Tuesday, December 13, 2011

David Glasner on Keynes, Hayek, Cassel, and Hawtrey

This is one of the best blog posts I've read in a while - one of those posts that really drives home the value-added of the blogosphere. I don't agree entirely with all of it, so let's take it piece by piece. It essentially makes two points: that the Keynes v. Hayek mania is ridiculous, and that Cassel and Hawtrey deserve more credit than Keynes and Hayek

Keynes v. Hayek

I strongly agree with Glasner here. I consider this blog (and myself) pro-Keynes and pro-Hayek. I like them both a lot, and while they obviously disagreed on specific points, I don't see Keynes as a whole as conflicting with Hayek as a whole. For some reason, though, people have latched on to this idea that they are polar opposites. This mentality has existed beneath the surface for a while. Keynes has always been a pariah in Austrian circles, and Hayek (before Friedman took his place) has always been a sort of short-hand for reactionary economics among left-wingers. But I'm not sure that ever defined the men for people like it has in the last couple years. And while it's been bubbling up all over the place, we really have two people to "thank" for this development: Russ Roberts and John Papola with the Keynes v. Hayek rap, which I suppose could be credited with making people familiar with the names "Keynes" and "Hayek" who weren't before. But I think it also needs to be credited with lowering the quality of the discussion at the same time that it broadened scope of the discussion.

Roberts and Papola will often protest that there's nothing "wrong" with what they had Keynes say, and they'll note that Skidelsky gave it the thumbs up. This is mostly true. You had a few Keynesian buzzwords thrown in with definitions that were passable with an acknowledgement that some poetic license was involved. The problem is precisely what Glasner puts his finger on in his post: "As I observed in September after watching the first Keynes-Hayek debate, we can still learn a lot by going back to Keynes’s and Hayek’s own writings, but all this Keynes versus Hayek hype creates the terribly misleading impression that the truth must lie with only one side or the other, that one side represents truth and enlightenment and the other represents falsehood and darkness, one side represents pure disinterested motives and the other is shilling for sinister forces lurking in the wings seeking to advance their own illegitimate interests, in short that one side can be trusted and the other cannot."

It's not that any of Keynes's words were "wrong" (although I would have written it differently), it's that he was advocating top-down solutions, he was getting special favors from government, he was acting like he could (and he wanted to) plan people's lives, he was a jerk to Hayek, he was on the side of the cronies and crooks, he was irresponsible, he was indifferent about war, etc. It wasn't the economics that was the problem. There wasn't a whole lot of economics in the videos (particularly the second one). It was that Roberts and Papola are pounding the story that Keynesianism is the anti-bottom up, illiberal, cronyist, cheating side. Papola continues to protest to me in correspodence that he's presenting an entirely legitimate view of Keynes, but Russ Roberts has come out and said it's all about ideology for him, an admission that should probably have made even more of an impact on people than it did. This presentation of the history of economic thought as a clash of the titans needs to stop. My assessment is it's doing far more harm than good.

Cassel and Hawtrey

Glasner goes on to talk about who he thinks really ought to be recognized instead of Keynes and Hayek: Gustav Cassel and Ralph Hawtrey. I found this discussion interesting, in part because I know Keynes was so influenced by Cassel and I think considered himself on the same page as Casssel (I don't know if Keynes knew Hawtrey very well, but he may have). Cassel and Keynes were brought to Berlin together in the 20s to advise the German government, and a lot of Keynes's Tract on Monetary Reform (1923) draws on Cassel's work from a few years earlier.

Keynes agreed on the monetary sources of the depression as far as I'm aware, and he agreed with the Hawtrey-Cassel solution of leaving the gold standard, and indeed he celebrated these departures in the early 1930s. I don't think it's quite right to draw this sharp line that Glasner does.

