I was thumbing through my copy of Hayek’s wonderful collection of essays, Studies in Philosophy, Politics, and Economics, and perused his (heavily underlined) essay, “Full, Employment, Planning, and Inflation,” originally published in the Institute of Public Affairs Review, Melbourne, vol. IV, 1950. The essay is an argument against the adoption of Keynesian (including monetary) policies to maintain full employment, warning that increasing aggregate demand to achieve the maximum attainable level of employment would lead not only to chronic inflation, but also to a mismatch between the distribution of demand and the distribution of labor. The inevitable mismatch between the demand for and supply of labor would cause unemployment to rise despite inflation, inviting the imposition of direct controls and the piecemeal implementation of central planning.
I will make two observations in passing. First, it is obvious from the discussion that although Hayek believed that there was a connection between expansionary monetary policy aimed at maintaining full employment (actually he meant “over-full” employment), he viewed the connection as indirect, clearly not identifying the conduct of monetary policy with central planning as such. Second, Hayek, already in 1950, had anticipated the essence of the argument for a vertical long-run Phillips Curve.
The main point of this post, however, is to focus on a few other gems about monetary policy from Hayek’s essay. Here is one:
Full employment has come to mean that maximum of employment that can be brought about in the short run by monetary pressure. This may not be the original meaning of the theoretical concept, but it was inevitable that it should have come to mean this in practice. Once it was admitted that the momentary state of employment should form the main guide to monetary policy, it was inevitable that any degree of unemployment which might be removed by monetary pressure should be regarded as sufficient justification for applying such pressure. That in most situations employment can be temporarily increased by monetary expansion has long been known. If this possibility has not always been used, this was because it was thought that by such measures not only other dangers were created, but that long-term stability of employment itself might be endangered by them. What is new about present beliefs is that it is now widely held that so long as monetary expansion creates additional employment, it is innocuous or at least will cause more benefit than harm.
Hayek here seems to be intimating a fairly hard-line stance against the use of monetary policy to increase employment. But two paragraphs later he adds an important qualification.
That so long as a state of general unemployment prevails, in the sense that unused resources of all kinds exist, monetary expansion can only be beneficial [my emphasis], few people will deny. But such a state of general unemployment is something rather exceptional, and it is by no means evident that a policy which will be beneficial in such a state will also always and necessarily be so in the kind of intermediate position in which an economic system finds itself most of the time, when significant unemployment is confined to certain industries, occupations or localities.
So Hayek here acknowledges that monetary policy can be effective in times of widespread unemployment of all kinds throughout the economy, i.e., (to use a more conventional idiom than Hayek used) when aggregate demand is deficient. Some people may regard our current levels of unemployment as not “unexceptional,” but nearly three years of 9-10% unemployment will hardly qualify as an “intermediate position” in the minds of most people. Hayek continues:
Of a system in a state of general unemployment it is roughly true that employment will fluctuate in proportion with money income, and that if we succeed in increasing money income we shall also in the same proportion increase employment. But it is just not true that all unemployment is in this manner due to an insufficiency of aggregate demand and can be lastingly cured by increased demand. The causal connection between income and employment is not a simple one-way connection so that by raising income by a certain ratio we can always raise employment by the same ratio.
Sixty years ago Hayek was arguing against an extreme version of Keynesian doctrine that viewed increasing aggregate demand as a panacea for all economic ills. Hayek did not win the battle himself, but his position did eventually win out, if not completely at least in large measure. Today, however, an equally extreme version of Hayek’s position seems to have become ascendant. It denies that increasing aggregate demand can, under any circumstances, increase employment. I don’t know what Hayek would think about all this if he were alive today, but I suspect that he would be appalled.
Uneasy Money 
Well, David Glasner is on fire, another post!
I guess a real economist (such as Glasner), after having befouled himself by reading a Wall Street Journal editorial, has to “take a cleansing tonic” in the form of reading Hayek.
It s interesting to see succeeding generations and axe-grinding hagiographers lay claim to famous personages; by now our Founding Fathers have posthumously (and perhaps unwillingly) served every cause from slavery to global militarization to progressive taxation.
I have not read much Hayek, but I understand the arch-backed and gold-crazed Austrians tout his name highly. They might try reading him.
