Keynes vs Hayek
I'll take Hayek and lay the points.
Hey Jethro, can you name any country whose economy is Austrian school based?
Oh, that's right...America, before Keynesian economics ended the Great Depression. You know, the Great Depression, the one caused by following Hayek...
Economic Policy Under Hoover
Throughout this declinewhich carried real GNP per worker down to a level 40 percent below that which it had attained in 1929, and which saw the unemployment rise to take in more than a quarter of the labor forcethe government did not try to prop up aggregate demand. The only expansionary fiscal policy action undertaken was the Veterans Bonus, passed over President Hoovers veto. That aside, the full employment budget surplus did not fall over 192933.
The Federal Reserve did not use open market operations to keep the nominal money supply from falling. Instead, its only significant systematic use of open market operations was in the other direction: to raise interest rates and discourage gold outflows after the United Kingdom abandoned the gold standard in the fall of 1931.
This inaction did not come about because they did not understand the tools of monetary policy. This inaction did not come about because the Federal Reserve was constrained by the necessity of defending the gold standard. The Federal Reserve knew what it was doing: it was letting the private sector handle the Depression in its own fashion. It saw the private sectors task as the liquidation of the American economy. It feared that expansionary monetary policy would impede the necessary private-sector process of readjustment.
Contemplating in retrospect the wreck of his countrys economy and his own presidency, Herbert Hoover wrote bitterly in his memoirs about those who had advised inaction during the downslide:
The leave-it-alone liquidationists headed by Secretary of the Treasury Mellon
felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.
He held that even panic was not altogether a bad thing. He said: It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.
The Federal Reserve took almost no steps to halt the slide into the Great Depression over 192933. Instead, the Federal Reserve acted as if appropriate policy was not to try to avoid the oncoming Great Depression, but to allow it to run its course and liquidate the unprofitable portions of the private economy.
In adopting such liquidationist policies, the Federal Reserve was merely following the recommendations provided by an economic theory of depressions that was in fact common before the Keynesian Revolution and was held by economists like
Friedrich Hayek, Lionel Robbins, and Joseph Schumpeter.
