Hayek in the 1930s

Paul Krugman on Hayek’s influence in the 1930s:

…back in the 30s nobody except Hayek would have considered his views a serious rival to those of Keynes…

Alvin Hansen reviewing Hayek’s Prices and Production in 1933 in the American Economic Review.

The present volume is, it seems to me, the only book of recent years which at all approaches Keynes’s A Treatise on Money in the impetus it has given to renewed interest and discussion of business-cycle theory.
This in itself is high praise. Altogether aside from the soundness of its
conclusions, the value of the book and its important place in the recent
literature of cycle theory is unquestioned.

The Nobel Prize committee:

von Hayek’s contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.

To be clear, it is true that Keynes’s General Theory eclipsed Hayek but to say that Hayek was not a serious rival to Keynes in the 1930s is a Whiggish misreading of the history of economic thought.

Addendum: Don Boudreaux also comments noting that Hicks specifically referred to the great Hayek-Keynes rivalry of the 1930s. See also Greg Ransom’s citations from Hicks and Coase in the comments.

Do note that reading Hayek out of the debate diminishes Hayek but perhaps even more it diminishes Keynes who clearly won over the profession.


You gotta love Krugman: he says he's not big on intellectual history, but then he can't help commenting about it.

Krugman is the archetype of a strong thinker increasingly corrupted by blind ideology and tribalist ex-post rationalization. Watching his degeneration from his thoughtful 1990s Slate pieces to little more than a partisan mouthpiece is not altogether different than watching a once intelligent mind suffer the ravages of Alzheimer's.

As someone with experience with Alzheimer's, I do not appreciate ignorant characterizations of the disease. AD does not really change what you think or how you think. It has a profound effect on memory. You will not change from a Democrat to a Republican, nor from a Republican to a Democrat. You may forget who Obama is, and you may even forget who Reagan was. But you will not change in your basic beliefs or how you interpret the world. If anything, your basic beliefs become even more firmly rooted, because you have much less ability to change them. To the extent that new evidence may cause you to change them, those changes will be fleeting indeed. They will be completely forgotten tomorrow.


Actually it does. If your ideas and opinions are based on experience losing access to that experiential knowledge causes one to revert in one's ideas and opinions, depending of course on what memories are lost. I am not just saying this from theory but from unfortunate actual experience with both Alzheimer's and dementia.

Of course if you have never changed your ideas from new knowledge this won't apply.

I blame Robin Wells, mostly. Apparently he does, too.

Sometimes I wonder how much of that 'degeneration' process is about claimants agreeing with Krugman 1990s columns but disagreeing with his 2000s ones.

You'd think that would-be psychohistorians would know more about history

“I will be discussing what happened in economics in England, but these were times when, to a very considerable extent, this was what happened in economics. The first episode I will discuss is local, but the economists involved were among the best in the world. In February 1931, Friedrich Hayek gave a series of public lectures entitled ‘Prices and Production’ at the London School of Economics . . They were undoubtably the most successful set of public lectures given at LSE during my time there, even surpassing the brilliant lectures Jacob Viner gave on international trade theory. The audience, notwithstanding the difficulties of understanding Hayek, was enthralled. What was said seemed to us of great importance and made us see things of which we had previously been unaware. After hearing these lectures, we knew why there was a depression. Most students of economics at LSE and many members of the staff became Hayekians or, at any rate, incorporated elements of Hayek’s approach in their own thinking. With the arrogance of youth, I myself expounded the Hayekian analysis to the faculty and students at Columbia University in the fall of 1931.” (Ronald Coase, “How Should Economists Choose?”, Essays on Economics and Economists, Chicago: U. of Chicago Press, 1994, .

- See more at: http://hayekcenter.org/?page_id=5#sthash.1XsNnp2P.dpuf

But what happened next? -- "The swift adoption of the Keynesian system came about, I believe, because its analysis in terms of the determinants of effective demand seemed to get to the essence of what was going on in the economic system and was easier to understand (at least in its broad outlines) than alternative theories... And it is not without relevance that the alternative theory that was displaced, or at any rate displaced at LSE, was that of Hayek... Keynes' analysis was adopted in the main because it seemed to make sense to most economists. Or, as I put it earlier, it provided a better base for thinking about the problems of the working of the economic system as a whole." -- Ronald Coase, "How Should Economists Choose?" Essays on Economics and Economists, Chicago: U. of Chicago Press, 1994, p. 21.

