Two top economists talk about ideas and economic personalities.  Part 1.  Part 2.

Quotable:

One point which deserves mention in this connection is that Keynes knew appallingly little about nineteenth-century economics, or about nineteenth-century history.  He hated the nineteenth century for aesthetic reasons [laughter].  While he was a great expert on Elizabethan history, he just disliked the nineteenth century so much that beyond Marshall and just a little John Stuart Mill and Ricardo, he knew nothing of the literature and very little about the history of the period.

They are all here, full length, streaming on the internet.  Every one of them.  These are the interviews organized by Armen Alchian and Robert Chitester in 1978 and recorded as part as the UCLA Oral History project.  Conversations with Axel Leijonhufvud, James Buchanan, Robert Bork, Leo Rosten, Jack High, Thomas Hazlett, Armen A. Alchian, Robert Chitester, and Earlene Graver.

I first read the transcript of these interviews at UCLA in the late 1980s, and then watched them in the 1990s in a side room at the Hoover Archive at Stanford.  It’s an amazing world where these interviews are now available to anyone around the world who has a computer or smart phone and an internet connection.

Everyone will have their own favorites, but for economists I might recommend in particular Hayek’s conversations with Armen Alchian, Alex Leijonhufvud, James Buchanan, and Jack High.

From Armen Alchian’s introduction to the interviews:

A series of conversations with Hayek was conducted in a television studio ..  An integral part of Hayek’s recorded oral history, indeed the most interesting, are the videotapes. Seeing the man gives a reliable picture of his personality and traits: calm, imperturbable, systematic, questioning, uncompromising, explicit, and relaxed. It is the personality of the man that was sought, and the video and audio record helps capture it faithfully ..

So, here is the man, alive and influential, whether this be read in 1984 or in the inscrutable future years of 2034, 2084, or, hope of hopes, 2984. Here are represented the visions and beliefs of a group of people in 1978. See and hear their manner of expression, their subtle prejudices and misconceptions, fully apparent only to people a century from now. Perhaps we in 1983 will be envied, perhaps we will evoke sympathy. Whatever it may be, if not both, here is the personality, appearance, and style of Friedrich von Hayek, a man for all generations, who believes mightily in the freedom of the individual, convinced that the open, competitive survival of diffused, decentralized ideas and spontaneous organizations, customs, and procedures in a capitalist, private-property system is preferable to consciously rational-directed systems of organizing the human cosmos a judgment that distant future viewers and readers may more acutely assess.

Armen A. Alchian

May 1983

(bumped)

Friedrich Hayek discussed Keynes, unemployment, general rules, and the notion of “society” with William F. Buckley, Nov. 7, 1977.  Read the PDF transcript here.  (Note well — the transcript contains a number of mistakes.)

Listen to Hayek on Keynes:

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From the transcript:

“Lord Keynes .. was operating [in the 1930s] in a very peculiar situation.  Now in Great Britain a successful attempt was made after World War I — which brought a good deal of inflation — to bring prices down to the pre-war level.  Prices came down but wages did not, so you had in the 1920s a position in Great Britain where wages were internationally too high and Britain had become noncompetitive on the world market.  The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages.

Notice these real wages had been artificially increased by increasing the value of the pound.  So because the pound was par to its former level, people receiving the same wartime wages, or inflated wages, could buy much more.  Wages had not come down.

Now his first argument was wages must come down.  Then the conclusion was that is politically impossible, so we must find another way, instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages.

And then by a curious intellectual somersault, I would almost say, he led himself to believe that even bringing down money wages was not any use.  It involves a very complex economic argument and all he said, concluded, was that, a, well, we must inflate, in short.”

Now in English: Conversations with Great Economists:  Friedrich A. Hayek, John Hicks, Nicholas Kaldor, Leonid V. Kantorovich, Joan Robinson, Paul A.Samuelson, Jan Tinbergen by Diego Pizano.

Originally published in Spanish as Dialogos Con Economistas Eminenes, (Mexico) Fondo de Cultura Economica, 1980.  Preview the book at Google Books here.  Buy the book from Amazon here.

The interview is among the most substantive conversations with Hayek I’ve seen.  Quotable:

“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.”

The interview is from July, 1979.

