“More Hayek and Less Armey”
by David Glasner
Dick Armey, an obscure economics professor who enjoyed a second career as a moderately well-known politician, does not much like President Obama’s stimulus plan. To buttress his opposition with more intellectual heft than he can himself muster, Professor Armey, in an op-ed piece in the Wall Street Journal, (February 4, 2009) invokes the authority of the late economist and philosopher F.A. Hayek.
I do not doubt that there are good reasons for opposing the stimulus plan now on the table, nor do I presume to speak for F.A. Hayek. Nevertheless, Professor Armey’s almost devout invocation of Hayek’s authority to the fervent plaudits of the right-wing libertarian blogosphere, for whom Hayek is an almost iconic figure, is, well, embarrassing.
First Professor Armey is plainly out of his depth as an intellectual historian. “Hayek,” Armey informs us, “famously debated Keynes in a series of articles after the release of ‘General Theory,’ and gave . . . the most devastating critique of government action to stimulate ‘aggregate demand.’ Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments’ artificial inflation of money and credit.”
In fact, Hayek engaged in no debate, much less a famous one, with Keynes after Keynes published his General Theory. Hayek had written a critical review of Keynes’s preceding work, A Treatise on Money, which prompted Keynes, in a fit of pique, to respond with an ill-tempered attack on Hayek’s just-published book Prices and Production. So egregious was Keynes’s tone that even Sir Roy Harrod, in his admiring 1946 biography of Keynes, scolded Keynes for his deplorable conduct in that exchange. Hayek later regretted that he had not responded after the General Theory was published, but explained (somewhat lamely) that after Keynes had quickly disavowed his Treatise on Money in the face of criticism, he assumed that Keynes would change his views yet again, so why bother?
Nor is Professor Armey right to attribute to Hayek the view that the business cycle is caused by governments’ inflation of money and credit. In his first book on the subject, Monetary Theory and the Trade Cycle, Hayek stated that he was aiming to formulate a theory of the business cycle in which the very process of credit creation within a modern banking system generates cyclical economic fluctuations. Whether Hayek envisaged that anything like our current credit crisis would issue from the workings of a modern banking system, I seriously doubt. But Hayek’s mind was surely capacious enough to comprehend the possibility that a capitalist economic system, built on money and credit supplied by banks, could, even without misguided government policies, be subject to serious disturbances.
Beyond misstating the basic facts of Hayek’s polemical encounter with Keynes and mischaracterizing his theory of business cycles, Professor Armey does Hayek the extreme injustice of implying that he would oppose any stimulus plan designed to bolster aggregate demand. It is true that, after the onset of the Great Depression, Hayek did oppose proposals to “reflate” the economy, but only because he believed that a short period of sharp deflation might, as it had in the Depression of 1920-21, loosen monopolistic rigidities that were preventing the economy from adjusting on its own to the crisis and were thereby postponing the recovery.
His opposition to monetary expansion and public spending earned him an undeserved reputation, even among such kindred spirits as Milton Friedman and other Chicago School economists, as a “liquidationist” who was impervious to the horrors of the Great Depression. Hayek later admitted that he had erred in his early policy recommendations, and he greatly regretted that he had been understood to oppose taking countermeasures to stop the deflationary spiral that enveloped the world economy in the 1930s
In a 1975 discussion at the American Enterprise Institute with his old friend and colleague Gottfried Haberler, Hayek expressed his view as follows: “The moment there is any sign that the total income stream may actually shrink, 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.”
One cannot, of course, know what measures Hayek would have favored to mitigate the current crisis, but there is no reason to believe that, Professor Armey notwithstanding, he would have opposed a stimulus plan as a matter of principle. Hayek’s opposition to Keynes was based on Keynes’s conceit in imagining that he had arrived at a general theory when in fact he had, at best, developed a special theory applicable to periods of great depression. But Hayek also recognized that in those exceptional circumstances, policies that might be inappropriate under normal conditions could be necessary stopgaps to stem a deflationary tide.
Today’s crop of libertarians, Professor Armey included, in their ideological zeal to resist any and every anti-deflationary policy and government spending project, need to go back to school and read Hayek a little more carefully. They are certainly doing Hayek’s memory, which they appear to hold in such pious reverence, no service by invoking his name to support a policy stance with which he was wrongly identified and which he explicitly disavowed.
David Glasner is an economist at the Federal Trade Commission. He is the author of Free Banking and Monetary Reform and editor of Business Cycles and Depressions: An Encyclopedia. Glasner’s publications on Hayek include “F.A. Hayek: Philosopher of the Open Society”, Michigan Quarterly Review, Vol 24, No. 4, Fall, 1985, pp. 523-543 and “Hayek and the Conservatives,” Commentary, Oct. 1992.
The views expressed by Dr. Glasner do not necessarily reflect the views of the Federal Trade Commission or the individual commissioners.