I have yet to meet or read of a serious economist, including Hayek and Milton Friedman and even John Taylor (Japan 2006), who did not advocate monetary expansion in the right circumstances.
We are in those right circumstances now. Ben Bernanke, please note.
Print money until the plates melt, and then start issuing scrip.
LikeLike
Right, Hayek warned of the dangers of the “money stream” (his term) decreasing, and by that he just meant nominal income.
He was primarily arguing against people who wanted to create an excess supply of money to artificially boost employment. They didn’t recognise or understand that such a policy would have other deleterious long-run repercussions.
The idea that Hayek opposed any and all monetary stimuli (and unfortunate term, really) is just a misreading of his position onto contemporary debates.
LikeLike
Hayek is such a good example of complexity itself, in terms of the ways a writer’s thought – and work – can be taken out of context. Sometimes words don’t seem to do the whole job of what a person wants to express and they can get frozen in time and space. After I read The Road To Serfdom last year and considered the divide in those who followed him, I tried to become more careful about my own writing. But sometimes, I still goof up. Interesting that I am posting under Benjamin’s comment as I say this, and he should know I was only encouraging him!
LikeLike
In _The Pure Theory of Capital_ Hayek ridicules the idea that _EVERY_ good can be an “idle resource” all at once and everywhere throughout the whole of the economy.
He implies that the idea that this could exit in the real world is an absurd notion.
And he explicitly suggests that Keynes’ economics depends on this absurdity.
David quotes Hayek saying,
“That so long as a state of general unemployment prevails, in the sense that unused resources of all kinds exist, monetary expansion can only be beneficial [my emphasis], few people will deny. “
LikeLike
I should have said is that Hayek suggests that Keynes’ work assumed universal “idle resources” in every category of goods everywhere in the economy.
Hayek says that Keynes work contains within it that absurdity.
Whether it depends on it is a different question.
LikeLike
Yet ore evidence that Hayek didn’t stop working in economic science in 1940 as all of the peer reviewed journal articles and Hayek biographers falsely insist.
LikeLike
I try to figure out what my third-grade grammar teacher would say about that sentence, and I don’t think it would be good. When I try to read Hayek, or von Mises, or even Rothbard, I’m reminded that murky writing usually means murky thinking. Without examining the larger context, I think that sentence is supposed to mean, “Few people would deny that monetary expansion can only be beneficial when a state of general unemployment exists. That is, when unused resources of all kinds exist.” Which is, of course, exactly the situation we are in. He really needed an editor.
LikeLike
Benjamin, As I point out in a comment on another post, a lot of the more extreme Austrians are well aware of how bitterly they disagree with Hayek. Some openly admit that they have no use for him while others pretend not to notice.
Lee, You are right. Hayek was a complex thinker and he is not as easily pigeonholed as a lot of people mistakenly think.
Becky, I see we are all agreeing here that it is not always to pin Hayek down. Another point worth noting about Hayek was that he was very tolerant of opposing viewpoints. In his early years at LSE in the 1930s, one of his best student was G.L.S. Shackle who went on to a very distinguished career as an academic economists writing a number of really outstanding books and articles, focusing especially on the unpredictability of economic phenomena. Shackle began writing a dissertation under Hayek. At some stage of the dissertation, Shackle went to Hayek and told him that he did not think that he could continue writing under Hayek, because he was becoming a Keynesian and his dissertation would certainly reflect his newly adopted Keynesian perspective. To which Hayek’s reply was something like: Oh, I see. That’s very interesting. But why could you not write such a dissertation under me?
Greg, I never succeeded in reading the Pure Theory of Capital from cover to cover. Geoffrey Harcourt claims to be one of the ten living people to have accomplished that feat. But I did read his commentary on Keynes in the Pure Theory of Capital and my recollection is that what he ridicules is the pretense that a theory in which there are unused resources of all kinds
could be a “general theory” as Keynes styled his theory premised on the existence of unused resources of all kinds. Would you care to provide a specific citation from the Pure Theory of Capital?
Procopius, The sentence Greg quotes from my post is certainly not the best example of Hayek’s prose. Hayek’s writing was uneven. He sometimes wrote very elegantly, but he was not always able to shed the syntactical influence of his native German, which sometimes gives his writing the convoluted quality evident in the quotation.
