Friday, August 19, 2011

An Over the Top Attack on Hayek

Robert Skidelsky, a Keynes biographer and member of the British House of Lords, is out with an over the top attack on Friedrich Hayek.

He tells us that, when John Maynard Keynes was alive, Keynes " savaged [Hayek] intellectually."

And that:
Hayekians have nothing sensible to contribute.
This comment, it should be noted comes from a guy whose most recent contribution to economics was the wacky belief that gold smiths loaned out money, while at the same time keeping it all in cash reserves. Try that trick at home.

Skidelsky argument against Hayek goes like this:
As Keynes pointed out, if everyone – households, firms, and governments – all started trying to increase their saving simultaneously, there would be no way to stop the economy from running down until people became too poor to save.
Last I looked, if people saved money (in the sense of investing), Keynes used the term savings to mean many different things (simultaneously!), that would mean firms would hire people to work on various projects. How this would result in people becoming too poor to save is baffling.

But this great Keynesian insight is according to Skidelsky how Keynes "savaged" Hayek. Hah!

Skidelsky then tells us that:
Except to Hayekian fanatics, it seems obvious that the coordinated global stimulus of 2009 stopped the slide into another Great Depression.
Skidelsky paper was published this morning. Has he looked out the damn window? The eurozone is collapsing, crisis meetings are held almost on a weekly basis. Under Keynesian policy, price inflation is out of control in China, which is resulting in a severe slowdown in money creation by the PBOC that will lead to the eventual collapse of Chinese stock markets. In the US, money printing is so out of control that prices at the producer level are now climbing at an annual 7.2% rate.

This is how Keynesian policy stopped the slide?

Skidelsky then appears to take a slap at Ron Paul:
Hayekians have nothing sensible to contribute. It is far too late for one of their favorite remedies – abolition of central banks, supposedly the source of excessive credit creation. Even an economy without central banks will be subject to errors of optimism and pessimism. And an attitude of indifference to the fallout of these mistakes is bad politics and bad morals.
"Supposedly the source of excessive credit creation"? Where the hell does Skidelsky think excess credit is created at, the TSA? There may be errors of optimism and pessimism even in an economy without central banks, but they won't be co-ordinated and lead to the big booms and busts. As Murray Rothbard wrote:
In the purely free and unhampered market, there will be no cluster of errors, since trained entrepreneurs will not all make errors at the same time. The "boom-bust" cycle is generated by monetary intervention in the market, specifically bank credit expansion to business.
Bad morals? Does Skidelsky seriously think that those who oppose a central bank, such as the Federal Reserve, which created an unsustainable housing boom that created financial havoc for millions of homeowners, have bad morals because they object to this type of money manipulations and the institutions that do the manipulating?

You can from time-to-time see an over the top attack on Hayek, but, given this attack is coming in the middle of collapsing markets and economies built on Keynesian sand, one would think these guys would keep their mouths shut at present and crawl in a hole somewhere.

(Thanks2Keith Kelly)

13 comments:

  1. I don't get these staunch Keynesians. Is it ignorance or corruption?

    Is there some magical Keynesian theory that I'm missing out on? In light of these past three years, and the what should be the utmost vindication of Austrian economics, I don't understand how people can continue to spew Keynesian mantras with little to no basis in reality.

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  2. To paraphrase Mr. Roddis' admonition and insight from a couple of days ago:

    "Let these clowns blab their Keynesian nonsense".

    They're looking more and more foolish all the time.

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  3. Now you know what we have to put up with from the Establishment in Britain.

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  4. "Supposedly the source of excessive credit creation"

    Supposedly?

    LOL! He is just another lying Statist brat.

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  5. "Under Keynesian policy, price inflation is out of control in China, which is resulting in a severe slowdown in money creation by the PBOC that will lead to the eventual collapse of Chinese stock markets."

    This sentence beautifully summarizes the empirical essence of business cycle theory.

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  6. Tell us what you really think, Bob. :)

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  7. This quote attributed (but with some dispute) to Gandhi seems appropriate:

    "First they ignore you, then they laugh at you, then they fight you, then you win."

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  8. Skidelsy is not fanticising about goldsmiths...he is referring to the Sephardim and their role in the development of financial management way back in England's history. It has been a long and successful operation building the world's fianacial centers and perhaps it is time all you "newcomers" to financial affairs take a look at the real financial world.


    As the western world watches its real wealth disappearing from its capitals and precincts, going to South America, you might start by listening again to Rattigan's screaming accusations on MSNBC. Or you might try rereading Ivanhoe re how high finance came to power!

    Regards, Alice S. Maxwell

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  9. Alice S. Maxwell:

    The issue is not whether or not goldsmiths acted at one time as bankers. Mr. Wenzel’s point was that Skidelsky does not seem to comprehend that he is describing two types of transactions as one type of transaction. Gold deposited with a “goldsmith bank” can be held by the goldsmith as a demand deposit OR be lent out, at which point it is no longer available to either the bank or the depositor until paid back. As Mr. Wenzel described the clueless Mr. Skidelsky:

    This comment, it should be noted comes from a guy whose most recent contribution to economics was the wacky belief that gold smiths loaned out money, while at the same time keeping it all in cash reserves. Try that trick at home.

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  10. 'Last I looked, if people saved money (in the sense of investing), that would mean firms would hire people to work on various projects. How this would result in people becoming too poor to save is baffling.'

