The Hayek Series at Duke University: "How did economists of the day think about the Great Depression -during- the Great Depression?

The 04/09/2012 installment of The Hayek Series at Duke University consisted of visiting professors Lawrence H. White of George Mason University and Douglas A. Irwin, Dartmouth College. Dr. Caldwell of Duke University, the organizer of the Hayek Series, announced at the onset the narrowing of the subject to: "how did economists of the day think about the Great Depression during the Great Depression". Stated alternatively, what were economists real time impressions and real time solutions when they were actually experiencing the Great Depression.

F.A. Hayek made this observation during the Great Depression (circa 1938) [paraphrasing]: monetary policy manipulation can certainly create a boom, however monetary policy alone can’t sustain a boom and it always ends up a bust. His basic point being that monetary policy has limitations and if one is not careful you create a boom/bust cycle through monetary manipulation.

Notes taken during the lecture indicated that between White and Irwin they stated:

(1) Keynes thought monetary policy would not help and advocated fiscal policy intervention,

(2) that Hayek advocated allowing the recession/depression cycle to run its course,

(3) that between the two choices the public sided with "doing something" aka intervention.


Keeping the above lecture points in mind; consider the Friday 04/06/2012 jobs report. Further, consider aggregating every jobs report from 06/2009 [official end of the recession] right up to the 04/06/2012 jobs report. If we aggregate the jobs reports we find 140 million employed 06/2009 and 140 million employed today. That is, the aggregation over three years of every jobs report places us in the same exact square that we started from three years ago: 140 million employed.

One might say that monetary policy has done what it can do. That is, its reached Hayek’s “limitation”. Keynes, as well, did not think monetary policy would help.

Returning to the Hayek Series at Duke, Hayek’s recommendation in the Great Depression was to let the recessionary cycle run its course. That is, market intervention merely prolongs the cycle. Keynes on the other hand wanted intervention (fiscal policy) as the implicit and explicit assumption is that we cannot merely do nothing (which, by-the-way, may very well be the forerunner of today’s politico needing to show voters they are “doing something”).

Taking Hayek’s position and fast forwarding to 04/2012 one sees a world of monetary limitations [monetary policy has reach its limitations] with market intervention fiscal policy prolonging the recessionary cycle.

Let us leave the lecture for a moment and travel back to 1923.

Consider Frank Knight’s book Risk, Uncertainty and Profit. Paul Krugman aside, Frank Knight produced a most excellent argument that most certainly risk exists, but uncertainty exists as a separate phenomena.

One should consider spontaneous order/emergent uncertainty vs. purposefully created uncertainty or purposeful policy creating uncertainty as a byproduct. One might say the rule of law has become uncertain, regulation (property rights) has become uncertain and taxes of all sorts and sizes have become uncertain. That is, we are experiencing man-made created uncertainty beyond any emergent uncertainty.

Hence we arrive at the junction of: limitations, prolonging and uncertainty. Rod Serling would be proud!

Returning to Hayek’s “let it run its course” vs. “we cannot merely do nothing”, it’s likely a combination of doing what we know we can do, not doing what we don’t know how to do, stop creating manmade obstacles and leaving the remainder to market forces.

People have become accustomed to the idea that you must intervene. However, intervention means you actually know what you are doing. Maybe, just maybe we don’t know what we are doing.