Tuesday, December 16, 2008
Hayek Tells Bill Buckley That Even Keynes Was Afraid of the Keynesians
Last month Bob Roddis caused a stir when he made available the audio recording of Hayek's 1975 "Meet the Press" appearance.
Well Roddis has done it again. He has provided me with this recording (mp3) of Hayek on Bill Buckley's Firing Line. Buckley asks Hayek about the popularity of Keynesianism, if (as Hayek claimed) it was so "manifestly ill-adviiiiised" (picture Buckley's scary eye rolling).
Let me map what Hayek says, because it gets a little tricky in the middle but the ending is amazing. Hayek explains that in Great Britain during World War I, the pound was cut loose from gold, leading to large increases in prices and wages. Then after the war, the British government wanted to return to pre-war parity. Prices generally came down, but nominal wage rates remained high. Thus, workers saw a huge increase in their real wages because of the efforts at deflation (needed to go back on the gold standard at the old parity).
So, in order to prevent widespread unemployment (i.e. allow British workers to be competitive with the rest of the world), they either had to lower nominal wages or raise prices again. Hayek explains that the first option was politically unpopular, and also was--according to a complicated argument from Keynes' General Theory--not even effective. (I.e. Keynes argued in his book that even if all nominal wages fell, that might end up reducing overall prices and hence not lead to a fall in real wages.)
But now the awesome part. Hayek says that Keynes' theory was, at best, appropriate for the specific deflationary environment of the 1930s. After the war had passed, the great danger was inflation. And--according to Hayek--Keynes himself agreed with this, and even promised to rein in his foolish disciples if they ever got the crazy notion to advocate pump-priming in an inflationary environment. But alas, Keynes died six months after pledging this to Hayek.
As I said, Hayek sounds like he's rambling for a bit, but try to stay focused because the end of the clip is really incredible.
Well Roddis has done it again. He has provided me with this recording (mp3) of Hayek on Bill Buckley's Firing Line. Buckley asks Hayek about the popularity of Keynesianism, if (as Hayek claimed) it was so "manifestly ill-adviiiiised" (picture Buckley's scary eye rolling).
Let me map what Hayek says, because it gets a little tricky in the middle but the ending is amazing. Hayek explains that in Great Britain during World War I, the pound was cut loose from gold, leading to large increases in prices and wages. Then after the war, the British government wanted to return to pre-war parity. Prices generally came down, but nominal wage rates remained high. Thus, workers saw a huge increase in their real wages because of the efforts at deflation (needed to go back on the gold standard at the old parity).
So, in order to prevent widespread unemployment (i.e. allow British workers to be competitive with the rest of the world), they either had to lower nominal wages or raise prices again. Hayek explains that the first option was politically unpopular, and also was--according to a complicated argument from Keynes' General Theory--not even effective. (I.e. Keynes argued in his book that even if all nominal wages fell, that might end up reducing overall prices and hence not lead to a fall in real wages.)
But now the awesome part. Hayek says that Keynes' theory was, at best, appropriate for the specific deflationary environment of the 1930s. After the war had passed, the great danger was inflation. And--according to Hayek--Keynes himself agreed with this, and even promised to rein in his foolish disciples if they ever got the crazy notion to advocate pump-priming in an inflationary environment. But alas, Keynes died six months after pledging this to Hayek.
As I said, Hayek sounds like he's rambling for a bit, but try to stay focused because the end of the clip is really incredible.
Comments:
Bob,
While I agree that Keynesianism is a terrible idea, I haven't heard any reputable economist explain in detail what is going to happen (or tend to happen) if this $1T goes through. My own thoughts suggest a drop in private investment due to crowding out, and lower long term growth. Any else more specific?
While I agree that Keynesianism is a terrible idea, I haven't heard any reputable economist explain in detail what is going to happen (or tend to happen) if this $1T goes through. My own thoughts suggest a drop in private investment due to crowding out, and lower long term growth. Any else more specific?
Brian,
What you said is right, plus I think it will have a crippling effect because people will anticipate higher future taxes to service the extra debt.
Depending on how they spend the money, it will screw up particular sectors. E.g. if they spend billions of dollars on solar panels, that will drive up wages of certain workers and hurt the industries that employ them right now, etc.
What you said is right, plus I think it will have a crippling effect because people will anticipate higher future taxes to service the extra debt.
Depending on how they spend the money, it will screw up particular sectors. E.g. if they spend billions of dollars on solar panels, that will drive up wages of certain workers and hurt the industries that employ them right now, etc.
Bob,
The idea that the General Theory was a specific ad-hoc policy prescription (to fight off the deflationary forces of the 1930s) is also consistent with pragmatic Keynesian aphorisms about "in long run.. dead" and "when facts change..." etc..All of which suggests Keynes put a high degree of importance on being the go-to guy in policy circles.
Yet, he did call it the General Theory for a reason, namely, that investment is inherently (in general) unstable, and Say's Law holds only in that special case where that unstable condition happens to match up with full employment for what is likely a fleeting equilibrium.
Thus Keynes provides us with both a title for his book and an explanation for the title that argue against what Hayek says to Buckley.
It may be a simple case of Hayek projecting his own interpretation onto Keynes. Not the first to do so. Well, maybe he was the first.
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The idea that the General Theory was a specific ad-hoc policy prescription (to fight off the deflationary forces of the 1930s) is also consistent with pragmatic Keynesian aphorisms about "in long run.. dead" and "when facts change..." etc..All of which suggests Keynes put a high degree of importance on being the go-to guy in policy circles.
Yet, he did call it the General Theory for a reason, namely, that investment is inherently (in general) unstable, and Say's Law holds only in that special case where that unstable condition happens to match up with full employment for what is likely a fleeting equilibrium.
Thus Keynes provides us with both a title for his book and an explanation for the title that argue against what Hayek says to Buckley.
It may be a simple case of Hayek projecting his own interpretation onto Keynes. Not the first to do so. Well, maybe he was the first.
# posted by 
: January 5, 2009 at 9:20 PM
: January 5, 2009 at 9:20 PM Subscribe to Post Comments [Atom]
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