Hayek: “I am not only against inflation but I am also against deflation.”

Steve Horwitz had an interesting read last week on Friedrich von Hayek, the Nobel Prize winning Austrian School economist. Von Hayek is best known for his 1944 Libertarian call to arms “Road to Serfdom” and is generally considered one of the fathers of the free market ideology.

In Horwitz’s piece, he points out that Hayek was not a ‘liquidationist’ and he uses the title quote to demonstrate that Hayek saw deflation as destructive. Was this an evolution in beliefs? it’s hard to say.

Horowitz goes on to say:

Those Austrians who think deflation is always and everywhere a good phenomenon strongly overlap with those Austrians who wonder whether Hayek is really an Austrian (or a even a classical liberal) anyway, so I’m doubtful this will convince them of the claim that a concern with monetary deflation has been, and should be, a core part of Austrian monetary and macro theory.  However, it does, in fact, bolster the case for a monetary equilibrium reading of Hayek.

The question, of course, is if price stability is the ultimate goal of monetary policy, how does one achieve that in a deflationary environment?


Hayek on Deflation and the Great Depression – Steve Horwitz

  1. Matt Stiles says

    Mises was also against deflation, using the same logic.

    But they both contended that with a stable currency unit and lack of unbacked lending (ie. forced savings) price movements would be limited to supply/demand market forces, rather than monetary concerns, as is now the case.

    I can guarantee you that if either were alive today, liquidation of bad debt – not necessarily monetary contraction – would be the prescription.

    They were both against the purposeful manipulation of prices by central planners – either inflationary or deflationary.

  2. cs says

    If you read through the comments, and the interview in question, you’ll find that it was taken out of context. As Dan mentions:

    I think Prof. Horwitz may be jumping the gun on this, because in the next page Hayek says: “I do not agree with Friedman on the causes” (Deflation per se – since we know what Friedman was blaming) and right before that he says “The authorities made things worse by a process of deliberate contraction” (emphasis on deliberate, as opposed to a natural contraction).

    1. Edward Harrison says

      I did read through the comments actually – and that’s one reason I said “Was this an evolution in beliefs? it’s hard to say.”

      On the whole, I would agree with Dan that liquidating overcapacity is what he would recommend and what I also think is key to recovery. This is one reason that risk is back (overcapacity in financial services).

      But, that’s not necessarily driven by monetary policy. So, the question still stands: how does one achieve price stability in a deflationary fiat currency environment?

      1. Matt Stiles says

        You can’t. And any attempts to do so are inherently temporary, causing further price instability in the future.

        In a credit based monetary system, prices are so violently skewed (due to the lack of differentiation between forced and voluntary savings) that wide swings between asset inflation (from forced savings) to asset deflation (reverting to a level commensurate with voluntary savings) is inevitable.

        If relative price stability (based on market forces, not monetary) is what one seeks, then the abolition of the credit based monetary system is a prerequisite.

        1. Edward Harrison says

          So, you are getting at the real problem here: a fiat currency system in which there are no restraints on the provision of base monetary liquidity.

  3. Matt Stiles says

    Yes and no. The moment someone nowadays mentions fiat currencies, most jump to assume ‘goldbug.’ I’m not.

    I think we can have multiple competing currencies backed by various assets (wheat, land, gold, oil, etc) and exchanged electronically. Depositary institutions would be separate from all other banking institutions. They would merely charge a tiny fee to keep your deposit safe. Lending institutions would also charge small fees for the service of facilitating exchanges between borrowers and lenders. Unbacked lending would be criminally punishable under existing misappropriation laws.

    1. Edward Harrison says

      Have you seen my post on Davidson’s global currency system? That might also be workable.


      1. Matt Stiles says

        Ugh. “Exchange Controls” “Capital Controls” “Global Clearing House (Central Bank)” Yada, yada, yada.

        More communist style central planning if you ask me. Only global this time and enforceable not by one’s own democratically elected government, but some opaque global body. That’s worse than what we have.

        This solves none of the problems inherent in unbacked lending and does nothing to turn the issuance of currency over to the free-market. I would violently oppose this.

        I had thought better of the Post Keynesians (Minsky, Schumpeter). Davidson sounds more like Keynes on steroids.

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