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A Tiger by the Tail: The Keynesian Legacy of Inflation
Book by Hayek, Friedrich A., Shenoy, Sudha R.
- GenresEconomicsNonfiction
158 pages, Paperback
First published January 1, 1972
About the author
Friedrich A. Hayek
260 books1,764 followersFriedrich August von Hayek CH was an Austrian and British economist and philosopher known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought. He is considered by some to be one of the most important economists and political philosophers of the twentieth century. Hayek's account of how changing prices communicate signals which enable individuals to coordinate their plans is widely regarded as an important achievement in economics. Hayek also wrote on the topics of jurisprudence, neuroscience and the history of ideas.
Hayek is one of the most influential members of the Austrian School of economics, and in 1974 shared the Nobel Memorial Prize in Economics with Gunnar Myrdal "for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena." He also received the U.S. Presidential Medal of Freedom in 1991 from president George H. W. Bush.
Hayek lived in Austria, Great Britain, the United States and Germany, and became a British subject in 1938.
Hayek is one of the most influential members of the Austrian School of economics, and in 1974 shared the Nobel Memorial Prize in Economics with Gunnar Myrdal "for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena." He also received the U.S. Presidential Medal of Freedom in 1991 from president George H. W. Bush.
Hayek lived in Austria, Great Britain, the United States and Germany, and became a British subject in 1938.
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Displaying 1 - 5 of 5 reviews
June 26, 2017
Excellent introduction to the Hayekian view and an absolute must for every student of macroeconomics.
The book mostly deals with the impossibility of sustaining employment with recourse to inflation, delving deeper than the superficial macro analysis into the discoordinations of relative prices brought about by powerful unions and previous credit-induced booms.
Hayek's point is that most unemployment is due to a discoordination between the pattern of demand and the distribution of the labor market, so that while we can avoid present unemployment by pumping the printing press, this will only agravate the misallocation of labor and end up being even harder to correct in the future. As people expect prices to keep rising, we need even more inflation to even keep the same level of employment - and that's the definition of a bubble: an activity that can only be sustained by adding more credit to the cocktail.
In my opinion, there's also another cause for the need for ever greater inflation in this vicious cycle: and that is capital consumption. If we keep capital consuming activities from being liquidated through credit creation, then, when prices readjust, we will need even more money to keep it going, as the depletion of the so called "subsistence fund" will mean higher real prices (which are seen as costs for the capital consuming activity).
There's also a lot of political speculation. I certainly wouldn't recommend this book to a union leader (they are beyond hope of even changing their mind) and in a sense the excerpts found in this book may explain why Hayek is seen by the left as a neoliberal nemesis.
I found Keynes's letter contained in the book, with respect to the international monetary order, also very enlightening with respect to his views. There's a sense of mystery regarding Keynes that makes people believe that he knew how things worked but people just couldn't really understand him. Well, for someone who has read some of Mises's most basic expositions of the mechanisms of a market economy, it is quite obvious that Keynes's mind was a mess in terms of economics and that he just couldn't avoid being more interested in influencing the politics of the time than in getting his economic model right. Keynes was a bad economist in what respects to understanding how the market is supposed to work. There's no way around that.
The book mostly deals with the impossibility of sustaining employment with recourse to inflation, delving deeper than the superficial macro analysis into the discoordinations of relative prices brought about by powerful unions and previous credit-induced booms.
Hayek's point is that most unemployment is due to a discoordination between the pattern of demand and the distribution of the labor market, so that while we can avoid present unemployment by pumping the printing press, this will only agravate the misallocation of labor and end up being even harder to correct in the future. As people expect prices to keep rising, we need even more inflation to even keep the same level of employment - and that's the definition of a bubble: an activity that can only be sustained by adding more credit to the cocktail.
In my opinion, there's also another cause for the need for ever greater inflation in this vicious cycle: and that is capital consumption. If we keep capital consuming activities from being liquidated through credit creation, then, when prices readjust, we will need even more money to keep it going, as the depletion of the so called "subsistence fund" will mean higher real prices (which are seen as costs for the capital consuming activity).
There's also a lot of political speculation. I certainly wouldn't recommend this book to a union leader (they are beyond hope of even changing their mind) and in a sense the excerpts found in this book may explain why Hayek is seen by the left as a neoliberal nemesis.
I found Keynes's letter contained in the book, with respect to the international monetary order, also very enlightening with respect to his views. There's a sense of mystery regarding Keynes that makes people believe that he knew how things worked but people just couldn't really understand him. Well, for someone who has read some of Mises's most basic expositions of the mechanisms of a market economy, it is quite obvious that Keynes's mind was a mess in terms of economics and that he just couldn't avoid being more interested in influencing the politics of the time than in getting his economic model right. Keynes was a bad economist in what respects to understanding how the market is supposed to work. There's no way around that.