I suppose it needs to be pointed out that LSE's favor for Hayek appears to have been in the early '30's after Keynes had written A Treatise on Money (1930), but Keynes won decisively with The General Theory of Employment Interest and Money (1936). Regarding the first half of the decade, Coase's FULL comments on the influence of Hayek reveals a bit of condemnation:

"Most students of economics at LSE and many members of the staff became Hayekians or, at any rate, incorporated Hayek's approach in their own thinking. With the arrogance of youth, I myself expound the Hayekian analysis to the faculty and students at Columbia University in the fall of 1931. What now strikes me as odd is the ease with which Hayek conquered LSE. I think this was in part the result of a lack of precision in the existing analysis or, at any rate, in our grasp of it, so that Hayek's analysis seemed to give a well-organised and fruitful way of thinking about the working of the economic system as a whole. As far as I can see, the Hayekian analysis did not make predictions except in the sense that it explained why there was a depression. What can be said is that the analysis seemed to be consistent with everything we observed. To show that this was so, Lionel Robbins published in 1934 The Great Depression, the only one of his works, as he tells us, that he wishes he had not written.

"The next episode I will consider was by no means local, although I viewed it from the London School of Economics. It was a worldwide phenomenon. This was the Keynesian revolution. I will not labour its importance -- that is conceded by the great majority of economists. I need only quote the statement of John Hicks: 'The Keynesian revolution is the obvious example of a big revolution [in economics]; there are not more than two of three others which might conceivably be compared to it.' (Coase's footnote: John Hicks, "Revolutions in Economics")

"...there can be no question that Keynes triumphed. Nor did it take very long. The General Theory was published in 1936. Although some of the early reviews were hostile or lukewarm, it soon became apparent that the economics profession was, for the most part, going to adopt the Keynesian approach."

— Ronald Coase, “How Should Economists Choose?” Essays on Economics and Economists, Chicago: U. of Chicago Press, 1994, pp. 19-20.

I should point out that, for my own part, I think the two greatest economists of the 20th century are unquestionably Keynes and Ronald Coase.

He should stick to talking about Arcade Fire.

“I can date my own personal ‘revolution’ rather exactly to May or June 1933. It was like this. It began . . with Hayek. His Prices and Production is one of the influences that can be detected in The Theory of Wages; it could not have been otherwise, for 1931 was a Prices and Production year at the London School of Economics . . I did not in fact find it all easy to fit in whith my own ideas. What started me off in 1933 was an earlier work of Hayek’s, his paper on ‘Intertemporal Equilibrium’, an idea which I found easier to reduce to my preferred (Paretian or Wicksellian) pattern.” (John Hicks, The Theory of Wages, 2nd Edition,1963, p. 307)

“.. it was from Hayek that I began ["Equilibrium and the Cycle" (1933), the early beginnings of Hick's influential work on the topics of intertemporal equilibrium, monetary theory, and trade cycle phenomena] “. (John Hicks, Money, Interest and Wages, Cambridge: Harvard U. Press, 1982, p. 28).

“There were four years, 1931-1935, when I was myself a member of [Hayek's] seminar in London; it has left a deep mark on my thinking.” (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 97).

“Hayek was making us think of the productive process as a process in time, inputs coming before outputs ..”. (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 359).

“I did not begin from Keynes: I began from Pareto, and Hayek (footnote 10: There is evidence for this, in the paper ‘Equilibrium and the Cycle’) ..”. (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 359).

“At the end of the discussions in that seminar [Hayek's L.S.E seminar] .. we were, I believe, on the point of taking what now seems to me to be a decisive step. I was, at least, on the point of taking it myself. There is evidence for that in my Value and Capital, much of the groundwork for which was done before I left London ..” (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 97).

