Wednesday, January 1, 2014

Hayek's Tactical Error

In my recent post, The Inconsistency and Non-Libertarian and Non-Austrian Positions of Hayek, I quoted Murray Rothbard:
In my letter of October 23, 1956, I criticized Hayek’s Claremont lectures, which summarized this book [The Constitution of Liberty], and reference to the letter would be helpful. However, there I wrote  that Hayek is a “composite of brilliant things, and very wrong things . . . a mosaic of confusion.”
Indeed, Rothbard in "Letter on The Constitution of Liberty by F. A. Hayek" (p 73 of Murray N. Rothbard vs. The Philosophers: Unpublished Writings on Hayek, Mises, Strauss, and Polanyi, Edited by Roberta A. Modugno) lists 34 specific deviations from libertarian principles.

Rothbard writes in the letter:
It is, in fine, a tragic failure because, setting out in this big book to establish a groundwork and a system for liberty,this is precisely what Hayek fails to do and which constitutes his chief error. He has no principle for liberty. His only principle is the “rule of law,” and this, weak anyway, is so vitiated and qualified that, by the end, there is virtually no principle remaining.
This lack of principle can best be shown by a list I have compiled from the book, setting forth Hayek’s partisan biases, biases stemming from his odd concept of the State’s “noncoercive” activities, and from his defining “coercion”peculiarly to include “neighborhood effects” on others’ property, etc.
But in addition to Hayek's lack of a "principle for liberty," I believe Hayek made a serious tactical political error with regard to business cycle theory, which has resulted in yet another case of the "even Hayek admits" problem, that is, citations can be made to show Hayek retreating from his opposition to money printing by a central bank under all conditions. See Larry White on this, as well as Will Luther.

First, let us look at Hayek's original discussion on the business cycle. In Prices and Production (1930) he wrote (my highlight)
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.
In other words, Hayek saw no place for money printing in his thinking in 1930.

This view changed later. Here is one quote that those who advance the "Hayek was in favor of money printing under certain circumstances" point to (From New Studies in Philosophy, Politics, Economics, and the History of Ideas [1978])
… a ‘secondary depression’ caused by an induced deflation should of course be prevented by appropriate monetary counter-measures. Though I am sometimes accused of having represented the deflationary cause of the business cycles as part of the curative process, I do not think that was ever what I argued.
BUT, there's more to the story. Hayek goes on to say (My highlight):
 What I did believe at one time was that a deflation might be necessary to break the developing downward rigidity of all particular wages which has of course become one of the main causes of inflation. I no longer think this is a politically possible method and we shall have to find other means to restore the flexibility of the wage structure than the present method of raising all wages except those which must fall relatively to all others. 
Thus, Hayek never really changed his view on Austrian Business Cycle Theory (ABCT) from a theoretical perspective, but rather thought for political reasons that money printing during the "secondary depression" could be justified.

Here's Hayek being even clearer about this point [1978] (My highlight)
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.
This has to be classified as a major tactical blunder by Hayek. He has admittedly thrown overboard correct theory to advocate incorrect measures because of the "practical" problems of advocating correct theory!

This leads, as I suggest above, to promoters of the idea of Hayek as an unabashed advocate of money printing under certain circumstances, without making clear that Hayek called for this, not because his thoughts on ABCT changed on a theoretical level, but because of his view of what could be accomplished politically.

Here's White promoting just such an idea. There is no mention of Hayek's references to doing so because of what he thought politically possible:
In the 2008 article I point out that Hayek enunciated a monetary policy norm of stabilizing nominal income (aka nominal aggregate demand, or MV in the equation of exchange) in the face of a declining money multiplier or declining velocity of money. Under a gold standard, a high price level driven unsustainably high (by the boom-creating inflationary policies that Friedman references) needs to return to the sustainable level, but there is no virtue in “secondary” deflation going beyond that point. Thus, according to Hayek, the central bank should expand its liabilities H to offset an increased bank reserve ratio or public hoarding that reduces M/H or V. In yet other words, it is better to remedy an unsatisfied excess demand for money balances by supplying the called-for money balances than by putting a burden of downward price adjustment on the economy.
Bottom line: We can see why Hayek took this position and Austrian theorists Ludwig von Mises and Murray Rothbard did not. Quite simply, Mises and Rothbard were made of tougher stock. They would never bend correct theory to political winds. M and R occasionally made policy prescriptions that could be viewed as stop gap measures on the road to freer markets, but they never came close to the switch/political-type advocacy on a theoretical level that Hayek did with regard to ABCT.

Because of their tougher stock, we can easily grasp correct ABCT via the teachings of Mises and Rothbard, while Hayek's bending to "practicality" has resulted in his thinking on ABCT being twisted and abused.


  1. “M and R occasionally made policy prescriptions that could be viewed as stop gap measures on the road to freer markets, but they never came close to the switch/political-type advocacy on a theoretical level that Hayek did with regard to ABCT.”

    Rothbard explained very clearly and succinctly his views on “transitional demands,” or stop-gap measures, if you will:

    “If, then, the libertarian must advocate the immediate attainment of liberty and abolition of statism, and if gradualism in theory is contradictory to this overriding end, what further strategic stance may a libertarian take in today’s world? Must he necessarily confine himself to advocating immediate abolition? Are “transitional demands,” steps toward liberty in practice, necessarily illegitimate? No…

    “How, then, can we know whether any halfway measure or transitional demand should be hailed as a step forward or condemned as an opportunistic betrayal? There are two vitally important criteria for answering this crucial question: (1) that, whatever the transitional demands, the ultimate end of liberty be always held aloft as the desired goal; and (2) that no steps or means ever explicitly or implicitly contradict the ultimate goal.”

  2. A few years ago, I paid $20 for this little pamphlet containing a Hayek speech/interview from 1975.

    I've quoted from it extensively and it is the "source material" for several of the distortions by the always loathsome "Lord Keynes". Between page 5 and 9, Hayek is not as clear about his reasons for opposition to "secondary deflation" as he is in the above quotes and the loathsome LK has latched on to these like a dog finding a chuck of fat on the floor.

    Click on a page to make it larger and then click on "more actions" on the right to bring up the link for downloading each page if you are so inclined.

  3. Sun Zhaoxue: US Intends To Suppress Gold To Ensure Dollar’s Dominance

    I’ve got a confession to make: I believe in conspiracy facts. After having witnessed scandals like NSA, LIBOR, Lance Armstrong, ISDAfix, money laundering by too big to fail banks, rigging currency rates, the fall of Madoff, the US sub-prime event, bank bailouts (in Europe and the US), the Greek tragedy, 9/11, the Iraq invasion and Enron, I came to the conclusion it is just what people do when there is money and power at stake: they conspire.

    When it comes to gold price manipulation there are currently four camps:

  4. "This has to be classified as a major tactical blunder by Hayek. He has admittedly thrown overboard correct theory to advocate incorrect measures because of the "practical" problems of advocating correct theory!"

    Awesome stuff, again, thank you for the old Rothbard snips and anecdotes (thinkin of the Thornton audio)