October 25, 2023
A COLLECTION OF WRITINGS ABOUT VARIOUS SUBJECTS (BUT MOSTLY INFLATION)
The Publisher’s Note explains, “The first edition of [this book], which was published in 1972… comprised seventeen extracts from Professor Hayek’s writings and lectures two extracts from the works of Keynes, and one … of F.D. Graham… Included also in this first edition was Hayek’s essay, ‘The Outlook for the 1970s: Open or Repressed Inflation?’ written in July 1971. For the second edition of this work, published in 1978 … three excerpts from Hayek’s writings of the mid-1940s were added… to the original edition… The Cato Institute … is pleased to present this third edition… this new edition … contains… the text of a lecture entitled ‘Can We Still Avoid inflation?’ delivered by Professor Hayek … on May 18, 1970.”
Sudha R. Shenoy’s Introduction outlines, “There are further implications of the Hayekian approach: 1. If the current level of output and employment is made to depend on inflation, a slowing-down in the pace of inflation will produce recessionary symptoms. Moreover… the rate must itself be continuously increased if symptoms of a depression are to be avoided. Thus, to inflate is to have ‘a tiger by the tail.’ 2. To limit price or wage-rate increases by an incomes policy is to freeze a particular set of price and wage-rate interrelationships while underlying circumstances of supply and demand are continually changing. This is like the ‘stability’ of a set of defective gauges perpetually pointing to the same set of readings.” (Pg. 11)
Hayek explains, “What is so difficult here for the layman to understand is that to protect the individual against the loss of his job may not be a way to decrease unemployment but may over longer periods rather to decrease the number which can be employed at given wages. If a policy is pursued over a long period which postpones and delays movements, which keeps people in their old jobs who ought to move elsewhere, the result must be that what ought to have been a gradual process of change becomes in the end a problem of the necessity of mass transfers within a short period.” (Pg. 56)
He states, “The point which tends to be overlooked in current discussions is that inflation as a stimulus to business only insofar as it is unforeseen, or greater than expected. Rising prices by themselves, as has often been seen, are not necessarily a guarantee of prosperity. Prices must turn out to be higher than they were expected to be, in order to produce profits larger than normal. Once a further rise in prices is expected with certainty, competition for the factors of production will drive up costs in anticipation. If prices rise no more than expected, there will be no extra profits, and if they rise less, the effect will be the same as if prices fell when they had been expected to be stable.” (Pg. 60)
He argues, “Though unions may still often act on a contrary belief, there can now be no doubt that they cannot in the long run increase real wages for all wishing to work above the level that would establish itself in a free market---though they may well push up the level of money wages, with consequences that will occupy us later. Their success in raising real wages beyond that point, if it is to be more than temporary, can benefit only a section al interest even when it obtains the support of all. This means that strictly voluntary unions, because their wage policy would not be in the interest of all workers, could not long receive the support of all. Unions that had no power to coerce outsiders would thus not be strong enough to force up wages above the level at which all seeking work could be employed, that is, the level that would establish itself in a truly free market for labor in general.” (Pg. 69)
He asserts, “The accidental differences in union power of the different trades and industries will produce not only gross inequalities in remuneration—which have no economic justification---among the workers, but uneconomic disparities in the development of different industries. Socially important industries, such as building, will be greatly hampered in their development and will conspicuously fail to satisfy urgent needs simply because their character offers the unions special opportunities for coercive monopolistic practices. Because unions are most powerful where capital investments are heaviest, they tend to become a deterrent to investment---a deterrent at present probably second only to taxation…Unionism as it is now tends… to produce that very system of overall socialist planning which few unions want and which, indeed, it is in their best interest to avoid.” (Pg. 71-72.