“I remember Robbins asking me if I could turn the Hayek model into mathematics .. it began to dawn on me that .. the model must be better specified. It was claimed that, if there were no monetary disturbance, the system would remain in ‘equilibrium’. What could such an equilibrium mean? This, as it turned out, was a very deep question; I could do no more, in 1932, than make a start at answering it. I began by looking at what had been said by .. Pareto and Wicksell. Their equilibrium was a static equilibrium, in which neither prices nor outputs were changing .. That, clearly, would not do for Hayek. His ‘equilibrium’ must be progressive equilibrium, in which real wages, in particular, would be rising, so relative prices could not remain unchange .. The next step in my thinking, was .. equilibrium with perfect foresight. Investment of capital, to yield its fruit in the future, must be based on expectations, of opportunities in the future. When I put this to Hayek, he told me that this was indeed the direction in which he had been thinking. Hayek gave me a copy of a paper on ‘intertemporal equilibrium’, which he had written some years before his arrival in London; the conditions for a perfect foresight equilibrium were there set out in a very sophisticated manner.” (John Hicks, Money, Interest and Wages, Cambridge: Harvard U. Press, 1982, pp. 6-7).

J. Hicks, “It is not so well known that it [Keynes's and my own move from thinking in terms of price-levels and the rate of interest to thinking in terms of inputs and outputs] is matched by a movement from Hayek to Harrod. I once asked Harrod what had put him on to the construction of his so-call ‘dynamic’ theory; he said, to my surprise, that it was thinking about Hayek.” (J. Hicks, 1982, pp. 340-341)

"...That, clearly, would not do for Hayek. His ‘equilibrium’ must be progressive equilibrium, in which real wages, in particular, would be rising, so relative prices could not remain unchange .. - See more at: http://marginalrevolution.com/marginalrevolution/2013/08/hayek-in-the-1930s.html#comments..."

So, a Hayekian equilibrium would be attained by progressively hiking the minimum wage to spur the expectation of more income and more demand?

Surely the debate on how to unstick real wages so they would fall faster than they have over the past three decades is seeking a Hayekian disequilibrium, isn't it?

You can believe Paul Krugman -- who tells us he hasn't and won't read any economics published in 'prose' written before the mid-1970s* -- or John Hicks, who was there:

"here was a time when the new theories of Hayek were the principal rival of the new theories of Keynes. Which was right, Keynes or Hayek?"

*Krugman confesses he had never read even Bertil Ohlin -- the outstanding figure in Krugman's own sub-discipline -- until asked to speak at a conference on Ohlin in the late 1990s.

John Hicks, “There was a time when the new theories of Hayek were the principal rival of the new theories of Keynes. Which was right, Keynes or Hayek?” John Hicks, "The Hayek Story," Critical Essays in Monetary Theory (Oxford: Oxford University Press, The Clarendon Press, 1967)

ok,ok Hayek was a genius. Now will you let us repair infrastructure ?

Sure thing. Fire up the consumption taxes and pay for it.

Did you vote for Al Gore in hopes the gas tax would be increased 50 cents a gallon?

Do you praise Reagan and Bush for each hiking the gas tax by 5 cents a gallon?

Is hiking the gas tax and spending more Hayekian, or is cutting the gas tax and spending less on infrastructure?

What is the correct amount of infrastructure? Show your work.

+1. This is the decisive point.

Hardly anyone opposes all government infrastructure, and hardly anyone thinks there is no upper limit to the amount government should spend on it. So we are all arguing about the proper level of spending. Which makes the argument unwinnable on ideological grounds. We all have to actually start doing cost-benefit analyses of everything the government is doing or possibly should be doing. Boring, but true.

what part of "repair" dont you understand ?

What is the correct amount to spend on repair/maintenance? Show your work.

2.145 hogshead per library of congress

I'd be delighted if we actually spent any consideravle portion of the money borrowed on infrastructure. Or even stopped letting infrastructure decay due to deferred maintenance. But strangely of the four big stimulus highway projects I encountered, three replaced major highways less than ten years old and in good repair without actually increasing capacity, while the fourth is a hunddred mile stretch through a underpopulated corner of an underpopulated state that doesn't actually have much traffic. I will admit that I am a big fan of that last one but I drive it several times a month and often see only a few other vehicles on my drive.

Is there a study somewhere that measures real dollars spent per mile of road actually constructed over time? I would imagine it's been falling...

I was shocked at the difference between Tappan Zee costs then and now. TGS anyone?

If you read the whole of Hicks' Hayek story you will conclude that Lionel Robbins considered in the early 30s Hayek's views as a serious rival to those of Keynes. But (almost) no one else did at the time or in the following years. This paper by Hicks, written in the 60s was part of the wave of rehabilitation of Hayek among mainstream economists that would reach its peak in the late 70s. By this time, Hayek's contribution to Economics was perceived as much wider and richer than his theories of capital and the business cycles.

