I read Tyler Cowen’s review of Keynes/Hayek in the National Review with mixed feelings:

There is one part of the longer story that Wapshott leaves out, and it is a quite recent development. Circa 2009, enter Scott Sumner, professor of economics at Bentley University and author of the blog TheMoneyIllusion. Sumner has almost singlehandedly resurrected the tradition of Milton Friedman and, more broadly, the philosophy of neo-monetarism.

Although Sumner is a brilliant thinker, and extremely well read, he admits he hasn’t given Hayek’s Prices and Production a thorough tussle; he seems to find the ideas too difficult and too obscure, as indeed do most other professional economists. Sumner’s diagnosis is simple: The American economy has collapsed because the Fed did not stabilize the flow of purchasing power in the economy,or what Sumner calls “nominal GDP.” Circa 2008, the Fed let purchasing power decline when it should have supported it with an aggressive commitment to reflate the economy. This may sound too interventionist to many free-market supporters, and the parts of the argument that emphasize “aggregate demand” seem suspiciously Keynesian. Nonetheless, Sumner persuasively couches the entire argument in terms of constraining the Fed with rules, in this case a “nominal-GDP rule” that would stabilize the flow of purchasing power and create a predictable macroeconomic environment for businessmen and consumers.

The bottom line is this: Whether we like it or not, the Fed has to do something, and letting the money supply continue to fall, in down times, is one of the worst options. It will give the economy a sharp negative shock in the short run and sweep interventionists and their cure-all policies into power, while creating a public hungry for quick-fix recipes. That is indeed what has happened in the United States.

Over the last two years, I’ve been amazed, and pleased, to see how many market-oriented economists have come around to Sumner’s point of view. (These days I cannot go anywhere in the world of economics, or blog readers, without hearing his name.) What that means is not a victory for either Hayek or Keynes, but rather a comeback for Milton Friedman, Irving Fisher, and the good old-fashioned “quantity theory of money.” Stabilizing the flow of purchasing power is indeed what the central bank should be trying to do, even if it achieves this end only imperfectly.

For all his brilliance, Hayek didn’t””at the critical time””have a good enough understanding of the dangers of deflation.  He didn’t fully realize the extent of sticky wages and prices and, more deeply, he didn’t see that ongoing deflation would render the “calculation problem” of a market economy more difficult. Hayek stressed that a market calculates value in a way that a central planner cannot””but lying behind this ability to calculate is some basic macroeconomic stability. At the key moments, Hayek did not offer the proper recipe forth at stability.

Why the mixed feelings?  Well it’s nice to be praised, but Tyler ignored all the other market monetarists (neo-monetarists?) who have played a big role in the revival of monetarism.  And then there’s poor Nicholas Wapshott, who must have felt like I hijacked the review of his book.

Tyler’s right that I’m no expert on Hayek; I recommend Lawrence White’s Journal of Money, Credit and Banking piece on Hayek’s views during and after the Great Depression.  White is sympathetic to Hayek, but also points out that late in his life Hayek expressed some regret at initially missing the dangers posed by deflation during the early 1930s.

Am I being disingenuous in claiming “mixed feelings” while reading Tyler Cowen’s book review?  Not at all; I felt a mixture of elation and euphoria.

PS.  I read lots of interwar stuff when I was much younger, but most of it didn’t stick.  I tend to remember things that interest me, and there’s really only two things about macro that I find interesting; how monetary policy drives nominal aggregates, and why nominal shocks have real effects.  I liked Fisher best, and also like Hawtrey, Cassel, Warren and Einzig.  I had mixed feelings about Keynes (Tract > Treatise > General Theory), Hayek, and Benjamin Anderson.  Don’t remember much about Pigou and Robertson.

PPS.  The book review is in the November 28th National Review.  Unfortunately it’s behind a pay wall.



32 Responses to “Keynes/Hayek/Friedman”

  1. Gravatar of marcus nunes marcus nunes
    10. December 2011 at 15:00

    Scott Enjoy your (deserved) elation! In the end there´s nothing (wholly) new under the sun. Why Cassel/Hawtrey who had repeatedly pointed to the dangers of gold “idolatry” were eclipsed by the Keynes/Hayek debate is one of the gross intelectual mistakes of the last century. And maybe the reason we´re trying hard to reprise the failures of long ago.

