01 Sep 2016

Did Hayek Favor Targeting NGDP?

Austrian School, Banking, Market Monetarism 18 Comments

I think I may have blogged about this before, but hey, if I can’t quite remember, maybe you guys can’t either. (Plus, there could be new readers.)

Sometimes I see people claiming that Hayek supported NGDP targeting, or perhaps that Hayek’s preferred monetary regime would mimic NGDP targeting. I am by no means a Hayek scholar, but when I dug up his Nobel acceptance speech (for other reasons) I was struck by this passage:

The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. [Hayek, 1974]

That doesn’t sound like a full-throated defense of stable NGDP growth.

Now, I think the issue is that perhaps earlier in his career, Hayek had supported the maintenance of MV during a depression. I asked von Pepe, who keeps track of such things better than me, and he dug up this comment from Jerry O’Driscoll:

I wasn’t at the debate and don’t know what Larry White or anyone else said. I do know what Hayek said, however, and I know my economic history.

It is entirely anachronistic to say that Hayek or anyone else wanted to maintain nominal GDP in the Great Depression. National income accounting hadn’t been invented yet. Here is a link to the history of NIA.http://www.bea.gov/national/pdf/nipaguid.pdf

[What] Hayek wrote in P&P [Prices and Production] is that neutral money meant keeping MV constant. He later clarified that he never intended this to be a guide to policy for any number of reasons. Velocity was not observed in real time and he thought the demand for money changed cyclically and unpredictably. And then there is the knowledge problem I referenced.

(His statement of the knowledge problem predates P&P. So we have additionally textual evidence that the concept of money neutrality wasn’t intended be a guide to activist policy.)

To say something would be desirable in [principle], but is impossible to execute in practice is not a fault. It is intellectual honesty. I don’t think he ever used these words, but Hayek thought that fractional reserve banking with central banks was inherently unstable.

On this, he was in the Henry Simons/Milton Friedman camp. He expressed support for both 100% reserve banking and free banking, but did not think either…was politically possible.


18 Responses to “Did Hayek Favor Targeting NGDP?”

  1. Major.Freedom says:

    “If I were responsible for the monetary policy of a country I would certainly try to prevent a threatening deflation, that is, an absolute decrease in the stream of incomes, by all suitable means, and would announce that I intended to do so. This alone would probably be sufficient to prevent a degeneration of the recession into a long-lasting depression.” – Hayek, 1975

    “The moment there is any sign that the total income stream may actually shrink [during a post-bust deflationary crash], I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.” – Hayek, 1975

    “I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.” – Hayek, 1979

    “I think it is certainly true that ending an inflation need not lead to that long-lasting period of unemployment like the 1930s, because then the monetary policy was not only wrong during the boom but equally wrong during the Depression. First, they prolonged the boom and caused a worse depression, and then they allowed a deflation to go on and prolonged the Depression.” – Hayek, 1977

    Source: http://hayekcenter.org/?p=5401

    • Major.Freedom says:

      Hayek often contradicted himself.

      Like Hoppe said: Mises not Hayek.

      • Andrew_FL says:

        Forgive me if I’m missing something obvious, Major, but if you’re going to say someone often contradicted themselves, shouldn’t you provide quotes saying contradictory things? As far as I can tell Hayek said the same thing on four separate occasions from 1975-1979 and did not contradict himself at all.

        • Bob Murphy says:

          I think MF is using those quotes in contrast to the two I provided.

          • Major.Freedom says:

            Yes, that, and his politics.

          • Andrew_FL says:

            There is a difference between taking the view expressed in the Nobel lecture-that a constant level of money expenditures will not assure full employment-and taking the position that the level of money expenditures should be permitted to fall in the event of a depression.

            I can read Hayek in 1974 as warning that it is not sufficient to stabilize the level of expenditures, to assure full employment, and Hayek in 1975 as saying that it is necessary-but still not sufficient-that the total income stream not fall, to prevent a depression. There is no necessary contradiction there.

            • Major.Freedom says:


              Actually there is. Key word is “recession”.

              • Andrew_FL says:

                He says that it would be sufficient, to prevent degeneration, of a recession, that is, already not full employment, into a full depression. He does not say that it would be sufficient to prevent a recession, and thus assure full employment, to begin with.

              • Major.Freedom says:

                Right, Hayek therefore said two inconsistent propositions. On the one hand, he said fixing aggregate spending on output in the hopes of maintaining full employment is a categorical economic fallacy (and if you read the rest of his works you can read why), and on the other he said fixing aggregate spending on output in the hopes of maintaining somewhat less than full employment is the bees knees.

                It is not a salvaging of this to emphasize one is a recession while the other is a depression. This is because the reasoning he used to refute the former, necessarily applies to the latter.

  2. Bob Roddis says:

    In this video (especially the last minute), Hayek says that he wants to abolish the government monopoly in money and allow competing monies (which the government would probably not allow) so that there could be the complete abolition of “monetary policy”.


    “Stable NGDP growth” depends upon the baseless assumption that the market lacks or requires an external boost of “momentum”. Hayek certainly did not believe that.

    The quotes MF found are apparently based upon Hayek’s belief that IF there is monetary policy, it must do the things described in those quotes. It’s a second best option (Hayek suggests). However, I fail to see why it is not ALWAYS best to discovery true and honest pricing ASAP.