    You are basing this on the pretense that savings create investment just because they equal investment. Keynes argued that if investment opportunities were too low in a downtrodden economy, savings would just end up as idle cash balances. If you look at firms right now, this is what is actually happening – they are hoarding massive surpluses.

    'The eurozone is collapsing, crisis meetings are held almost on a weekly basis.'

    I think he meant the coordinated global stimulus, which most analysts agree stopped the world economy falling off a cliff. The bailouts were a travesty, certainly in the manner they were conducted. I concur that something needs to be done on a deeper level about Zombie Banks and the Eurozone, and I don't think anybody with sense would disagree.

    'Under Keynesian policy, price inflation is out of control in China, which is resulting in a severe slowdown in money creation by the PBOC that will lead to the eventual collapse of Chinese stock markets.'

    Inflation isn't really 'out of control'; it is high, sure, but people seem to forget that 4-5% inflation used to be the norm, and was never considered a problem before people got this weird obsession with it.

    China is a developing nation with a smorgasbord of public-private mixed policies. It does seem to be overheating and I'm not exactly sure why (other than the basic observation that capitalism tends to do that), but I'm don't you can paint it as simply 'Keynesian'

    'In the US, money printing is so out of control that prices at the producer level are now climbing at an annual 7.2% rate.'

    I have no idea how people still claim inflation in the U.S. is out of control despite the statistics. Check the BPI, an independently calculated index. It is pretty much the same as CPI.

    As for 'printing money' causing inflation, well, that's based on a fundamental misunderstanding of the money supply - it is endogenous, not exogenous, and banks are not reserve constrained. Google 'the roving cavaliers of credit' or 'the base money myth'.

    The next part of your analysis seems to ignore the fact that boom bust cycles predate central banks and fiat currency, and that more importantly boom bust has actually been much more mild under these two things.

    You base your ideas around a 'natural' rate of interest, something Sraffra, Hick, Keynes & Kaldor dealt with in the 1930s & 40s. What is that you say? They have been 'refuted'? Well, Bob Murphy doesn't seem to think so:

    'Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest..Unfortunately, Hayek’s successors have made no progress on this issue, as I will show in the case of Ludwig Lachmann..Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.'

    At least one Austrian is honest enough to admit it!

    I don't know why you're trying to paint current policy as 'Keynesian' when it has been neoliberal through and through. Inflation targeting is horrible as it has put interest rates too high; Keynes wanted an international stabilisation system and capital controls; he wanted to ban loans to speculators and other financial regulation. I simply cannot believe the crisis would have happened with these things in place.

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  11. @TMMBLog

    I went over and read the piece at Naked Capitalism that you cite.

    Apart from it's cute title, I'm not sure what is so new about it.

    It suggested that bank lending ("the roaming cavaliers of credit") isn't constrained or led by fiat money creation by the Fed, but follows it. And that in fact the only constraint on bank lending is consumers' willingness to take on debt.

    OK. Banks wanting to make loans more than consumers needing to take them on is a fairly well-documented phenomenon.

    However, you forget that it is Austrians who have been in the forefront of railing against this, notably in their criticism of the "micro-lending" culture of Grameen banks. It was the Austrians who pointed out that poor people needed savings more than they needed debt.

    Second, I fail to see how this "cavalier" thesis gets the Fed off the hook as you claim it does.

    You say that the deleveraging process means that the amount of stimulus or fiat money injected into the system is trivial next to the credit money created.

    And you point out that the stimulus alone can do nothing because, in addition to being relatively small compared to the "digital debt", it faces the entrenched UNWILLINGNESS of firms to borrow and/or the INABILITY of indebted or bankrupt households to borrow.

    Also, fair enough, but hardly novel. All this has been said before by many people, including me.

    http://www.lewrockwell.com/rajiva/rajiva14.html

    Where your piece fails is in trivializing the role of fiat money and relegating it to an afterthought to the process of credit creation, simply because bank lending is observed to take place in advance of it (credit creation).

    But this is to mistake a chronological sequence for a causal relationship.

    The banks might indeed get ahead of the Fed when it comes to lending out, or even speculating, with money. But your piece does nothing to understand why such speculation comes about, blaming it simply on the private sector.

    But, as I point out in the piece I just cited, speculation becomes rampant,when the interest rate is not as HIGH as it would be under market conditions, because of government intervention.

    It is this prevalence..and anticipation.. of...cheap money that drives speculation and creates the monopoly conditions under which fraud of all kinds flourishes.

    As for inflation, indeed, speculation will lead to asset price inflation of one kind or other.

    What you will then have is a contracting, deleveraging economy (which we have, when you look at house prices, wages and employment) accompanied by rising prices (which we also have, when you look at commodity and food prices - yes, they are up).

    The end result can fairly be called stagflation.

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  12. http://caffeinatedthoughts.com/2011/08/ron-pauls-website-hacked-during-birthday-money-bomb/

    Just saw this. Has anyone been following the story?

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  13. Hi Lila,

    I'm against he current banking system as much as you are - I just don't think a gold standard is the answer, because:

    a) Historically, they have proven to create depressions.
    b) There is no such thing as a 'natural' rate of interest, which you assume in your analysis and which I dealt with above.

    Keynes wanted to ban loans to speculators to stabilise M2, as did Adam Smith. It hasn't been tried but gold standards have.

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