Two years ago today we noted Daniel Keuhn saying smart things about Friedrich von Hayek and Paul Krugman saying smart things about Milton Friedman. Keuhn’s major point was that Hayek is inconsistent and incoherent on both macroeconomic political economy issues, and we should recognize that incoherence. Krugman’s is that Friedman’s the-market-is-perfect-except-we-need-a-k%-money-growth-rule is deeply incoherent. Both are very smart points, but…
I do give Hayek much less credit than Daniel does for the times when he says the proper monetary policy is to stabilize the nominal level of total spending. In my view that position is, while not as bad as liquidationism, also batshit-insane. It calls for the overall price level to fall at a rate equal to the sum of population and productivity growth. It calls for nominal wages to fall as rapidly as the labor force increases? In the real world we live in, why would anybody want that?
The reason Hayek gives seems to be that… well, actually, there are no coherent reasons.
And the really existing Hayek deployed today is not the stabilize nominal GDP on its pre-2007 trend path Hayek. It is the liquidationist Hayek.
I think that Krugman overstates the inconsistency when he says that: “if markets can go so wrong that they cause Great Depressions, how can you be a free-market true believer on everything except macro?” It is possible, after all, that the vulnerability of the market economy to Great Depressions is its only major market failure. That is unlikely, but it could be the way that world is. Because it is unlikely, it is a hard position to argue for. But you can argue for it.
Daniel Kuehn Smacks Down Larry White: That Friedrich von Hayek Was Not Consistent or Coherent Does Not Redound to His Benefit: “Hayek said liquidationist things and he said stable nominal income things…
…and the latter do not erase the former. Larry White has a very odd response up to Paul Krugman…. White makes a great argument that Hayek said he wanted to stabilize MV…. [Hayek] also made alarmingly liquidationist statements. I hate this tendency to act like people are dummies because of Hayek’s inconsistency or the tendency to act like because Hayek said X on Tuesday it means he didn’t say Y on Friday. The latter absolutely does not follow from the former. It’s hard to get around this: ‘…if we pass from the moment of actual crisis to the situation in the following depression, it is still more difficult to see what lasting good effects can come from credit expansion.’…
You see this with Road to Serfdom too… [so] I… [am] tuning out of any posts about the book. Farrant and McPhail do a really masterful job on this one taking down the Caldwell/Boettke position by pointing out that–as with the MV stabilization/liquidationist issue–Hayek did indeed make strong slippery slope arguments sometimes and didn’t at other times. The Caldwell/Boettke camp usually responds to this by pointing out the times that Hayek wasn’t making the strong slippery slope arguments. But that… only demonstrates that Hayek was highly inconsistent!…
People are allowed to change their minds, and… be careless with words…. What bothers me….
- Larry White treating Krugman like he’s being intellectually lazy for pointing out that Hayek was clearly a promoter of liquidationism… and
- The failure to recognize that this seems to be a particularly common problem with Hayek. You wouldn’t get liquidationism jumbled up together with anti-liquidationism in Keynes or Friedman…. But you do with Hayek…. If we still can’t agree on the message of the Road to Serfdom or… the interwar macro work… the obvious conclusion is not that Krugman is a dummy–but that Hayek was all over the map. And it seems to me it’s reasonable to assume he is culpable for being all over the map…
Paul Krugman: The Eclipse of Milton Friedman: “Friedman’s larger problem… is… he was…
…a man trying to straddle two competing world views… an avid free-market advocate, who insisted that the market, left to itself, could solve almost any problem… [and] also a macroeconomic realist, who recognized that the market definitely did not solve the problem of recessions and depressions. So he tried to wall off macroeconomics… and make it… inoffensive to laissez-faire sensibilities…. We do need stabilization policy–but we can minimize the government’s role by relying only on monetary policy… and then not even allowing the monetary authority any discretion.
At a fundamental level, however, this was an inconsistent position: if markets can go so wrong that they cause Great Depressions, how can you be a free-market true believer on everything except macro? And as American conservatism moved ever further right, it had no room for any kind of interventionism…. So Friedman has vanished from the policy scene–so much so that I suspect that a few decades from now, historians of economic thought will regard him as little more than an extended footnote.
Friedman’s problem with the right–and the reason for his effective banishment by the right from the intellectual scene today–is not so much a logical problem as a rhetorical problem. People who believe the market is perfect can on a rhetorical level accept the proviso “…as long as you maintain a neutral monetary policy which is easily to calculate and automatic”. They cannot accept the proviso “…as long as the central bank and the government juggle enough balls well enough to make Say’s Law true in practice even though it is false in theory”.
But do you know who else thought that the market was perfect as long as the central bank and the government juggle enough balls well enough to make Say’s Law true in practice even though it is false in theory? No, this time the answer to the “do you know who else?” question is not Adolf Hitler:
John Maynard Keynes: The General Theory of Employment, Interest and Money by John Maynard Keynes: “If the State is able to determine the aggregate amount…
…of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary…. Our criticism of the accepted classical theory of economics has consisted… in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if… [the] aggregate volume of output correspond[s]… to full employment as nearly as is practicable, the classical theory comes into its own…. Then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed… no objection to… the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively… no more reason to socialise economic life than there was before….
When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production…. There will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.
Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency — the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.
Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.
For if effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.
The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.
I have mentioned in passing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect.
War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.
I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.
Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours.
There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.
