Sunday, November 28, 2010

Would FA Hayek Favor QE2?

I made the case earlier that Miltion Friedman would have endorsed QE2 in some form.  So what would F.A. Hayek say about QE2?  Where would he stand on this issue?  Larry White says he would not support QE2 , but he would have supported QE1:  
But Lawrence White, an economist at George Mason University in Washington, DC, argues that this is an unfair characterisation. “Hayek was not a liquidationist,” he says, referring to the philosophy of Andrew Mellon, President Herbert Hoover’s Depression-era treasury secretary, who wanted to “purge the rottenness out of the system”. Hayek believed the central bank should aim to stabilise nominal incomes. On that basis Mr White thinks the Fed was right to pursue the first round of quantitative easing, since nominal GDP was falling, but wrong to pursue a second round with activity recovering.
Yes, F.A. Hayek was a fan of stabilizing nominal spending, a point I have discussed before on this blog. The question that I don't know the answer to is whether he would have stabilized nominal spending around its existing trend level or some other value. If Hayek were stabilizing it around its existing trend level then he would be in favor of something like QE2. Presumably, though, he would have implemented it in a more rules-based form than the current ad-hoc design of QE2.

White believes, however, that Hayek would not have maintained nominal spending at its existing trend level.  Okay, let's assume as a baseline case Hayek would  have  stabilized nominal spending at the point where it was before its collapse in 2008.  If this were the case and if we looked to nominal spending per capita, I think one can make the case that Hayek might have been sympathetic to a rules-based version of QE2.  Here is the reason: (Click on figure to enlarge)

This figure shows that domestic demand per capita is only at its 2007:Q2 value.  Aggregate demand per capita shows the same thing: nominal spending per person has yet to reach its previous peak.  So  maybe Hayek would be sympathetic to further monetary stimulus.  Again, there is no doubt he would have objected to the way QE2 is being implemented. I would love to know what type of nominal spending target he  would have favored.


  1. I´m not worring very much about Hayek had said or not.
    I like some works of Hayek, not others.
    But it is interesting to know this aspect on him, I believed He was a pure liquidationist.

  2. Didn't Keynes warn us about being in thrall to dead economists? (He asked, keenly aware of the irony.)

    More seriously, thanks for this. I just started reading Hayek and have discovered he was not a liquidationist, was not dogmatically opposed to government intervention nor in favor of lassez faire, and was strongly in favor of free, open trade.


  3. Luis and Jazzbumpa:

    I realize the danger of appealing to authority, but if we can on the margin convince some inflation hawks that even their heroes saw times when monetary stimulus was appropriate then maybe they will be more supportive of QE2.

  4. Hayek, like any real Austrian, was for keeping the supply/demand curve of money stable.

    This means he DID support the money supply being increased at pace with the economy.

    But this does not mean he would have supported these bouts of Quantitative Easing.

    And here is why:

    The point of keeping the money supply in sync was to prevent changes that distort pricing. Hayek had built upon Max Weber's recognition that the price system communicates needs so efficiently that no alternative can compare...and if money goes out of sync with demand, it distorts prices, ergo breaks down that communication.

    The economy having been distorted by a shift the money ratio for an extended period of time, suddenly changing the money supply to "fix" it all at once is even more damaging.

    You can see this in Hayek's condemnation of the Fed, when it did the 1928-9, the Fed decided that the 1920s had included too much it suddenly cut the money supply 30%. Hayek called this "silly", was emphatic that it shouldn't have happened.

    Quantitative Easing is the same in reverse. In both cases, the economy has spent years compensating for the distortion effect of the money supply disbalance. Suddenly "fixing" it just distorts the economy and pricing system that much more.

    So yes; Hayek believed in a stable supply/demand money ratio. But no, that doesn't mean he wanted any imbalance "fixed" by a sudden shift from a central bank.

    What he really wanted was a free market in money, that would settle all of these debates once and for all.

  5. Early-Hayek may have been somewhat sympathetic to offering an ear to proponents of QE (1 or 2) but by the time his thoughts had become more refined and after decades long observations on the stagflationist consequences of artificial interventions by monetary authorities it's no surprise he would go on to write something like "The Denationlalization of Money", a book sadly overlooked by a liberal/keynesian/moneterist sympathizers who would be quick to mischaracterize Hayek as one of their own. If these disingenuous (or incompetent) interpreters of past intellectuals' works only spent a bit more time learning more about those they presume to be well-informed about they might realize that they've missed out on quite a bit of necessary background requisit to proclaiming any reasonably accurate interpretation of these great mens' works.

    Just to clarify, read: "The Denationalization of Money: The Argument Refined" (1977) to get a real understanding of Hayek's earnest disaproval of what the author of this Blog eroneously judges to be "good-policy Hayek approved".

  6. Anonymous & butnowyouknow:

    Both of you need to read and wrestle with the article by Larry White--probably the preeminent Austrian macroeconomist today--on Hayek.

  7. I'll read White's piece but you need to read and wrestle with "The Denationlalization of Money" from the horses mouth. White may be an expert on Hayek, but I'll take Hayek himself (especially after his change of heart in later years on this exact issue) to be the more credible source.