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Fwd: [Free Banking] Larry White: Krugman on Friedman, Hayek, and Liquidationism

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  • Bruce Majors
    ... From: *Free Banking* Date: Monday, August 12, 2013 Subject: [Free Banking] Larry White: Krugman on Friedman, Hayek, and Liquidationism To:
    Message 1 of 1 , Aug 12, 2013
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      ---------- Forwarded message ----------
      From: *Free Banking*
      Date: Monday, August 12, 2013
      Subject: [Free Banking] Larry White: Krugman on Friedman, Hayek, and
      To: majors.bruce@...

      Free Banking has a new post by Larry White.

      Krugman on Friedman, Hayek, and Liquidationism:

      In a blog post yesterday, entitled “Friedman and the Austrians” , Paul
      Krugman quotes Milton Friedman’s charge that in the “London School (really
      Austrian) view,” i.e. the view held by F. A. Hayek and Lionel Robbins,

      the depression was an inevitable result of the prior boom, that it was
      by the attempts to prevent prices and wages from falling and firms from
      bankrupt, that the monetary authorities had brought on the depression by
      inflationary policies before the crash and had prolonged it by “easy money”
      policies thereafter; that the only sound policy was to let the depression
      its course, bring down money costs, and eliminate weak and unsound firms.

      Krugman then remarks:

      I have, incidentally, seen attempts to claim that nobody believed this, or
      any rate that Hayek never believed this, and that characterizing Hayek as a
      liquidationist is some kind of liberal libel. This is really a case of who
      you gonna believe, me or your lying eyes.

      One of the "attemps" Krugman may be referring to is my June 2008 article in
      Journal of Money, Credit, and Banking, “Did Hayek and Robbins Deepen the
      Depression?” (Ungated pre-publication version here). Or he may be referring
      subsequent discussion of the question on Brad DeLong’s blog -- if you follow
      this link, please scroll down to see my comments on DeLong’s post.

      In either case Krugman’s remarks call for a reply.

      In the 2008 article I point out that Hayek enunciated a monetary policy
      norm of
      stabilizing nominal income (aka nominal aggregate demand, or MV in the
      of exchange) in the face of a declining money multiplier or declining
      of money. Under a gold standard, a high price level driven unsustainably
      (by the boom-creating inflationary policies that Friedman references) needs
      return to the sustainable level, but there is no virtue in “secondary”
      deflation going beyond that point. Thus, according to Hayek, the central
      should expand its liabilities H to offset an increased bank reserve ratio or
      public hoarding that reduces M/H or V. In yet other words, it is better to
      remedy an unsatisfied excess demand for money balances by supplying the
      called-for money balances than by putting a burden of downward price
      on the economy.

      Overlooking Hayek’s stable-MV norm, Friedman and others have
      Hayek as prescribing only “to let the depression run its course.” Hayek did
      oppose cheap-money policies that distort the economy, and did counsel
      policy-makers not to obstruct the process of correcting the mistaken
      made during the boom. But quoting such statements doesn’t show that he said
      nothing else about depression policy.

      It’s a question of who you gonna believe, a one-sided quoting of only some
      bits of Hayek by people unaware of the rest, or the full story of what Hayek
      wrote about depression policy?

      I’m sorry that Krugman didn’t call me out by name. It prevents his readers
      from finding and reading the other side of the debate.

      I might also mention that my article treats the question of what Hayek
      said as a matter of getting the intellectual history right. I do not suggest
      that mischaracterization of Hayek’s position is limited to left-liberals.
      Indeed, as Krugman’s blog post does, my article prominently quotes Milton
      Friedman’s criticism of Hayek for supposed liquidationism. Friedman is no
      left-liberal. Thus I would never call it “some kind of liberal libel.”

      Read the full post and join the discussion at:

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      Best regards,
      Free Banking

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