Greg, Again, my interpretation of Hayek is that it was absurd to call theory premised on that assumption a general theory. That is a different kind of absurdity from the one that you are suggesting. Hayek certainly did not stop working on economic theory after 1940, but it is undeniable that he did little further work on technical economics after the publication of the Pure Theory of Capital. That can be seen from his publications which include very few works published in the leading economics journals after 1945.
LikeLike
Well, I’ve read _The Pure Theory of Capital_ cover to cover twice, and many sections of it 10 or 12 times.
The first 4 or 5 chapters are profound — and non-optional for anyone attempting to understand Hayek’s economics.
Part IV of the book is the mythically “missing” volume two of _The Pure Theory of Capital_.
Hayek discusses Keynes and his “economics without scarcity” in chapter 27 of _TPTofC_.
“[Keynes] has given us a system of economics which is based on the assumption that no real scarcity exists, and that the only scarcity with which we need concern ourselves is the artificial scarcity created by the determination of people not to sell their services and products below certain arbitrarily fixed prices.” p. 341 of the Collected Works edition.
Hayek does write this,
“Now such a situation, in which abundant unused reserves of all kinds of resources, including all intermediate products, exist, may occasionally prevail in the depths of a depression. But it is certainly not a normal position on which a theory claiming general applicability could be based.”
CW p. 340
Everything else Hayek rights indicates he really didn’t believe with without massive qualification which make the statement in its essence false.
And, indeed, if you look at the real world, it is clearly false and at no historical date has it ever been true.
Its a massive falsehood and exaggeration to capture an insight — a metaphorical picture to grasp some aspect of reality rather than an accurate statement of truth.
LikeLike
Hayek became interested in the very core of economic science — how economics works as a explanatory enterprise, and how it goes off the rails and crashes into a brick wall.
The language of “technical economics” doesn’t help us in seeing this fact — Hayek saw economics as so far off track & as crashing to massively into a brick wall that he returned to re-thinking the core of the explanatory enterprise, e.g. what is the problem to be explained, what is the causal explanatory component of this explanation, e.g. what role to pure tautologies in a causal/contingent scientific explanatory enterprise, etc.
The fact that “economists” didn’t care that their “science” was smashing into a brick wall and were happy doing “technical economics” (whatever that is) doesn’t much tell us anything about what Hayek himself was doing.
David writes,
“Hayek certainly did not stop working on economic theory after 1940, but it is undeniable that he did little further work on technical economics after the publication of the Pure Theory of Capital. That can be seen from his publications which include very few works published in the leading economics journals after 1945.”
LikeLike
Saying that Darwin stopped doing economics because he stopped publishing in journals and stopped doing “technical biology” when he turned his attention to rethinking all of biology in his “one long argument” doesn’t really capture what happened when Darwin turned himself to re-thinking the whole explanatory strategy of biology.
Hayek, essentially, set about doing the same thing for economics beginning with his 1936 Presidential addressed published in 1937 as “Economics and Knowledge”.
LikeLike
Greg, I agree with your assessment of the early chapters of The Pure Theory of Capital.
I am not sure what you mean when you say that Part IV was “the mythically missing volume II.” But here is what Hayek wrote in his preface.
The final draft was in an advanced state of completion when the war broke out, and it became clear that, if I could hope to publish the book at all, I must not delay too long nor make it unduly large. The result of this is that Part IV has become rather more condensed and sketchy than I had intended and that several further appendices had to be sacrificed in which I had hoped to deal with controversial points which in recent years have become the subject of extensive discussion.
I have no problem reconciling Hayek’s statements in the Pure Theory of Capital with the statement that I quoted from Philosophy, Politics and Economics. Can you reconcile them?
If you disagree with my statement that Hayek did little technical economics after 1940, perhaps you could refer me to his publications after 1940 that you feel had important implications for economic theory. You cite the 1950 paper that I quoted from as evidence that everyone else is wrong about his not having done any more work in economics after 1940, as I said in my post he anticipated Friedman’s argument for the vertical long-run Phillips Curve, so that was a worthwhile contribution, but you seem to be suggesting something much more profound than that. I just don’t see what you are trying to prove.
