⁶²In Britain the expansion was generated because of the rigid wage structure caused by unions and the unemployment insurance system, as well as a return to the gold standard at too high a par; and in the United States it was generated by a desire to inflate in order to help Britain, as well as an absurd devotion to the ideal of a stable price level.
Saturday, October 31, 2020
In Rothbard’s Opinion, Lionel Robbins’s Book Is Unquestionably the BEST Work on the Great Depression
⁶²In Britain the expansion was generated because of the rigid wage structure caused by unions and the unemployment insurance system, as well as a return to the gold standard at too high a par; and in the United States it was generated by a desire to inflate in order to help Britain, as well as an absurd devotion to the ideal of a stable price level.
According to Rothbard, Sir Ralph George Hawtrey Was One of the Evil Geniuses of the 1920s
Government CANNOT Act in the General Interest When It Controls the Supply of Money
Yet even if we assumed that government could know what should be done about the supply of money in the general interest, it is highly unlikely that it would be able to act in that manner. As Professor Eckstein, in the article quoted above, concludes from his experience in advising governments:
Governments are not able to live by the rules even if they were to adopt the philosophy [of providing a stable framework].
Once governments are given the power to benefit particular groups or sections of the population, the mechanism of majority government forces them to use it to gain the support of a sufficient number of them to command a majority. The constant temptation to meet local or sectional dissatisfaction by manipulating the quantity of money so that more can be spent on services for those clamouring for assistance will often be irresistible. Such expenditure is not an appropriate remedy but necessarily upsets the proper functioning of the market.
—F. A. Hayek, “The Denationalization of Money: An Analysis of the Theory and Practice of Concurrent Currencies,” in The Collected Works of F. A. Hayek, vol. 6, Good Money, Part II: The Standard, ed. Stephen Kresge (Indianapolis: Liberty Fund, 1999), 203.
Today, Money Is NOT an Effective Medium of Exchange, But a Tool of Government for Fleecing Us and for “Managing” the Economy
In fact, in endeavouring to design a better monetary order we at once encounter the difficulty of not really knowing what we want. What would be a really good money? To the present day, money is that part of the market order that government has not allowed to find its most effective form, and on which silly rulers and economists have doctored most. Yet it was not economists or statesmen who invented the market, though some have come to understand it a little; nor is it our present knowledge which can show us the best solutions, but the discoveries made by free experimentation. Those who chiefly needed money as an indispensable tool of trade, and who had first discovered it as a means for making most trade possible, were soon forced to use what money government gave them. And government jealously guarded its monopoly for quite different purposes than those for which money had been introduced. Today, money is not mainly an effective medium of exchange, but chiefly a tool of government for fleecing us and for ‘managing’ the economy. The result is that we are obliged to admit that we have little empirical evidence of how the various conceivable methods of supplying money would operate, and almost none about which kind of money the public would select if it had an opportunity to choose freely between several different and clearly distinguishable kinds of money. For this we must rely largely on our theoretical imagination, and try to apply to a special problem that understanding of the functioning of competition which we have gained elsewhere.
—F. A. Hayek, “The Future Unit of Value,” in The Collected Works of F. A. Hayek, vol. 6, Good Money, Part II: The Standard, ed. Stephen Kresge (Indianapolis: Liberty Fund, 1999), 240-241.
Friday, October 30, 2020
Gustav Cassel’s Fear of a Gold Shortage and His Stabilization Views Led to the Gold Exchange Standard and Cooperation Between Central Banks
The second important factor which determined the development of ideas on monetary policy was that the above-mentioned facts were partly contributory to the extraordinary influence exercised by two particular representatives of the mechanistic Quantity Theory of Money and the concept of a systematic stabilization of the price level, Irving Fisher and Gustav Cassel. The fluctuations in the value of money mentioned above necessarily aroused wide interest in Fisher’s proposal for stabilizing the value of gold, which he had been advocating for a long time; and the lively propaganda which was being circulated, particularly by the Stable Money Association which he had founded, had succeeded in making the concept of price stabilization as the objective of monetary policy into a virtually unassailable dogma. Cassel, who deserved the greatest credit for the stabilization of European currencies, contributed a further, extraordinarily effective argument in favour of the policy of stabilization, the influence of which upon actual developments it is impossible to overestimate.
