Archive for March, 2012



Kuehn, Keynes and Hawtrey

Following up on Brad DeLong’s recent comment on his blog about my post from a while back in which I expounded on the superiority of Hawtrey and Cassel to Keynes and Hayek as explainers of the Great Depression, Daniel Kuehn had a comment on his blog cautioning against reading the General Theory either as an explanation of the Great Depression, which it certainly was not, or as a manual for how to recover from the Great Depression. Although Daniel is correct in characterizing the General Theory as primarily an exercise in monetary theory, I don’t think that it is wrong to say that the General Theory was meant to provide the theoretical basis from which one could provide an explanation of the Great Depression, or wrong to say that the General Theory was meant to provide a theoretical rationale for using fiscal policy as the instrument by which to achieve recovery. Certainly, it is hard to imagine that the General Theory would have been written if there had been no Great Depression. Why else would Keynes have been so intent on proving that an economy in which there was involuntary unemployment could nevertheless be in equilibrium, and on proving that money-wage cuts could not eliminate involuntary unemployment?

Daniel also maintains that Keynes actually was in agreement with Hawtrey on the disastrous effects of the monetary policy of the Bank of France, citing two letters that Keynes wrote on the subject of the Bank of France reprinted in his Essays in Persuasion. I don’t disagree with that, though I suspect that Keynes may have had a more complicated story in mind than Hawtrey did.   But it seems clear  that Hawtrey and Keynes, even though they were on opposite sides of the debate about restoring sterling to its prewar parity against the dollar, were actually very close in their views on monetary theory before 1931, Keynes, years later, calling Hawtrey his “grandparent in the paths of errancy.” They parted company, I think, mainly because Keynes in the General Theory argued, or at least was understood to argue, that monetary policy was ineffective in a liquidity trap, a position that Hawtrey, acknowledging the existence of what he called a credit deadlock, had some sympathy for, but did not accept categorically.  Hawtrey is often associated with the “Treasury view” that holds that fiscal policy is always ineffective, because it crowds out private spending, but I think that his main point was that fiscal policy requires an accommodative monetary policy to be effective. But not having studied Hawtrey’s views on fiscal policy in depth, I must admit that that opinion is just conjecture on my part.

So my praise for Hawtrey and dismissal of Keynes-Hayek hype was not intended to suggest that Keynes had nothing worthwhile to say. My point is simply to that to understand what caused the Great Depression, the place to start from is the writings of Hawtrey and Cassel. That doesn’t mean that there is not a lot to learn about how economies work (or don’t work) from Keynes, or from Hayek for that matter. The broader lesson is that we should be open to contributions from a diverse and eclectic range of sources. So despite superficial appearances, there really is not that much that Daniel and I are disagreeing about.

PS (8:58 AM EST):  I pressed a button by mistake and annihilated the original post.  This is my best (quick) attempt to recover the gist of what I originally posted last night.

PPS (11:07 AM EST):  Thanks to Daniel Kuehn for reminding me that Google Reader had protected my original post against annihilation.  I have now restored fully whatever it was that I wanted to restore.

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Brad Delong Likes Bagehot and Minsky Better than Hawtrey and Cassel

It seems as if Brad DeLong can’t get enough of me, because he just quoted at length from my post about Keynes and Hayek even though he already quoted at length from the same post a month ago.  So, even though Brad and I don’t seem to be exactly on the same page, as you can tell from the somewhat snarky title of his most recent post, I take all this attention that he is lavishing on me as evidence that I must be doing something right.

After his long quote from my post, Brad makes the following comment:

As I have said before, IMHO Cassel and Hawtrey see a lot but also miss a lot. The Bagehot-Minsky and the Wicksell-Kahn traditions have a lot to add as well. And Friedman was a very effective popularizer of most of what you can get from Cassel and Hawtrey.

But, as I have said before, those of us who learned this stuff from Blanchard, Dornbusch, Eichengreen, and Kindleberger–who made us read Bagehot, Minsky, Wicksell, Metzler, and company–have a huge intellectual advantage over others.

I left a reply to Brad on his site, (which, as I write this, is still awaiting moderation so I can’t reproduce it here); the main point I made was that Hawtrey (who coined the term “inherent instability of credit”) was not outside the Bagehot-Minsky tradition, or, having invented the fiscal-multiplier analysis before Richard Kahn did (as documented by Robert Dimand), and having relied extensively on the concept of a natural rate of interest in most of his monetary writings, was he outside the Wicksell-Kahn tradition.  But, while acknowledged the importance of the two traditions that Brad mentions and Hawtrey’s affinity with those traditions, I maintain that those traditions are not all that relevant to an understanding of the Great Depression, which was not a typical cyclical depression of the kind that those two traditions are primarily concerned with.  The Great Depression, unlike “normal” cyclical depressions, was driven by powerful worldwide deflationary impulse associated with the dysfunctional attempt to restore the gold standard as an international system after World War I.  Hawtrey and Cassel understood the key role played by the demand for gold in causing the Great Depression.  That is why Brad’s reference to Friedman’s popularization “of most of what you can get from Cassel and Hawtrey” is really off the mark.  Friedman totally missed the role of the gold standard and the demand for gold in precipitating the Great Depression.  And Friedman’s failure — either from ignorance or lack of understanding — to cite the work of Hawtrey and Cassel in any of his writings on the Great Depression was an inexcusable lapse of scholarship.

Daniel Kuehne picks up on Brad’s post with one of his own, defending Keynes against my criticisms of the General Theory.  Daniel points out that Keynes was aware of and adopted many of the same criticisms of the policy of the Bank of France that Hawtrey had made.  That’s true, but the full picture is more complicated than either Daniel or I have indicated.  Perhaps I will try to elaborate on that in a future post.

When Ben Bernanke Talks, People Listen

Yesterday, the stock market (S&P 500) dropped sharply upon hearing Chairman Bernanke’s testimony before Congress in which he declined to promise that the Fed would engage in another round of quantitative easing as many observers were anticipating. The news sent the market tumbling, and the dollar rose 1% against the euro. Readers of a certain age will recall a well-known advertising slogan for a now defunct stock- brokerage house, E. F. Hutton: when E. F. Hutton talks, people listen. Ben Bernanke is not a stock trader, but when he talks, people do pay attention. By day’s end, however, the market recovered a bit of the ground that it lost immediately after Bernanke’s testimony was released, falling by just half a percent. What happened?

My guess is that the markets may have been factoring in two separate pieces of information. The first was the upward revision in real GDP growth in the fourth quarter of 2011 from 2.8% to 3%. Thus, the market was in positive territory before Bernanke’s testified. The news was reflected in rising real interest rates associated with improving expectations of real GDP growth. The improved expectations of future real GDP growth were countered by Bernanke’s testimony, which suggested that the anticipated easing might not be forthcoming. That sent inflation expectations south, and the market followed inflation expectations, as I have found that it usually has done ever since tight money sent the economy into steep decline in the spring of 2008 when the Fed was mistakenly focused on countering rising energy prices instead of supporting a faltering economy.

The combination of the two effects, the improvement in the real strength of the economy, a positive, was more than offset by the disappointment about the future course of monetary policy. The net effect was a slight fall in prices, but it is interesting to see an example of the two effects going in opposite directions on the same day.

Today the market more than recovered yesterday’s losses, the S&P 500 reaching a new post-crisis high. Real and nominal interest rates both rose, reflecting increasing optimism about economic recovery, and inflation expectations were unchanged. So there are some grounds for cautious optimism, but an oil-price shock could stall this fragile recovery yet again, especially if the inflation hawks on the FOMC have their way, yet again.


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.

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