The Tender-Hearted Prof. Sumner Gives Mises and Hayek a Pass

Scott Sumner is such a kindly soul. You can count on him to give everyone the benefit of the doubt, bending over backwards to find a way to make sense out of the most ridiculous statement that you can imagine. Even when he disagrees, he expresses his disagreement in the mildest possible terms. And if you don’t believe me, just ask Paul Krugman, about whom Scott, despite their occasional disagreements, always finds a way to say something nice and complimentary. I have no doubt that if you were fortunate enough to take one of Scott’s courses at Bentley, you could certainly count on getting at least a B+ if you showed up for class and handed in your homework, because Scott is the kind of guy who just would not want to hurt anyone’s feelings, not even a not very interested student. In other words, Scott is the very model of a modern major general – er, I mean, of a modern sensitive male.

But I am afraid that Scott has finally let his niceness get totally out of hand. In his latest post “The myth at the heart of internet Austrianism,” Scott ever so gently points out a number of really serious (as in fatal) flaws in Austrian Business Cycle Theory, especially as an explanation of the Great Depression, which it totally misdiagnosed, wrongly attributing the downturn to a crisis caused by inflationary monetary policy, and for which it prescribed a disastrously mistaken remedy, namely, allowing deflation to run its course as a purgatory of the malinvestments undertaken in the preceding boom. Scott certainly deserves a pat on the back for trying to shed some light on a subject as fraught with fallacy and folly as Austrian Business Cycle Theory, but unfortunately Scott’s niceness got the better of him when he made the following introductory disclaimer:

This post is not about Austrian economics, a field I know relatively little about. [Scott is not just nice, he is also modest and self-effacing to a fault, DG] Rather it is a response to dozens of comments I have received by people who claim to represent the Austrian viewpoint.

And then after his partial listing of the problems with Austrian Business Cycle Theory, Scott just couldn’t help softening the blow with the following comment.

Austrian monetary economics has some great ideas – most notably NGDP targeting. I wish internet Austrians would pay more attention to Hayek, and less attention to whoever is telling them that the Depression was triggered by the collapse of an inflationary bubble during the 1920s. There was no inflationary bubble, by any reasonable definition of the world “inflation.”

Scott greatly admires Hayek (as do I), so he sincerely wants to believe that the mistakes of Austrian Business Cycle Theory are not Hayek’s fault, but are the invention of some nasty inauthentic Internet Austrians. In fact, because in a few places Hayek seemed to understand that an increased demand for money (aka a reduction in the velocity of circulation) would cause a reduction in total spending (aggregate demand or nominal income) unless matched by an increased quantity of money, acknowledging that, at least in principle, the neutral monetary policy he favored should not hold the stock of money constant, but should aim at a constant level of total spending (aggregate demand or nominal income), Scott wants to absolve Hayek from responsibility for the really bad (as in horrendous) policy advice he offered in the 1930s, opposing reflation and any efforts to increase spending by deliberately increasing the stock of money. During the Great Depression, Hayek’s recognition that in principle the objective of monetary policy ought to be to stabilize total spending was more in the way of a theoretical nuance than a bedrock principle of monetary policy. The recognition is buried in chapter four of Prices and Production. The tenor of his remarks and the uselessness of his recognition in principle that total spending should be stabilized are well illustrated by the following remark at the beginning of the final section of the chapter

Anybody who is sceptical of the value of theoretical analysis if it does not result in practical suggestions for economic policy will probably be deeply disappointed by the small return of so prolonged an argument.

Then in the 1932 preface to the English translation of his Monetary Theory and the Trade Cycle, Hayek wrote the following nugget:

Far from following a deflationary policy, Central Banks, particularly in the United States, have been making earlier and more far reaching efforts than have ever been undertaken before to combat the depression by a policy of credit expansion – with the result that the depression has lasted longer and has become more severe than any preceding one. What we need is a readjustment of those elements in the structure of production and of prices which existed before the deflation began and which then made it unprofitable for industry to borrow. But, instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. (pp. 19-20)

And then Hayek came to this staggering conclusion (which is the constant refrain of all Internet Austrians):

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure which can only lead to a much more severe crisis as soon as the credit expansion comes to an end. It would not be the first experiment of this kind which has been made. We should merely be repeating, on a much larger scale, the course followed by the Federal Reserve system in 1927, an experiment which Mr. A. C. Miller, the only economist on the Federal Reserve Board [the Charles Plosser of his time, DG] and, at the same time, its oldest member, has rightly characterized as “the greatest and boldest operation ever undertaken by the Federal reserve system”, an operation which “resulted in one of the most costly errors committed by it or any other banking system in the last 75 years”. It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. We must not forget that, for the last six or eight years, monetary policy all over the world [like, say, France for instance? DG] has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown. [OMG, DG] (pp. 21-22)

That the orthodox Austrian (espoused by Mises, Hayek, Haberler, and Machlup) view at the time was that the Great Depression was caused by an inflationary monetary policy administered by the Federal Reserve in concert with other central banks at the time is clearly shown by the following quotation from Lionel Robbins’s book The Great Depression. Robbins, one of the great English economists of the twentieth century, became a long-distance disciple of Mises and Hayek in the 1920s and was personally responsible for Hayek’s invitation to deliver his lectures (eventually published as Prices and Production) on Austrian Business Cycle Theory at the London School of Economics in 1931, and after their huge success, arranged for Hayek to be offered a chair in economic theory at LSE. Robbins published his book on the Great Depression in 1934 while still very much under the influence of Mises and Hayek. He subsequently changed his views, publicly disavowing the book, refusing to allow it to be reprinted in his lifetime.