This was his prediction that gold production was not adequate for the annual increase of 3 per cent in the world stock of monetary gold which, on his calculations, would be required to maintain stability in the price level.
Fear of the imminent shortage of gold, and the desire to arrive at a systematic policy for stabilizing the value of money, gave rise to two further ideas which dominated the period, and were expressed particularly in the resolutions of the conference on international economic relations in Genoa in 1922; a preference for the gold exchange standard as the object of stabilization in individual countries, and the recommendation of “Cooperation between Central Banks.” Both desires were to become extremely significant for the development of monetary policy over the next few years. Perhaps it is therefore appropriate at this point to also name the man who acquired special influence as the propagator of the ideas expressed by the Genoa Conference—even if he were not, as one might suspect, its instigator: R. G. Hawtrey of the British Treasury.
—F. A. Hayek, “The Fate of the Gold Standard,” in The Collected Works of F. A. Hayek, vol. 5, Good Money, Part I: The New World, ed. Stephen Kresge (Indianapolis: Liberty Fund, 1999), 154.
To Combat the Depression by a Forced Credit Expansion Is to Attempt to Cure the Evil by the Very Means Which Brought It About
Thursday, October 29, 2020
It Was the Political Inability to Make That Choice That Led to the Debacle of the 1930s
It Was Keynes’s Use of Aggregates that Hayek Came to View as Being Keynes’s MOST DANGEROUS Contribution
Both “The Economics of the 1930s as Seen from London” and “Personal Recollections of Keynes and the Keynesian Revolution” were written in the 1960s. In them, Hayek recounted that after the release of The General Theory he had a feeling, vague but enduring, that in order to do a full critique of Keynes he would need to do more than to criticize his model. Hayek disagreed with Keynes on both theory and policy. But it was Keynes’s methodological approach, specifically his use of aggregates, that Hayek came to view in retrospect as being his opponent’s most dangerous contribution.
Now, it is easy to understand that Hayek might put things in this way in essays written in the 1960s. Macroeconomic modelling was then at its zenith, as was hubris about the economics profession’s ability to control the business cycle by applying fiscal ‘fine-tuning’. What doesn’t ring quite true in Hayek’s claim is that he was only vaguely becoming aware of this difference over methodology in the 1930s. As we saw in our discussion of Hayek’s earlier work on the United States economy, opposition to the use of statistical aggregates has long been a methodological principle among Austrians. Aggregates mask the movement of relative prices, and relative price movements are the central foci of Austrian theory.
—Bruce Caldwell, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 9, Contra Keynes and Cambridge: Essays, Correspondence, by F. A. Hayek (Indianapolis: Liberty Fund, 1995), 42-43.
Hayek Secured the Capital-Theoretic Foundation of Austrian Theory By Replacing “Average Period of Production” with the “Structure of Production”
By the time that Hayek published his next major theoretical work, The Pure Theory of Capital, the world was at war. Few in the profession even noticed the book. Furthermore, it was clear to Hayek that even after a prodigious effort he had not gotten very far. True enough, he had been able to clear away Böhm-Bawerk’s “average period of production” and replace it with the far more complex notion of a structure of production, thereby securing the capital-theoretic foundation of Austrian theory. But he had made no further progress towards building on this new foundation a fully dynamic theory of the cycle. Hayek never returned to this task, hoping that it would be completed by others. It remains unfinished.
—Bruce Caldwell, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 9, Contra Keynes and Cambridge: Essays, Correspondence, by F. A. Hayek (Indianapolis: Liberty Fund, 1995), 42.
Wednesday, October 28, 2020
Monetary Theories of the Trade Cycle Are Generally Regarded as “Exogenous” (Instead of “Endogenous”) Theories
The Pressure for More and Cheaper Money Is a Political Force Which Monetary Authorities Have NEVER Been Able to Resist
The pressure for more and cheaper money is an ever-present political force which monetary authorities have never been able to resist, unless they were in a position credibly to point to an absolute obstacle which made it impossible for them to meet such demands. And it will become even more irresistible when these interests can appeal to an increasingly unrecognizable image of St. Maynard. There will be no more urgent need than to erect new defences against the onslaughts of popular forms of Keynesianism, that is, to replace or restore those restraints which, under the influence of his theory, have been systematically dismantled. It was the main function of the gold standard, of balanced budgets, and of the limitation of the supply of ‘international liquidity’, to make it impossible for the monetary authorities to capitulate to the pressure for more money. And it was exactly for that reason that all these safeguards against inflation, which had made it possible for representative governments to resist the demands of powerful pressure groups for more money, have been removed at the instigation of economists who imagined that, if governments were released from the shackles of mechanical rules, they would be able to act wisely for the general benefit.
—F. A. Hayek, “Choice in Currency,” in The Collected Works of F. A. Hayek, vol. 6, Good Money, Part II: The Standard, ed. Stephen Kresge (Indianapolis: Liberty Fund, 1999), 119-120.
Tuesday, October 27, 2020
Should We Rely on the Price Mechanism to Provide Us with an Indicator of the Relative Scarcity of the Various Factors of Production?
In discussions of war economics it is generally taken for granted that the monetary authorities should always employ all the means at their disposal to keep rates of interest as low as possible. That it is possible to postpone a threatened rise of interest rates for a long time cannot be doubted. The real problem is whether it is desirable to do so. For nearly two hundred years economists fought fairly consistently against the popular argument in favour of such a policy; and until two or three years ago, when these old arguments experienced a sudden recrudescence, it was commonly regarded as highly dangerous. For the time being the prompt rise of the Bank Rate at the outbreak of war has provided a temporary answer. But with the infinitely greater demands for capital during actual warfare the problem is bound to return in much more acute and pressing form.
Basically, the question at issue is the same as that discussed in the article on pricing versus rationing in the last issue of The Banker. Should we rely on the price mechanism to provide us with an indicator of the relative scarcity of the various factors of production? Or should we deliberately make this price mechanism inoperative and try to substitute for it a detailed regulation of all productive activity by a central authority? And the argument that the rate of interest should be allowed to express the real scarcity of capital is fundamentally the same as that with respect to any other price. But this similarity was never easy to see, since in the case of capital we have not to deal with a single concrete resource but with a somewhat abstract concept. And the more recent discussions, confining themselves entirely to the monetary influences at work, hardly have increased the understanding of this problem.
—F. A. Hayek, “The Economy of Capital,” in The Collected Works of F. A. Hayek, vol. 10, Socialism and War: Essays, Documents, Reviews, ed. Bruce Caldwell (Indianapolis: Liberty Fund, 1997), 157.
Every Explanation of Economic Crises MUST Include the Assumption that Entrepreneurs Have Committed Errors
Every explanation of economic crises must include the assumption that entrepreneurs have committed errors. But the mere fact that entrepreneurs do make errors can hardly be regarded as a sufficient explanation of crises. Erroneous dispositions which lead to losses all round will appear probable only if we can show why entrepreneurs should all simultaneously make mistakes in the same direction. The explanation that this is just due to a kind of psychological infection or that for any other reason most entrepreneurs should commit the same avoidable errors of judgment does not carry much conviction. It seems, however, more likely that they may all be equally misled by following guides or symptoms which as a rule prove reliable. Or, speaking more concretely, it may be that the prices existing when they made their decisions and on which they had to base their views about the future have created expectations which must necessarily be disappointed. In this case we might have to distinguish between what we may call justified errors, caused by the price system, and sheer errors about the course of external events. Although I have no time to discuss this further, I may mention that there is probably a close connection between this distinction and the traditional distinction between ‘endogenous’ and ‘exogenous’ theories of the trade cycle.
—F. A. Hayek, “Price Expectations, Monetary Disturbances, and Malinvestments,” in The Collected Works of F. A. Hayek, vol. 5, Good Money, Part I: The New World, ed. Stephen Kresge (Indianapolis: Liberty Fund, 1999), 235-236.
