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« Did Keynes Have Any Good Ideas? | Main | An Error in the Opposite Direction is Still --- AN ERROR! »


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Steve, your comment has been published entirely in his website, at least by now.

Yeah, let's see what happens when he wakes up on the west coast and checks the blog.

Speaking of Delong,

have you read this by Garrison?

He talks about Delong and Krugman at length concerning their confusion in Austrian thinking on capital and business cycles. I think it generally applies all around. DeLong refers to Hayek so inaccurately and so frequently that it's...truly beyond words for a PhD.

Steve, your comment still published in full -- with obligatory snarky comments.

I posted this comment:

DeLong is again making uniformed claims. In support of Horwitz, I quote Hayek from The Constitution of Liberty (1960/2008):

" This means that when at any time people change their minds how much cash they want to hold in proportion to the payments they make (or, as the economists calls it, they decide to be more or less liquid), the quantity of money should be changed correspondingly. However we define 'cash,' people's propensity to hold part of their resources in this form is subject to considerable fluctuation both over the short and over long periods, and various spontaneous developments (such as, for instance, the credit card and the traverlers' check) are likely to affect it profoundly. No automatic regulation of the supply of money is likely to bring about the desirable adjustments before such changes in the demand for money or in the supply of substitute for it have had a strong and harmful effect on prices and employment." (p. 284)

The automatic regulation is, for instance, Friedman's k-rule.

Well, DeLong already made his own modifications. What a dishonest man!

Posted at Delong's

and now here in case he deletes or alters it:


Why is the Keynesian is trying to lecture the Austrian on HAYEK?

This is actually far more comical than the reverse.

Austrians go through the same training in Keynes' work as Keynesians do. The teaching of Keynes' principles is widespread, ubiquitous and detailed. In that sense, Austrians understand the work of Keynes as well as (or almost as well) Keynesians do. It's standard curriculum on the way to any degree in Economics.

Can the same be said of Keynesians on Hayek or even Mises? Not really. I'm not even a PhD economist and I repeatedly see the glaring flaws in how DeLong treats Hayek. And this is just from casual readings of Hayek. I get the impression that most of what Keynesian economists understand of Hayek...and especially Austrian very filtered through their the lens of their Keynesian professors who shaped them.

I think it's safe to say that the level of detailed knowledge about the targets of criticism for either side are not equal.

Roger Garrison say:

"Part II of the answer to “Why don’t the mainstreamers see the Austrian theory’s
relevance?” actually deals with a follow-on question. “Why don’t they at least make the
effort to learn what the Austrian theory is?” After all, economists who study and teach at
top-tier universities are intelligent people who could learn the Austrian theory. A little
reflection suggests that while they surely have the ability, they lack the motivation. For a
seasoned member (or even an upstart member) of the Berkeley or Princeton faculty,
studying Austrian economics is just not a career-enhancing activity."

I think this also applies to details of Hayek.

I think Dr. Garrison is right. DeLong is a very intelligent man. I think he can master the understanding of anything he chooses to (Notice: 'master" doesn't mean "agree"). Is a lack of motivation or interest really the root of the matter here?

Delong not only deleted the above entry that I posted but he also deleted Dr. Horwitz's entire second post!


Ha ha ha! I just read DeLong's description of the "Marx-Hoover-Hayek axis." Memo to Brad: It's called MAL-investment, not "over-investment."

Of course he knows that, right? There's NO WAY Brad DeLong actually believes that the Austrians believed in either "too much" capital or in a boom-bust morality tale. Does he? Does Krugman really believe this too? One has to wonder.


Yes, they actually do believe that's what the Austrians are saying. As Garrison's work notes, they simply don't have a framework for understanding the concept of MAL-investment, given the aggregation at the heart of modern economics.

You mean they really believe in those silly "aggregates" too? Even when I've explained this to the poor things on multiple occasions?

I've laid this all out so clearly, so politely, on Krugman's blog. I thought for sure I had settled the matter -- you mean Krugmand, et al. haven't recanted and confessed the error of their ways?

The more I think about it, it seems that the Austrians have been TOO accomodating of the Keynesian view. If your profession were geography and some of your colleagues believed the earth was flat, or that it only stayed round through fiscal stimulus, would you treat them as equals, or would you treat them with the contempt they deserve? I think the latter might be more appropriate and effective.

Krugman, not "Krugmand"


Mainstream economists have some conception of structual unemployment. That capital goods could be subject to the same sorts of problems is just not that difficult to understand.

