Wednesday, September 26, 2012

If you take Hayek seriously (like I do), don't read Taking Hayek Seriously

Greg Ransom, the author of Taking Hayek Seriously, is impressive in his ability to marshall up texts by Hayek and as a general resource.

But please, please, please, don't take his interpretive claims about Hayek for granted. This is not Daniel the Keynesian talking - I know a lot of Austrians have big reservations about him too.

My motivation, now, for saying this is this post by Greg:

"As pointed out by an endless stream of leading academic specialists, Jeffrey Sachs & Paul Krugman are constantly making false and deeply ignorant claims about Friedrich Hayek and his work.

The latest false and ignorant claims of Jeffrey Sachs and Paul Krugman can be found in "Masters of Money – Friedrich Hayek" presented by Stephanie Flanders on the BBC.

Here is Hayek’s clearly stated view:

"I agree with Milton Friedman that once the [1929] Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression."

F. A. Hayek, interviewed in 1979, from Conversations with Great Economists: Friedrich A. Hayek, John Hicks, Nicholas Kaldor, Leonid V. Kantorovich, Joan Robinson, Paul A.Samuelson, Jan Tinbergen by Diego Pizano.

"I think it is certainly true that ending an inflation need not lead to that long-lasting period of unemployment like the 1930s, because then the monetary policy was not only wrong during the boom but equally wrong during the Depression. First, they prolonged the boom and caused a worse depression, and then they allowed a deflation to go on and prolonged the Depression."

F. A. Hayek, interviewed in 1977

In "Masters of Money" Sachs and Krugman flatly and falsely say that Hayek denied what he directly asserts just above
."

Notice both these are from the 1970s - 40 years after the depression. This was not what he was saying during the depression.

Take "The Fate of the Gold Standard", in 1932:

"Although there can be no doubt that the fall in prices since 1929 has been extremely harmful, this nevertheless does not mean that the attempts made since then to combat it by a systematic expansion of credit have not done more harm than good. In any case, it is a fact that the present crisis is marked by the first attempt on a large scale to revive the economy immediately after the sudden reversal of the upswing, by a systematic policy of lowering the interest rate accompanied by all other possible measures for preventing the normal process of liquidation, and that as a result the depression has assumed more devastating forms and lasted longer than ever before."

The claim in the 1970s - that the response to the depression was wrong because it allowed deflation - is completely different from the claim in the 1930s - that the response to the depression was wrong because it didn't allow for enough liquidation! Indeed the whole essay is an argument against what Hayek called the "stabilization theorists" who were arguing what Hayek would come to argue in the 1970s - that you wanted to avoid both inflation and deflation.

Greg could responsibly argue that some time in the intervening 40 years, Hayek changed his mind and agreed with the Keynesians and the monetarists. But he cannot accuse Jeff Sachs and Paul Krugman of "bottomless ignorance" for accurately presenting Hayek's view at the time of the depression. This was the common perception of the Hayek-Robbins position, and it was a common perception for good reason. If you want to talk secondary deflations we can talk secondary deflations and that sort of thing. But Hayek, in 1932, was critical of the Federal Reserve because it ameliorated too much of the deflation; whatever deflation was occuring, Hayek of 1932 thought there should be even more of it.

21 comments:

  1. You are absolutely right about Hayek. He was a liquidationist until at least 1933:

    http://socialdemocracy21stcentury.blogspot.com/2012/01/when-did-hayek-renounce-liquidationism.html

    He even tells us in Prices and Production that nothing at all should be done:

    "And so, at the end of our analysis, we arrive at results which only confirm the old truth that we may perhaps prevent a crisis by checking expansion in time, but that we can do nothing to get out of it before its natural end, once it has come.” (Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. p. 275).

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  2. Greg Ransom's comment reminds me of Suo Marte's reviews of Allan Meltzer's two-volume A History of the Federal Reserve: he uses the Federal Reserve System's performance in Meltzer's book to argue that the Federal Reserve needs to be abolished.

    http://www.amazon.com/review/R3LL0F5C56CTZO/

    http://www.amazon.com/review/R15MMAMIPEGFAV

    http://www.amazon.com/review/R2R8Z4QQTK7H8K/

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  3. I haven't listened to the broadcast but if Jeffrey Sachs and Paul Krugman are saying (or implying) that Hayek always supported liquidationism (rather than just supporting it in his early career) then Ransom would be correct in his statement.

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  4. Hayek explains his change of heart on page 5:

    http://www.flickr.com/photos/bob_roddis/7534880372/in/set-72157630494776170

    However, he also appears to say that there is no excuse for any prior Keynesian-style policies which would have caused the problem in the first place. See page 8.

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    1. Yes.

      It's worth mentioning that Hayek (arguably) supported something like monetary equilibrium from "Prices and Production" onwards. Just in the 30s he didn't think that it was very relevant in practice. He never really changed his theoretical view much, he changed his view on what's practically important.

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  5. In fairness, the Masters of Money about Keynes was truly awful, so I wouldn't be surprised if they made some mistakes on Hayek (not that I'll watch it).

    God knows what they are going to do to Marx...