He acknowledges, “unions have [some] useful functions to perform… unions will fully develop their potential usefulness only after they have bene diverted from their present antisocial aims by an effective prevention of the use of coercion. Unions without coercive powers would probably play a useful and important role … in the process of wage determination… there is often a choice to be made between wage increases… and … alternative benefits which the employer could provide at the same cost… The same is true … of all the general problems relating to conditions of work other than individual remuneration, those problems which truly concern all employees and which, in the mutual interest of workers and employers… takes account of as many desires as possible… There is, finally, the oldest and most beneficial activity of the unions … as ‘friendly societies’ they undertake to assist members in providing against the peculiar risks of their trade.” (Pg. 75-77)
He contends, “The process is sometimes described as though wage increases directly produced inflation. This is not correct. If the supply of money and credit were not expanded, the wage increases would rapidly lead to unemployment. But under the influence of a doctrine that represents it as the duty of the monetary authorities to provide enough money to secure full employment at any given wage level, it is politically inevitable that each round of wage increases should lead to further inflation.” (Pg. 82)
He observes, “From what we know, it still seems probable that we should be able to prevent serious depressions by preventing the inflations which regularly precede them, but that there is little we can do to cure them, once they have set it. The time to worry about depressions is, unfortunately, when they are furthest from the minds of most people.” (Pg. 90)
He states, “There are two points that cannot be stressed enough. First, it seems certain that we shall not stop the drift toward more and more state control unless we stop the inflationary trend. Second, any continued rise in prices is dangerous because, once we begin to rely on its stimulating effect, we shall be committed to a course that will leave us no choice but that between more inflation, on the one hand, and paying for our mistake by a recession or depression, on the other. Even a very moderate degree fo inflation is dangerous because it ties the hands of those responsible for policy by creating a situation in which, every time a problem arises, a little more inflation seems the only easy way out.” (Pg. 94)
He recalls, “I had undertaken to review … [Keynes’] ‘Treatise On Money’ … and I put a great deal of work into two long articles on it… Great was my disappointment … because…. He told me that he … no longer believed what he had said in that work. This was one of the reasons I did not return to the attack when he published his now famous ‘General Theory’---a fact for which I later much blamed myself. But I feared that before I had completed my analysis, he would again have changed his mind. Though he had called it a ‘general’ theory, it was to me too obviously another tract for the times, conditioned by what he thought were the momentary needs of policy.” (Pg. 98)
He continues, “the last time I saw him, a few weeks before his death… I had asked him whether he was not getting alarmed about the use to which some of his disciples were putting his theories. His reply was that these theories had been greatly needed in the 1930s, but if these theories would ever become harmful, I could be assured that he would quickly bring about a change in public opinion… he was really supremely confident of his powers of persuasion and believed that he could play on public opinion as a virtuoso plays on his instrument.” (Pg. 101-102)
He suggests, “There are two important reasons for this failure. Inflation tends not only to preserve but to increase the maldistribution of labor between industries, which must produce unemployment as soon as inflation ceases. Secondly, some of the stimulating effects of inflation are due to prices being for a time higher than expected, so that many undertakings are successful which would have failed if prices had not risen.” (Pg. 112)
This book will appeal to many Libertarians, as well as those studying Austrian economics.
The Publisher’s Note explains, “The first edition of [this book], which was published in 1972… comprised seventeen extracts from Professor Hayek’s writings and lectures two extracts from the works of Keynes, and one … of F.D. Graham… Included also in this first edition was Hayek’s essay, ‘The Outlook for the 1970s: Open or Repressed Inflation?’ written in July 1971. For the second edition of this work, published in 1978 … three excerpts from Hayek’s writings of the mid-1940s were added… to the original edition… The Cato Institute … is pleased to present this third edition… this new edition … contains… the text of a lecture entitled ‘Can We Still Avoid inflation?’ delivered by Professor Hayek … on May 18, 1970.”
Sudha R. Shenoy’s Introduction outlines, “There are further implications of the Hayekian approach: 1. If the current level of output and employment is made to depend on inflation, a slowing-down in the pace of inflation will produce recessionary symptoms. Moreover… the rate must itself be continuously increased if symptoms of a depression are to be avoided. Thus, to inflate is to have ‘a tiger by the tail.’ 2. To limit price or wage-rate increases by an incomes policy is to freeze a particular set of price and wage-rate interrelationships while underlying circumstances of supply and demand are continually changing. This is like the ‘stability’ of a set of defective gauges perpetually pointing to the same set of readings.” (Pg. 11)
Hayek explains, “What is so difficult here for the layman to understand is that to protect the individual against the loss of his job may not be a way to decrease unemployment but may over longer periods rather to decrease the number which can be employed at given wages. If a policy is pursued over a long period which postpones and delays movements, which keeps people in their old jobs who ought to move elsewhere, the result must be that what ought to have been a gradual process of change becomes in the end a problem of the necessity of mass transfers within a short period.” (Pg. 56)
He states, “The point which tends to be overlooked in current discussions is that inflation as a stimulus to business only insofar as it is unforeseen, or greater than expected. Rising prices by themselves, as has often been seen, are not necessarily a guarantee of prosperity. Prices must turn out to be higher than they were expected to be, in order to produce profits larger than normal. Once a further rise in prices is expected with certainty, competition for the factors of production will drive up costs in anticipation. If prices rise no more than expected, there will be no extra profits, and if they rise less, the effect will be the same as if prices fell when they had been expected to be stable.” (Pg. 60)
He argues, “Though unions may still often act on a contrary belief, there can now be no doubt that they cannot in the long run increase real wages for all wishing to work above the level that would establish itself in a free market---though they may well push up the level of money wages, with consequences that will occupy us later. Their success in raising real wages beyond that point, if it is to be more than temporary, can benefit only a section al interest even when it obtains the support of all. This means that strictly voluntary unions, because their wage policy would not be in the interest of all workers, could not long receive the support of all. Unions that had no power to coerce outsiders would thus not be strong enough to force up wages above the level at which all seeking work could be employed, that is, the level that would establish itself in a truly free market for labor in general.” (Pg. 69)
He asserts, “The accidental differences in union power of the different trades and industries will produce not only gross inequalities in remuneration—which have no economic justification---among the workers, but uneconomic disparities in the development of different industries. Socially important industries, such as building, will be greatly hampered in their development and will conspicuously fail to satisfy urgent needs simply because their character offers the unions special opportunities for coercive monopolistic practices. Because unions are most powerful where capital investments are heaviest, they tend to become a deterrent to investment---a deterrent at present probably second only to taxation…Unionism as it is now tends… to produce that very system of overall socialist planning which few unions want and which, indeed, it is in their best interest to avoid.” (Pg. 71-72.