  3. Andrew_FL says:

    It’s probably best to take this point by point:

    In the first place, O’Driscoll is absolutely correct that it is anachronistic to say Hayek favored a policy targeting a statistic that hadn’t been invented yet-although it is not impossible to advocate the targeting of a statistic not yet invented if one also proposes the creation of the statistic for that purpose.

    Regardless, however, the real problem here is that saying Hayek was focused on stability of NGDP is that it obscures the rather foundational issues involved in the distinction between Hayek’s concept of the “effective money stream” and the peculiar statistic that is NGDP. It is potentially very important indeed that a stable path of spending on final, domestically produced goods and services, is not necessarily consistent with a stable effective money stream.

    O’Driscoll is also probably correct that Hayek was skeptical that this was a practical guide to policy. But it is nonetheless clear that by the 1970’s, Hayek was of the opinion that, practical problems O’Driscoll mentions with implementing it notwithstanding, it would be better for the Central Bank, if it is to have a policy-that is, if it is to exist-should at least prevent the effective money stream from ever collapsing. This is still something rather different from either NGDP growth rate targeting, much less level targeting.

    With regard to whether Hayek ever supported the idea of free banking or 100% reserves, I cannot speak to the latter, but on the former much confusion has arisen conflating his proposal for private issuers of fiat money with what Mises would have understood as free trade in banking. These are not the same thing, and it must be recognized that Hayek’s late proposal for competing fiat monies was a theoretical retrogression from Prices and Production, where Hayek made it very clear that the idea of a stable price level was not, in fact, desirable, and also a dangerous fallacy. Hayek thought at that point the only realistic way to stop the then out of control price inflation in essentially every major economy, was to settle for price stability, and he advanced the arguably dubious idea competing private issuers would tend to stabilize the level of money prices denominated in their particular fiat issues. As far as I know Hayek never supported free trade in banking as Mises would have understood it. I do know he said at various times things indicating he explicitly opposed it-though Hayek’s views changed over time on several subjects, so who knows.

    In 1977:
    “We have indeed given government, and for fairly good reasons, the exclusive right to issue gold coins. And after we had given the government that right, I think it was equally understandable that we also gave the government the control over any money or any claims, paper claims, for coins or money of that definition. That people other than the government are not allowed to issue dollars if the government issues dollars is a perfectly reasonable arrangement, even if it has not turned out to be completely beneficial. And I am not suggesting that other people should be entitled to issue dollars. All the discussion in the past about free banking was really about the idea that not only the government or government institutions but others should also be able to issue dollar notes. That, of course, would not work.”

    Ironically Milton Friedman probably ended up closer to Mises’ position by the end of his life than Hayek ever was, when it came to whether there should be freedom of trade in banking, though he, too, never quite got there.

    However it was Mises-and only Mises-who consistently held the right position on policy on this matter.

  4. Ivan says:

    Hayek did not advocate stabilising MV “earlier in his careeer (if you mean 1930s when he wrote most of his economic works). In Prices in Production he explicitly rejects this idea. Of course, as MF demonstrated you can probably find it someplace else:

    O Driscol, White and others cite the following passage from PP as “proof” that Hayek advocated MV stabilization

    “Such a change in the “velocity of circulation” has rightly always been considered as equivalent to a change in the amount of money in circulation, and though, for reasons which it would go too far to explain here, I am not particularly enamored of the concept of an average velocity of circulation,79 it will serve as sufficient justification of the general statement that any change in the velocity of circulation would have to be compensated by a reciprocal change in the amount of money in circulation if money is to remain neutral toward prices.” (PP, 297, LvMi edition)

    But they typically “forget” the very next passage in which Hayek says that this is impossible to implement as a maxim of monetary policy, so he never “advocates” it:

    …in order to eliminate all monetary influences on the formation of prices and the structure of production, it would not be sufficient merely quantitatively to adapt the supply of money to these changes in demand, it would be necessary also to see that it came into the hands of those who actually require it, i.e., to that part of the system where that change in business organization or the habits of payment had taken place. It is conceivable that this could be managed in the case of an increase of demand. It is clear that it would be still more difficult in the case of a reduction. But quite apart from this particular difficulty which, from the point of view of pure theory, may not prove insuperable, it should be clear that only to satisfy the legitimate demand for money in this sense, and otherwise to leave the amount of the circulation unchanged, can never be a practical maxim of currency policy.”

    • von Pepe says:

      Ivan, I would proffer to you that O’Driscoll does not believe “that Hayek advocated MV stabilization”.
      I think he would agree with your follow-up…”can never be a practical maxim of currency policy.”

  5. Ryan Murphy says:

    I don’t know what “observing velocity in real time” even means. We don’t observe it today. It is literally defined as NGDP/M.

    More serious reference: https://www.jstor.org/stable/2601142?seq=1#page_scan_tab_contents

  6. tesc says:

    So, Hayek did favor constant NGDP=money stream=MV as second best if we are stuck with a Central Bank to prevent deterioration. Obviously not to prevent Supply Side recessions, which can keep MV constant and unemployment high, not full employment in the Keynesian sense.

    No different than Larry White”s position.

    But, do you guys agree that a 0% to say 1% money stream target when we are stuck with a Central Bank would create less malinvestments and less cycles then the current price inflation target of 2%?

    • Andrew_FL says:

      That depends to a very significant degree on how it is implemented.

      • tesc says:

        For example?

        • Andrew_FL says:

          I.E. what are the injection points, who is given new money first, when it is created by the central bank to maintain the spending stream?

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