  2. Gravatar of Lee Kelly Lee Kelly
    10. December 2011 at 15:09

    Best get used to the term ‘Sumnerian’.

  3. Gravatar of Tyler Cowen Tyler Cowen
    10. December 2011 at 15:13

    I’ve sent you an extra copy in the mail…!

  4. Gravatar of Bogdan Bogdan
    10. December 2011 at 15:44

    I enjoyed reading Hayek and others of the period. Hayek’s macroeconomics are also about how nominal shocks have real effects, but it’s all expressed through a peculiar, but fascinating, body of economic theory that seems alien to today readers although it is very modern and mainstream in essence.

    In the interwar period, the Austrian economists, Hayek most famously among them, building on the analysis of how the economy works of the previous generations of Austrian economists (primarely Menger, Boehm-Bawerk and Wieser) concluded that for an efficient economy to exist three grand abstract conditions have to be met : 1) secure property rights on goods, especially factor prices, must exist; 2) free exchange of goods at free prices must be allowed; 3) monetary stability should exist.

    When these condtions were not met one had all sorts of problems : inneficient allocations of resources, distorsions, what one would call externalities, shortages, surpluses etc…and economic crises (In a fully socialist economy, where none of these conditions would be met, one would have all of these problems simultaneously, as it actually happened – that’s the whole calculation problem).

    Mises and Hayek were primarely interested in the third condition for an efficient economy. They set about to show how crises emerge when monetary stability is not met (Schumpeter was also interested in explaining business cycles and more generally growth, but he pursued the question primarely from the real side, as it were)

    Mises and Hayek didn’t have microeconomic and macroeconomics, they saw the problems in terms of “the natural economy” (see also Wieser) and the monetary economy.

    In the natural economy, if all the theorems of economics are correct (marginal utility, law of demand, opportunety cost, law of price, natural interest rate etc…), then by definition – taking also into account some “dynamic elements” not very familliar in other schools, like time and entrepeneurship – in a natural economy there cannot be any disturbance, equilibrium would prevail across markets and steady, roundabout, growth would occur. Consequently, they thought all major distrubances in a market economy must somehow have something to do with the money economy. Money is a loose joint, money creates some complications, additional complexity, for the axiomatical relationships of the natural economy. So, their objective was to learn about how money affects the real economy and how to make money neutral, that is to leave the allocation of resources as equivalent as possible with how a theoretically perfect natural economy might have allocated them.

    On theoretical grounds, monetary stability implied, for both Mises and Hayek, no sudden inflation or deflation that could have disturbed real allocations. They way they judged the issue during the 1930s from a policy perspective is a separate issue. Basically, from what I understand, they saw the economic problems of the interwar period as the result of a loosening of the gold standard discipline after World War I and their focus on this issue was probably a factor for their relative disregard of the strong deflatation that occured in the early 1930s. They had a more lagged perspective on the issues.

  5. Gravatar of ssumner ssumner
    10. December 2011 at 15:50

    Marcus, Good point. Macro is an interesting field. Despite all the incredible brilliance of the Nobel Prize winners who buy into the standard model, it’s still not clear that the standard model is any better than what Fisher/Hawtrey and Cassel were doing in the 1920s. Indeed on some key issues they may see the problem more clearly than do modern macroeconomists.

    Thanks Lee, I actually never liked the name, which is based on government workers who summoned people to court. And not only does it not sound good, it’s often misspelled. The pop star “Sting” was smart to change his name. I’ve encouraged my daughter to change her name–to Summer or Sommer.

    But not Summers!

    Tyler, Thanks, I got it. Perhaps I should frame a copy and put in on my wall–so that years from now I can recall my brief moment in the sun.

  6. Gravatar of ssumner ssumner
    10. December 2011 at 15:52

    Thanks Bogdan, That makes sense.

  7. Gravatar of Benjamin Cole Benjamin Cole
    10. December 2011 at 16:05

    “Over the last two years, I’ve been amazed, and pleased, to see how many market-oriented economists have come around to Sumner’s point of view. (These days I cannot go anywhere in the world of economics, or blog readers, without hearing his name.)”

    Excellent! And Congratulations!!

    That said, I advocate Market Monetarists develop a concrete program””not perfect in everyone’s eyes, but good enough to hold your nose and support””instead of getting stuck where we are. We have won the battle in the blogs, we have won in print. But we have not won where it counts: The Fed.

