Monday, February 8, 2010

Hayek and the Stabilization of Nominal Spending

Russ Roberts did an interesting interview with Larry H. White on F.A. Hayek. Among other things, we are reminded that Hayek actually favored stabilizing nominal spending as a policy goal. Stated differently, he was for stabilizing input prices (or factor income) but not for stabilizing output prices. Such a policy would lead to the anchoring of nominal spending but allow the price level to move in response to productivity changes. If that sounds familiar, it should. It is the basis of the George Selgin's Productivity Norm Rule. Note that such a rule would have meant a reigning in of nominal spending during the housing boom and a more aggressive response by the Fed to the collapse of aggregate demand in late 2008, early 2009. When this latter point was brought up by Larry White in the interview, Russ Roberts expresses some skepticism by asking how could the Fed have prevented the collapse in velocity in 2008. Scott Sumner would say target the forecast of nominal spending. I agree with him.

One implication of Hayek's view is that the Fed should have been more vocal during the Great Depression. Larry White, however, notes that Hayek failed to push this point in the 1930 because he wanted (1) to use the deflation at that time to loosen the nominal rigidities in order to restore more flexibility to the economy and (2) simply was complacent. One wonders where nominal income targeting rules would be today had Hayek maintained his relevance by calling for the stabilization of nominal spending during the Great Contraction.

For more on Hayek's view on stabilizing nominal spending see Larry White's JMCB article or this post.


  1. Hayek wasn't all THAT silent...

    Hayek’s 1932 Letter on the Great Depression

    "It is agreed that hording money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable."
    -- Friedrich von Hayek, 1932, in an open letter debating Keynes on the solution to the Great Depression.

  2. Hayek actually changed his views over time and ended up favouring zero inflation (i.e. stable price level with no inflation or deflation overall).

    George Selgin, 'Hayek vs Keynes on how the price level ought to behave', (1997):

    "Hayek himself eventually came to support a zero-inflation ideal. During the last decades of his career, and after having said little on the matter of price-level policy for several decades, Hayek began to distance himself from the productivity-norm: in The Constitution of Liberty (1960, 337) he recommended stabilization of an index number combining prices of both factors of production and final goods--a measure half-way between a productivity norm and zero inflation. Still later, in Denationalisation of Money (1978, 66-70) Hayek joined advocates of zero inflation, quietly abandoning his earlier arguments against such a policy together with the business-cycle theory connected to those arguments: attempts to stabilize the price level in face of productivity changes may lead to forced savings, but the problem is, after all, "of minor practical significance" (ibid., 83; see also White 1998, 17-20). In summary, Hayek came at last to accept a view of optimal price-level behavior that was practically the same as the one he had found wanting in Keynes almost half a century before."