Hayek
in
the Roaring Twenties
Almost final version
For
The Annual Conference of HETSA 2016
By
Shigeki TOMO, Ph.D.
Kyoto-Sangyo University, under dispute
[email protected]
Acknowledgements
My heartfelt thanks must go to Profs Harada & Kubo at Kwansei-Gakuin University, Prof Taishido at
Tohyoh University, Prof Shimodaira at Yamagata University, Young Ph.D scholar Yoshihumi Ozawa at
Tohhoku University and Prof Rieko TOMO for kindly helping me to refer to the materials quoted in my
paper. Also to Prof Alex Millmow for generously giving an opportunity for me to read my paper at the
HETSA conference in Melbourne.
 Purposes of this paper
To show how Hayek became a successful liberalist follower of the Austrian
School of economics in the 1920s, by underlining his unique orientation
represented by the order perspective. It evolved from the emergence
problem of order in general during his undergraduate and Ph.D candidate
days at Vienna to the sustainability condition for economic order at New
York.
Seeing currency as a fundamental element of economic order, to
which sustainability the stability of currency would be required, Hayek
started empirical studies in the American actual institution of the Gold
Standard under W. C. Mitchell suggesting reading of Publications of the
Pollak Foundation for Economic Research.
It was its volume 1, Irving Fisher’s Stabilizing the Dollar, that
brought Hayek the liberalist viewpoint of criticizing policymakers’
arbitrary manipulation for stabilizing the purchasing power of currency.
This is in liberalist line with Hayek’s supporting the automatic adjusting
mechanism of the gold standard under the non-arbitrarily rule of keeping a
constant convertible rate and free specie shipping.
At the same time at New York, the order perspective lead Hayek to
return to Böhm-Bawerk’s idea on profitability of roundaboutness for
elaborating his monetary theory of business cycle. It was Pollak
Foundation’s volume 2, Foster & Catchings’ Money, that triggered Hayek
as an eminent Austrian scholar to be invited by Robbins to the LSE after the
Roaring Twenties.
 Works by Hayek in the 1920s
At Vienna
1920 Sept. Beiträge der Entwicklung des Bewußtseins
1923 Feb. Zur Problemstellung der Zurechnungslehre,
March: Dr. of Staatswissenschaften
Excommunicated from Spann’s Seminar
At New York (March 1923 -)
1924 March Das Stabilisierungsproblem in Goldwährungsländern (a review
article on 11 books)
At Vienna (May 1925 - )
1925-a Das amerikanische Bankwesen seit der Reform von 1914 (Not in
McCloughry, Roy ed. (1984) Money Capital & Fluctuations, Early
Essays by F. A. Hayek)
1925-b Die Währungspolitik der Verinigten Staaten seit der Überwindung
der Kriese von 1920 (An English extract of Sec. 6 in McCloughry,
Roy ed. (1984) Ch.1 "Monetary Policy in the United States after the
Recovery from the Crisis of 1920." also in Good Money, Part I: The
New World (vol. 5 of The Collected Works of F. A. Hayek), ed.
Stephen Kresge, 71-152. University of Chicago Press
1926 Bemerkungen zum Zurrechnungsproblem (McCloughry, Roy ed.
(1984) Ch. 2)
1926 Friedrich Freiherr von Wieser (obituary essay; in Hayek ed (1929)
1927-a March Aufgaben der Konjunkturforschung
1927-b Zur Problemstellung der Zinstheorie (McCloughry, Roy ed. (1984)
Ch 3)
1928 Das intertemporale Gleichgewichtssystem der Preise und die
Bewegungen des "Geldwertes" (McCloughry, Roy ed. (1984) Ch
4)
1929 Geldtheorie und Konjunkturtheorie (Habilitation)
1929 Friedrich Freiherr von Wieser Gesammelte Abhandlungen
------------------------------------------------------------------------------------1930 Gibt es einen "Widersinn des Sparens"?