Thus in the last analysis, it was deliberate co-operation between Central bankers, deliberate “reflation” on the part of the Federal Reserve authorities, which produced the worst phase of this stupendous fluctuation. Far from showing the indifference to prevalent trends of opinion, of which they have so often been accused, it seems that they had learnt the lesson only too well. It was not old-fashioned practice but new-fashioned theory which was responsible for the excesses of the American disaster. (p. 54)

Like Robbins, Haberler and Machlup, who went on to stellar academic careers in the USA, also disavowed their early espousal of ABCT. Mises, unable to tolerate apostasy on the part of traitorous erstwhile disciples, stopped speaking to them. Hayek, though never disavowing his earlier views as Robbins, Haberler, and Machlup had, acknowledged that he had been mistaken in not forthrightly supporting a policy of stabilizing total spending. Mises was probably unhappy with Hayek for his partial u-turn, but continued speaking to him nevertheless. Of course, Internet Austrians like Thomas Woods, whose book Meltdown was a best-seller and helped fuel the revival of Austrianism after the 2008 crisis, feel no shame in citing the works of Hayek, Haberler, Machlup, and Robbins about the Great Depression that they later disavowed in whole or in part, without disclosing that the authors of the works being cited changed or even rejected the views for which they were being cited.

So I am sorry to have to tell Scott: “I know it’s hard for you, but stop trying to be nice to Mises and Hayek. They were great economists, but they got the Great Depression all wrong. Don’t try to sugarcoat it. It can’t be done.”


50 Responses to “The Tender-Hearted Prof. Sumner Gives Mises and Hayek a Pass”

  1. 1 MG November 29, 2011 at 11:39 pm

    ” Robbins published his book on the Great Depression in 1934 while still very much under the influence of Mises and Hayek. He subsequently changed his views, publicly disavowing the book, refusing to allow it to be reprinted in his lifetime.”

    Can anyone name another instance of something like this happening? Can anyone even IMAGINE it happening today, when people will do anything to make a buck, regardless of the consequences to other people, and even themselves?


  2. 2 Marcus Nunes November 30, 2011 at 3:09 am

    Intelectual honesty, a scarce “commodity” indeed. Today, economists are defined by their “school of thought”. If they disavow it, they think they´ll become pariahs! In 2002 Bernanke said to Friedman; “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right. We did it. We’re very sorry.”
    But he went on to “embrace creditism” when 2008 came along!


  3. 3 Becky Hargrove November 30, 2011 at 7:06 am

    David, I cannot thank you enough for getting to the heart of this matter. Indeed many an “internet” Austrian is resigned to what is the economic philosophical equivalent of “the poor will always be with us”; small wonder the debate continues to rage on. That belief is so strong (while it is seldom voiced in such a way) that many Austrians are willing to endure yet another Depression.

    But the problem is not with credit. The problem is with what credit is expected to to – to somehow make the poor equivalent to the rich in terms of much of what they are expected to both produce and consume. When some Austrians see monetary policy attempting to bridge that gap they are repulsed. However, neither left or right has known how to create real respect for the poor in different terms. Both continually raise the bar to economic success, and both say that others should lower the bar but not themselves. So yes it looks like inflation when the poor person buys a house that takes half the income of what they are able to earn.

    The poor woman finds her way to economic freedom one focused step at a time and it is possible for credit to be organized in ways that reflect that reality. Microcredit has stumbled because while it recognized the need to take small steps, it did not create rungs along the success ladder where one could catch their breath as they continued upward.


  4. 4 Frank Restly November 30, 2011 at 7:19 am

    The inflation that the Austrians talk about happened during World War I (1914-1918) three recessions prior to the Great Depression (recession 1920-1921, recession 1923-1925, recession 1927-1928, Great Depression 1929-1933). The cause of the Great Depression was in fact a limitation of monetary policy – the cost of debt service cannot go below zero.


  5. 5 Benjamin Cole November 30, 2011 at 8:45 am

    Terrific post. Forget the Austrians. Forget gold.

    Let’s go with what works now. Monetary stimulus.


  6. 6 Becky Hargrove November 30, 2011 at 8:49 am

    Correction: the problem is with what credit is expected to do. (or accomplish)


  7. 7 David Glasner November 30, 2011 at 10:00 am

    MG, Yes Robbins was a wonderfully admirable scholar and public servant. Of course the Austrian take on him is that he saw which way the wind was blowing and opportunistically decided to cut his losses by going over to the Keynesian side in exchange for a life peerage. Of course, if he was miserable character, why would you credit anything he said before he switched sides?

    Marcus, Schools of thought are dangerous.

    Becky, The motto of the Austrians seems to be “bring it on!”

    Frank, You said:

    “The cause of the Great Depression was in fact a limitation of monetary policy – the cost of debt service cannot go below zero.”

    Not sure what you mean. Are you invoking the liquidity trap?

    Benjamin, Thanks. Monetary stimulus indeed.


  8. 8 rob November 30, 2011 at 10:04 am

    I think there are 2 different questions here

    1. Did a credit boom cause the great depression?
    2. Would increasing and stabilizing AD in the 1930’s have alleviated/cured the Great Depression?

    On #1 , there is clearly a lot of conflicting data but I think it is fair to say that both Hayek and Mises did some excellent work in the 1920’s that showed prescience in terms of predicting the Great Depression and analyzing the causes in terms of the ABCT that also help us understand the present crisis.

