1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/11591/white-on-hayek/

White on Hayek

February 2, 2010 by

Russ Roberts’ podcast interview with Larry White is a fascinating listen.

White is one of the leading experts (along with Roger Garrison and Gerry O’Driscoll) on Hayek’s monetary thought. Roberts has developed into an outstanding interviewer, asking penetrating questions and making timely comments but allowing the interviewee to shine.

And shine White does. Wearing his deep scholarship lightly, he carefully and clearly explains Hayek’s business cycle theory and then leads the listener through the evolution of Hayek’s monetary thinking noting its several twists and turns.

While I had a few quibbles with White’s responses, I was particularly struck by his apparent support for a nominal GDP rule for the Fed as a second best solution to free banking. Under this rule, the Fed would strive to maintain the total spending on current goods and services constant over time, which would entail injecting new money into the economy through the credit markets anytime the public increased its demand to hold money. He does not explain why the implementation of this rule would not cause a distortion of the structure of market interest rates that leads to malinvestments and a Hayekian downturn in the economy.

White also briefly alludes to the shrinkage in nominal GDP that accompanied the onset of the current recession, which some economists now hold responsible for the depth of the recession. But nominal GDP declined only 2.7 percent over three quarters, from 3Q 2008 through 2Q 2009 and then began to grow again.

Taking a longer pespective, for the two calendar years of 2008 and 2009, nominal GDP rose 2.6 percent and declined 1.3 percent, respectively. Hardly a decline, one would think, that can explain the depth of the real decline. But, as I said, this is a minor gripe.

Congratulations to Larry and Russ for an enlightening and stimulating discussion of Hayek.

{ 11 comments }

Speedmaster February 2, 2010 at 12:15 pm

Indeed! I’ve been following Roberts for a few years and listened to every one of his podcasts. He’s really phenomenal, one of the brightest minds around, imho.

Brent February 2, 2010 at 1:02 pm

“He does not explain why the implementation of this rule would not cause a distortion of the structure of market interest rates that leads to malinvestments and a Hayekian downturn in the economy.”

I’ll listen to it because you said it was fascinating, but I knew this was coming. Another question is how the Fed would ever implement this rule? Wouldn’t it be chasing its tail? But I guess he did state it was a SECOND best option, right?

fundamentalist February 2, 2010 at 1:16 pm

I would prefer the Fed to target the price of gold.

Dennis February 2, 2010 at 1:32 pm

In line with Professor Salerno’s above insight, one problem that I believe exists with “free banking” is that under this framework banks could increase the quantity of money to counteract the downward effect on prices of an increase in the demand for money. The free bankers believe that this is a positive aspect of their program.

However, this increase in the quantity of money would occur through an increase in fiduciary media that would be directly injected into the loanable funds market and, thus, lower the rate of interest. Would this not set in motion the unsustainable boom that is fundamental to the Austrian analysis of the business cycle? Or stated another way, does not the free bankers’ position on this issue mean that they cannot support Austrian business cycle theory, or that they are willing to set in motion the boom/bust cycle in their attempt to counteract the downward pressure on prices caused by an increase in the demand for money? Have the free bankers adequately addressed this issue in their analyses?

Also, in a more general sense, does not any increase in fiduciary media that first enters the economy through the loanable funds market set in motion the unsustainable boom phase of the business cycle?

pussum207 February 2, 2010 at 2:04 pm

“I was particularly struck by his apparent support for a nominal GDP rule for the Fed as a second best solution to free banking. Under this rule, the Fed would strive to maintain the total spending on current goods and services constant over time, which would entail injecting new money into the economy through the credit markets anytime the public increased its demand to hold money. He does not explain why the implementation of this rule would not cause a distortion of the structure of market interest rates that leads to malinvestments and a Hayekian downturn in the economy.”

In my interpretation, the basis for it is the idea that departures of the market interest rate from the natural rate are caused an excess (or deficient) supply of money. Therefore, the market rate will always track the natural rate as long as the money supply responds only to changes in money demand or, in terms of the equation of exchange, MV remains constant. A constant MV implies a constant PY (or nominal GDP).

The problem that I have with nominal GDP (NGDP) targeting is that it appears to implicitly assume that excess money balances will be spent exclusively on components of current GDP, rather than potentially also on existing assets. In other words, it assumes that as long as NGDP is not expected to change, monetary policy must have just offset changes in money demand.