Keynes's point on the gold standard was that money was a "limiting factor" rather than an "operative factor" (this comes out in his letter to Roosevelt, but also more clearly on pages 230-236 of the General Theory). Tight money could drive economies into depression for all the reasons that Keynes and many other economists at the time laid out, and that money would have to be loosened to enable a recovery. But Keynes's broader point was that the level of output and employment is a function of investment demand, which itself is function of entrepreneur's expectation of future yields. I think it's wrong to see the General Theory as a theory of recessions - I think it ought to be read as a theory of the determinants of output and employment. There's discussion in it of the problems associated with golden fetters, but that alone doesn't give you a theory of output and employment, which is the book's object.

I've never personally seen any substantial disagreement between Keynesianism and market monetarism. I think there's something to be said for monetary policy becoming relatively less effective in a liquidity trap (something Glasner isn't entirely in disagreement with himself), but that hasn't lead any prominent Keynesians to disagree with market monetarists, just as Keynes was right there with Cassel and Hawtrey advocating and then praising the exits from the gold standard in the 1930s.

I would put it this way: Contrary to Say's Law, money opens the door to general gluts, and general gluts can cause depressions. Keynes recognized this quite clearly, and as a result advocated what today is called market monetarism. But Keynes rejected Say on a more fundamental level, pointing out that even when purchases and sales were balanced, the balance might not be struck at a full employment level. Was he right? That's a tough call. The Depression didn't end in 1933, and there's pretty strong reason to believe increased (public) investment demand in the early 1940s determinantly put an end to it. That seems to be a mark in Keynes's favor (although, of course, not a mark against Cassel and Hawtrey... there's no need for Scott Sumner to make a Keynes-Cassel rap!). But perhaps if devaluation continued even more vigorously it could have all been over and done with in 1934. Maybe. What's a good test? Anyone? Does comparing today to the 1930s offer a good test of whether the Cassel-Hawtrey strategy alone could have addressed the problem?

btw - anyone not following Glasner's blog should be.


  1. Good post, Daniel Kuehn. As for Ralph Hawtrey, I think Keynes did correspond with Hawtrey fairly often. I might add that one could wonder about the mathematical training of Hawtrey and other economists in Keynes's time (Hawtrey was unable to properly understand A.C. Pigou's "The Theory of Unemployment", which used differential and integral calculus, IIRC), but that's another story.

    As for the GT being labelled a "theory of recessions" - I agree with you that Keynes had in mind a comprehensive theory. But you could also argue that Keynes's magnum opus was a good instance of induction: starting from specific instances and going to the general view. So one can take some pride in that description, especially if the choice of words was "depression economics"!

  2. For some reason, though, people have latched on to this idea that they are polar opposites.

    My theory is the Koch Brothers et. al. are funding a propaganda campaign to push the notion.

    Invisible Backhand

  3. Koch brothers may agree with the people I disagree with on this point, and they may put money behind it - but that's their prerogative. We have no evidence they are buying the results they want - in other words, we have no evidence that anyone getting Koch funding is changing their views because of the money. So I really think you should stop pressing this line of argument, IB. Talk about Koch because you think they're wrong and putting their money behind the wrong things - but I don't think these accusations of "propaganda" are very fair.

    BTW - I am applying for some Koch funding in just a couple weeks, so if I'm successful I may push back even more forcefully because it's going to start to get personal!

  4. Aha! You're one of them! :)

    FWIW, I work from the definition of propaganda as:

    propaganda = (lies + truth) x repetition

    and of course everyone makes up their own mind if what comes out of Mercatus is propaganda.

    Invisible Backhand

  5. Aside from Invisible Backhand's disdain for the rich and powerful financing research for supposedly sinister purposes, what edition of the GT do you own, Daniel Kuehn?

    I own the Harcourt, Brace, and Company paperback edition that was reprinted in 1964. I don't have my copy of the GT right now with me, but what chapter does "pages 230 to 236" refer to?

