In 1979 the Cato Institute published a collection of Hayek’s post-Nobel-laureate contributions to Austrian monetary theory, policy, and macroeconomics titled, Unemployment and Monetary Policy: Government as Generator of the Business Cycle. The monograph made more available to an American audience material originally published by The Institute of Economic Affairs in London in 1975, including the foreword by Gerald P. O’Driscoll and “A Note on Capital Theory” by Sudha R. Shenoy. This volume has been one of my favorites and has been a source I have used frequently during nearly 30 years of commentary on Hayek’s business cycle theory. It is good to see others highlight passages from the work as was done most recently in the “Quotation of the Day” posted by Don Boudreaux on November 12, 2012 at Café Hayek. Much of the content or similar content is available in New Studies in Philosophy, Economics and the History of Ideas. For those who prefer an audio rendition of many of Hayek’s arguments during this same period of time my mentor, Fred R. Glahe , has made an audio of Hayek’s lecture given at the Department of Economics of the University of Colorado on April 28th, 1975 available at the Mises Institute web site. The question and answer period with CU-Boulder faculty is quite interesting, especially in the context of the then-emerging stagflation and the breakdown of the Keynesian synthesis that occurred along with and because of the development of the Phelps-Freidman natural unemployment rate theory.
Bourdeaux’s quote of the day (p. 40):
The conquest of opinion by Keynesian economics is due mainly to the fact that its argument conformed to the age-old belief of the businessman that his prosperity depended on consumer demand. This plausible but erroneous conclusion was derived from his individual experience in business, namely, that general prosperity could be maintained by keeping general demand high. Economic theory had been rejecting this conclusion for generations, but it was suddenly made respectable by Keynes. And since the 1930s it has been embraced as obvious good sense by a whole generation of economists brought up on the teaching of his school. Thus for a quarter of a century we have systematically employed all available methods of increasing money expenditure, which in the short run creates additional employment but at the same time leads to a misdirection of labor that must ultimately result in extensive unemployment.
It is useful to add to this Austrian insight Bob Higgs’s important theory of regime uncertainty . (For a longer treatment, see here. [For an update see here and here]) Nothing in economic theory argues against the possibility of a relatively rapid restoration of employment – employment of labor and other resources rapidly channeled into whatArnold Kling describes as patterns of sustainable specialization and trade. In contrast, demand-management policies, such as those favored by Keynesians, effectively aim to channel unemployed workers and other resources back into the employments that have proven to be unsustainable.
CONTINUED at the Ludwig von Mises Institute. Written by John P. Cochran.