Saturday, 13 July 2013

HAYEK’S THEORY OF MONEY AND CYCLES: RETROSPECTIVE AND REAPPRAISAL

By G.R. STEELE

In adopting the view that “relatively few of our readers are interested in the history of economic thought anymore,”1 the editors of one journal have allowed criticisms of the work of Friedrich Hayek to remain unanswered. That situation is now redressed, by courtesy of the editors of this journal. Three significant assertions were made; namely, that Hayek
(a) switched his focus from monetary policy to monetary regimes: “However doubtful its forecasts, The Denationalisation of Money had the virtue of boldly reconceiving the debate over monetary policy as a more fundamental debate over monetary regimes” (White 1999, p. 117);
(b) abandoned an earlier position: “In Denationalisation, however, Hayek (1978a, pp. 64–70) argued for the coordinating properties of price-level stability or zero inflation in final output prices. He abandoned his earlier position that preventing nominal output prices from falling would systematically create intertemporal misallocation” (White 1999, p. 117); and
(c) denied the practical relevance of his business-cycle theory: “At the end of his career, surprisingly switching from critic to advocate of consumerprice stabilization, Hayek was compelled to deny the practical relevance of his business-cycle theory” (White 1999, p. 118).
These assertions are now addressed in the course of a reexamination of Hayek’s monetary theory of business cycles, which allows Hayek’s own retrospective and reappraisal to be placed in their proper context. In particular, as Hayek gains political influence in later years, he more obviously tailors his message to his audience. For example, with his later examination of monetary distortions in the context of the labor market, trade unions, and unemployment, he is more careful to engage the attention of a readership who, by then, had become well-versed in monetarism and Phillips’s curves.

It emerges that Hayek variously focuses upon aspects of the money economy, where diverse issues of current concern are addressed at different times; and that, although reservations are expressed in regard to an earlier position regarding the Great Depression and the likely impact of a policy of prices stabilization,
these are misrepresented when they are taken to suggest that Hayek ever denies the relevance of his monetary theory of the business cycle.

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