    On #2 It is clear that both Hayek and Mises were in the liquidationist camp at the start of the 1930’s. Mises never changed his views but Hayek did , and went on to provide the theoretical foundation (along with the MET economists) for such Austrians as White, Horwitiz and Garrison who tend to be sympathetic to the views of the Market Monetarists.

    I guess it is the Rothbardian followers of Mises (present day liquidationists) who are being referred to as “internet Austrians” . . I can’t help feeling that there is a lot “assuming ones own conclusions” going on with the various Keynesian and MM bloggers this week who have chosen to attack this school of thoughts as being out of touch with reality .


  9. 9 Luis H Arroyo November 30, 2011 at 10:32 am

    Very good post, very informative to me. whwn I read the Scott´s post, I suspected some benign actitude for hayek & Al. But I hadn´t very much knowledge on, and his post was so clever!
    The terrible thing is that today´s Austrians continue to defend the old ABCT, at least in Spain. And quite dogmatically, BTW.


  10. 10 Lars Christensen November 30, 2011 at 11:45 am

    David, I agree – both Mises and Hayek were indeed great economists. I would even say that Austrian Business Cycle Theory is worth studying, but I totally agree it is basically worthless in explaining the Great Depression and the Great Recession.

    I have for sometime been skeptical about the view that Hayek was in favour of nominal income targeting. Yes, he seems to have asked for that some places, but when it mattered he did basically reject the idea. That, however, does not change the fact that some modern day Austrians like Steve Horwitz are “Market Hayekians” who embrace nominal income targeting and have a very different view of the Great Recession (the the Great Depression) than the Rothbard crowd among the “internet Austrians”. I am not sure that Scott differentiates betweens these groups of Austrians, but I think there is a very significant difference. I hope that you agree on this.


  11. 11 David Glasner November 30, 2011 at 12:09 pm

    Rob, The answers are no and yes. However, at some point fairly early in the Great Depression, stabilizing AD was no longer consistent with staying on the gold standard.

    Mises and Hayek did some excellent work in the 1920s, but their monetary policy diagnoses and recommendations were consistently wrong, and, I regret to say, abysmally so. Their prescience in predicting the Great Depression was purely coincidental, as is obvious from the fact that according to their analysis, there should have been a perpetual Great Depression because credit expansion was faster in every decade after the 1920s than during the 1920s.

    I agree that Hayek did learn from his mistakes, and the Austrians whom you mention take a more restricted view of what ABCT is capable of explaining, which is no more than the upper turning point of a certain (but not the only) kind of business cycle expansion.

    It’s actually not clear to me how influential Austrians were in the 1930s in encouraging liquidationist policies, but they seem to have become very surprisingly influential since 2008, which is sort of scarry.

    Steve Horwitz is a very smart guy, and is remarkably sensible. White, Selgin and Garrison are also good economists and worth listening to. Unfortunately, they are not the ones that the Austrian street is paying attention to.


  12. 12 Lars Christensen November 30, 2011 at 3:00 pm

    David, good to hear you share that view. Obviously Larry and George are also worth listening to. In fact I would be lying if I said my own thinking was terrible different from what George is saying on most issues.


  13. 13 Frank Restly November 30, 2011 at 5:08 pm

    No, what I am talking about is the difference between nominal and real interest rates. Even if interest rates are very low on a nominal basis (0%, 1%, 2%, whatever), they can still be very high on a real basis because of deflation.

    For instance, if you borrow money at 2% that seems like a good deal – right? Now, imagine that the price of what you are producing using debt falls 10% a year. And so, your real cost of debt service is more like 12%.


  14. 14 MG November 30, 2011 at 5:30 pm

    That’s because Austrianism is, for all intents and purposes, nothing more than polemical armor certain interests are using to cover themselves, and certain other people who have a fixed world view, use to confirm the rightness of their beliefs.

    I intended to say in my first post in this thread, that if Hayek and von Mises hadn’t existed, then they would have been invented — the NEED for them among some groups is too great for them not to exist. As it is, much of what people think they know of Hayek has been invented, in the sense that it was taken out of context, and the reservations and qualifications Hayek expressed regarding his own stuff ignored. It’s the age we live in. In some ways, it’s worse than the 1930s, when Marxism had an iron grip on the intelligentsia of Europe, and contrary views were derisively squashed. At least back then, they didn’t have empiric evidence that showed they were on the wrong path. We, or at least the faux Austrians, have no such excuse.


  15. 15 Frank Restly November 30, 2011 at 5:33 pm

    A liquidity trap implies that there is no escape or solution. And so, I don’t subscribe to the thinking that there are no solutions. See my post on selling tax breaks and why 0% is not the lower bound under “Unpleasant Fishererian Arithmetic”.


  16. 16 The Liquidationist November 30, 2011 at 6:14 pm

    To the contrary MG – it is the Market Monetarists who are needed by the financial elite to provide intellectual cover for the coming inflationary frenzy which will soon be needed to protect their interests.


  17. 17 Scott Sumner December 1, 2011 at 5:06 am

    David, Good post. A few comments:

    1. Elsewhere I’ve discussed the fact that Hayek favored tight money in the early 1930s, and later changed his mind, arguing monetary stimulus would have been appropriate. So I agree with you there.

    2. I haven’t read Mises, but was constantly being told by others that he defined inflation as a rise in the money supply. Since the money supply didn’t rise in the 1920s, this puzzled me.

