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Interwar Britain: Tim Worstall Gets It Wrong

Greg Ransom vs. Larry White and Tyler Cowen on Hayek

Larry White claims and Tyler Cowen agrees that Friedrich A. von Hayek thought the right policy to deal with the Great Depression was for the government to expand the money stock via open-market operations as much as needed to stabilize nominal GDP:

In Which I Am Once Again Reminded of How Wrong Friedrich Hayek Was: Larry White: They did denounce, as counterproductive, attempts to bring prosperity through cheap credit. But such warnings against what they regarded as monetary over-expansion did not imply indifference to severe income contraction driven by a shrinking money stock and falling velocity. Hayek’s theory viewed the recession as an unavoidable period of allocative corrections, following an unsustainable boom period driven by credit expansion and characterized by distorted relative prices. General price and income deflation driven by monetary contraction was neither necessary nor desirable for those corrections. Hayek’s monetary policy norm in fact prescribed stabilization of nominal income rather than passivity in the face of its contraction...

In comments, Greg Ransom protests that that is not the case. What Hayek thought over 1929-1933, he claims, was that a stable nominal GDP was the last thing Britain needed--that the right policy during the depression was to make sure you did not alleviate it because that would delay the crushing of unions:

Hayek at the time made a political/policy judgment that the important thing was to finally address the "sticky wage" problem of over-priced, extremely powerful and legally privileged British unions...

In some ways this disagreement between Ransom and White is irresolvable, because "Hayek" is not a label one can hang on a consistent and coherent worked-out model. As I read Hayek, most of the time his macroeconomics concluded that stabilizing nominal GDP by either fiscal or monetary policy would be ineffective and counterproductive. As Joan Robinson said in her Ely lecture:

Friedrich A. von Hayek as a Possible Originator of the Full (as Opposed to Hawtrey's Limited) Fama...: Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter attraction to Keynes. I very well remember Hayek's visit to Cambridge on his way to the London School. He expounded his theory and covered a blackboard with his triangles. The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time. The general tendency seemed to be to show that the slump was caused by [excessive] consumption. R. F. Kahn, who was at that time involved in explaining that the multiplier guaranteed that saving equals investment, asked in a puzzled tone:

Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?"

"Yes," said Hayek, "but," pointing to his triangles on the board, "it would take a very long mathematical argument to explain why."

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