An Elaboration of the Theory of Capital Is a Prerequisite for a Thorough Disposal of Keynes’s Argument
I ought to explain why I failed to return to the charge after I had devoted much time to a careful analysis of his writings—a failure for which I have reproached myself ever since. It was not merely (as I have occasionally claimed) the inevitable disappointment of a young man when told by the famous author that his objections did not matter since Keynes no longer believed in his own arguments. Nor was it really that I became aware that an effective refutation of Keynes’s conclusions would have to deal with the whole macroeconomic approach. It was rather that his disregard of what seemed to me the crucial problems made me recognize that a proper critique would have to deal more with what Keynes had not gone into than with what he had discussed, and that in consequence an elaboration of the still inadequately developed theory of capital was a prerequisite for a thorough disposal of Keynes’s argument.
So I started on this task intending it to lead to a discussion of the determinants of investment in a monetary system. But the preliminary ‘pure’ part of this work proved to be much more difficult, and took me very much longer, than I had expected. When war broke out, making it doubtful that publication of such a voluminous work would be possible, I put out as a separate book what had been meant as a first step of an analysis of the Keynesian weaknesses, which itself was indefinitely postponed.⁷
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⁷F. A. Hayek, The Pure Theory of Capital
—F. A. Hayek, “The Keynes Centenary: The Austrian Critique,” in The Collected Works of F. A. Hayek, vol. 9, Contra Keynes and Cambridge: Essays, Correspondence, ed. Bruce Caldwell (Indianapolis: Liberty Fund, 1995), 251-252.Economic Phenomena Are NOT Mass Phenomena of the Kind to Which Statistical Theory Is Applicable
The hope of becoming more ‘empirical’ by becoming more macroeconomic is bound to be disappointed, because these statistical magnitudes—which are alone ascertainable by ‘measurement’—do not also make them significant as the cause of actions of individuals who do not know them. Economic phenomena are not mass phenomena of the kind to which statistical theory is applicable. They belong to that intermediate sphere that lies between the simple phenomena of which people can ascertain all the relevant data and the true mass phenomena where one must rely on probabilities.
—F. A. Hayek, “The Keynes Centenary: The Austrian Critique,” in The Collected Works of F. A. Hayek, vol. 9, Contra Keynes and Cambridge: Essays, Correspondence, ed. Bruce Caldwell (Indianapolis: Liberty Fund, 1995), 251.
Monday, October 26, 2020
Léon Walras Was Hired as a Professor of Economics in Lausanne Because, and Not in spite of, His Socialism
—Michel Herland, “Three French Socialist Economists: Leroux, Proudhon, Walras,” Journal of the History of Economic Thought 18, no. 1 (Spring 1996): 134-135.
The Kornai–Lipták Two-Level Planning Idea Is Very Much Reminiscent of the Taylor–Lange Market Socialist Models
The Kornai–Lipták two-level planning idea is very much reminiscent of the Taylor–Lange market socialist models described 30–35 years earlier in the throws [throes] of the early stages of the socialist calculation debate with Austrian economists Ludwig von Mises and F. A. Hayek (see, for instance, Lange, 1936; Taylor, 1929). The Taylor–Lange model worked as follows: let there be a market in consumer goods and labor but leave the means of production in government’s hands. The central planning office will set prices for producer goods and on the basis of these ‘‘accounting prices’’ producers will be instructed to set price equal to marginal cost and to combine resources in such a way as to minimize average cost. Of course, the initial administered prices will be wrong. At these non-equilibrium prices some goods will sit unpurchased; for others there will be excess demand. The resulting shortages and surpluses will signal to planners how they need to modify prices to bring the economy into equilibrium. Through trial and error the planners will engage in a kind of Walrasian auctioneer tattonement [tâtonnement means “groping”] process that will eventually converge on or approximate general competitive equilibrium. This equilibrium will have the same efficiency properties that general competitive equilibrium has in the Walrasian world in which producers’ goods are privately owned. . .
—Peter T. Leeson, “We’re All Austrians Now: János Kornai and the Austrian School of Economics,” in vol. 26, pt. A of Research in the History of Economic Thought and Methodology, ed. Warren J. Samuels, Jeff E. Biddle, and Ross B. Emmett (Bingley, UK: Emerald Group Publishing, 2008), 212-213.