    My rough-house suggestion is that Market Monetarists back a QE program of $100 billion a month until certain NGDP targets are met, such as 8 percent NGDP growth, and limit IOR.

    I propose this simple platform—easy to understand—is clearly communicated to the public by the Fed. Market Monetarists should also say they generally support lower taxes and regulations on business and want Americans to work and get off the dole. This is a platform designed to neutralize adversaries. Tout the name Friedman, wave the starts and stripes.

    Why the concrete $100 billion number? It is platform and policy the public can understand. It will give assurance to the markets that action will be taken, not just plans and words.

    I fear Market Monetarists are becoming too esoteric, and talk about targeting NGDP as if that can happen by waving a wand. There has to be a simple ground game the public understands and accepts. I don’t think the public understands us, and then we get into esoteric definition cul-de-sacs with the John Taylors of the world.

    I propose Sumner lead the way.

  8. Gravatar of Charlie Deist Charlie Deist
    10. December 2011 at 17:03

    I’ve never liked saying “Sumnerian.” It sounds too much like Sumarian, and puts the accent in the wrong place. If Scott really has resurrected the monetarist tradition of Friedman, doesn’t “Sumnerite” make more sense? Either way, count me as one.

  9. Gravatar of Greg Ransom Greg Ransom
    10. December 2011 at 17:35

    What Hayek did you read?

    The most important are _Monetary Theory & The Trade Cycle_, Monetary Nationalism & International Stability_ and _The Pure Theory of Capital_.

    Read any of those?

  10. Gravatar of ssumner ssumner
    10. December 2011 at 17:40

    Ben, That may be a good idea, let me give that some thought.

    Charlie, I don’t think it makes any sense to attach my name to ideas like NGDP targeting, as much more famous people than me have advocated the idea. Ditto for market monetarism. If there is anything distinctive about my blog it might be in some of the fringe areas. My insistence that there is no “wait and see,” that fiscal and monetary policy actions either succeed or fail within five minutes. (via expectations and market prices) Or that the fiscal multiplier is zero under inflation targeting. Even that’s not my idea, but I seem to be one of the few people talking about it. Or my insistence that people were getting causation partly backward in the great NGDP crash of late 2008. Not too many people were saying that back then, the crash was widely attributed to the bank panic.

  11. Gravatar of ssumner ssumner
    10. December 2011 at 17:42

    Greg, I read some of his stuff on money/macro, not capital theory (a subject that makes my eyes glaze over.)

  12. Gravatar of Integral Integral
    10. December 2011 at 19:36


    While I agree with you that capital theory can be dull, I actually think it’s a key area of research going forward for Market Monetarists. Your implicit transmission mechanisms are almost entirely forward-looking and flow through asset markets. As such, capital and capital market imperfections might be a useful avenue of further study.

    Not to give away too many of my dissertation ideas…

  13. Gravatar of Bogdan Bogdan
    10. December 2011 at 20:14

    Here’s a paper by David Laider in connexion with the topic, in which he favourably reviews the pre-Keynesian thinking on “the monetary economy” and Hayek, as well as Robinson, in particular :

  14. Gravatar of Bogdan Bogdan
    10. December 2011 at 20:15

    I meant Robertson!

  15. Gravatar of Bob Murphy Bob Murphy
    10. December 2011 at 20:36

    Tyler wrote:

    Whether we like it or not, the Fed has to do something, and letting the money supply continue to fall, in down times, is one of the worst options. It will give the economy a sharp negative shock in the short run and sweep interventionists and their cure-all policies into power, while creating a public hungry for quick-fix recipes. That is indeed what has happened in the United States.

    Scott, is Tyler referring to the early 1930s or to 2008-2011 here? If the latter, are you politely not pointing out that this is not at all “indeed what has happened in the United States”?

  16. Gravatar of happyjuggler0 happyjuggler0
    10. December 2011 at 23:28

    When I think of Hayek and Sumner in the same sentence, i think of one thing only…”secondary depression”, which is as I understand was Hayek’s phrase.

    To the extent that NGDP expectations level targeting works and is a good idea, it should be noted that Hayek was aware of “why” it is/was a good idea many decades before most economists got out of diapers; namely that pesky “secondary depression” that results from a panicky increased demand to hold money unaccompanied by central bank accommodation of that demand with new supply.