The whole issue as to whether to target asset prices in addition to prices of the components of GDP (or, alternatively, growth/level of NGDP) seems to me to really be a debate about the demand for money and what people do with excess money balances.

Dennis February 2, 2010 at 2:45 pm

Professor White’s apparent conditional support for a nominal GDP rule in his interview regarding Hayek’s monetary theory is particularly interesting since I believe that it was Hayek, as well as anyone, who demonstrated in the early 1930s as part of his elucidation of Austrian business cycle theory that the stabilization of a macroeconomic construct such as nominal GDP or the “price level” will not necessarily stabilize the real economy.

Alexander S. Peak February 2, 2010 at 4:05 pm

I’d be inclined to say that the second-best option, next to free banking, is the Fed simply keeping the money supply unchanging. While I’m inclined to suspect that the absense of any required reserve ratio is most in line with natural law, as long as we’re looking for second-best “solutions,” I’d say that that second best solution is for the Fed to impose a 100% required reserve ratio, and to cease buying and selling bonds

Having the Fed try to immitate whatever fluctuation of the money supply would exist in a free-banking situation, rather than simply adopting free banking, sounds like something that would backfire. But, then again, I’m not an economist, so take everything I say with the same amount of salt you would take any other non-economist.

I’ll have to check this interview out at some point.

Alex

DD February 2, 2010 at 4:38 pm

What part of the Calculation problem does Dr. White not understand?

Recommending second best options (or third best…) is still “planning”. I didn’t know that the calculation problem only pertains to first best option.

Bill J February 2, 2010 at 5:16 pm

Good observations, Joe.

I’m pretty skeptical of this NGDP targetting too. Especially Scott Sumner’s ideology. Seems so superficial.

EIS February 3, 2010 at 3:43 am

Terrible interview. White had a hard time dealing with the expectations question for some reason, and I can’t figure why. Anyone well-read in the Wicksell-Mises theory of the trade cycle knows that the term “low interest” rate is purely a relative term (its position relative to the natural rate). Entrepreneurs may be suspicious of a 1% interest rate, for example, and they may expect future rates to rise towards 4,5 maybe even 6%. But the natural rate may be at 10,11, or 12%. This makes economic calculation impossible when there’s monetary central planning. The rest of the interview was just bad. A lot of confused Monetarists who like Hayek.

Don Lloyd February 3, 2010 at 10:31 am

“…Under this rule, the Fed would strive to maintain the total spending on current goods and services constant over time, which would entail injecting new money into the economy through the credit markets anytime the public increased its demand to hold money….”

Any policy that depends on reacting to the demand for money is doomed. This is not only because of measurement difficulties, but because the demand for money is not a homogeneous, unitary whole. Also, It needs to be realized that the demand for money must be addressed on a time-average basis.
Holding $1 every day for 30 days is the same demand for money to hold as holding $30 for 1 day. As long as the particular 1 day for which $30 is held is randomly selected over a large enough population, everything evens out.

There are at least two, and probably three, distinct components of the demand for money to hold.

First is the true demand for money. This is money that is required to enable uncertain purchases which can only be made with actual money, in its role as the medium of exchange. A failure to hold enough of this component may leave you unable to buy a sandwich in a convenience store or to pay a tow truck driver to move your disabled vehicle.

Second is a demand for money to be used for routine, predictable expenditures such as paying your rent. This is a wildly variable demand whose average depends on the time duration between the actual rent payment and the beginning of the holding period, whether it starts with a cashed paycheck or with the conversion of a financial asset to actual money.

Both of the above components generally demonstrate a sawtooth value over time as they are spent down over a pay period.

A third component tends to be a relatively slowly changing liquid financial asset or store of value. You would usually only hold this component when alternate available investments are not worth the trouble.

It is important to note that different components interact with price inflation differenty. If the prices of the uncertain purchases that you make are rising, you may well find that you are running out of money before your next paycheck. This will induce you to increase your allocation of money out of your next paycheck. This is an increase in the demand for money in response to a price inflation which is underway. In contrast, an expectation of an increase in price inflation will induce a reduction in the demand for the other two components of money, especially the third.

In summary, the demand for money is so arbitrary and variable that it is hard to believe that any policy that reacts to it will be anything but a disaster.

Regards, Don

Comments on this entry are closed.

Previous post:

Next post: