OMG! John Taylor REALLY Misunderstands Hayek

Since Friday’s post about John Taylor’s misunderstanding of Hayek, I watched the 57-minute video of John Taylor’s Hayek Prize Lecture. I will not offer an extended critique of the lecture, which was little more than a collection of talking points based on little empirical evidence and no serious analysis or argument. If that description sounds like a critique, so be it, but the lecture was more in the way of a ritual invocation of shared beliefs and values than an attempt to make a substantive case for a definite policy or set of policies. Whether those present at the lecture were appropriately reinforced in their shared beliefs by Taylor’s low-key remarks and placid delivery, I have no idea, but he obviously was not trying to break any new intellectual ground.

Though I found Taylor’s remarks generally boring, I did perk up about 33-34 minutes through the lecture when Taylor observed that Hayek had himself, on occasion, deviated from his own principles. How does Taylor know this? He knows this (or thinks he does, at any rate), because, as a fellow of the Hoover Institution at Stanford University, he has access to Hayek’s correspondence, which contains Keynes’s famous letter to Hayek praising The Road to Serfdom, a letter Taylor quotes from just before he gets to his point about Hayek’s “deviation,” and access to a letter that Milton Friedman wrote to Hayek complaining about Hayek’s criticism of his 3-percent rule for growth in the stock of money. Hayek made the criticism in a 1975 lecture entitled, “Inflation, the Misdirection of Labour, and Unemployment,” which was published in a 52-page pamphlet called Full Employment at any Price? (of which I own a copy) along with Hayek’s Nobel Lecture and some additional Hayek had written about inflation and unemployment.

Here is what Hayek said about Friedman’s rule:

I wish I could share the confidence of my friend Milton Friedman who thinks that one could deprive the monetary authorities, in order to prevent the abuse of their powers for political purposes, of all discretionary powers by prescribing the amount of money they may and should add to circulation in any one year. It seems to me that he regards this as practicable because he has become used for statistical purposes to draw a sharp distinction between what is to be regarded as money and what is not. This distinction does not exist in the real world. I believe that, to ensure the convertibility of all kinds of near-money into real money, which is necessary if we are to avoid severe liquidity crises or panics, the monetary authorities must be given some discretion. But I agree with Friedman that we will have to try and get back to a more or less automatic system for regulating the quantity of money in ordinary times. The necessity of “suspending” Sir Robert Peel’s Bank Act of 1844 three times within 25 years after it was passed ought to have taught us this once and for all.

A polite, but stern, rebuke to Friedman. Friedman, not well disposed to being rebuked, even by his elders and betters, wrote back an outraged response to Hayek accusing him of condoning the discretionary behavior of central bankers, as if unaware that Hayek had already explained 15 years earlier in chapter 21 of The Constitution of Liberty why central bank discretion was not a violation of the rule of law.

Somehow or other, Professor Taylor must have come across Friedman’s letter to Hayek, and thought that it would be edifying to mention it in his Hayek Prize lecture. Bad idea!

The following is my rough transcription of Taylor’s remarks, starting at about 33:50 of the Manhattan Institute video, just after Taylor quoted from Keynes’s letter to Hayek about The Road to Serfdom and Friedman’s comment about the letter that Keynes had obviously not read the chapter of The Road to Serfdom entitled “Why the Worst Get on Top.”

Now there’s always pressure for even the best-intentioned people to move away from the principles of economic freedom. And just to show you how this can happen, Hayek, himself, deviated, at least in his writings. There’s a book he wrote called Full Employment at Any Price [no intonation indicating the question market in the title], written in the middle of the 1970s mess of high inflation, rising unemployment. So people, you know, just really said, we gotta get – he wanted, of course, to get back to the rule of law and rules-based policy, but what about – well, we gotta do something else in the meantime. Well, once again, Milton Friedman, his compatriot in his cause — and it’s good to have compatriots by the way, very good to have friends in his cause. He wrote in another letter to Hayek – Hoover Archives – “I hate to see you come out, as you do here, for what I believe to be one of the most fundamental violations of the rule of law that we have, namely, discretionary activities of central bankers.”

So, hopefully, that was enough to get everybody back on track. Actually, this episode – I certainly, obviously, don’t mean to suggest, as some people might, that Hayek changed his message, which, of course, he was consistent on everywhere else.

Well, this is embarrassing. Obviously not well-versed in Hayek’s writings, Taylor mistakes the Institute of Economic Affairs, Occasional Paper 45, Full Employment at any Price? for a book, while also overlooking the question mark in the title. That would be bad enough, but Taylor apparently infers that the title (without the question mark) represented Hayek’s position in the pamphlet, i.e., that Hayek was arguing that the chief goal of policy in the 1970s ought to be full employment, in other words, exactly the opposite of the position for which Hayek was arguing in the pamphlet that Taylor was misidentifying and in everything else Hayek ever wrote about inflation and unemployment policy.  Hayek was trying to explain that the single-minded pursuit of full employment by monetary policy-makers, regardless of the consequences, would be self-defeating and self-destructive. But, ignorant of Hayek’s writings, Taylor could not figure out from reading Friedman’s letter that all Friedman was responding to was Hayek’s devastating criticism of Friedman’s 3-percent rule, a rule that Taylor, for some inexplicable reason, still seems to find attractive, even though just about everyone else realized long ago that it was at best unworkable, and, in the unfortunate event that it could be made to work, would be disastrous. As a result, Taylor thoughtlessly decided to show that even the great Hayek wasn’t totally consistent and needed the guidance of (the presumably even greater) Milton Friedman to keep him on the straight and narrow. And this from the winner of the Hayek Prize in his Hayek Prize Lecture, no less.