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  6. In the early Hayek explicitly said whether their was a secondary deflation problem was an EMPIRICAL ISSUE -- and evidence could show this that this was a significant problem.

    EVERYONE agrees that Schwartz & Friedman collected & constructed empirical evidence and data that hadn't existed before -- evidence that changed EVERYONE's mind about the 1930s -- and it explicitly changed Hayek's mind.

    On the theory -- Hayek was already 100% there, from the 1920s.

    It's simply FALSE to indicated that this causal mechanism is somehow not Hayek -- it's a recognized part of Hayek's causal mechanism from the 1920s. The SIZE of the causal factor is strictly an empirical issue -- and issue that Hayek found to be definitively decided by Schwartz and Friedman in the 1960s.

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    1. So you agree with me that he changed his mind later when other evidence and discussion came in, but was not of the same view in the 1930s and the 1970s?

      I simply cannot see how you can reconcile what Hayek said in the 1970s and what he said in 1932 about the Fed.

      He changed his position. Krugman and Sachs are not liars.

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    2. Hayek did NOT change his mind about the science or the causal mechanisms at play -- THAT is the issue and the topic, and that was the FALSE representation by the BBC and by Sachs & Krugman.

      Typically, you present a perverse reading as an "argument".

      It's not an argument. It's spin.

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    3. The whole things was presented on the BBC in the present tense -- as "Hayek's Position", as "Hayek's theory" as "Hayek's science".

      That is bullshit. And it's bullshit spread by Sachs, Krugman and the BBC.

      We should expected bullshit from Sachs and Krugman on this topic -- they've never read any Hayek on this topic.

      They are talking directly out of their ass, as has been noted before by top specialists in academia.

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    4. Foul mouthed and wrong into the bargain.

      Hayek's actual early 1930s view:

      "And so, at the end of our analysis, we arrive at results which only confirm the old truth that we may perhaps prevent a crisis by checking expansion in time, but that we can do nothing to get out of it before its natural end, once it has come.” (Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. p. 275).

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  7. Begin that ... in the early 1930s ...

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  8. Current has it exactly right -- except that view date from the 1920s, not the 1930s.

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  9. "Lord Keynes" typically presents a false mischaracterization of Hayek's position -- no doubt intentionally.

    Hayek as early as the 1920s supported anti-secondary deflation measure and basic Bagehot rules central banking.

    It's just a lie to suggest otherwise.

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    1. Provide actual evidence of that statement.

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  10. Hayek in the very early 1930s explicitly said the evidence was incomplete and not yet in -- when the evidence became clear he said so.

    NOTHING changed in Hayek's science -- NOTHING changed in Hayek's scientific recommendation.

    That is the key issue -- the central issue where Sachs, Krugman & the BBC are either dishonest and cluelessly ignorant.

    Sachs & Krugman are making claims about what Hayek would argue GIVEN the facts -- and their claims are false.

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    1. "NOTHING changed in Hayek's science -- NOTHING changed in Hayek's scientific recommendation."

      (1) Then why does Hayek tell us he changed his mind:

      “Although I do not regard deflation as the original cause of a decline in business activity, such a reaction has unquestionably the tendency to induce a process of deflation – to cause what more than 40 years ago I called a ‘secondary deflation’ – the effect of which may be worse, and in the 1930s certainly was worse, than what the original cause of the reaction made necessary, and which has no steering function to perform. I must confess that forty years ago I argued differently. I have since altered my opinion – not about the theoretical explanation of the events, but about the practical possibility of removing the obstacles to the functioning of the system in a particular way” (Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London. p. 206).

      (2) Why does Lachmann tell us that Hayek changed his mind on stabilising measures (“Hayek has now realised that that was wrong,” he says from 56.53) in this video:

      http://www.youtube.com/watch?feature=player_embedded&v=QdymByxT1Gg#t=3382s

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    2. This is what I said:

      "I have since altered my opinion – not about the theoretical explanation of the events."

      Are you incapable of reading?

      Maybe take a class in reading. You never know, it might fix this pathology of being unable to read you constantly display.

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  11. Note well -- this is NOT a statement about a central bank pursuing Bagehot's Rule:

    "all other possible measures for preventing the normal process of liquidation, and that as a result the depression has assumed more devastating forms and lasted longer than ever before."

    It's a statement about a hundred horrible efforts by Hoover etc which made things worse.

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    1. re: "Note well -- this is NOT a statement about a central bank pursuing Bagehot's Rule... It's a statement about a hundred horrible efforts by Hoover etc which made things worse."

      No, it's not Greg. If you read the section immediately below the part I quoted, Hayek quite clearly criticizes both the Fed and Hoover. He mentions both separately.

      I am glad to see that you are down to one all-caps word per comment, though. That's progress.

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  12. This "debate" is like what might occur after writing a treatise on how to avoid arsenic poisoning and then arguing with the arsenic poisoners on the least worst solution for keeping the patient alive. The arsenic poisoners then declare victory in their quest for more poisonings when the opponent agrees with them on perhaps one post-poisoning procedure that might keep the patient from dying.

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