UPDATE — NYU economist Mario Rizzo comments:

So now we have not only the logic of Hayekian economics (both micro and macro) and the words of the man himself that deflation (of the increase in the relative demand to hold variety) should be avoided. I claim infallibly that this is the Hayekian position. We can argue about whether he was right but we cannot profitably argue about whether this was his position. QED.

Hayek consistently asserted that the work of John Maynard Keynes was a retrograde throwback to the backward looking, pre-marginalist, objective cost, distributional thought of the classical British economists, a brand of thinking that had been smuggled into post-marginalist economics by Alfred Marshall.  For Hayek, the modern marginalist economics of Menger, Knight, Wieser, and Jevons looked at prices as guides to future marginalist decision making, especially alternative subjective cost considerations in the reorganization of alternative production plans.  The retrograde economics of Marshall, Mill, Ricardo, and Keynes looked at prices as objective measures of aggregate quantities of objectively defined goods from the past which could by used in an economist’s mathematical logarithm to map out the necessary determination of the next sequence of objectively defined and measurable aggregate quantities and prices.

Given that background, I don’t believe it is entirely a coincidence that Hayek’s break though 1936 articulation of his long-growing insight into the role of price signals into the coordination of production plans and consumer goods across time came just eight months after the publication of Keynes’ muddled account of backward determined objective “aggregates” which logrithmically determining the next round of objectively measurable aggregates, published in his General Theory. Here is Hayek explaining his own breakthrough year of 1936 to Armen Alchian in an interview from 1978:

ALCHIAN:  Two things you wrote that had a personal influence on me, after your Prices and Production, were ["Economics and Knowledge"] and “The Use of Knowledge in Society.” These I would regard as your two best articles, best in terms of their influence on me.

HAYEK: “Economics and Knowledge” — the ’37 one — which is reprinted in the volume [Individualism and Economic Order], is the one which marks the new look at things in my way.

ALCHIAN: It was new to you, too, then? Was it a change in your own thinking?

HAYEK: Yes, it was really the beginning of my looking at things in a new light. If you asked me, I would say that up till that moment I was developing conventional ideas.  With the [Nov. 10, 1936] lecture to the Economics Club in London, my presidential address, which is “Economics and Knowledge,” I started my own way of thinking.

Sometimes in private I say I have made one discovery and two inventions in the social sciences: the discovery is the approach of the utilization of dispersed knowledge, which is the short formula which I use for it; and the two inventions I have made are denationalization of money and my system of democracy.

ALCHIAN: The first will live. [laughter] How did you happen to get into that topic? When you had to give this lecture, something must have made you start thinking of that.

HAYEK: It was several ideas converging on that subject.  It was, as we just discussed, my essays on socialism, the use in my trade-cycle theory of the prices as guides to production, the current discussion of anticipation, particularly in the discussion with the Swedes on that subject, to some extent perhaps Knight’s Risk, Uncertainty and Profit, which contains certain suggestions in that direction–all that came together. And it was with a feeling of a sudden illumination, sudden enlightenment, that I — I wrote that lecture in a certain excitement. I was aware that I was putting down things which were fairly well known in a new form, and perhaps it was the most exciting moment in my career when I saw it in print.

ALCHIAN: Well, I’m delighted to hear you say that, because I had that copy typed up to mimeograph for my students in the first course I gave here. And Allan Wallace, whom I guess you must know, came through town one day, and I said, “Allan, I’ve got a great article!” He looked at it, started to laugh, and said, “I’ve seen it too; it’s just phenomenal!” I’m just delighted to hear you say that it was exciting, because it was to me, too.

But when did the idea hit you? When you started to write this paper, started to think about it, there must have been some moment at which you could just suddenly see you had something here. Was there such a moment at which you said, “Gee, I’ve got a good paper going here”?

HAYEK: It must have been in the few months preceding that, because I know I was very unhappy about having to give the presidential address to the Economics Club.  Then I hit on that subject, and I wrote it out for that purpose. How long it was exactly before the date [of the address] I couldn’t say now, but I do know that the idea of articulating things which had been vaguely in my mind in this form must have occurred to me when I was thinking of a subject for that lecture — the presidential address at the London Economics Club.