    3. The post wasn’t really aimed at Austrian economics, it was aimed at the constant assertion that the 1920s was “inflationary”, I wanted to know where this came from. I’m still not sure.

    4. I’m not an easy grader, at least by modern standards..


  18. 18 David Glasner December 1, 2011 at 9:26 am

    MG, Obviously libertarianism is an ideology useful to many vested interests. Does that account for its existence? I don’t think so. Does it account for all the money going to support pro-libertarian scholarship and policy advocacy? No doubt. Does that make libertarianism is illegitimate? I don’t think so. But it does suggest that there should be disclosure of funding sources. The world is full of vested interests and they will use whatever ideologies they can find to make themselves appear more respectable. That’s just the way it is in this imperfect, but occasionally lovable, world of ours.

    Lars, Why am I not surprised by that admission of sorts?

    The Liquidationist, And do you think that creditors are inherently superior to creditors? Is redistribution from debtors to creditors morally or ethically preferable to redistribution in the opposite direction? Is redistribution from debtors to creditors economically more efficient than redistribution in the opposite direction?

    Scott, Glad you liked it. The point of course was not so much to challenge your understanding of Austrian economics, but to make some observations about the defects of Austrian business cycle theory. Sorry, Scott, but you were just a convenient prop. But what a splendid prop!

    Although you are correct that Hayek later took back some of his unfortunate policy positions in the 1930s, his original remarks about stabilizing money expenditures were so tentative and qualified that they hardly count. I don’t think that White and Selgin are wrong to point out that Hayek understood that stabilizing money expenditure is the right policy, but it is a tad disingenuous to do so without acknowledging that he pretty steadfastly refused to base any policy recommendation on that understanding.

    On inflation, Mises pretty clearly defines inflation as an increase in the money supply rather than an increase in prices. Hayek understood that the correct criterion is not the quantity of money per se, but the quantity relative to the demand, except that Hayek did not consider increases in transaction demand relevant, only increases in precautionary demand were relevant.

    The notion that the 1920s were inflationary was a staple of Austrian theory in the 1920s and 1930s. So it is not the invention of internet Austrians or even of Murray Rothbard. It was an essential premise in the work of Mises, Hayek, and in the early work of Haberler, Machlup, and Robbins.


  19. 19 MG December 1, 2011 at 11:22 am

    Scratch a modern libertarian, and you’ll find a plutocrat underneath. And you won’t have to scratch very hard. There are very few exceptions to this rule.


  20. 21 The Liquidationist December 1, 2011 at 4:20 pm

    I think the distribution between creditor and debtor needs to be decided by the market.

    What is needed to clear the markets is lower wages and other primary factor prices. This clearing mechanism is being hampered by supply-side factors that keep unemployment high. Attempt to shore up AD by “conventional” means has failed. No-one wants to borrow either to invest or to consume, and so banks are not re-lending paid-down loans.

    It is my prediction that the financial elite will soon wish to reset the books on debt with a burst of money-supply led inflation and that the Market Monetarists economists will provide intellectual capital for that project.


  21. 22 von Pepe December 1, 2011 at 6:12 pm

    I do believe in many ways this is the fairest presentation of Hayek I have seen. It seems to me that Scott has only read White (2008) and claimed Hayek an NGDP targeter.

    As far as I am concerned in the above quotes you have successfully convicted Hayek of being a microeconomist. In many ways we all talk past each other. MM speak of the price level or inflation whilst Austrians are ONLY concerned with relative prices. We will never demonstrate our inflation thesis to you through CPI or other aggregate. Nor will we be able ot demonstrate the distortive effects of money (increased through the credit channel) has as an uncertain quantity on one (or both sides in financial economics) side of all exchanges.

    What Hayek wrote in P&P is that neutral money meant keeping MV constant. He later clarified that he never intended this to be a guide to policy for any number of reasons. Velocity was not observed in real time and he thought the demand for money changed cyclically and unpredictably. And then there is the knowledge problem which we actually take SERIOUSLY – not just lip service..
    (His statement of the knowledge problem predates P&P. So we have additionally textual evidence that the concept of money neutrality wasn’t intended be a guide to activist policy.)
    To say something would be desirable in principal, but is impossible to execute in practice is not a fault. It is intellectual honesty.

    So, Austrians see technocrats advising discretionary inflation (DG’s favorite unbanned word) in order ot target either P or Q…which they are not sure nor do they care. They have observed a historical correlation and expectations asserted will take care of the rest. If this is not mechanical lever pulling by political pretense of knowledge technocrats serving the people I have never seen one then.

    Please, you DO NOT know the outcome of your monetary expansion…that is Hayek’s point and today’s Austrians. YOU DO NOT KNOW. So, please give some of us and Hayek a break when we raise our hand in hte back of the room and say, “you don’t know result of your actions, you are ignoring microeconomic adjustments that need to occur based on real scarcities”

    Yes, Austrians do not have perfect solution to a recession or depression, but we do believe we have a good explanation that is often true of the boom and when we see people trying to create another artificial boom…yes, we do try to jump in front of the lever pulling and say it might cause distortions in the real economy that no amount of money printing can fix and it might make the distortions even worse as the the new boom is created leading to the next bust – filled with human suffering. All Austrians are saying for a “remedy” is: Do you trust the market or technocrats that cannot posess the knowledge to execute the ideal of stable NGDP growth. The Austrians vote for the market…I will leave it to your readers to judge the fed, discretion, and lever-pulling macroeconomics.

