Wednesday, June 20, 2012

DeLong on Hayek

I never did understand this episode, and it doesn't sound like he was joking. Thoughts?


  1. It is an argument that could be true at full employment to shift production resources from one use to another where costs and prices are rigidly determined by the gold standard and total supply fixed, they need to be freed before being reused, in this case through higher interest rates. In the real world coat prices would rise and draw those resources away from lessor uses or more likely from non employment because their costs were higher than they could usefully be employed. The only other possibility for this argument is resources are commanded away by price but having been bid away can't be sustained or make their way back. Buying the coat today forestalls buying the next one and this was a transitory impulse, a shift from not employed to employed to unemployed (though really to not employed). One would have to ask why lower interest rates wouldn't increase employment in construction in making the shift back, so the non employed/unemployed distinction is the only other one that could make sense in the latter case.

  2. I wouldn't get too hung up on this. This is verbal history and Hayek barely understood English at that point.

  3. As I said, I really do think it's the sectoral-shifts-cause-unemployment argument. I cannot see what else it might be...

    1. Haha - no I mean it doesn't sound like Hayek was joking. In other words, Hayek isn't just giving a cute answer to Kahn's question. He actually thinks that.

      I think your sectoral shift point is basically right, although I think the focus is usually on prices being bid up in the overcoat market and bidding resources away (which is coming at it from a slightly different angle from your point on withdrawing from the bank - but still basically the same point).

      Moreover, in 1931 - in Prices and Production - Hayek was assuming full employment, so this is almost certainly a Treasury View kind of approach.

      Later, in 1939 and 1941, he dropped that assumption and it has very much the flavor of rigidities in repurposing capital and labor (again, though, a structural/sectoral rebalances argument). I know that work more second-hand, though, but that's my impression.

      So later on it may not quite be the Treasury View, but it's still not the right view. In 1931 I think you've got a much stronger case for the Treasury View, which he got smacked down hard for. There is no grounds for a full employment assumption in 1931. To Hayek's credit, he was smart enough to realize the critics were right on that point.


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