    No doubt Scott will correct me if I am mischaracterizing something here….

  17. Gravatar of Martin Martin
    11. December 2011 at 01:27

    Scott, Ben,

    the buying of assets does not seem very credible to me. The Fed, once it has credibly announced its target, will actually have to sell many of the assets it has to accommodate the demand. The plan seems – to me – to be only necessary when the Fed lacks that credibility.

    I would however propose it as a back-up, if the market does not move to a particular point, then the Fed starts buying assets at a rate of $ 100 billion a month until that target is reached. Authorization for that would make it a credible threat with as a result that you’d never have to use it and can actually sell assets.

  18. Gravatar of marcus nunes marcus nunes
    11. December 2011 at 05:11

    For those interested I uploaded the whole National Review and also only the article:

  19. Gravatar of marcus nunes marcus nunes
    11. December 2011 at 05:12

    Forget the previous link. This is the correct one:

  20. Gravatar of ssumner ssumner
    11. December 2011 at 06:28

    Integral, Sounds like a good area for YOU to pursue. In any case, I find that the best way for me to learn things is reading smart commenters like you. This blog is an education in itself.

    Bogdan, Thanks, I read a couple excellent books by Laidler on that topic.

    And Robertson >>>>>> Robinson. 🙂

    Bob, I noticed that too. I assume he meant that M fell in the 1930s, and M*V fell in 2009. Later he talks about keeping the “money stream” growing steadily, or something like that.

    happyjuggler0, Yes, that’s right.

    Martin, Yes, it would be conditional, as you say.

    Thanks Marcus.

  21. Gravatar of dwb dwb
    11. December 2011 at 06:41

    But we have not won where it counts: The Fed.

    I like the idea but IMO the Fed is still stuck on inflation targeting with a small positive rate of inflation. There are some at the Fed who maybe think that nominal rigitities exist but if they do the best way to minimize or eliminate them is to have 0% inflation. I think that the link between nominal income declines and debt-deflationary spirals is not clear or accepted by many at the FOMC. Some on the FOMC would adopt income targeting, not as a good policy per se, but as a backdoor way to an higher inflation target (some bigtime bloggers are in this category, like Krugman). Before the battle at the Fed is won, I think that the academic debate needs to be won, with much more debate about the nature of inflation (vs substitution and relative price changes) and I think the superiority of inflation targeting really needs to be empirically questioned. There are some on the FOMC who genuinely think (and are on record) that 0% inflation is ideal to squeze nominal rigidities out of the economy. they will never be convinced unless its it demonstrated that either nominal regidities are permanent economic features, or there is proof beyond a reasonable doubt that its too costly to squeeze the rigidities out that way. As for the rest, particularly those who see nominal income targeting as a backdoor way to higher inflation, for the market to believe the Fed will stick to it, it also has to belive the Fed thinks its optimal policy (which will not be abandoned in favor of inflation targeting at a later date). For that to happen, the academic debate really needs to line up in the direction. just my opinion.

  22. Gravatar of Morgan Warstler Morgan Warstler
    11. December 2011 at 07:23

    Two things need said:


    2. Matty was FOR the propping up of banks. That article represents him turning corner…. now working at slate. All is as I have foreseen it.

  23. Gravatar of B B
    11. December 2011 at 08:01


    Care to give your ideas to me? That’s the avenue I’m exploring as well.

  24. Gravatar of flow5 flow5
    11. December 2011 at 10:52


    In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make the statement correct. And Keynes’ liquidity prefercnce curve is a false doctrine.


    Friedman couldn’t define what “money” aggregate to target. Money is the measure of liquidity, the “yardstick” by which the liquidity of all other assets is measured.
    He preached the “monetary base/high powered money” as a base for the expansion of the money & credit
    Aggregate demand is measured by monetary flows (MVt), i.e., income velocity is a contrived figure.
    Monetary flows are not “long & variable”
    He thought legal reserves were a tax.


    Never could read him.

  25. Gravatar of Greg Ransom Greg Ransom
    11. December 2011 at 11:01

    Hayek has _no_ book that is just on capital theory.

    Book 4 of _The Pure Theory of Capital_ is all about monetary economics.

    Book 1 of _The Pure Theory of Capital_ is all about what possible use equilibrium constructs can have for explaining a world which is never in equilibruim and could never have the properties if a math construct or logical construct.