    Scott, of course is not in favor of discretionary in his theory, he wants NGDP futures, but that does not exist just like Free Banking does not exist. Austrians should just sit here in 2011 and say we want Free Banking executed by the fed! MM is counting on the fed to target NGDP at 5%, really?

    As summarized by Fritz Machlup [1976, p. 23], “monetary factors cause the cycle but real phenomena constitute it.”

    Think about it.


  22. 23 David Glasner December 2, 2011 at 9:21 am

    MG, I share your frustration with and disdain for modern libertarianism. However, I think that you underestimate the philosophical and purely ideological appeal that libertarianism holds for many people (including me, though, even in my youthful enthusiasm, did I ever consider myself a real libertarian, being too much of a Hayekian for that). Many people really are captivated with the idea of a social order governed not by any central authority but by voluntary exchange motivated by self-interest. Adam Smith’s invisible hand theorem and metaphor is a very powerful idea and many people embrace it on account of its intellectual beauty rather than their own self-interest. However, it is a sign of youthful innocence and superficiality to believe that one single principle provides an adequate foundation for a great society.

    Liquidationist, You said:

    “I think the distribution between creditor and debtor needs to be decided by the market.”

    You win the today’s award for question begging.

    “What is needed to clear the markets is lower wages and other primary factor prices.”

    Do you have any estimate of the percentage of debts that will be repaid after the deflation that you are advocating has run its course?

    “This clearing mechanism is being hampered by supply-side factors that keep unemployment high.”

    You mean like minimum wage laws and unemployment insurance? I don’t think that there is any reliable evidence on the quantitative significance of those factors on employment.

    “Attempt to shore up AD by “conventional” means has failed. No-one wants to borrow either to invest or to consume, and so banks are not re-lending paid-down loans.”

    The expectation of deflation created by the policy that you advocate would produce another great depression instead of the little depression we have now.

    von Pepe, Thanks for your compliment about my presentation of Hayek’s theory. It’s clear that we have very different perspectives on Hayek and his theory, so I won’t try to convince you that your view is mistaken. However, I will say that I don’t think it is appropriate to invoke Hayek’s authority, without acknowledging that Hayek himself recanted the policy advice he gave in the 1930s, even though he did not recant the theory. The only possible explanation for his rejection of the policy advice without rejecting the theory is that he came to the conclusion that stabilizing total spending is the appropriate policy in a depression and he explicitly said as much on numerous occasions after WWII. Not to acknowledge that is unfair to Hayek, and approaches the line of intellectual dishonesty. Of the five most prominent exponents of Austrian theory in the 1930s, von Mises, Hayek, Haberler, Machlup and Robbins. Four disavowed (with varying degrees of emphasis) their policy advice. The only one who did not (von Mises) was, despite his many good points, clearly a nut.


  23. 24 The Liquidationist December 2, 2011 at 11:03 am

    DG: You win the today’s award for question begging.
    Why ? I’ just suggesting that rather than having the CB choose an inflation level that revalues debts according to its own interests that we allow the market to do it.

    DG:Do you have any estimate of the percentage of debts that will be repaid after the deflation that you are advocating has run its course?
    No. But creditors can choose to accept a lower level of repayment or force bankruptcy. Either way the loan markets finds a new and healthier equilibrium.

    DG:You mean like minimum wage laws and unemployment insurance? I don’t think that there is any reliable evidence on the quantitative significance of those factors on employment.
    Agreed. But those factors (and others) must be responsible for price stickiness which is the single biggest reason why the recession is lasting so long. We should address the causes and not the symptoms.

    DG: The expectation of deflation created by the policy that you advocate would produce another great depression instead of the little depression we have now.
    In my opinion not if we free the market in a much more radical way than you are probably envisaging. I agree that if you combine polices that encourage price stickiness with policies that restrict spending then you have a deeper depression. I am simply suggesting that rather than going for the easy option that increases spending but fails to address the structural issues we go for a real solution that gets us away from being prisoners of CB policy.


  24. 25 MG December 2, 2011 at 12:26 pm

    I was 16 once, too, you know. I read Ayn Rand and thought of myself as a budding Howard Roark. Then I grew up. Or as close to grew up as I could. Haven’t quite made it all the way, and at this point probably won’t

    I understand libertarianism has a strong appeal — I think any utopian philosophy does, especially for those of us with a strong idealistic streak. The problem is that many of the “liberatarians” I know today, and almost all the ones I’ve read, manifestly lack any real sense of idealism at all. They are “libertarians” because espousing it is what’s best for them in their circumstances. And it’s dragging us all down. Although I dislike libertarianism, it absolutely has its place at the table as a counter to left authoritarianism. But when there is no left authoritarianism at the table, which is the case now, libertarianism serves no practical function. It just screws everything up with mindless ideologues (I think I see a couple posting in this thread), and self-interested hacks.

    Anyway, we’re going too far afield here, so I’ll stop.


  25. 26 David Glasner December 3, 2011 at 4:03 pm

    MG, I agree that there are all kinds of reasons why people are espousing libertarianism, these days. I was responding mainly to what seemed an overly harsh and overly general statement about what motivates libertarians these days. But you are right that we have probably said as much as needs to be said on the subject at least for the time being.

    Liquidationist, On second thought question-begging may not be the right word. My problem is that in the real world (i.e., the one that we live in, not the one that we would like to live in) the rate of inflation is determined by the issuer of the money that we use, the issuer of the money that we use is the monetary authority, so I don’t see what good it does to say, let the “market” (as if the market were a completely autonomous entity following its own rules disconnected from government decisions) determine the rate of inflation.