Stop being reasonable. We're in full throttle Krugman bashing here and reason is not helpful.

Precisely, while I don't agree with much of Krugman's policy positions, I think Tyler missed the boat on this one. Now, it may well be the case that in the early 1930s there were a few who took Austrian business cycle theory seriously, by the end of the 1930s it was clear who had won. Now strictly speaking, I'm sure someone besides Hayek thought it was a serious competitor to the General Theory, but you would have to be delusional to believe it had any real impact on how the profession as whole thought about business cycles. Technically I suppose Krugman over stated the case, but it was not by much, and in spirit his statement is much closer to the truth than Tyler's position.

It might not be fair, but to me, anyone who takes the Austrian business cycle theory seriously as an explanation of macro fluctuation is for all intent and purposes functionally illiterate when it comes to both economics and history.

You mention Tyler's name twice, but the blog entry was written by Alex Tabarrok, not Tyler Cowen.

Stop using reading comprehension. We’re in full throttle Tyler bashing here and reading comprehension is not helpful.

Keynes really was a very clever fellow but Hayek had the more interesting mind. My guess is that Krugman is neither clever nor interesting enough to have anything valuable to say about those two. Perhaps he had before he decided to blind himself with doctrinal zealotry?

So Hayek is out of bounds, but AT/TC are otherwise OK with Krugman's recent commentary on MF.

Got it.

I guess you proved Krugman's point by having to go forward to the 1970's (the Nobel quote) to find someone praising Hayek. Good job.

Nice one bobv, I came here to post the same thing. Moreover, the second quote "at all approaches" which is very different to being a serious rival.

AT fail.

The point of the Nobel quote is not praise of Hayek but that it explicitly refers to the great debate Hayek's theories created in the 20s and 30s.

I'm not seeing where the Noble Committee comment compares Hayek to Keynes. Tyler is misrepresenting the comment. He frequently does this when dumping on Krugman.

"Noble Committee" "Tyler is misrepresenting the comment."

Put down the pipe, or at least the keyboard.

There is a much more modern side to all this: Lucas somewhere said that he was making the interest rate do what Hayek wanted to do with capital goods prices. [Apologies to all if I have gotten this wrong, but I don't think I have.]

There is more than one channel through which thoughts can get used, and that is good.

A couple of comments have emphasized that Tyler is going in the wrong direction, or missing the boat, or whatever, but it looks like the author of the blog post was Alex T., not Tyler. Just sayin.

Hayek isn't so much the problem for Krugman's prescriptions as Friedman. Liquidity traps are only real if you assume central banks can't inflate, and fiscal expansion assumes levels of gov't efficiency Friedman would have found amusing. Plus, Friedman understood that tight money could lead to low rates.

It's not like the Fed couldn't change their long-term target, or even tried very hard to inflate. Easy to forget the Fed statements at the time of the crisis were still worrying more about inflation than the oncoming fall in NGDP -- the first since TGD. They've really dropped the ball.

Krugman doesn't assume central banks can't inflate. In fact, he wrote a paper making precisely the opposite assumption. I think he assumes, as a practical matter, that central banks will simply refuse to inflate and central bank independence -- which can be a virtue when it comes to fighting inflation -- removes any ability to influence central bankers into reflating. Fiscal policy may not be any better on this score but I think Krugman is fighting a long battle where he hopes to move the political debate toward accepting fiscal policy as a legitimate tool for fighting depressions. The elite-level monetary policy debates clearly haven't been able to influence the Fed or the ECB by much.

Hayek incidentally had no problem whatsoever with socialized healthcare. In fact, he was a strong proponent of the nationalized healthcare mechanism. Steel, cars, train systems, coal, on the other hand, de-nationalize. (Thatcher followed that model.) Sensible fellow, unlike most in the contemporary GOP intelligentsia.

It's fun to see the right wing extremists at GMU fall over backwards trying to defned the position of Hayek, whose macroeconomic models were viewed as being incoherent.


Are uselss defenses of Hayek required to keep the Koch money flowing?

All well and good except nothing in this post defends Hayek's argument. Indeed, the implication is the opposite.

Mathturbation wins in academia? That is a shocker requiring the totally objective analysis of Paul Krugman.

This is not a disease that is unique to Paul Krugman. Some people, for whatever reason, feel the need to impugn a comparator in order to laud the object of their affection.

Comments for this post are closed