LikeLike
David, Part IV is the “money” / non- real analysis part of the _TPTofC_ that some claim went unpublished, based on misleading remarks by Hayek 35-40 years later.
I claim that Hayek continued doing economics — and my claim is grounded on what Hayek did, he spent decades recasting how economics / social sciences is done, rejecting the growing fashion varieties of “technical economics” which Hayek came to reject as actual science producing valid scientific explanations.
Part of his “doing economics” consisted in making a contrast between how science is done from all the ways it was botched in economics / social science.
The whole concept of “technical economics” is ill-grounded and misleading .. and privileges what Hayek considered to be botched/incompetent/incomplete “theorizing” over competent and sound causal explanations
Finally, Hayek’s contempt for and ridiculing of Keynes’ “the economics of abundance” comes out by reading the whole of Book IV of _, and it extends to thinking about the economics of the depression. See particularly the last few pages of the book.
LikeLike
Let me fix a small error this:
“Saying that Darwin stopped doing biology because he stopped publishing in journals and stopped doing “technical biology” when he turned his attention to rethinking all of biology in his “one long argument” doesn’t really capture what happened when Darwin turned himself to re-thinking the whole explanatory strategy of biology.”
LikeLike
Greg, I can’t remember exactly what remarks Hayek made about the last part of the Pure Theory of Capital after the fact, but his preface clearly suggests that he did not go into the discussion of Keynes and industrial fluctuations as deeply as he had intended. So I think that there may be a perfectly legitimate misunderstanding here.
Hayek said a lot of things about and relevant to economics after 1945, so he was doing economics in some sense, but it was a much different kind of economics than he was doing from 1925 to 1945. You provide no reference to any specific contributions he made to economics after 1945. Hayek did not reject technical economics. He was perfectly fine with standard neoclassical price theory as taught at places like Chicago and UCLA in the 1950s and 1960s. He objected to overly aggregated macromodels, but I never heard or read him reject standard neoclassical economic theory. Hayek legitimately took exception to Keynesian theory, in part iV of the Pure Theory of Capital, but you cannot deny that he accepted that it could be applicable under some circumstances and he reiterated that view in the 1950 paper that I quoted from.
LikeLike
David,
The record is abundantly clear. 1936 changed everything for Hayek.
He remembers it as the greatest intellectual moment of his life — seeing that the “givens” of the constructs economists had begun to created did not offer a causal mechanism or a causal explanation for the market order.
His breakthrough 1937 paper “Economics and Knowledge” is the result.
There were a series of follow on papers and books, including Hayek’s essay “The Meaning of Competition”, his “Scientism” papers, the first 4 or 5 chapters of his 1941 book, his “Uses of Knowledge” paper, his papers on explanation and complex phenomena, his “Competition as a Discovery Procedure” and all sorts of closely related efforts — his papers on rule following and law laying out the property rights and customs causal / empirical component of the explanation of global economic order, etc.
And Hayek really did blast neoclassical economics and the use almost all other economists made of the equilibrium construct — he simply rejected the idea that their formal constructs competently or successfully capture the causal / empirical guide function of prices or the role of genuine learning and competition on the causal processes of the market system.
Hayek came to see some of the same fallacies he saw in Keynes and Keynes’ aggregates in the “givens” of the neoclassical “technical economics” model builders. It wasn’t easy for him to articulate all of this, and he groped to do so, but the insight is put on the table.
Indeed, Hayek’s insight goes all the way back to his 1929 money & trade cycle book, where he points out the fallacy of assuming that the givens of technical or “blackboard” economics actually captured the price signal function of prices in the real world, esp. for the purposes of understanding the coordination process of the real money-using world.
Hayek is on the other side of a contest of paradigm rivals — and the term “economics” is essentially contested across schemata of these rivals.
Economics because something else post-1936 Hayek, and “technical economics” wasn’t a fully coherent or successful explanatory enterprise in Hayek’s eyes — in order to be a competent economist you had to do more that “technical economics” as Hayek came to explain it.
