David -

    Sorry, didn’t get to check back on this post until now. Yes, as I pointed out, I agree the monthly data would be helpful in assessing your argument – I looked around but didn’t find it. You may be right that the Depression was on its way out anyway, though I think it’s fairest to say that the data is at best inconclusive and we will never know. My point was that the conventional view is the fiscal stimulus brought on by the advent of WWII was the real knockout punch of the Depression, and that the economic data strongly support this thesis. I thought you were disagreeing – I know I certainly have seen others do so – but if not, then good.

    As for your discussion of the 2008 situation, maybe I am missing something. Are you, like Hetzel, claiming that had the Fed more aggressively lowered interest rates the Great Recession would have been avoided? Are you saying that the whole mess was caused largely by the Fed’s hesitancy – of a few weeks or months duration – during their 14-month lowering of interest rates from 5 1/2 % to 1%? Note that I am not disagreeing that there was some mistaken hesitancy to drop rates as fast as needed, but the question is What is the proof that things would have been substantially different if they had? The economy was on the brink of collapse for reasons having built up over years, and I find it hard to attribute all that much effect to a couple of months with a somewhat-higher-than-called-for fed funds rate.

  50. 50 David Glasner December 30, 2011 at 9:03 am

    Mitch, There’s no question that huge increases in government spending financed by printing lots of money (which is what happened in 1942) will be very stimulative. The problem is to tease out the relative contribution of the government spending and the money printing. I don’t think we know exactly what the relative contributions were.

    About the 2008 crash, the Fed reduced its FFR target to 2% in February or March 2008 and kept it there until about October 7 (3 weeks after Lehman went under), reducing it to 1.5% and simultaneously starting to pay banks .25% interest on reserves — a strongly deflationary move — while unemployment was rising steadily and the US economy had one of the fastest quarterly contractions in real GDP since WWII in the third quarter which was almost over when Lehman collapsed. So yes, I absolutely do hold the Fed responsible for allowing the economy to tank in the second and third quarters, setting the stage for the financial crisis. You might be interested in this YouTube clip of Scott Sumner talking about the cause of the financial crisis. I completely agree with you about the disastrous long-term effects of Nixon’s presidency on the economy.

  51. 51 Greg Ransom February 18, 2012 at 11:11 pm

    This is not true. This is a simplistic caricature of Hayek’s arguments and views. Hayek blames British gold and monetray policies dating to 1925 and before — and he attacks Britain’s decision to deflate via a partial return to gold at the pre-war parity.

    David writes,

    ” Hayek, on the other hand, along with von Mises, not only advocated precisely the wrong policy, namely, tightening money, in effect increasing the monetary demand for gold, he accepted, if not welcomed, deflation as the necessary price for maintaining the gold standard.”

  52. 52 Greg Ransom February 18, 2012 at 11:25 pm

    You may not have intended it, but re-reading Hayek’s “The Fate of the Gold Standard” it’s clear to me that you have really misrepresented Hayek’s position.

    Hayek was _always_ a critic of the gold standard, from his early 1920s.

    Hayek identifies a system which was not functioning in the 1920s and he identifies what country is most responsible for generating the deepest pathologies — Britain, a country living beyond it means & violation every principle required for a re-establishment of a gold standard and international stability.

    You haven’t engaged any of Hayek’s arguments, what you’ve done is mischaracterized Hayek’s views and his wider explanatory understanding.

    You may have all this right in some book or paper available here, but you are not adressing what Hayek actually believed and argued.

  53. 53 David Glasner February 19, 2012 at 8:30 pm

    Greg, You wrote:

    “This is not true. This is a simplistic caricature of Hayek’s arguments and views. Hayek blames British gold and monetray policies dating to 1925 and before — and he attacks Britain’s decision to deflate via a partial return to gold at the pre-war parity.

    David writes,

    ” Hayek, on the other hand, along with von Mises, not only advocated precisely the wrong policy, namely, tightening money, in effect increasing the monetary demand for gold, he accepted, if not welcomed, deflation as the necessary price for maintaining the gold standard.””

    I am sorry, Greg, but your comment just makes no sense to me. I am talking about what Hayek was saying in 1930-32 about British policy. He was advocating that Britain do whatever was necessary to maintain the sterling/dollar/gold parity, and he opposed the decision in of the British government to in September 1931 to let the pound to float against gold. While there was good reason to criticize the British decision in 1925 to restore the prewar parity against the dollar, that economic consequence of that decision were primarily felt in Britain and had little or no negative consequences outside Britain. It is a mistake to draw any connection between the 1925decision to restore the prewar sterling/dollar parity and the Great Depression that took started four and a half years later.

    You wrote:

    “You may not have intended it, but re-reading Hayek’s “The Fate of the Gold Standard” it’s clear to me that you have really misrepresented Hayek’s position.

    Hayek was _always_ a critic of the gold standard, from his early 1920s.
    Hayek identifies a system which was not functioning in the 1920s and he identifies what country is most responsible for generating the deepest pathologies — Britain, a country living beyond it means & violation every principle required for a re-establishment of a gold standard and international stability.

    You haven’t engaged any of Hayek’s arguments, what you’ve done is mischaracterized Hayek’s views and his wider explanatory understanding.
    You may have all this right in some book or paper available here, but you are not adressing what Hayek actually believed and argued.””

    Greg, as I said, singling out Britain’s 1925 decision to restore the prewar parity as a key factor in causing the Great Depression is itself a mistake. So if you are trying to defend Hayek by attributing that argument to him, you are only making it worse for Hayek.

    I have often pointed out that Hayek opposed going back on the gold standard after it was scrapped in the 1930s. I am in no position to say one way or another what his position on the gold standard was in the 1920s, but he clearly did not favor leaving the gold standard 1931=32.

    I absolutely did engage Hayek’s defense of the insane Bank of France and I showed that his argument was based on a misunderstanding (a fairly widely held misunderstanding to be sure, but a misunderstanding nevertheless) of the mechanism of international monetary adjustment under fixed exchange rates. If you think otherwise, I am afraid it is because you do not understand how the mechanism works.


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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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