Monday Smackdown: David Glasner on Friedrich von Hayek
When I read this by David Glasner, I wonder whether the shift in Hayek's beliefs between the 1930s and the 1980s was an improvement. In the 1930s, he believed in big depressions—"secondary deflation"—as a way of breaking "nominal rigidities", which I understand as the power of labor to resist being forced to accept declines in real wage rates. By the 1980s, he seemed to believe in shooting people like me in soccer stadiums, and throwing them out of helicopters into the South Atlantic. See: Pinochet, Augusto
David Glasner: Hayek, Deflation and Nihilism: "Hayek argued that... neutral money was... constant total spending (MV)... https://uneasymoney.com/2017/07/23/hayek-deflation-and-nihilism/
...Once the downturn started to accelerate, causing aggregate spending to decline by 50% between 1929 and 1933, Hayek, totally disregarding his own neutral-money criterion, uttered not a single word in protest of a monetary policy that was in flagrant violation of his own neutral money criterion. On the contrary, Hayek wrote an impassioned defense of the insane gold accumulation policy of the Bank of France, which along with the US Federal Reserve was chiefly responsible for the decline in aggregate spending.... Hayek’s policy advice was... relentlessly pro-deflation. Why did Hayek offer policy advice so blatantly contradicted by his own neutral-money criterion?...
The following argument about rigidities....
A theoretical problem of great importance... is the significance, for this process of liquidation, of the rigidity of prices and wages.... These rigidities tend to delay the process of adaptation and that this will cause a “secondary” deflation which at first will intensify the depression but ultimately will help to overcome those rigidities.... (Id. p. 176)
Hayek’s assertion that the intensification of the depression would help to overcome the rigidities is an unfounded and unsupported supposition. Moreover, the notion that increased price flexibility in a depression would actually promote recovery has a flimsy theoretical basis....
Whether this process of deflation... does not serve a necessary function in breaking these rigidities... whether the persistence of these deflationary tendencies proves that the fundamental maladjustment of prices still exists....
Unable to demonstrate that deflation was not exacerbating economic conditions, Hayek justified tolerating further deflation, as White acknowledged, with the hope that it would break the “rigidities” preventing the relative-price adjustments that he felt were necessary for recovery. Lacking a solid basis in economic theory, Hayek’s support for deflation to break rigidities in relative-price adjustment invites evaluation in ideological terms... to accomplish a political objective – breaking politically imposed and supported rigidities in prices – he did not believe could otherwise be accomplished.
Such a rationale, I am sorry to say, reminds me of Lenin’s famous saying that you can’t make an omelet without breaking eggs... policies that he had good reason to believe would increase the misery and suffering of a great many people. I don’t accuse Hayek of malevolence, but I do question [his] judgment... In Fabricating the Keynesian Revolution, David Laidler described Hayek’s policy stance in the 1930s as extreme pessimism verging on nihilism. But in supporting deflation as a means to accomplish a political end, Hayek clearly seems to have crossed over the line separating pessimism from nihilism.
In fairness to Hayek, it should be noted that he eventually acknowledged and explicitly disavowed his early pro-deflation stance:
I am the last to deny–or rather, I am today the last to deny–that, in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate.... I took a different attitude forty years ago.... I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should have even then understood that this possibility no longer existed.... I would no longer maintain... that... a short period of deflation might be desirable.... There is no justification for supporting or permitting a process of deflation. (A Discussion with Friedrich A. Von Hayek: Held at the American Enterprise Institute on April 9, 1975, p. 5)
Responding to a question about “secondary deflation” from his old colleague and friend, Gottfried Haberler, Hayek went on to elaborate:
The moment there is any sign that the total income stream may actually shrink, I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.... I have always thought that deflation had no economic function; but I did once believe, and no longer do, that it was desirable because it could break the growing rigidity of wage rates. Even at that time I regarded this view as a political consideration; I did not think that deflation improved the adjustment mechanism of the market. (Id. pp. 12-13)
I am not sure that Hayek’s characterization of his early views is totally accurate. Although he may indeed have believed that a short period of deflation would be enough to break the rigidities that he found so troublesome, he never spoke out against deflation.... But on the key point Hayek was perfectly candid: “I regarded this view as a political consideration..."
