"Only One Thing Worse Than an Open Inflation Is a Repressed Inflation" -- F. A. Hayek (1975)

|Peter Boettke|

This is the title of an interesting article that Hayek published in The Money Manager in 1975, it is based on a talk that he gave at the Univeristy of Chicago for a conference on World Economic Stabliization.  Hayek begins the talk stating simply that the only way to risk economic calamity is to follow better economic policy, and the only way to get better economic policy is for economists to work toward providing a "better informed public opinion" about economic policy.  To accomplish that goal, the economist should focus on a few simple, but timeless truths.

Hayek then walks his audience through 4 basic points: (1) the unemployment crisis circa 1975 is a consequence of the so-called full employment policies that were being pursued at the time; (2) attempts to combat inflation via wage and price controls are going to make matters worse; (3) inflation is solely and entirely a question of the quantity of money; and (4) that while many of the old institutions of monetary policy, such as a gold standard and fixed exchange rates, are inferior to an ideal policy, they may be necessary for binding the hands of government officials against inflationary pressures for political expediency.

He goes on to explain to his fellow economists that: "We must convince the public that what seems to be the effective short-run remedy for unemployment makes the unemployment position worse in the long-run."

Hayek argues that: "The relationship between inflation and unemployment is not that of an alternative, but is rather like the relationship between overeating and idigestion. ... Unemployment is the indigestion from which we suffer after the period of inflation."  What is required is binding and credible constraints on the monetary authorities and policy makers so they can resist "the ever-present demand for providing more and cheaper money."  They will always be under this political pressure to spend and inflate, "all that we can do is protect them against this political pressure as much as possible."

When we finally get to the point where further doses of inflation will not restore full employment, we will be ready to learn the hard lesson of economics and reconsider our current policy path.  Painful readjustments will be required, but it does not mean that another Great Depression will follow in terms of length and severity.  "What we got then was very largely due a very stupid policy we followed after the crash had occured."  Spending, printing, and atttempts to control are not the path to recovery and economic prosperity, but the reason why we are in the situation we are.  Time to do the opposite, and that must begin with we economists doing a better job of teaching a few simple truths.  "As I initially said, we can never get a better policy unless we are a better educated public, and at this present moment, the public is very definitely miseducated in economic matters."

Comments

[Greg Ransom]

The argument of Scott Sumner & other market monetarists is that there has been no inflation, that inflation isn't a good measure of anything, and that the Fed since 2008 has provoked an ongoing money-contraction led crash in NGDP.

I haven't seen much of an "Austrian" reply to this train of argument.

Is there one out there I missed?

[Niko]

Bob Murphy had an article recently at mises.org.

[William Bruce]

Greg, I know that George Selgin has commented on this before, and I think that Larry White has mentioned it as well -- although I believe that you are aware of this. Should I try and dig something up? (I am hardly the best person to be doing so.)

We all know about Hayek and the "total money stream," so I don't think I can contribute much...

[Greg Ransom]

I know Murphy has been an ongoing critic of Sumner, but I don't remember a full and detailed front to back critique.

I think I must have missed his most recent piece.

And I know Murphy and Sumner were doing to have a formal debate, but I don't think that has taken place yet.

[Mario Rizzo]

If good economic policy depends mainly on having an educated public, then we are doomed.

[Mario Rizzo]

Let me elaborate. I posted this comment on my Facebook page: "Remember the Deficit Super Committee? It was supposed to agree on a deficit reduction package and, if it failed, automatic cuts were to go into effect. Why don't we hear about this anymore? This is because both parties hate the automatic cuts for different reasons. And the cuts are not scheduled to go into effect until after the 2012 election. The further story, an embarrassment to both parties, is that they are not likely ever to go into effect. A new Congress will not feel bound by what the previous Congress decided. See how easy it is to make fools of the American people?"

It is not just abstract economic education that is involved; it is the manipulation of the political system and the obfuscation of the issues in a world of voter rational ignorance that all conspire to make bad economic policy.

Hayek and Mises are wrong in their naive liberal optimism about the practical relevance of economic education.

The only reason I think it is worthwhile to teach as many people as possible good economics is that, for me personally, the truth is of intrinsic value. It is vital to our self-respect and our moral value as human beings. I agree with Jesus (!)that the truth shall make you (morally) free. Don't expect more. But if we should get more anyway, count us lucky.

[Leonardo IHC]

It is actuallya bit surprising to me that improvements of economic environment necessarily needs improving economic education; what I leart of AE is that it does not matter what "model" you have got in mind, things will go right just if you are free to choose what you think is right for you at the moment.

I think - but I need confirmation - that Hayek was considering the actual context: an established Central Bank as monetary agent of the State i.e. strategically dependent on Government decisions (CB's are this today), and a Government relying on public consent. In this case we have a circuit of people temporarily helped by inflationism from a CB who obeys the Government which is legitimated by people who think inflationism is good for them as this is what Government says.

This vicious circle can get broken only by informed, educated people who - free from bad information - will no longer support a Government which asks CB to inflate, then Goverment turns forced to let the CB run a proper policy (I suppose zero-inflation or a K% rule).

Educate people, here, means make them free from false myths and wrong representations of reality, giving them back a clear vision of reality. This is in line with what I gathered about AE.
Hayek was facing (and coping with) reality, not building up a theorical construction. In Mengerian terms, Hayek here has exposed an "empirical theory" (economic policy) not an "exact theory" (political economy).

[McKinney]

Those are excellent points, Mario. I might add that a good education in economics can help individuals reduce the damage to their personal lives that the state might cause and maybe even allow some to profit from them.

[Don Kirk]

As ever, to listen to the very attractive arguments made by Austrians about the need for "good education in ecomonics" is to highlight that Keynesians make the exact same argument: to choose the best economic policies, the American people need a "good education in economics." The 80-year library of Keynesian writings to promote 'good economics' is enormous.

The American people might be better served in understanding 'good economics' if the Austrians would give up their psychological attachment to the ideological myth of free markets at the same time that Keynesians give up their psychological attachment to the ideological myth of controlled markets.

The American public cannot be well served in understanding "good economics" so long as they are being asked to choose one myth over another myth. If the Austrians refuse to lead the way out of ideo/theological myth-making in economics, then the American people will just have to stumble on, repeating mistake after mistake in whom they elect, because the Keynesians are never going to be able to turn their back on the myth-math of Keynes.

[McKinney]

Don, That's good advice for anyone. But how to go about is the larger issue. How do you propose we determine what is myth and what is reality?

[Vibram Sprint]

However, this article is not about complete it is about we-the USA.
By yzi10