A videotaped interview with Friedrich Hayek from 1985:

John Maynard Keynes knew very little economics — Friedrich Hayek drops that bomb and more in his 1978 UCLA Oral History interview with Leo Rosen:

ROSTEN: … this was the period, of course, when John Maynard Keynes was coming into international repute, and I’d love you to talk about him.

HAYEK: Well, I knew him very well. I made his acquainance even before I had come to England, in ’28, at the meeting of the Trade Cycle Research Institute. There we had our first difference on economics — on the rate of interest, characteristically — and he had a habit of going like a steamroller over a young man who opposed him. But if you stood up against him, he respected you for the rest of your life. We remained, although we differed in economics, friends till the end. In fact, I owe it to him that I spent the war years at King’s College, Cambridge. He got me rooms there. And we talked on a great many things, but we had learned to avoid economics.

ROSTEN: You avoided economics?

HAYEK: Avoided economics .

ROSTEN: But you took on General Theory, didn’t you, the moment that it appeared?

HAYEK: No, I didn’t; I had spent a great deal of time reviewing his Treatise on Money, and what prevented me from returning to the charge is that when I published the
second part of my very long examination of that book, his response was, “Oh, I no longer believe in all this.”

ROSTEN: He said so?

HAYEK: Yes. [laughter]

ROSTEN: How much later was this?

HAYEK: That was ’32, and the Treatise came out in ’30. He was already then on the lines towards The General Theory, and he still had not replied to my first part when six months later the second part came out. He just said, “Never mind, I no longer believe in this.” That’s very discouraging for a young man who has spent a year criticizing a major work. I rather expected that when he thought out The General Theory, he would again change his mind in another year or two; so I thought it wasn’t worthwhile investing as much work, and of course that became the frightfully important book. That’s one of the things for which I reproach myself, because I’m quite convinced I could have pointed out the mistakes of that book at that time.

ROSTEN: Well, did you seriously think that he would say, “Oh, I no longer believe in the tradeoff between unemployment” and so forth?

HAYEK: I am sure he would have modified.

ROSTEN: You think he did change?

HAYEK: He would have modified his ideas. And in fact, my last experience with him — I saw him last six weeks before his death; that was after the war — I asked him whether he
wasn’t alarmed about what his pupils did with his ideas in a time when inflation was already the main danger. His answer was, “Oh, never mind, my ideas were frightfully
important in the Depression of the 1930s, but you can trust me: if they ever become a danger, I’m going to turn public opinion around like this.” But six weeks later he was
dead and couldn’t do it. I am convinced Keynes would have become one of the great fighters against inflation.

ROSTEN: Do you think he could have done it?

HAYEK: Oh, yes. He wouldn’t have had the slightest hesitation. The only thing I blame him for is that what he knew was a pamphlet for the time, to counteract the deflationary tendencies in the 1930s, he called a general theory. It was not a general theory. It was really a pamphlet for the situation at a particular time. This was partly, I would say, due to the influence of some of his very doctrinaire disciples, who pushed him — There’s a recent essay by Joan Robinson, one of his disciples, in which she quite frankly says they sometimes had great difficulty in making Maynard see the implications of his theory. [laughter]

ROSTEN: I’m interested in the fact that you think it would have been that easy to have reversed opinion, coming out of a deflationary period.

HAYEK: Well, I don’t think so, but Keynes —

ROSTEN: Oh, he thought so. I see.

HAYEK: Keynes had a supreme conceit of his power of playing with public opinion. You know, he had done the trick about the peace treaty. And ever since, he believed he could play with public opinion as though it were an instrument. And for that reason, he wasn’t at all alarmed by the fact that his ideas were misinterpreted. “Oh, I can correct this anytime.” That was his feeling about it

*****

ROSTEN: How do you think he will rank in the history of economic theory and thought?

HAYEK: As a man with a great many ideas who knew very little economics. He knew nothing but Marshallian economics; he was completely unaware of what was going on elsewhere; he even knew very little about nineteenth-century economic history. His interests were very largely guided by aesthetic appeal. And he hated the nineteenth century, and therefore knew very little about it — even about the scientific literature. But he was a really great expert on the Elizabethan age.

ROSTEN : I’m absolutely astounded that you say that John Maynard Keynes really didn’t know the economic literature. He had surely gone through it.

