(Still) Uncovering Hayek's view of MV. A Note

2013-10-11

Fingering through Denationalisation of Money tonight, I found a quote that clearly reflects, I think, Hayek's view regarding MV stabilization. As you might expect, if you have read my last few posts, it is complicated!:

I have long since come to the conclusion that no real money can ever be neutral in this sense, and that we must be content with a system that rapidly corrects inevitable errors. The nearest approach to such a condition which we can hope to achieve would appear to me to be one in which the average prices of the 'original factors of production' were kept constant. But as the average price of land and labour is hardly something for which we can find a statistical measure, the nearest practicable approximation would seem to be precisely that stability of raw material and perhaps other wholesale prices which we could hope competitively issued currencies would secure.

I will readily admit that such a provisional solution (on which the experimentation of competition might gradually improve), though giving us an infinitely better money and much more general economic stability than we have ever had, leaves open various questions to which I have no ready answer. But it seems to meet the most urgent needs much better than any prospects that seemed to exist while one did not contemplate the abolition of monopoly of the issue of money and free admission of competition into the business of providing currency.

As I read through Hayek I notice that he forms his opinions methodically. Early in his career, Hayek might convey a theory and its implications, but then deny its application to policy. I am gathering that, as his research carried into the "socialist calculation debate" and "spontaneous order," Hayek began to understand more clearly that although theory cannot be applied perfectly, corrective mechanisms, such as those that express themselves in the market, might compensate. I argue that in the above statement, Hayek presents a robust view that contains many, if not all, of the opinions that he previously expressed. His position is something along the lines of "MV targetting does not work. Use MV targetting (at least for now)." This is followed by the suggestion that a more efficient policy will allow markets for money be freed from legal tender monopoly. It is not unreasonable to see Hayek as inconsistent, but such a reading is incorrect. If one does not study Hayek's views one layer at a time, then the interpretation that follows will be misleading.

So let's think of Hayek's view of MV stabilization as having 3 different layers (for simplicity):

1. Immediate Policy Suggestion
2. Ideal Policy Suggestion
3. Theoretical Analysis

The last of these is the source of the other two. Perhaps by such a perspective we can gain greater insight into both his view concerning MV stabilization and other economic phenomena.

Stay tuned for a more complete analysis Hayek, the gold standard, and central bank policies during the interwar period.

(Still) Uncovering Hayek's view of MV. A Note

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