He acknowledges, “unions have [some] useful functions to perform… unions will fully develop their potential usefulness only after they have bene diverted from their present antisocial aims by an effective prevention of the use of coercion. Unions without coercive powers would probably play a useful and important role … in the process of wage determination… there is often a choice to be made between wage increases… and … alternative benefits which the employer could provide at the same cost… The same is true … of all the general problems relating to conditions of work other than individual remuneration, those problems which truly concern all employees and which, in the mutual interest of workers and employers… takes account of as many desires as possible… There is, finally, the oldest and most beneficial activity of the unions … as ‘friendly societies’ they undertake to assist members in providing against the peculiar risks of their trade.” (Pg. 75-77)
He contends, “The process is sometimes described as though wage increases directly produced inflation. This is not correct. If the supply of money and credit were not expanded, the wage increases would rapidly lead to unemployment. But under the influence of a doctrine that represents it as the duty of the monetary authorities to provide enough money to secure full employment at any given wage level, it is politically inevitable that each round of wage increases should lead to further inflation.” (Pg. 82)
He observes, “From what we know, it still seems probable that we should be able to prevent serious depressions by preventing the inflations which regularly precede them, but that there is little we can do to cure them, once they have set it. The time to worry about depressions is, unfortunately, when they are furthest from the minds of most people.” (Pg. 90)
He states, “There are two points that cannot be stressed enough. First, it seems certain that we shall not stop the drift toward more and more state control unless we stop the inflationary trend. Second, any continued rise in prices is dangerous because, once we begin to rely on its stimulating effect, we shall be committed to a course that will leave us no choice but that between more inflation, on the one hand, and paying for our mistake by a recession or depression, on the other. Even a very moderate degree fo inflation is dangerous because it ties the hands of those responsible for policy by creating a situation in which, every time a problem arises, a little more inflation seems the only easy way out.” (Pg. 94)
He recalls, “I had undertaken to review … [Keynes’] ‘Treatise On Money’ … and I put a great deal of work into two long articles on it… Great was my disappointment … because…. He told me that he … no longer believed what he had said in that work. This was one of the reasons I did not return to the attack when he published his now famous ‘General Theory’---a fact for which I later much blamed myself. But I feared that before I had completed my analysis, he would again have changed his mind. Though he had called it a ‘general’ theory, it was to me too obviously another tract for the times, conditioned by what he thought were the momentary needs of policy.” (Pg. 98)
He continues, “the last time I saw him, a few weeks before his death… I had asked him whether he was not getting alarmed about the use to which some of his disciples were putting his theories. His reply was that these theories had been greatly needed in the 1930s, but if these theories would ever become harmful, I could be assured that he would quickly bring about a change in public opinion… he was really supremely confident of his powers of persuasion and believed that he could play on public opinion as a virtuoso plays on his instrument.” (Pg. 101-102)
He suggests, “There are two important reasons for this failure. Inflation tends not only to preserve but to increase the maldistribution of labor between industries, which must produce unemployment as soon as inflation ceases. Secondly, some of the stimulating effects of inflation are due to prices being for a time higher than expected, so that many undertakings are successful which would have failed if prices had not risen.” (Pg. 112)
This book will appeal to many Libertarians, as well as those studying Austrian economics.
October 8, 2019
The material covered in the book is thoroughly academic, especially the language in which it is presented is very dry. However, for readers who want to understand the effects of various monetary and fiscal policies this book is a revelation.
July 3, 2022
The last 50 or so pages are gold. This is a great format for Hayek's essays, demonstrating the essentials of his criticisms of Keynes without too much fluff.
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September 23, 2010A Tiger by the Tail: The Keynesian Legacy of Inflation (Cato paper) by Friedrich A. Hayek (1979)
Displaying 1 - 5 of 5 reviews