    You said,

    “But creditors can choose to accept a lower level of repayment or force bankruptcy. Either way the loan markets finds a new and healthier equilibrium.”

    Creditors can choose to do so in some instances; in other instances they can’t for a variety of legal or economic reasons. Whether the new equilibrium found by loan markets is healthier is very much an open question.

    “But those factors (and others) must be responsible for price stickiness which is the single biggest reason why the recession is lasting so long. We should address the causes and not the symptoms.”

    There is price stickiness that results from government restrictions on price movement, and there is price stickiness that results from a variety of costs and frictions, and there is price stickiness that results from incorrect expectations of future prices. The price stickiness that you are referring to may have harmful effects, but the “natural” price stickiness is an inherent characteristic of a normal market economy and it can’t be attributed to government restrictions or wished away. Consequently your final comment above, which I won’t copy, assumes a world in prices adjust instantaneously after a disturbance to a new equilibrium system. In the real world, the process of readjusting prices is very rough and imperfect, so that leaving all the work of adjustment to prices can produce a disaster.


  26. 27 The Liquidationist December 3, 2011 at 4:22 pm

    I agree that there is “natural” price stickiness that stops prices adjusting instantaneously which is why we will never truly arrive at equilibrium.

    However I do not think that this kind of stickiness is what explains the last 3 years. This is institutionalized stickiness brought about by government regulations and long-term fed policy aimed at adjusting AD to suit the needs of the financial elite.

    Freeing the markets would not “instantaneously” solve this situation but it would , in my opinion, lead to a sustainable, stable and prosperous economy.


  27. 28 David Glasner December 3, 2011 at 5:23 pm

    Liquidationist, What makes the price stickiness of the last three years any different from the stickiness of the last 60?


  28. 29 Greg Ransom December 3, 2011 at 8:34 pm

    David, you are well aware that Hayek changed his mind about the facts after reading Friedman & Schwartz.

    Being wrong about the facts is a matter utterly different from being wrong about the science.

    Why conflate theory & the data of history when you are well aware of the distinction — and Hayek’s re-evaluation of the historical facts?


  29. 30 Greg Ransom December 3, 2011 at 8:58 pm

    David, Using DNA science, microbiologists concluded from the date then at hand that Neanderthals had not bred with human, later better data was collected, and these same microbiologists changed their minds about interbreeding, but NOT about DNA science. Hayek and his macro science is in the same position as these microbiologists and their DNA science.

    This shouldn’t be a point that is had to grasp.


  30. 31 David Glasner December 3, 2011 at 10:00 pm

    Greg, every relevant fact about the monetary situation in the Great Depression was already known to and explained by Hawtrey in the early 1930s. There was no need for Hayek to wait 30 years for Friedman and Schwwartz whose understanding of the relevant theory and the most important facts was vastly inferior to Hawtrey’s.


  31. 32 The Liquidationist December 4, 2011 at 8:22 am

    Supply-side regulations and barriers to reducing wage-levels have definitely increased in recent years. I believe that this plus the supply-side shock following the housing bust have combined to create the current recession.


  32. 33 gregransom December 4, 2011 at 9:32 am

    What are the Hawtrey books and articles of relevance here?

    I’d like to read them.


  33. 34 gregransom December 4, 2011 at 9:37 am

    I look at Hayek’s work load, and I look at what he produced, and I see zero time or thought seriously given to the empirical facts of the 1930-1939 period in America. Hayek seems only superficially to know even the data on Britain, were he lived and which was of special interest to the British economics.

    Also, it seems clear to me that we have gotten more data and better data on the 1929-1933 period in recent years than was available in the London newspapers, in, say, 1931.

    E.g. knowledge about French gold stocks, as just one example.

    Has anyone compared what was in the London press in 1930, 1931, 1932, etc. with facts as we know believe them to be about the American and world economy?


  34. 35 gregransom December 4, 2011 at 9:40 am

    My point about the relation between a scientific explanatory theory vs the knowledge of and/or interpretation of particular facts and events stands. of course.


  35. 36 gregransom December 4, 2011 at 9:44 am

    David, here is the form of our argument:

    Darwin had the facts wrong & misinterpreted some particular episode in the evolution of some species or some adaptation.

    Therefore: Darwin’s theory of natural selection is false.


    It’s a bad argument.


  36. 37 David Glasner December 4, 2011 at 12:38 pm

    Liquidationist, Would you be kind enough to enumerate the increased supply-side regulations and barriers to reducing wage levels that were instituted in recent years?

    Greg, I should also have mentioned that Cassel gave an essentially equivalent explanation of what happened in the Great Depression to Hawtrey’s, and Cassel’s explanation, like Hawtrey’s, was undoubtedly known to Hayek.

    For Hawtrey, the key works are The Gold Standard in Theory and Practice (3rd ed. 1933) and The Art of Central Banking, and Trade Depression and the Way Out. The latter is probably difficult to lay your hands on.

    Greg, as a fervent admirer of Hayek’s, I appreciate your tenacious defense of him, especially against the many unfair charges against him by his detractors. But I am afraid that defending him against the charge that he gave very bad policy advice, which he later regretted, by saying that he had no idea what the facts were when he was giving advice, only makes him look worse, not better. If he didn’t know what the facts were, he had not business making policy recommendations. And his opposition to Britain’s abandonment of the gold standard in September 1931 was about as bad a call as can be imagined. You make it sound as if Hayek was the only economist in Britain who was working hard. That’s not an excuse for giving bad advice.