HAYEK: He knew very little. Even within the English tradition he knew very little of the great monetary writers of the nineteenth century. He knew nothing about Henry Thornton; he knew little about Ricardo, just the famous things. But he could have found any number of antecedents of his inflationary ideas in the 1820s and 1830s. When I told him about it, it was all new to him.

ROSTEN: How did he react? Was he sheepish? Was he–

HAYEK: Oh, no, not in the least. He was much too self-assured, convinced that what other people could have said about the subject was not frightfully important. At the end — well, not at the end — There was a period just after he had written The General Theory when he was so convinced he had redone the whole science that he was rather contemptuous of anything which had been done before.

ROSTEN: Did he maintain that confidence to the end?

HAYEK: I can’t say, because, as I said before, we had almost stopped talking economics. A great many other subjects — his general history of ideas and so on — we were interested in. And, you know, I don’t want you to get the impression that I underestimated him as a brain; he was one of the most intelligent and most original thinkers I have known. But economics was just a sideline for him. He had an amazing memory; he was extraordinarily widely read; but economics was not really his main interest. His own opinion was that he could re-create the subject, and he rather had contempt for most of the other economists.

ROSTEN: Does this tie in with your two kinds of minds? You wrote in Encounter some years ago a piece–

HAYEK: Curiously enough, I will say, Keynes was rather my type of mind, not the other. He certainly could not have been described as a master of his subject, as I described the other type. He was an intuitive thinker with a very wide knowledge in many fields, who had never felt that economics was weighty enough to — He just took it for granted that Marshall’s textbook contained everything one needed to know about this subject. There was a certain arrogance of Cambridge economics about — They thought they were the center of the world, and if you have learned Cambridge economics, you have nothing else worth learning.

Did John Maynard Keynes know the work of Knut Wicksell, did he read Schumpeter, what economics did he know?  Friedrich Hayek answers these questions and more in an interview with Leo Rosten:

ROSTEN:  … Is it true that he said, “I am no longer a Keynesian”?

HAYEK: I haven’t heard him say so; it’s quite likely. But, after all, Keynesianism spread only just about the time of his death. You mustn’t forget that he died as early as ’46, just as the thing became generally accepted. In fact, I sometimes say that his death made him a saint whose word was not to be criticized.

If Keynes had lived, he would greatly have modified his own ideas, as he always was changing opinion. He would never have stuck to this particular set of beliefs. And you could argue with him. Since we are speaking about him, curiously enough the two persons I found most interesting to talk to for an evening were Keynes and Schumpeter, two economists who were the best conversationalists and the most widely educated people in general terms I knew — with the difference that Schumpeter knew the history of economics intimately and Keynes did not.

ROSTEN: Had Keynes read Schumpeter?

HAYEK: I would assume yes, but he wasn’t reading much contemporary economics, either. He probably had an idea [of him]. I have seen them together; so I know he knew
Schumpeter. But I doubt whether he carefully studied any of … Schumpeter ‘s book on capitalism, which I mentioned before, came out in wartime, when he was much too busy to read anything of the kind. As for Schumpeter ‘s earlier works, I would suspect Keynes had read the brochure Schumpeter wrote on money, because that was in his immediate field, but probably nothing else.

ROSTEN: I’m interested in your earlier comment about the fact that here is a man of immense intelligence, great imagination, wide learning, and so on, and yet was not an economist. I’m not clear whether you mean he didn’t have the kind of mind that excels in economics — just as in mathematics, say, you can find people who are brilliant but who, given mathematics, are just hopeless — or do you mean he didn’t have the kind of mind that makes for first-rate economists?

HAYEK: Oh, yes, he had. If he had given his whole mind to economics, he could have become a master of economics, of the existing body. But there were certain parts of economic theory which he had never been interested in. He had never thought about the theory of capital; he was very shaky even on the theory of international trade; he was well informed on contemporary monetary theory, but even there he did not know such things as Henry Thornton or Wicksell; and of course his great defect was he didn’t read any foreign language except French. The whole German literature was inaccessible to him. He did, curiously enough, review Mises’s book on money, but later admitting that in German he could only understand what he knew already. [laughter]

ROSTEN: What he had known before he read the book. How would you distinguish the streams that economics took in Austria and Sweden and England during your time?

