Hayek, Friedman, and Keynes

I thought an exchange going on in the comments section to a recent post on the Coordination Problem blog is worth reproducing, especially my latest comment (just as a historical curiosity).  Steve Horwitz posts a short excerpt of an interview where Hayek discusses his views on monetary theory.  Hayek criticizes Friedman’s use of the mechanistic quantity theory of money (more accurately, Friedman’s version of it) and I point out,

[H]is statements here (against aggregation of money and prices) seems at odd with the argument that he supported maintaining monetary equilibrium.

By this, I did not mean anything controversial.  I actually meant to inspire more conversation on possible theoretical reasons as to why Hayek tended to believe that “secondary deflation” is harmful.  It may be the case he thought this for entirely different reasons than Friedman and other monetary equilibrium theorists, and even modern MET Austrians.

That is neither here nor there, though, because Daniel interprets that statement as a “jab against Keynes.” More fully,

That whole line is just a jab at Keynes. It also contradicts his (fruitful) use of aggregates elsewhere. There’s nothing wrong with aggregates. It’s code for “I’m not a fan of Keynes”.

Roger Koppl writes a comment in general agreement with Daniel with regards to Hayek on “Keynesian aggregates,” but suggests Hayek was right in criticizing these.

I think, in this particular case, they both missed Hayek’s point.  As I write,

I’m not sure that’s right. It’s true that Hayek calls Friedman a “Keynesian” (referring to his macroeconomic modeling), but I don’t think the particular point, that I pointed out above, was a “jab at Keynes.” Rather, he is critiquing the mechanistic (Fisherian) quantity theory of money — something he did as early as 1929 (as Daniel ought to know, since a long time ago we went through “Monetary Theory and the Trade Cycle” together).

If it was a jab at Keynes, that would certainly be interesting. Hayek, if I recall correctly, actually, very generally, “praised” (maybe too strong of a word) Keynes’ [what Hayek considered to be a] “transitory” approach to money in A Treatise on Money. He might have thought it incomplete or inadequate, but it was signs of improvement over the Neoclassical mechanistic quantity theory of money. This is the same idea that Dennis Robertson found confusing in his own review of Keynes’ book. It is the same approach that Hayek later lamented that Keynes largely abandoned in his final version of The General Theory.

Rather, what Hayek here seems to be critiquing is the belief that by maintaining the equation MV=PT (and more advanced versions of this equation) there is a causal connection with price stability and, consequently, stability in economic calculation. This goes well beyond Keynes; it is a criticism of the entire Neoclassical approach to money.

Hayek never opposed the use of aggregates; he criticized the misuse of aggregates. As Daniel rightfully points out, Hayek used aggregates throughout his analysis (something Sraffa criticized him on in the review of Prices and Production — i.e. a criticism that a “deaggregation” of his theory of interest leads us to problems regarding time preference and discount schedules between various goods). The idea of a “structure of production” is an aggregate, as it the idea of a “stage” in the “production process.” But, Hayek deaggregated when necessary (well, this was his intention) — consider Lachmann’s continued emphasis on Hayek’s theory of capital complementarity — and this was, essentially, his criticism of the mechanistic quantity theory of money. While a truism, it hides crucial causal mechanisms that aid our understanding of the role of money in the division of labor.

I think both Daniel and Roger are right, when looking at his later criticism of Keynes,* that Hayek may have unfairly attacked certain parts of Keynes’ analysis (including, perhaps, aggregation [effective demand?]). But, this is not the case with the specific comment by Hayek, made in this interview, that I was addressing.

* I forgot to add this footnote in the comment, but with regards to Hayek’s later criticism of Keynes (specifically, I am thinking about his interview with Leijonhufvud, I believe), I found this particular passage interesting (quoted from here), “Moreover, if the people you write about are alive and willing to talk, it turns out they’re only human: they’ve forgotten the vast majority of their past, mix up events and people, mistake a recollection they once read for their own memory, or even willfully rewrite history.”  Draw your own conclusions.


One thought on “Hayek, Friedman, and Keynes

  1. Greg Ransom

    Hayek _repeatedly_ criticized Friedman’s simple minded quantity theory of money and the simple minded quantity theory in general, and the context is _never_ Keynes, the context is discussing the quantity theory and Friedman.

    There are all sorts of places where Hayek does this.


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