Friday, April 29, 2011

Lawrence White on Hayek

Since the new Keynes vs. Hayek rap is out (and fantastic!), it's worth pointing out that on the same website there are some greater in-depth looks at the ideas of Keynes and Hayek with Keynes' biographer Robert Skidelsky and Austrian monetary economist/historian Lawrence White. In this video, White explains Hayek's views on monetary policy given a central bank. I've mentioned this before, as I've read White's paper on the views of Hayek and Robbins during the Great Depression-- highly recommend if you're interested. White wrote the textbook that my professor used in my undergraduate Monetary Economics course (still sits on my shelf).

As the video above points out-- Hayek was sometimes a pragmatist. The job of the Fed should be to stabilize nominal income (NGDP), offsetting decreases in velocity (ie: an increase in demand for money) by increasing the money supply. Not mentioned in the video is that Hayek later in life regretted calling for liquidation and deflation, agreeing with Milton Friedman that the Fed had done a bad job and should have worked to keep deflation from occurring. White seems to be saying that Hayek wouldn't have joined all the Rothbardian Austrians today who seem eager to see high unemployment, deflation, and "liquidation."

In other words, Hayek believed in something called aggregate demand (NGDP or P x Y) and believed that if you have a central bank, they better be certain to intervene with demand-side policies to keep it stable.

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