Consider the standard discussion of the impact of opening markets and allowing freer trade. And, the "need" for retraining of workers who are displaced. I can't imagine that it never crossed anyone's mind that there there are losses on capital equipment as well. The homogenous capital goods are just costlessly shifted to alternative uses? Come on...

Those who don't take the Austrian trade cycle theory "seriously" (which includes me,) just don't believe that inflationary policies generate significant malinvestments and or that the reversal of any such malinvestments is especially significant in a world of creative destruction. Changing technology "creates" malinvestmnets every day.

Keyensians, especially, are solely interested in the drop in "MV" and its adverse effects. I must admit, that I can't imagine how anyone can't see that there is an element of extra structual unemployment at this time (movement of resources out of the production of even more single family homes.) Are you really sure that they don't see that? I think it is that they (like me) don't believe that all of those houses and home building capacity was in any sense an optimal response to expansionary monetary policy. (Anyway.. I agree that it was partly to blame...)

There are many people who claim to represent "The" Austrian position on the trade cycle, and my reading of them suggests that any effort to increase M regardless of V is will create malinvestment. I will grant that it is Hayek and Robbins that were the face of Austrian economics at the time, but, where did Mises stand? And we know where Rothbard and his followers at the Mises Institute stand. In praise of deflation and a return to a 100% gold standard. Comparing that regime to the status quo, maybe we do have "overinvestment" in everything other than gold.

There is a lot of "noise" on the Austrian side.

Finally, I do think that DeLong is playing rhetorical games. He is using Friedman as the authority, because, DeLong is projecting.... just as he is a partisan for the center-left Democrat team, we must be partisan's for the center-right Republican team. That we just might say that someone important on our "team" was mistaken, is...inconceivable.

Even Feldstein agrees that we need fiscal stimulous, and that military spending is especially useful. Well, what a great point against the center-right Republican team, no? How are you going to reply to that one?

Can you even take as a compliment that your comment was deemed worthy to be modified but not deleted?

You have to get up early in the morning to correct Brad DeLong before Steve is on the job! My own reply to DeLong, and comments on his exchange with Steve, are here:

I would also second John V's recommendation of Roger Garrison's piece.


I wasn't generalizing about every mainstream economist. My "they" was really about DeLong and Krugman, who are smart enough to figure it out but either cannot see it through their theoretical lenses or are willfully denying it to score partisan points.

You and I will continue to disagree over these matters (including ABCT) because, to my recollection, you aren't particularly fond of Austrian capital theory. I think THAT is the theoretical support beam that distinguishes those who find the ABCT story plausible and those who either don't agree or don't understand. It's why I worked so hard in my book to try to integrate capital theory into the Yeager type monetary disequilibrium story. I think there really is a Wicksellian approach that combines Austrian capital theory with ABCT and old Monetarism.

But if one rejects (or refuses to understand) the capital theory, then the ABCT doesn't make much sense.


The "malinvestment" that comes with changing technology is totally different from that which the Austrians attribute to artificially low interest rates. Markets are always in a state of dynamic disequilibrium. But isn't there a fundamental conceptual difference between imperfect investment choices (which occur every day) and the kind of widespread "malinvestment" that comes from the lack of coordination between savings and investment, e.g. like that which occurred under the Greenspan regime? The malinvestment we're wrestling with right now results precisely from the lack of real savings to support it, no?

I'm also curious how you explain the housing bubble -- whether here in the US or in a country like Ireland where it was arguably even worse? Weren't artificially low rates at least necessary for the bubble to form? (These aren't rhetorical questions.)

Actually Larry, you have to get up pretty early to beat Greg Ransom, whose snarky comment that preceded mine was summarily deleted and whose Facebook status update called my attention to DeLong.

Below I copy my e-mail exchange with Lawrence H. White:


Dear Sir,

upon reading Hayek´s "Reflections on the Pure Theory of Money of Mr. J.M. Keynes" I´ve come to the conclusion that the charge of being "liquidationist" levelled against Hayek is not altogether unjustified:

"I do not deny that, during this process, a tendency toward deflation will regularly arise; this will particularly be the case when the crisis leads to frequent failures and so increases the risks of lending. It may become very serious if attempts artificially to "maintain purchasing power"; delay the process of
readjustment; as has probably been the case during the present crisis. This deflation
is, however, a secondary phenomenon in the sense that it is caused by the instability in the real situation; the tendency will persist so long as the real causes are not removed. ANY ATTEMPT TO COMBAT THE CRISIS BY CREDIT EXPANSION will, therefore, not only be merely the treatment of symptoms as causes, but may also PROLONG the depression by delaying the inevitable real adjustments. It is not difficult to understand, in the light of these considerations, why the easy-money policy which was adopted immediately after the crash of 1929 was of no effect."

[Hayek - Prices and Production and Other Works: F.A. Hayek on Money, The Business Cycle, and the Gold Standard, pg. 484-485, ]

How does it square with your claims in "Did Hayek and Robbins Deepen the Great Depression"?

Thanks a lot,

Matej Suster


Mr. Suster,

Good question.

The passage you quote provides evidence for what I noted as the germ of truth in the
indictment of Hayek as a "liquidationist", indifferent to monetary contraction.
Hayek held the view that by 1929 the economy had over-expanded. Not only was the
structure of production distorted (the "real causes" of instability), but the price
level had been inflated to a level too high to be consistent with the gold standard.
In the passage you quote he rejected attempts to prevent the correction back to a
sustainable structure and sustainable price level. He failed to add that
overshooting past those corrections would mean further pain with no further gain, so
that monetary policy to offset further contraction IS warranted once MV shrinks
BELOW the sustainable level. In a footnote in my article I try to roughly quantify
the distinction between warranted and unwarranted deflation.

--Lawrence H. White


On the other hand, isn´t the indictment of being "liquidationist" (in DeLong´s sense) completely fair against Mises? As far as I know, he would not recommend stabilization of MV as a norm for monetary policy.

"As far as I know, he would not recommend stabilization of MV as a norm for monetary policy."

Did he say that he would not recommend stabilization of MV? Or did he say that good policy would be the stabilization of M(or P) alone?

Well, I have no deeper knowledge of Mises views on monetary policy. But since he (at least in his later writings) did favor something very close to 100% Gold- based regime, I doubt he would recommend stabilzation of MV as a norm.

The thread is now closed over at DeLong's.

That's his customary final step when things like this happen.

Oh well...

The earlier Mises did define inflation and deflation as "excesses" and "deficiencies" in the supply of money as compared to the demand. This would *suggest* that he saw stabilizing MV as the correct policy norm, given that only if M responds to changes in money demand (the inverse of V) will we avoid both inflation and deflation. Mises, to my knowledge, never argued explicitly in terms of M and V.

Mises' later monetary writings do indeed have a different flavor.


If depressed conditions lower velocity or the money muliplier, how can this be offset without "easy money?"

The alternative perspective is that if pessemistic views about future income and profits lead to greater saving and less investement, and so a lower natural interest rate, what do we mean by easy money?


Any malinvestments that come from mistakes in monetary policy are just bad. What turn out to be malinvestments in the production of obsolete goods and processes are more than offset by the advantages of innovation. Perhaps a close analogy to monetary malinvestment is when there is a change in demand. The specific capital goods that are less useful or useless because their products aren't demanded are "wasted." Of course, it is just a necessary evil of investment under uncertainty. Any liquidation of malinvestment due to inflationary monetary errors should look exactly like a decrease in saving. An increase in demand for present goods and a reduction in demand for future goods. There is nothing good about malivestment created by monetary errors. But I think the adjustment process is pretty much "normal" and what we see frequently in a market economic system.

I think that there was a speculative bubble in housing caused by entrepreneurial error. As all of my relatives explained during my long period as a renter of on campus housing, you can never lose money investing in a home. That people were willing to lend to those investing into this bubble exacerbated it greatly. But not all credit is matched by money creation. I believe that the housing bubble starved the rest of the economy for credit as well as for resources.


Perhaps I have a poor understanding of capital theory, but to the degree I understand it, I think I take an "Austrian" view. Round-about methods of production. More saving, more provision for the more distant future, etc.

I think I understand that recently produced blast furnances won't help when more ovens are needed.

However, I think that everyone understands that ovens won't help produce more ice cream.

I think Garrison is right that most economists know about the oven and ice cream problem. And when thinking about growth theory, they abstract away from that and the blast furnace vs. oven issue. And then don't think about any of this when they think abour recession. And that is because they don't think about it is an issue of sectoral imbalances.

Perhaps you recollect that I have problems with Austrian interest rate theory, in particular the "pure time preference" theory. If I understand it, I think I agree with it, but I am more interested in what determines the level of the natural interest rate than explaining the ultimate meaning of the phenomenon of interest.

Anyway, I agree with the old monetarists and the Keynesians in being interested in the situation of not being able to sell hardly anything. I don't think the "we are set up to produce the wrong things" needs much of an explanation.

Delong has now altered his blog entry and reopened comments...


Hayek like everyone was commenting for a position of deep statistical / empirical ignorance -- people simply did not know the facts about what was going on in the American economy. Essentially, we didn't come close to even guessing the correct numbers until Friedman & Schwartz collected, reconstructed and interpreted those numbers.

Not too long after that exchange of letters with Keynes, Hayek changed his position -- arguing that action in the case of a _massive_ "secondary depression / deflationary downward spiral" was an appropriate, a position Hayek held for the rest of his life (see, for example, Hayek's talk to the AEI in 1978.)

"Mises, to my knowledge, never argued explicitly in terms of M and V."

Yep, that´s true. Mises, "of course" :), considered the equation of exchange "unscientific":

"The equation of exchange is incompatible with the fundamental principles of economic thought. It is a relapse to the thinking of ages in which people failed to comprehend praxeological phenomena because they were committed to holistic notions. It is sterile, as were the speculations of earlier ages concerning the value of "iron" and "bread" in general."

Also, from his "The Causes Of The Economic Crisis: An Address" (1931) you definitely get the impression that Mises did not care a wit about secondary deflation and was adamantly against monetary expansion (inflation) as a remedy:

"The error in equating the drop in prices with the crisis and, thus, considering the cause of this crisis to be the insufficient production of gold is especially dangerous. It leads to the view that the crisis could be overcome by increasing the fiduciary media in circulation. Thus the banks are asked to stimulate business conditions with the issue of additional banknotes and an additional credit expansion through credit entries. At first, to be sure, a boom can be generated in this way. However, as we have seen, such an upswing MUST eventually lead to a COLLAPSE in the business outlook and a NEW CRISIS.

It is astonishing that sincere persons can either make such a demand or lend it support. Every possible argument in favor of such a scheme has already been raised a hundred times, and demolished a thousand times over. Only one argument is new, although on that account no less false. This is to the effect that the higher than unhampered market wage rates can be brought into proper relationship most easily by an inflation."

[Mises, The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression, pg. 177-178, ]

Greg Ransom:

If Hayek was arguing from the "position of deep statistical / empirical ignorance", then he perhaps should have been more humble in his policy prescriptions. :)

Here my respond to DeLong's suggestion that I am partly right and Steven Horwitz just "incoherent":

Perhaps, I can clarify some misunderstandings between DeLong and Horwitz.

DeLong writes: "Horwitz, by contrast, in comments is simply incoherent: if you stabilize Q by stabilizing MV then you automatically must be stabilizing P, for PQ = MV. As long as you are trying to stabilize Q, saying "Hayek's correct arguments against stabilizing P... [are not] denying his belief that stabilizing MV is the correct policy norm..." makes no sense at all."

This is true for a given Phillips-curve, for a given capacity. Here, the general price level is a function of output and thus of bottlenecked demand. A stable price level is ensured by a constant level of output. This, however, is not the framework Horwitz is talking about. Very much like the Pre-Keynesian way of thought, the quantity equation serves as a demand-supply framework that determines the price level. Read his equations like this: P=Mv/Y, where money in circulation (MV) is a measure of aggregate expenditure (E). P=E/Y. Ceteris paribus, a higher supply reduces the price level. It is therefore coherent to claim that in stabilizing Mv (or E) any increase in output reduces prices so as to keep nominal income (PY) stable. You only have to allow for output to increase independent of aggregate demand.

Delong pees in the sandbox and pays no price. In
"the marketplace of ideas," this definitely qualifies as a "market failure"

...unless we do something about it.

May I suggest that henceforth Brad D. is referred to as Brad DeLiar until he begins to respect the norm that civil comments made in good faith get to remain on his blog, even if he must *vociferously* denounce them (it beats the swinish habit of deleting those you'd rather not debate).

Either that, or boycott DeLiar in toto. I recommend against that because boycotts don't work, especially against such well-established figures.

I have posted the following comment to Brad's revised entry. I copy it here in case it gets deleted or altered.


Nobody is saying that Hayek in 1929-32 was a Friedmanite.

Re-read amv's quote from Hayek (1960). Hayek is not endorsing but in fact rejecting Friedman's proposal that M should grow at a constant rate regardless of changes in V.

Re-read the later-period quote from Hayek you provided. Hayek is saying that we shouldn't hold any measured M to a constant level, but that we can and should vary M as necessary to stabilize P. (Why he switched from his earlier MV or PQ norm to simply P is another question.)

The comments to this entry are closed.

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