    It was no secret that the French were accumulating huge amounts of gold and in 1932 in his paper on the Fate of the Gold Standard, he actually defended the French policy as fully consistent with the rules of the game under the gold standard. Another OMG moment. There is just no excuse for that, inasmuch as Hawtrey and Cassel had explained what was going dozens of times before, and your defense of Hayek on this score is, please forgive me for saying so, pure obfuscation. Hayek’s theory of the business cycle may have some merit, but it was inexcusable for him to interpret the evens of the Great Depression as if they corresponded to his business cycle theory, when it was in fact a nearly pure monetary shock.


  37. 38 Greg Ransom December 4, 2011 at 6:48 pm

    Believe it or not, David, I’m trying to get the story & the history right, and to understand it.

    I’ve found again and again that Hayek often didn’t that good of a grip on the basic facts about current events .. and it’s clear to me that man spent massive hours in in his work, and in his academic duties. After 1929 this didn’t much include any focus at all on “empirical” economic matters.

    If its correct to say that Hayek didn’t have a good grip on the facts, and this makes him look bad, so be it, if that is the best account or the best explanation of what we know of the matter.

    I really couldn’t care less how this makes Hayek looks. What I’m sick of is all of the massive falsehood and nonsense written about Hayek.

    A correct and sound account of the historical record is better than a false or misleading or politically spun account, which is almost universally the sort of thing that has been out there.

    David writes,

    “But I am afraid that defending him against the charge that he gave very bad policy advice, which he later regretted, by saying that he had no idea what the facts were when he was giving advice, only makes him look worse, not better.


  38. 39 Greg Ransom December 4, 2011 at 6:51 pm

    David, you’ve switched topics.

    We were discussing Hayek’s empirical understanding of the U.S. Great Depression.

    Now you’ve switched to the very different British situation that was already over half a decade old by 1931.

    “And his opposition to Britain’s abandonment of the gold standard in September 1931 was about as bad a call as can be imagined. You make it sound as if Hayek was the only economist in Britain who was working hard. That’s not an excuse for giving bad advice.”


  39. 40 Greg Ransom December 4, 2011 at 6:58 pm

    Two things.

    1. I have no problem with saying that Hayek’s interpretation of events was “inexcusable”.

    2. You’ve seriously misunderstood Hayek’s macro if you don’t understand that Hayek’s macro was an account of the necessary monetary aspect of any boom and bust cycle, and that Hayek’s macro would be just as applicable to your factual description of the Great Depression as to some alternative set of possible facts.

    David writes,

    “It was inexcusable for him to interpret the evens of the Great Depression as if they corresponded to his business cycle theory, when it was in fact a nearly pure monetary shock.”


  40. 41 Greg Ransom December 4, 2011 at 7:01 pm

    My understanding — possibly mistaken — is that there is indeed new work on the empirics of French & US gold stocks, produced in the last decades.

    And my understanding is that the various data of the 1920s and 1930s has always been very partial and incomplete, and that it has continually been added to and re-evaluated across time.

    And isn’t that in part why anything thinks Friedman & Schwartz produced anything worth taking note of at all?


  41. 42 David Glasner December 4, 2011 at 8:37 pm

    Greg, I take you at your word that you are not engaged in Hayekian apologetics.

    I have not switched topics, I reject the notion invented by Friedman and Schwartz that there was a meaningful distinction between the Great Depression in the US and the rest of the world. It was a global phenomenon that coincided with the countries that had restored the gold standard. It is true that Britain had been suffering high unemployment since the early 1920s and the brutal deflation of 1920-21, but Britain, despite restoring the gold standard at an overvalued parity was slowly recovering, with positive real growth and slowly declining unemployment. The problem of an overvalued currency which afflicted Britain for most of the 1920s was dwarfed by the massive deflation that Britain had to endure, with the rest of the countries on the gold standard, until Britain ditched the gold standard in September 1931 and things stopped getting worse and started to improve within a few months over a year before recovery started in the US, once FDR suspended the gold standard in the US.

    You said:

    “You’ve seriously misunderstood Hayek’s macro if you don’t understand that Hayek’s macro was an account of the necessary monetary aspect of any boom and bust cycle, and that Hayek’s macro would be just as applicable to your factual description of the Great Depression as to some alternative set of possible facts.”

    My point is precisely that the deflation of the Great Depression, in contrast to a typical Hayekian business cycle, was entirely the result of an increase in the world demand for gold associated with a general restoration the gold standard and the disastrous French gold hoarding policy combined with the misguided attempt by the Fed to counteract stock market speculation by raising interest rates to the near record high level of 6.5 percent. An elongation of the structure of production was not — repeat not — a part of the story.

    I am not completely up to date on all the recent research on French monetary policy, but two of the more important recent works, Clark Johnson’s book, Gold, France and the Great Depression and Raymond Moure’s book The Gold Standard Illusion: France, the Bank of France, and the International Gold Standard 1914-1939 support the Hawtrey-Cassel interpretation.


  42. 43 The Liquidationist December 5, 2011 at 12:00 pm

    The have been changes in both minimum wage laws and unemployment insurance that have affected the supply-side of labor and countered the downward pressures on wages.