Just by way of sequel, here is how well Hayek learned from Friedman to stay on the straight and narrow. In Denationalization of Money, published in 1976 and a revised edition in 1978, Hayek again commented (p. 81) on the Friedman 3-percent rule.

As regards Professor Friedman’s proposal of a legal limit on the rate at which a monopolistic issuer of money was to be allowed to increase the quantity in circulation, I can only say that I would not like to see what would happen if it ever became known that the amount of cash in circulation was approaching the upper limit and that therefore a need for increased liquidity could not be met.

And then in a footnote, Hayek added the following:

To such a situation the classic account of Walter Bagehot . . . would apply: “In a sensitive state of the English money market the near approach to the legal limit of reserve would be a sure incentive to panic; if one-third were fixed by law, the moment the banks were close to one-third, alarm would begin and would run like magic.

So much for Friedman getting Hayek back on track.  The idea!


15 Responses to “OMG! John Taylor REALLY Misunderstands Hayek”

  1. 1 Marcus Nunes June 3, 2012 at 8:03 pm

    When you´re being honored with someone´s name, the least you could do is not “denigrate” the source of the honor. I´ve had the IEA brochure (red) since 1975 (cost 1 pound). But Taylor has been full of tricks lately. Not entoning the question mark is just another one of those.


  2. 2 Martin June 4, 2012 at 2:14 am

    If Taylor wanted to call attention to an abandonment of principles by Hayek, he should have pointed at Hayek’s position during the Great Depression.

    As you know, Hayek there hoped, according to an interview in the 70’s, that a secular deflation could break the power of the labour unions and did therefore not call for to stabilize MV. Friedman there could have told him that that was a bad idea and kept him ‘on the straight and narrow’ so to say.

    I doubt though that Taylor would like to point at that as that would conflict rather uncomfortably with the views expressed by him in various other outlets.


  3. 3 Tas von Gleichen June 4, 2012 at 3:56 am

    Targeting any percentage rule almost always fails. The numbers stand be trusted as they are manipulated by the government. Such as the unemployment numbers are way higher as the government claims them to be.


  4. 4 David Glasner June 4, 2012 at 10:11 am

    Marcus, My copy is red, too. I am inclined to think that Taylor did not deliberately leave out the questin mark. I think that he never saw the title before and wherever he did see it — perhaps in Friedman’s letter — the question mark either was missing or did not register with him. I fault him for inexcusable sloppiness, not trickery. At least in this instance. There’s another that comes up in Paul Gigot’s introduction of Taylor before the lecture, which Taylor actually mentioned in a blog post last week. That would be harder to attribute just to sloppiness. I was thinking of posting something about that, too, but maybe I need to find something else to write about.

    Martin, Fair point, but what you are bringing up is a matter of policy, rather than not adhering to the rule of law, which is what Taylor was ignorantly intimating that Hayek had done.

    Tas, Sorry, I don’t accept for a moment that US unemployment statistics are being manipulated by the government for political reasons. The criteria of unemployment are complicated, and different criteria would lead to different results, but the criteria have been long established and they have not been changed by the politicians to make them look better. If you or anyone else has evidence to the contrary, please provide it. Otherwise, I regard the suggestion as conspiracy-theorizing.


  5. 5 nbvbv June 5, 2012 at 3:33 pm

    Employment number methodology is varied from time to time – the ‘other side’ always ascribes nefarious intent.


  6. 6 Julian Janssen June 5, 2012 at 9:34 pm

    I think that this is just a case of a thoroughly ideological figure looking sloppily to identify intellectual forebears without considering what they actually had to say. Same deal as labeling a free market, free trade outfit with the name of Alexander Hamilton, despite his personal support of high tariffs and a national brewery. I’m not well-read in Hayek, but my bet is that Professor Taylor has only a passing knowledge of Hayek’s work, his disagreements with Keynes, probably Road to Serfdom and little else. Keep up the posts, David!


  7. 7 David Glasner June 7, 2012 at 7:03 pm

    nbvbv, You are correct. And I think that it is the insinuations of nefarious intent are generally, except in some egregious cases like Argentina, that are nefarious.

    Julian, Thanks. I just thought that it was unprofessional of Taylor to invoke Hayek in the way that he did when he clearly was not well versed in Hayek’s writings. When he made a completely unnecessary aside about Hayek’s inconsistency, displaying not just unfamiliarity, but total ignorance of Hayek’s writings and a gross misunderstanding of what he was reading, that was inexcusable.


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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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