LikeLike
Actually, I do deny it, and even suggest that anyone carefully reading the book couldn’t help but agree with me:
“Hayek legitimately took exception to Keynesian theory, in part iV of the Pure Theory of Capital, but you cannot deny that he accepted that it could be applicable under some circumstances and he reiterated that view in the 1950 paper that I quoted from.”
LikeLike
Greg, Here’s a quotation from Hayek’s paper, “The Place of Menger’s Grundsaetze in the History of Economic Thought” in Car Menger and the Austrian School of Economics, edited by J.R. Hicks and W. Weber. (Oxford U. Press 1973).
Perhaps I should add that the marked lack of interest that so many of the younger economists have shown for micro-theory in the immediate past is a result of the particular form that macroeconomic theory took during that period. It had been developed by Keynes during that period. It had been developed by Keynes chiefly as a theory of employment which, at least as a first approach, proceeded on the assumption that there existed unused reserves of all the different factors of production. The deliberate disregard of the fact of scarcity that this involved led to the treatment of relative prices as historically determined and not requiring theoretical explanation. This sort of theory may, perhaps, have been relevant for the kind of general unemployment that prevailed during the Great Depression. But it is not of much help for the kind of unemployment with which we are faced now or that we are likely to experience in the future. The appearance and growth of unemployment in an inflationary period shows only too clearly that employment is not simply a function of total demand but is determined by that structure of prices and production that only micro-theory can help us understand.
It seems to me that signs can already be discerned of revival of interest in the kind of theory that reached its first high point a generation ago — at the end of the period during which Menger’s influence had been mainly felt. His ideas had by then, of course, ceased to be the property of a distinct Austrian School but had become merged in a common body of theory which was taught in most parts of the world. (p. 13)
From Hayek’s Preface to Studies in Philosophy, Politics and Economics
This volume contains a selection from the work of the last twenty years or so of an economist who discovered that if he was to draw from his technical knowledge conclusions relevant to the public issues of our time, he had to make up his mind on many questions to which economics did not supply an answer. (p. vii)
LikeLike
Hayek directly says that “neoclassical” economics never really brought out the signal function of prices, which Hayek identifies as at the core of causal / explanatory element economic science.
He also says that the equilibrium construct itself has clear meaning only when applied to the planning situation of a single individual.
And as a partial indication of his disillusionment with the neoclassical economists, he talks about he how he has become disenchanted with the equilibrium construct itself, which once so fascinated him.
Hayek in the final analysis doesn’t reject supply and demand analysis or the equilibrium construct — but he does reject the unscientific use the economics profession has made of those constructs, most especially equilibrium constructs, and he waves a giant flag point out how they have failed to create a science with these equilibrium constructs due to their failure to make sense of how to use them in a sound/successful causal / explanatory enterprise.
This is what all of Hayek’s papers on learning, the equilibrium construct, competition, and the “perfect competition” model are about — pointing out the difference between a successful causal – explanatory science, and a failed non-science which has yet to come up with a sound or fully successful causal / explanatory use of its logical and math equilibrium constructs built out of relations between “givens”.
LikeLike
Hayek, 1941/2007, p. 341:
“Now if there is a well-established fact which dominates economic life, it is the incessant, even hourly, variation in the prices of most of the important raw materials and of the wholesale prices of nearly all foodstuffs. But the
reader of Mr. Keynes’ theory is left with the impression that these fluctuations of prices are entirely unmotivated and irrelevant, except towards the end of a boom, when the fact of scarcity is readmitted into the analysis, as an apparent exception, under the designation of “bottlenecks”.”
Also p. 357:
“”The relative prices of the various types of goods and services, and therefore the rate of profit to be earned in their production, will always be determined by the impactof the monetary demand for the various kinds of goods and the supplies of these goods. And unless we study the factors limiting the supplies of these various types of goods, and particularly if we assume, as Mr. Keynes does, that they are all freely reproducible in practically unlimited quantities and without any appreciable lapse of time, we must remain in complete ignorance of the factors guiding production.”
Hayek points out two things — both consistent with his book of 1929/1933.
He points out that “money” / changing liquidity preferences etc. can put slack in the system, slack producing goods without demand and prices that don’t indicate underlying scarcities, etc. The components of this are in Hayek 1929/1931.