    However that is not the whole story. Fed policy since the early 1980’s until 2008 did a good job of stabilizing AD and inflation. Businesses started to plan around the expectation that this would continue and this meant they built “sticky pricing” into their plans. The housing bust and financial crises blew up the fed’s strategy and led to sharply reduced AD which in turn led to reduced demand for labor. This should have led to a lowering of the price of labor but this did not happen precisely because of the kind of stable AD planning that the economy had adjusted to. In a healthy economy where established companies fail to reduce wages when there is unemployment then start-ups should be able to enter the market with lower costs and take market share. The fact that this has not generally happened in my opinion points to the fact that supply-side barriers (particularly minimum wage laws) are to some extent discouraging them from doing so.


  43. 44 David Glasner December 5, 2011 at 2:26 pm

    Liquidationist, You are right that the US minimum wage has gone up at just the wrong time. However, historically, I am not sure that the minimum wage is higher than it was for most of the post-war period until the 1980s when it began lagging inflation. Unemployment insurance has been extended, but that was an effect not a cause of the lingering downturn. Your point about stable inflation causing prices to become increasingly sticky could be applied to other historical periods, and I am not sure it is very concvincing.


  44. 45 aje December 5, 2011 at 3:48 pm

    David – why haven’t you mentioned Larry White’s JMCB article on “Did Hayek and Robbins Deepen the Great Recession”?


  45. 46 The Liquidationist December 5, 2011 at 6:16 pm

    I appreciate your replies to my comments. I plan to explore this idea in more detail.


  46. 47 Greg Ransom December 5, 2011 at 8:05 pm

    In _Monetary Nationalism_ Hayek discusses how gold flows and different exchange rates can cause cyclical phenomena.

    Hayek explicitly identifies the 1920s British depression as a result the consequences of war policy and central bank monetary policies and union legislation, fit within the world economic situation. There is no “elongation” element anywhere in this account.

    Hayek in his1929/1931 book says that his “elongation” story was an illustration of one way in which a boom – bust cycle could be played out. His point was to prove that any up / down phenomena would depend on — and would be made possible by — the loose joint aspect of the institutions of money and credit — he’s explicit about his aim in his _Monetary Theory and the Trade Cycle_ book.

    In later years Hayek repeatedly said his “elongation” story fit 19th century cycles, and that cycle phenomena could have other structures, depending on contemporary institutional arrangements and government policies, etc.

    To sum up, an elongation of the structure of production is not — repeat not — a necessary part of the monetary trade cycle theory as laid out by Hayek in his 1929/31 book.


  47. 48 Greg Ransom December 5, 2011 at 8:22 pm

    Hayek’s 1929/1931 point is that systematic discoordination will have a money/credit/leverage dimension — will be made possible by money/credit/leverage — and will be constituted in part by systematic movements in money/credit and in systematically shifting relative prices across every dimension of the economy, including time/production/capital goods/labor.

    Unstable gyrations in debt obligations, gold policies, money demand, credit risk estimations, etc. will produce systematic discoordinations across the structure of the economy — putting labor and capital out of work.

    Part of that systematic twisting and ripping of relative price relations will involve structures of relations across time, disrupting production processes of alternative lengths and using alternative amounts of labor.

    Because money/credit/leverage/liquidity etc. is constituted by what can be characterized as a “loose joint” or a “ruler made of a rubber band” systematic discoordinations in both output and in the the employment of inputs to production are inevitable. And all of this causally takes place via microeconomic relative price relations and constantly re-coordinated heterogeneous production inputs, some of which go into and out of the status of “economic goods”.

    That, in a nutshell, is Hayek’s macro.

    It ain’t Murry Rothbard, but Hayek isn’t Murry Rothbard.


  48. 49 David Glasner December 7, 2011 at 7:50 pm

    Greg, Exchange rates had a role in the Great Depression, but it was the accumulation of gold by the central banks, especially the Bank of France, that was the main force driving down prices. And Hayek in his 1932 paper in German “The Fate of the Gold Standard,” (translation included in one of the volumes of his collected works) defended the Bank of France against criticism for its policies.

    Hayek correctly attributed high British unemployment after 1925 to an overvalued exchange rate, but criticized the Fed for seeking to ease the transition by monetary expansion in 1927. You are right that Hayek in later years adopted a broader view of monetary disturbances that was not tied to the elongation of the capital structure as his early expositions were. But we are talking about the eary Hayek not the more mature Hayek whose views changed from those he espoused in his early works. But even so, the 1929-33 deflation was an almost pure monetary deflation resulting from a rapid increase in the world’s monetary demand for gold, and the real factors focused on by the early Hayek and the later Hayek were largely irrelevant to that monetary phenomenon. That doesn’t mean that Hayek didn’t have important insights, but those insights were wasted on the analysis of the Great Depression. And I am the last person in the world who would confuse Hayek and Rothbard.

    aje, I read White’s paper quickly many months ago. My initial reaction was that it was an important piece of revisionist history. Although I consider Larry a very fine economist and a careful scholar, I am less inclined to think that his defense is as powerful as it seems, because I think he gives too much weight to Hayek’s theoretical acknowledgment that the correct criterion for monetary policy was constant money income. Hayek mentioned that a theoretical consideration but gave it little or no weight in his policy discussions. Robbins, too, attributed deflation to some sort of natural adjustment necessary to correct the real misallocations caused by the previous boom. And both Hayek and Robbins were very emphatic in first opposing and then deploring Britain’s abandonment of the gold standard. Staying on the gold standard would have required prolonging the agony of deflation for Britain, so although Hayek had the intellectual resources to have provided better policy advice, he failed to put those resources to good use, as he later acknowledged.


  1. 1 The Tender-Hearted Prof. Sumner Gives Mises and Hayek a Pass « Economics Info Trackback on November 30, 2011 at 11:01 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. 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.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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