Lesson 6 of 7
Analysis, not advocacy
What named authors derive from this theory, reported as their positions. They disagree with each other, and this academy holds none of them.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A theory of how something works does not by itself say what anyone should do. Getting from one to the other takes extra premises, and different authors supply different ones.
- Rothbard derived a list of measures he said would delay a recovery. Hayek, later, held that an induced secondary deflation should be prevented. Both start from the same mechanism.
- This academy reports both as positions held by named people, adopts neither, and gives no advice of any kind.
This lesson exists because the tradition is usually met as a set of political conclusions rather than as an explanation. The conclusions are real, they are held by serious people, and they do not follow from the mechanism on their own.
Two positions from one mechanism
Rothbard, 1963
- Do not interfere with the market's adjustment.
- He lists six ways he says government hampers it, including preventing liquidation and further inflation.
- Holds that the secondary deflation has positively beneficial effects.
- Concludes the depression is itself the recovery process.
Hayek, 1978
- Stop the increase in the quantity of money, or reduce it to the rate of real growth.
- But endeavour to prevent an actual deflation if one threatens.
- Holds that a secondary depression from induced deflation should be prevented by monetary counter-measures.
- Says the deflation has no steering function to perform.
The mechanism is shared. The conclusions are not, which is the point of this lesson.
Why the gap between theory and conclusion exists
The mechanism says that credit not backed by saving misdirects capital and that the misdirection has to be corrected. It does not say who should bear the cost, how quickly, or what a government owes anybody while it happens.
Those are questions about value, about institutions and about the practical consequences of alternatives, and answering them requires premises the theory does not contain. That is why two people can accept the whole of the boom course and disagree completely here.
Rothbard's derivation
In the first chapter of America's Great Depression, published in 1963, he asks what a government should do if it wants a depression ended quickly, and answers that it should not interfere with the market's adjustment process. He then lists the measures he says hamper it: preventing or delaying liquidation, inflating further, keeping wage rates up, keeping prices up, stimulating consumption and discouraging saving, and subsidising unemployment.
He also argues, as the previous lesson set out, that the government should not block a credit contraction, because on his account deflation speeds recovery.
Hayek's derivation, later
In the chapter on the campaign against Keynesian inflation in New Studies, published in 1978, he says the first necessity is to stop the increase in the quantity of money or reduce it to the rate of real growth of production, and that he can see no advantage in gradual deceleration.
He then says this does not mean a real deflation should be allowed to set in, that if he were responsible for a country's monetary policy he would endeavour to prevent a threatening actual deflation with all suitable methods, and that a secondary depression caused by induced deflation should be prevented.
Where this academy stands
Nowhere. This is a research tool for people reading company filings, and it has no position on monetary policy, fiscal policy, bank regulation, the gold standard or the existence of a central bank.
What it does have a position on is honesty. A reader who is given one of the two columns above and told it is the Austrian view has been misinformed about a tradition that argues with itself in print.
Check yourself
Why do two economists sharing this mechanism reach different policy conclusions?
- Because one of them misunderstands the theory
- Because getting from an explanation to a prescription needs extra premises about institutions, consequences and value, which the theory does not contain
- Because they use different data
Show the answer
Answer: B.
Rothbard and Hayek both accept the account of the boom in this track and part on what should happen during the contraction.What did Hayek hold in 1978 about a threatening actual deflation?
- That it should be allowed to run
- That if responsible for monetary policy he would endeavour to prevent it, while first stopping the increase in the quantity of money
- That it is impossible under fiat money
Show the answer
Answer: B.
He also says a secondary depression caused by an induced deflation should be prevented by appropriate monetary counter-measures.What position does this academy take on these questions?
- Rothbard's
- None. It reports both as positions held by named people and gives no advice
- Hayek's later one
Show the answer
Answer: B.
This is a research tool for reading company filings. It has no position on monetary policy, fiscal policy, bank regulation or the structure of the banking system.Sources
- Rothbard, America's Great Depression, 1963, part one, chapter 1, section on government depression policy, for the injunction not to interfere with the market's adjustment process and for the six measures he lists as hampering it.
- Rothbard, America's Great Depression, 1963, part one, chapter 1, section on secondary features of depression, for the claim that the government should not block a credit contraction.
- Hayek, New Studies in Philosophy, Politics, Economics and the History of Ideas, 1978, the chapter 'The Campaign Against Keynesian Inflation', for stopping the increase in the quantity of money or reducing it to the rate of real growth, for seeing no advantage in gradual deceleration, for endeavouring to prevent a threatening actual deflation, and for preventing a secondary depression caused by induced deflation.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The two columns describe positions held by two named authors at two dates. They are reported, not endorsed, and neither is presented as the position of the tradition as a whole.
- Every position described here has been argued against at length by economists inside and outside this tradition, and those arguments are not reproduced in this lesson.
- Nothing in this lesson is a recommendation about policy, about markets, or about any security.