At the LSE (January 1931 -)
1931 May Paradox of Savings
 The order perspective for Hayek at Vienna
The emergence problem of order
(a) Two types of order: (Hayek 1920)
1) spontaneous: human consciousness
From Mach, Schlick, Wundt, James (Tomo 2015 May)
2) designed: democracy
From Hans Kelsen (1920) (Tomo 2015 September)
(b) No emergence problem of order in Economics (Hayek 1923):
Methodological givenness (Tomo 2015 July)
 The Gold Standard for Hayek at New York
(a) From the emergence to the sustainability conditions for order
(b) Constant Gold convertibility and free specie shipment as liberalist rules
for an economic order
b.1 not for but against Fisher’s 1920 Plan (On the top of Hayek 1924)
b.2 investigated the American central banking system (Hayek 1925-a)
b.3 devoted pages to his empirical analysis on the effects of the constant
convertible rate and free specie shipment (Hayek 1925-b: Secs. 1 to 5
untranslated in English)
(c) Hayek’s future liberalist proposal for currency stabilization by
individual free selections of currencies
 Fisher’s 1920 Plan
(a) Contents:
Proposal for an arbitrary manipulation of the gold convertible rate,
$20.67 per Gold ounce, according to the price index to stabilize the
purchasing power of dollar, based on the Gold Standard
(b) Interpretations
b.1 The first target of Hayek’s liberalist criticism: Hayek saw it as an
arbitral manipulation by policymakers
b.2 Hayek’s objection from an orthodox viewpoint of price mechanism
in the free competitive market. An equilibrium price level cannot be
controlled as long as the market remains freely competitive. (Hayek
1924 370)
 The source of Hayek’s criticism against Fisher
(a) Friedrich Wieser
Was not the supervisor for Hayek’s dissertation, due to his
retirement
(b) referred to by Hayek (1924 378)
(c) Wieser’s collected works edited by Hayek (1929)
(d) conjecture
Wieser must have directly at Vienna suggested to Hayek two unsolved
problems of marginal utility economics: 1) the coordination of price
determination represented by Menger’s horse trading model with the
imputation theory of distribution; 2) the explanation for the value of
money on the principle of marginal utility.
 Hayek’s 1925-b investigation of free specie shipment
(Hayek 1925-b p.28)
This belongs to the part untranslated in English.
 The road to the Tooke Professorship
The German original article “Paradox of Savings” (Hayek 1930) was
translated by Kaldor and Tugendhat for publication in Economica
following the suggestion by the author, Hayek. There are two remarkable
omissions in the English translation, which has blocked reader’s attention
out of noticing its origin: as early as 1924 Hayek had already reached
through Foster & Catchings an idea of applicability of Böhm-Bawerk’s
capitalist postulate of roudaboutness.
(a) Hayek’s 1930 subtitle untranslated
Gibt es einen "Widersinn des Sparens"? Eine Kritik der Kriesentheorie von
W. T. Foster und W. Catchings mit einigen Bemerkungen zur Lehre von den
Beziehungen zwischen Geld und Kapital
(b) One untranslated footnote as to Foster & Catchings on page 388 of
Hayek 1930
The German term “Sammelbesprechungen” simply indicates that Hayek
1924 is not a regular article, but a review and that it must have reviewed
several books including Foster and Catchings, which Hayek read at New
York. It would be natural for scholars interested in Hayek’s intellectual
developments to infer that the origin of Hayek’s 1931 article on the
paradox of savings could be traced back to his reading experiences at New
York.
(c) No mention to the importance of Hayek’s 1924 review article in major
biographies on Hayek: ex. in Ch 4 describing Hayek at New York by
Ebenstein (2000) as well as in Caldwell (2004)
 Opening page of Hayek 1924
 Money as a fundamental property of economic order
(a) Among seven usages of the key term “economic order” in Foster &
Catchings’ Money, we can find its interesting definition, which Hayek did
not quoted, but must convincingly have accepted, as follows:
Assuming that we are right in our contention that production of
goods and human welfare generally are best advanced in an
economic order based on private property, individual initiative, and
a medium of exchange, society must not only provide sufficient
inducements for the saving of money, but also some means of
distributing savings among the innumerable producers who would
like to make use of savings. (Foster & Catchings 1923 - 1928 136)
(b) Hayek’s expression of the order of monetary system (die Ordnung des
Geldwesens) on page 371 of Hayek 1924.