    Finally, the notion that money, interest & credit can be understood without understanding their instantialiton in the changing real and value structure of interrelated productions and consumption processes and relative price relation is an incredible fantasy, only folks who don’t care to understand the real world could pretend to believe.

    Scott writes,

    “Greg, I read some of his stuff on money/macro, not capital theory (a subject that makes my eyes glaze over.)”

  26. Gravatar of Greg Ransom Greg Ransom
    11. December 2011 at 11:10

    This is as good an expression of the non-seriousness of tenured academics as I’ve seen.

    You give us an “economic” for an “economy” without capital goods and all of the monetary economics bundled up in the whole world of changing production and consumption relation wrapped within credit and interest and liquidity — and whe are suppose to take you seriously — folks whose only “scientific” is to punt on first down.

    The economics of a non-capital using economy is not a monetary / trade cycle “science” that has anything to do with our world.

    Economists with “glazed of eyes” when confronting the core of the economy are not part of the “cool” gang — they are part of an entrenched self-protecting power guild that everyone in the public should not take seriously as “scientists”.


    “capital theory (a subject that makes my eyes glaze over.)”

  27. Gravatar of W. Peden W. Peden
    11. December 2011 at 12:49

    Greg Ransom,

    It’s ironic that, as Friedman put it, “Money is a special topic in the theory of capital”!

  28. Gravatar of Becky Hargrove Becky Hargrove
    11. December 2011 at 14:06

    Like many others here I routinely jump up and down about the importance of capital, but in no way does that decrease my respect as to your approach. You would not spend so much time with this blog if you were not looking for other parts of the story!

    Benjamin’s recent pleas are making me rethink the current situation with the Fed and I am increasingly concerned. Someone correct me if I’m wrong, but the only ‘monetary’ response I remember in last night’s presidential debate came from Ron Paul. At the moment the Fed isn’t all that popular with the general public, neither of course is anyone else in Washington, but who is still ultimately perceived as more important? The Fed is going to have to start winning some popularity contests, and soon. Why does this matter? From Tyler’s article:

    “In the late 1920s, Hayek recommended a policy of monetary stabilization, rather than deflation, in response to a depression. In the early 1930s, Hayek came out for tight money and letting bad investments liquidate themselves…Sharp deflationary shocks have never been friendly to free markets or classical-liberal ideas…”

    In other words, I believe that the very organization of the marketplace itself needs to be fully explored alongside the efforts of monetary policy so that those targets can accomplish what they need to. Should the Fed pursue greater monetary policy with no changes in a tightly defined marketplace, the public could become easily discouraged. What if the Fed could put together a campaign to convince the public it would stand behind them in breaking up economic gridlock, thereby creating greater job opportunities. Should the public see real progress at the local level it may respond by backing monetary policy over fiscal policy.

  29. Gravatar of david david
    11. December 2011 at 16:32

    Greg Ransom, it is conventional to put what you are <blockquote>ing before your message, especially in a non-threaded conversation format. This is not e-mail, which is inherently threaded. Just saying.

  30. Gravatar of Morgan Warstler Morgan Warstler
    11. December 2011 at 17:30

    Becky, I think many gents on that stage, are receptive to not having deflation, but they SURELY like having inflation at 1%.

    The way to sell them on level targeting, as I have said over and over (and if my bet with Sumner on Obama pays off, Scott will become my devotee on this) is to show them a level target % (likely 4% or less) than historically equals far less inflation then we had before.

    Don’t convince yourself that just because you don’t want to do what you have to do to convince them… that they cannot be convinced.

  31. Gravatar of Becky Hargrove Becky Hargrove
    11. December 2011 at 18:09

    Perhaps, as Barry Eichengreen hopes, Europe will muddle through next year and gradually ‘feel better’ as Tyler Cowen would say. That would buy all of us more time for convincing and persuasion. Who would have thought a twelve year old cat (who hates to travel) would keep me from putting on my walking shoes and a good backpack.

  32. Gravatar of ssumner ssumner
    12. December 2011 at 07:36

    dwb, I agree, We need an academic debate before the Fed changes policy.

    Morgan, I’m not sure Yglasias has changed his mind.

    flow5, I agree about Keynes and Hayek.

    Greg, I’m not very interested in credit.

    Becky, That may be more than the Fed can do.

Leave a Reply