And old set of myths about Hayek and his work on money and
economic disequilibrium have recently been given new life by
again being circulated by Brad DeLong in his review of James Scott,
_Seeing Like a State_ and by Robert Skidelsky in his essay,
"Hayek versus Keynes: The Road to Reconciliation," recently
quoted by Richard N. Langlois in his EH.NET review of McCraw's
 _Prophet of Innovation_.

Let me begin by pointing out that Hayek can be found showing
how disequilibrium phenomena -- a trade cycle -- can be created
by banks and entrepreneurs in a system lacking a central bank.
He can also be found saying that changes in the supply of money
-- in a system lacking credit institutions -- will create system wide
disruptions in the ordering processes of the market.  Indeed,
Hayek calls money -- even in the absence of credit institutions --
"a kind of loose joint in the otherwise self-steering mechanism of
the market".

Yet one finds Brad DeLong asserting Hayek argued that "government
regulation of the money supply lies at the root of the business cycle".

In Hayek's _The Constitution of Liberty_ (p. 324-333) what you actually find
is Hayek arguing for the necessity of central banks -- and their use by
the government to "deliberately control the interacting money and
credit systems."  And one of the things he wants to use the central bank
for is to deliberately counteract "spontaneous fluctuations in the
supply of money."  And the bottom line idea here is that the central
bank can help counteract financial panics and trade cycle instability.

Compare Hayek's own words with this claim by Robert Skidelsky:

"Hayek believed that the market economy was a smoothly-adjusting machine
in the absence of credit creation by the banking system."

On top of the fact that Hayek didn't believe this, Hayek states flatly
that he can't imagine a market economy on the scale of our own which lacks
credit creating institutions.  Quote:  "We know of no substantially
different alternatives to the credit institutions on which the organization
of modern business has come largely to rely."  Hayek's monetary and trade
cycle theory wasn't interested in any economy of the sort Skidelsky seems to
think Hayek concerned himself with.  In fact, contrary to Skidelsky, for
Hayek
a money using market economy wasn't and couldn't ever be "a
smoothly-adjusting
machine."

Skidelsky goes on to contrast "Hayek's" view with what Skidelsky imagines
is Keynes "opposing" view: "Keynes saw monetary  'management' by the central
bank,
which could include credit creation, as the only way to keep it stable." In
fact, if you read Hayek's _The Constitution of Liberty_, you can see that
this
is also exactly Hayek's own view.


Richard N. Langlois, for his own part, seems to assume that Hayek's view
is contrary to Schumpeter's, when Langlois writes:

"Schumpeter believed that the process of growth could never be made
stable through monetary policy of any sort, since, in his view, the
money supply was the endogenous product of the entrepreneurial
process. Business cycles are thus an inevitable manifestation of
creative destruction."

I can't imagine that Hayek would find much here that was utterly
unacceptable.
Hayek would agree that the process of growth could never be made fully
stable through monetary policy.  Hayek would agree that the money supply
was in part an endogenous product of the entrpreneurial process.  And he
would
agree that the processes of growth and creative destruction manifest
themselves
across time in business cycle patterns.

Finally is should be noted, very late in his life and after his retirement
from
academics, Hayek put out what he called an intellectual "dare" or challenge
to
the economics profession -- his proposal for competitive currencies.  It
should
be noted that his proposal does not require the elimination of any central
bank,
it merely requires allowing for the use of more than one currency as legal
tender
in all transactions.

Brad DeLong claims that Hayek argued that "the Federal Reserve should be
abolished."
I can't recall anyplace where Hayek argued for that (if anyone can correct
me on that,
I'd welcome the correction.)  Hayek's argument for competing currencies does
not
require that.  But it is correct to say that Hayek's faith in the capacity
to get
sound decision making from the folks running the central banks increasingly
declined
over the years.  And he seems to have come to the conclusion that multiple
competitors
might do a better job dealing with the "knowledge problem" of identifying
"equilibrium"
interest rates over time, than would a single national bureaucratic entity.
As Hayek
had hoped, this argument has been taken up by other economists, who have
done a better
job with the problem than Hayek in his declining years was able to manage.
The results
of this work can be found in the publications of Lawrence White, among
others.


Greg Ransom