Charlie Rose

vongleichent  02/07/2012 09:06 AM Report

I wish Hayek would have won, and we wouldn't have the FED now.

REMant  01/30/2012 01:35 PM Report

This is old hat, has been written about extensively, and, argued for centuries now, is hardly a new debate. Still, altho I don't know the author's bias, it is nice to keep the subject before the public. This particular sparring reflects, on the one hand, the assimilation by the German-speaking world of Anglo-French tradition, and, on the other, Keynes' rehabilitation of mercantilist writers, and repudiation of the more classical economics of his teacher, Alfred Marshall. In the previous century it had been between the Banking and Currency Schools. See T M Humphrey's 1999 article, Mercantilists and Classicals: Insights from Doctrinal History, to be found at http://www.richmondfed.org/publications/research/annual_report/1998/pdf/article.pdf or http://www.richmondfed.org/publications/research/economic_quarterly/1999/spring/pdf/humphrey.pdf

Keynes, having been a student of Marshall's and the author of a well-known classical criticism of the Versailles treaty was, of course, better known in his native land than the expatriate Hayek. But one should not tho get the idea that the latter was a mere hanger-on, or that Keynes' "brilliance and originality" triumphed. Hayek was later awarded the "Nobel prize" in economics. (Keynes, because he died before it was instituted, in fact never was.) Scans of their Times exchange can be found here: http://thinkmarkets.files.wordpress.com/2010/06/keynes-hayek-1932-cambridgelse.pdf Keynes and co argued for spending, while Hayek and co for saving and investment. BTW, mail twice a day - morning and afternoon, like newspapers - was the norm at the time, both here, and, I imagine, in London. People did communicate before the Internet.

Lionel Robbins, himself, who, as an adherent of marginalism like the Austrians had little truck with Marshall and any sort of utilitarianism or subjectivism, brought Hayek to the LSE and attacked Marshall from the opposite direction. He wrote the brief but very readable and incisive book about the Depression two years before the General Theory's appearance, which took those he dubbed inflationists apart. A striking quote: "Again and again during the boom years we were assured by men who should have known better that the trade cycle had been eliminated, that so long as prices did not rise there was no fear of overexpansion, that the boom in land and common stocks was merely a reflection of the increased value of property, and that if there were any sign of a fall of prices due to a transfer of expenditure to Stock Exchange and real-estate speculation, then the Central Banks should create more credit to support the speculation. This policy was pursued. Yet such is the inflexibility of the human mind that, in spite of all that it led to, there are yet to be heard voices urging that a similar policy should be adopted in the next period of prosperity. It is no accident that they are the voices of men who failed utterly to see what was happening before the depression, and who throughout the slump, no doubt with the best will in the world, have consistently supported those policies which have arrested liquidation, prolonged uncertainty and delayed the coming of recovery." It can be found at http://www.mises.org/books/depression-robbins.pdf.

Not long after The General Theory Keynes began moderating aspects of it, and the post-war Robbins admitted that he had come to realize the difficulties in institutional change and deplored the pain of Depression deflation. A consensus emerged in the 1950s that perhaps demand could be regulated by government within narrow limits. But it is not possible to be to a classical Liberal or free-trader and also believe in either wholesale credit creation, or socialism. And it is not a question of what to do when a banking system goes awry. It is one system or the other. The question is whether participants should be allowed to find their own self-interested enlightenment, or force or fraud exercised in the name of equality. Much later Hayek, too, accepted the possibility of a contraction spiraling out of control and recanted his position on the efficacy of deflation. But it can only possibly be true if one accepts a system based on insubstantial credit in the first place.

However, Keynesianism was all but dead theoretically after the stagflation of the post-Vietnam era, its place taken not by a return to a more strictly classical or marginalist economics, but by monetarism, which amounted to Keynesianism in their eyes, since like his mercantilist predecessors, Keynes was a paper-money man. The issue between monetarists and Keynesians became focused on liquidity traps, that is whether monetary policy was sufficient to reverse downturns, or whether govt spending - fiscal policy - was required. Galbraith, who incidentally had studied with Hayek, wrote vigorously against monetary policy, much as Krugman has. Opposed to monetary manipulation, classicists agree in that respect with the Keynesians, but opposed to unbalanced budgets, if not govt period, with the monetarists. Hayek criticized Friedman for never clearly stating what he thought money was, and I think the latter confused as to which way causation runs. IMHO easy money serves initially to lower prices by encouraging overproduction, boosting only asset prices until limits of scarcity and return are reached and a crash ensues. Inflation is caused by underproduction, usually as a result of non-productive govt involvement, as the Laffer curve suggests.

In older textbooks treating economic history, a "marginalist" revolution is considered to have taken place in the mid-19th century sweeping all before it, much as the way behaviorism is represented in psychology textbooks. In simple terms marginalism is a mathematical method for decision-making, and forms the bulk of what is taught in microeconomics courses, but in a larger sense, like behaviorism considered only as a method of investigation, it represents a shift away from subjective valuation, i.e. according to desire or will, and towards valuation only as consequence, which is what we call objectivity. It can be equated with the acceptance of natural selection and its roots in design and "optimism," i.e., that this is of necessity the best of all possible worlds, and, of course, its origin in Stoicism. To those who do not understand this, these represent precisely what was argued against, and, as a result, we still have economists ridiculing ideas of value not originating with desire, and psychologists believing anything can be conditioned. However, this is in fact a question of re-inventing the wheel because it was precisely the position of Locke, the Physiocrats and Adam Smith. Is it any wonder students come away from these courses thoroughly confused?

It is difficult, as well, to separate Tory paternalism from Whiggism, especially in a country like the US with no history of aristocracy. The former, founded on jealousy, reflects noblesse oblige or Stoic magnanimity, while the latter, a matter of envy, is bound up with evangelically-motivated moral reform, and altho paying lip service to free will expects loyalty in return for patronage, very evident in the founder of Utilitarianism, and arguably marginalism, Jeremy Bentham.