HAYEK: Well, in England unfortunately — Sweden and Austria were moving on parallel lines — if Jevons had lived, or if his extraordinarily brilliant pupil Wicksteed had had more influence, things may have developed in a different direction; but Marshall established almost a monopoly, and by the time I came to England, with the exception of the London School of Economics, where Edwin Cannan had created a different position, and where Robbins was one of the few economists who knew the literature of the world — he drew on everything — England was dominated by Marshallian thinking. And this idea that if you knew Marshall there was nothing else worth reading was very widespread.

If you want to understand who Friedrich Hayek is and what his life was all about, you can’t do better than read the transcripts of the 1978 interviews with Friedrich Hayek conducted by Earlene Craver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen Alchian, and Robert Chitester in October and November of 1978.  The interviews are available in these formats:  pdf, text, flip book, and others.  In important ways these interviews with Hayek are more insightful than the Hayek biographies and most of the peer reviewed literature.  Here are some excerpts (more later):

On his early interests and ambitions:

My interests, even from the beginning, were — my reading was largely philosophical. Well, not philosophical; it was method of science. You see, I had shifted from the wholly biological approach to the social field, in the vital sense, and I was searching for the scientific character of the approach to the social sciences. And I think my career, my development, during those three years exactly at the university was in no way governed by thoughts about my future career, except, of course, that tradition in our family made us feel that a university professor was the sum of achievement, the maximum you could hope for ..

The role of socialism in his turn toward the study of economics:

I never was a social democrat formally, but I would have been what in England would be described as a Fabian socialist. I was especially influenced — in fact the influence very much contributed to my interest in economics — by the writings of a man called Walter Rathenau, who was an industrialist and later a statesman and finally a politician in Germany, who
wrote extremely well. He was Rohstoff diktator in Germany during the war, and he had become an enthusiastic planner.  And I think his ideas about how to reorganize the economy were probably the beginning of my interest in economics.  And they were very definitely mildly socialist.

Perhaps I should say I found a neutral judge. That’s what made me interested in economics. I mean, how realistic were these socialist plans which were found very attractive? So there was a great deal of socialist inclination which led me to  – I never was captured by Marxist socialism. On the contrary, when I encountered socialism in its Marxist, frightfully doctrinaire form, and the Vienna socialists, Marxists, were more doctrinaire than most other places, it only repelled me. But of the mild kind, I think German Sozialpolitik, state socialism of the Rathenau type, was one of the inducements which led me to the study of economics.

On growing up in pre-war Vienna:

I have only recently become aware that the leading people [of Vienna] were really a very small group of people who somehow were connected with each other. It was only a short while ago, when somebody like you inquired about whom I knew among the famous people of Vienna, that I began to go through the list, and I found I knew almost every one of them personally. And with most of them I was somehow connected by friendship or family relations and so on. I think the discussion began, “Did you know [Erwin] Schrodinger?” “Oh, yes, of course; Schrodinger was the son of a colleague of my father’s and came as a young man in our house.” Or, (“Did you know Karl von] Frisch, the bee Frisch?” “Oh, yes, he was the youngest of a group of friends of my father’s; so we knew the family quite well.” Or, ["Did you know Konrad) Lorenz?" "Oh, yes, I know the whole family. I've seen Lorenz watching ducks when he was three years old." And so it went on ..

On studying economics at the U. of Vienna:

when I arrived there was nobody but a socialist economic historian.  Then [Friedrich] Wieser came back, and he became my teacher.  He was a most impressive teacher, a very distinguished man whom I came to admire very much, I think it’s the only instance where, as very young men do, I fell for a particular teacher. He was the great admired figure, sort of a grandfather figure of the two generations between us. He was a very kindly man who usually, I would say, floated high above the students as a sort of God, but when he took an interest in a student, he became extremely helpful and kind. He took me into his family; I was asked to take meals with him and so on. So he was for a long time my ideal in the field, from whom I got my main general introduction to economics.