 Hayek’s Repetition of quoting Foster & Catchings 1923, p. 277
MONEY spent in the consumption of commodities is the force that
moves all the wheels of industry. When this force remains in right
relation to the volume of commodities offered for sale, business
steadily. When money is spent faster than the commodities reach
the retail markets, business booms forward. When commodities
continue to reach the retail markets faster than money is spent,
business slackens. (Foster & Catchings 1923 277)
– Hayek 1924 379; Hayek 1930 389; Hayek 1931 127)
 Hayek’s own German translation of Foster & Catchings 1923, p. 277
Das für Genußgüter ausgegebene Geld ist die Kraft, die alle Räder
der Industrie treibt. So lange diese Kraft im richtigen Verhältnis zur
Menge der zum Verkauf angebotenen Güter bleibt, verläuft das
Gesehäftsleben stetig. Wenn Geld schneller ausgegeben wird, als
die Güter die Detailmärkte erreichen, blüht das Geschäft auf, wenn
jedoch die Güter dauernd schneller auf den Markt kommen, als
Geld ausgegeben wird, versiegt es. Damit jahrein, jahraus alle Güter
von, Markte genommen werden können, ohne daß das
Gesehäftsleben Störungen erleidet, müssen die Verbraucher genau
so viel Geld und nicht mehr ausgeben, als nötig ist, um allen Waren
Dollar für Dollar zu entsprechen. (S. 277.)
(a) These sentences are repeatedly presented on page 389 of his 1930
article.
(b) The last sentence highlighted in red was omitted in his English
translation (1931).
 The origin for Hayek to be an eminent scholar of Austrian School
Hayek was inspired by this paragraph to conceptualize that the key for
explaining business cycle lies in answering the question whether there is
the regular cause of the diversity in the rates of money and commodity
flows in an economic order.
Our capitalist society is characterized as adoption of the roundabout
process of production. It was Eugen von Böhm-Bawerk who pointed out its
profitability for explaining the existence of positive rates of interest. It
would explain business cycle from the discrepancy between supply side
and money supply: the speed of commodity flows is capitalistically lower
than that of money flows accelerated by bank credit even under the gold
standard.
 Two Evidences
Hayek had read Böhm-Bawerk’s Positive Theory of Capital before 1924
(a) Hayek referred to Böhm-Bawerk in his 1923 dissertation (Hayek
1923 )
(b) Hayek recommended F. X. Weiss as the editor of Collected Works of
Böhm-Bawerk, whose first volume was published in 1924, to
include in its collection the author’s 1876 unpublished draft on
interest submitted at Knies’ Heidelberg seminar. It was in Winter
1922/23 that Hayek found the draft at the hand of the widow of
Böhm-Bawerk (Yagi ed. 1983 15). In spite of Hayek’s
recommendation, Weiss rejected it, even though he regarded it as
“Ur-Positive”, which means that it primitively anticipated the
contents of Böhm-Bawerk’s Positive Theory of Capital. Hayek’s
pre-1924 commitment as to the Austrian grandmaster should assure
that Hayek had already prepared for an idea elucidating the reason
why the flow rates of goods inclines to be lower due to capitalist
structure of production.
 Concluding Remarks
It was Hayek’s introduction of the Austrian roundaboutness idea for an
amendment of the English interesting monetary arguments suggesting some
fundamental properties of savings, its paradox or forced savings by Foster
& Catchings in his German 1930 article, entitled “Gibt es einen Widersinn
des Sparens?,” that attracted Lionel Robbins deeply (Interview 109, 407,
Caldwell 2004 171ff). Its English translation by Kaldor and Tugendhat was
published in Economica of May 1931. For Hayek with order perspective,
Böhm-Bawerk’s capital theory may have been a mere source for finding
another fundamental property of the capitalist economic order at first. But
after all, it opened the gate for Hayek’s later successful life.
An offer came from Robbins for Hayek to deliver lectures at the
LSE. This invitation allowed Hayek to escape from the reality caused by
the Great Depression. In March 1927, Hayek as the director of the Austrian
Institute of business cycle tried to promote the forecasting method of
Harvard Economic Service (Hayek 1927), with whose director, Charles
Bullock, Hayek corresponded for collaboration in forecasting job
(Friedman, W. 2009), but failed in predicting the 1929 stock-market crash.
The collapse of the Harvard Economic Society after the Great Depression
indicated one of possibilities for Hayek’s hard future.
In February 1931 Hayek started teaching the theoretical stuffs
which would provide the basis for Price and Production. Its English was
supported by Hicks, one of audiences at Hayek’s lectures. Their
performance brought not only the Tooke Professorship at the LSE to Hayek
in 1931, which afforded him in October to pass his Vienna director position
to his close friend, Oskar Morgenstern, but also an opportunity for
publishing in English his old 1929 habilitation German paper: Trade Cycle
and Monetary Theory in 1933. More than forty years later, these
contributions were celebrated by the Novel Prize of economics.
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