Typically, Hayek attempts to articulate this point contained in his own work using the language and picture of Keynes — the “universal idleness” picture and the possibility of “push-button” costless universal abundant production without differential relative scarcity constraints, using monetary and fiscal instruments.
But he directly suggests and insists that Keynes’ picture is actually false of the real world. He also points out that as policy the Keynesian system makes impossible knowledge demands on policy makers. And finally Hayek also points out that short term gains are likely to be systematically swamped by long-term costs hidden to the Keynesian framework.
So Hayek’s “in theory” / “in fact” concession to Keynes is really disingenuous — he makes it only to “concede” a position he has already staked out in 1929/1933 and to make the case for his own view within the alternative language and picture of Keynes’ rival conception. But not for a minute does Hayek accept that conception — as his many counters to that conception make clear .. and as Hayek brutal and slashing attack on Keynes and his “economics of abundance” make self-evident.
LikeLike
Hayek’s language here, gives away the game, doesn’t it?
“which, at least as a first approach .. ”
[i.e. would be unacceptable on a more thorough & theoretically and empirically sound 2nd approach]
“perhaps” [enough said]
Hayek writes,
“It had been developed by Keynes chiefly as a theory of employment which, at least as a first approach, proceeded on the assumption that there existed unused reserves of all the different factors of production. The deliberate disregard of the fact of scarcity that this involved led to the treatment of relative prices as historically determined and not requiring theoretical explanation. This sort of theory may, perhaps, have been relevant for the kind of general unemployment that prevailed during the Great Depression
LikeLike
Greg, Hayek obviously was not endorsing Keynes, but was he allowing for the possibility that in situations of general unemployment of resources that monetary expansion could increase output with little adverse consequence. You seem to be saying that he had already arrived at the position in a publication in 1929 and you try to somehow obscure the clear quotation from his 1950 paper republished in Studies in Philosophy, Politics and Economics. Your interpretations of the Pure Theory of Capital are “perhaps” defensible, though I myself am unpersuaded that he is saying that Keynes’s theory is absurd even in the depth of a depression, but his 1950 statement is completely clear and will not admit of any such interpretation.
LikeLike
“monetary expansion could increase output with little adverse consequence”
Hayek was aware of how liquidity preference and the expansion and contraction of the value and liquidity of near money assets could create “slack” in the system — and his books and papers of the late 1920s and early 1930s make this clear. Hayek explicitly talks about actions to counter a post-bust secondary deflation in his review of Keynes’ Treatise — and he takes a favorable view of some of Keynes novel ideas for address this problem. So Hayek both identifies a situation where “monetary expansion could increase output with little adverse consequence” and he praises Keynes ideas new ways to effect the same result.
Hayek is really making an “as if” statement about the market when he translates his own point — about the “loose joint” situation where gyrating near money values and liquidity (etc.) crash output — into the system and language of Keynes where cost & choice free production of all goods is possible. It “as if” any and all goods could be infinitely produced cost & choice free. (Things really aren’t like that, but compared to normal equilibrium it seems “as if” this were true).
And, no, not for a minute do I fantisize that Hayek believed in that picture of how the economy works — Hayek proceeds to berate that perspective in the most damning terms, and with an example quoted above that jabs in and slices apart the heart out of that picture.
LikeLike
January 23, 2014
How is that monetary policy working? U6 doesn’t seem to agree with your supposition on Hayek statements. I haven’t seen anything with Hayek that suggests such policies or that of govt attempting to artificially increase AD(aggregrate demand) will resolve economic woes and all be well. He merely suggests that it can have some positive results. But, then we must deal with the consequences. In another Hayek piece he talks about how interventions will distort the market and prolong changes that must occur and will occur. The changes he refers to are the movement of capital and people in the market. Govt, try as it might, cannot stop a shift that must occur. An example being that of the low tech or simple product manufacturing job. They are going and must go. Govts can try to stop it. But, either it will phase out slowly and people must shift to other occupations, or govt can try to stop the tides and we will have a flood of jobless in a short time.
I would add that, most of such insinuations on economic policy assumes ceteris paribus. But, with such enormous and consequential policies as The horrendous ACA, any potential positives from govt meddling to increase AD is harmed.
LikeLike