The influence of Ernst Mach & positivism:

I think my introduction to what I now almost hesitate to call philosophy — scientific method, I think, is a better description — was to Machian philosophy. It was very good on the history of science generally, and it dominated discussion in Vienna. For instance, Joseph Schumpeter had fully fallen for Mach, and when– While I was still at the university, this very interesting figure, Moritz Schlick, became one of the professors of philosophy. It was the beginning of the Vienna Circle, of which I was, of course, never a member but whose members were in close contact with us. [There was] one man [Hayek is referring to philosopher Felix Kaufmann] who was supposedly a member of our particular circle, the Geistkreis, and also the Schlick circle, the Vienna Circle proper, and so we were currently informed of what was happening there. [tape recorder turned off] Well, what converted me is that the social scientists, the science specialists in the tradition of Otto Neurath, just were so extreme and so naive on economics that it was through [Neurath] that I became aware that positivism was just as misleading as the social sciences. I owe it to his extreme position that I soon recognized it wouldn’t do.

On Mach, logical positivism, Karl Popper, and the philosophy of science:

It took me a long time, really, to emancipate myself from it [Mach & logical positivism]. It was only after I had left Vienna, in London, that I began to think systematically on problems of methodology in the social sciences, and I began to recognize that positivism in that field was definitely misleading.  In a discussion I had on a visit to Vienna from London with my friend [Gottfried] Haberler, I explained to him that I had come to the conclusion that all this Machian positivism was no good for our purposes. Then he countered, “Oh, there’s a very good new book that came out in the circle of Vienna positivists by a man called Karl Popper on the logic of scientific research.” So I became one of the early readers. It had just come out a few weeks before. I found that Haberler had been rather mistaken by the setting in which the book had appeared. While it came formally out of that circle, it was really an attack on that system, [laughter] And to me it was so satisfactory because it confirmed this certain view I had already formed due to an experience very similar to Karl Popper’s. Karl Popper is four or five years my junior; so we did not belong to the same academic generation. But our environment in which we formed our ideas was very much the same. It was very largely dominated by discussion, on the one hand, with Marxists and, on the other hand, with Freudians.

Both these groups had one very irritating attribute: they insisted that their theories were, in principle, irrefutable. Their system was so built up that there was no possibility — I remember particularly one occasion when I suddenly began to see how ridiculous it all was when I was arguing with Freudians, and they explained, “Oh, well, this is due to the death instinct.” And I said, “But this can’t be due to the [death instinct].” “Oh, then this is due to the life instinct.” [laughter] Well, if you have these two alternatives, of course there’s no way of checking whether the theory is true or not. And that led me, already, to the understanding of what became Popper’s main systematic point: that the test of empirical science was that it could be refuted, and that any system which claimed that it was irrefutable was by definition not scientific. I was not a trained philosopher; I didn’t elaborate this. It was sufficient for me to have recognized this, but when I found this thing explicitly argued and justified in Popper, I just accepted the Popperian philosophy for spelling out what I had always felt. Ever since, I have been moving with Popper. We became ultimately very close friends, although we had not known each other in Vienna. And to a very large extent I have agreed with him, although not always immediately. Popper has had his own interesting developments, but on the whole I agree with him more than with anybody else on philosophical matters.

On Hayek’s own Vienna Circle, the “Geistkreis” or “Mind Circle”:

It may have been purely accidental in our circle that the interest in methodology was so high. It was, to some extent, brought by some of my colleagues who went elsewhere for a semester. When people like [Alfred] Schutz and [Felix] Kaufmann went to Freiburg to study under [Edmund] Husserl, or when [Herbert] Furth and [Use] Minz went to Heidelberg to study there for a semester, they brought back philosophical ideas, partly because an Austrian student going to another German university doesn’t use that semester to continue law, but he looks around for other subjects.

So we had special stimuli in our discussion circle who were interested in philosophical problems, and whether apart from these special reasons it would have been– Well, of course, there was also a great general fashion in Vienna due to the influence of Mach on the whole intellectual outlook.  There was this almost excitement about matters of scientific method due to the influence of Mach, very largely ..

But our group, while we happened to be all ex-law students, law was the least subject we ever considered in our circle. It was either the social sciences or literature or — well, sociology is a social science, but sociology in the widest sense — Felix Kaufmann brought in from the Schlick circle [i.e. the "Vienna Circle"] the approach of the natural sciences. There were a great deal of semi-practical aspects. I mean, the fact that somebody like Alfred Schutz was, by profession, secretary of the banking association, but he was in one sense most philosophical, and he was most intimately connected with daily events.

Quotable:

Q: You taught with Lord John Maynard Keynes at the same university, did you not?