  6. Daniel, Thanks for the kind words. Lucy Kellway had a piece in the Financial Times yesterday about the ethics of people giving each other compliments on social networks which makes me feel a little self-conscious about returning the compliment, but I like your blog a lot, too. At any rate, on Keynes vs. Hawtrey, I didn't mean to suggest that Keynes had nothing worthwhile to say that Hawtrey hadn't already said. And I think that fiscal policy can make a contribution to restoring full employment. I meant to focus on the narrower point of providing a diagnosis for the Great Depression. I think the implication that Keynes and the Keynesians wanted to leave was that to understand the Great Depression you had to understand the General Theory. I don't think that is correct. Also as Blue Arora points out, Hawtrey and Keynes were actually quite close and Keynes writes somewhere that Hawtrey and Robertson were his grandparent and parent in the paths of errancy. Hawtrey was a few years older than Keynes, graduating Cambridge when Keynes started. Both were Apostles, and both studied mathematics as an undergraduate not economics. Although he is often regarded as part of the Cambridge tradition, he was actually self-taught in economics and never studied under Marshall.

  7. I remember the "parent and grandparent" quote but did not realize that was Hawtrey! Very interesting.

  8. What I don't understand about the "gold supply" explanation of the Great Depression is the situation with reserve ratios. George Selgin goes to great lengths to show that in the late 18th century banks in backwoods places in Scotland were using very low reserve ratios, less then 10% often less than 5% even 2%. They did that even though banknotes circulated very rapidly at the time.

    In 1929 reserve ratios were set by Central Banks and were much higher than they had been a century before in Scotland. If the central banks wanted to increase the money supply then why was gold supply an issue. Why didn't they just decrease the reserve ratio? I can't see why they thought they were close to the limit where doing that would cause bank failures, gold outflow or calls on Central banks to act as LOLR.

  9. And incidentally,...

    "Contrary to Say's Law, money opens the door to general gluts"

    Say himself pointed out that that's true in the short-run. He pointed it out even in his first explanation of his law of vent before his debate with Malthus.

    I think in the early 20th century there was some notion of monetary regimes. Not at precise as what we have now, but certainly present (see Mises early books if you don't believe me). A "gold standard" was seen to tie the hands of politicians. Conventional economists didn't think that deflation had no ill effects. Their view was that some amount of recession was worth it to stay in a system that would keep the long-run expectations of inflation at a low level.

  10. You have to read Steve Horwitz's piece on Say's Law someday.

  11. Current - right, and by the 1820s he was getting even more right. But Say's Law is what it is, and it was taken up by others, and even today people make the mistake of either acting like it's true, or acting like when it holds true that is automatically a good thing.

  12. I don't think it's like that Daniel. People mean a lot of different things by "Say's Law", that's one reason why there's so much controversy about it.

    I have a whole bunch of notes on it ready for a paper I'm going to call something like "Say's Law: The Sense in which it's true and the sense in which it's false". If I ever get round to it that is.

  13. noiselull - there's a lot to read out there on Say's Law. Entice me a little as to why I should read this one when there's so much else to do and read on so many other issues.

  14. Congrats

    Cafe Hayek has stopped taking comments, probably because Russ and Don can longer handle your criticism of Hayek via DeLong

  15. You write, "But perhaps if devaluation continued even more vigorously it could have all been over and done with in 1934. Maybe. What's a good test? Anyone?"

    What rule or law of economics says there is only one solution to a problem? Given that much of economics is applied psychology (how we are ever going to restore confidence under any future Scenario is beyond me, at this point), it necessarily follows, in my mind, there are there are many solutions to a situation.

    For example, right now, Stiglitz is right about the need for investment, regardless of whether his added insights about what happend before 1929 and 2007 are correct or not.

  16. Daniel

    You and your brother seem like bright, nice young men, both of you incredibly naive.

    You responded to IB on the Koch brothers writing, "we have no evidence that anyone getting Koch funding is changing their views because of the money."

    Let me frame the question differently. Do you see any evidence that Don and Russ (whom you have marked as being intellectually dishonest and an ideologue) are putting out stuff, hoping to attract the attention and support of either Koch or Fox?


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