Hayek: I taught at his university while he was advising government. We at the London School of Economics were evacuated to Cambridge for the whole World War II period, and Keynes got me rooms in his college. But he was most of the time advising governments, so we met only occasionally on weekends. We were personally very good friends.

He had the illusion that a little inflation is good. Too much, no. He was one of the cleverest men I knew, but he was not really a very competent economist at all. He had strong intuitions, which sometimes were right, and the strong conviction that he could put over any theory that he invented to justify his particular recommendations. He was a very great man, but I don’t think he was a great economist.

More:

Q: This controversial theory of competition of currencies is beginning to receive some attention. How do you think it would work? Would the major banks issue currencies, or would there be gold coins issued?

Hayek: It seems to me that my original plan is right, but I am afraid that I’ve come to the conclusion that politically, it is completely Utopian. Governments will never allow monetary competition, and even bankers do not understand the idea because they have all grown up in the system which is so completely dependent on central banks. So I think we need a roundabout way. After all, in the modern world, currency is no longer the most important money. Credit and credit cards are substitutes. While governments can stop people from issuing money, they can hardly stop them from opening accounts in something unless they introduce a complete system of exchange control. I do not expect that any bank will understand this idea. But I hope that one of the big dealers in raw materials will be prepared to open accounts which will be redeemable in so much of current moneys as are necessary to buy this list of raw materials. Through these accounts he can make his unit—call it the “solid”—the standard unit without it ever being used in circulation. People very soon will begin to keep their accounts in “solids”—the only thing which is trustworthy. Although it’s a thing where many people can compete, most of them will probably choose the same list of raw materials. If one major firm will start this, others will imitate it. So I think we can forget about existing money and existing banks, and gradually open a system of accounts which will displace the government money.

Q: Maybe the unit, one day, will be known as the “Hayek.” Continuing on the money issue, it seems to me that the fundamental flaw in Milton Friedman’s theory of monetary control is becoming more and more evident today. The authorities are now admitting that they don’t even know what the money supply is. So how could you have a theory based on a steady increase in the money supply?

Hayek: You know, about forty years ago, I once wrote a sentence something like this: Almost the worst thing which could happen would be if mankind ever forgot the quantity theory of money—except they should ever take it literally. While I still believe that it is true that the price level is determined from the quantity of money, we never know what the quantity of money in this sense is. I think the rule ought to be that whoever issues the money must adapt the quantity so that the price level will remain stable. But to believe that there is a measurable magnitude which you can keep constant, with beneficial effects, I regard as completely wrong.

I don’t like criticizing Milton Friedman not only because he is an old friend but because, outside of monetary theory, we are in complete agreement. Our general views on what is desired and what is not are almost identical until we get on to money. But if I told him what I said before, that I very much doubt whether monetary policy has ever done anything good, he would disagree. He personally is convinced that a good monetary policy is a foundation for everything.

Q: What do you think will be the outcome of the Third World debt crisis?

Hayek: I don’t know. If we are very lucky—I doubt that we should be so lucky—we may get through it without either a resumption of inflation or new controls being clapped on. But the only good thing I hope to see is that people are becoming somewhat aware that the present monetary system is not very satisfactory and that we will have to consider fundamental reform. I don’t think anybody is yet going far enough.

I sympathize with the people who would like to return to the gold standard. I wish it were possible. I am personally convinced it cannot be done for two reasons: The gold standard presupposes certain dogmatic beliefs which cannot be rationally justified, and our present generation is not prepared to readopt beliefs which were old traditions and have been discredited. But even more serious, I believe that any attempt to return to gold will lead to such fluctuations in the value of gold that it will break down. So although I must sympathize with the gold standard people, I don’t believe that is a possible way. I think, in the long run, only my much more radical proposal will be feasible.

Q: Do you see the future as being more and more inflation and currency depreciation, or do you think that we could have a depression?

Hayek: Many things in the last three years have moved very much better than I had hoped. Particularly in England, the fact that Mrs. Thatcher would be able to bring inflation down as well as she has done, and the same to some extent in America, is very encouraging. If you can bring down inflation to zero, and have it stay there, I think the position of the leading countries can be saved. I’m not sure that means the positions of their banks can be saved!

from “Exclusive Interview with F. A. Hayek”.  James Blanchard, III.  Cato Policy Report, vol. VI, no. 3, May/June 1984