Money and Inflation

by Hahn,

"Hahn picks away at the foundations of some recent economic analysis; he points to the absence of any acceptable theory of expectations; to the disturbing fact that even with certainty, and with correct predictions built into the model, shocks to the economic system can still result; to the difficulties and contradictions inherent in the idea of the 'neutrality' of money with respect to 'real' variables; and, most scathingly of all, to the extraordinary character of the monetarist claim that involuntary unemployment not only does not exist but has no useful meaning. These summaries do less than justice to the subtlety and specificity of argument involved, or to the book's engaging... mixture of vigour, cleverness, and elliptical egocentricity." London Review of Books

Genres: Economics

118 pages, Paperback

First published January 1, 1982

Reviews

[Frank Stein · Rating 3 out of 5]

This book is mainly of historical interest, in that it shows how heated the macroeconomic debates had become by the early 1980s. Cambridge Economics Professor Frank Hahn wishes unemployment on those he calls "Lucasians" economists and their associated "monetarists," so "that they may come to learn by personal experience what that notion is about." He lobs several squibs at "Ms. Thatcher." He regularly expresses "frustration" and anger at his opponents' positions. This is not how classic economics is usually done (although, one should read Robert Lucas's and Thomas Sargent's "After Keynesian Economics" (1979) for the other side of this trench war).

Hahn points out some real flaws in what is today called "Real Business Cycle" theory: namely, that wages don't adjust instantaneously even with full information; that aggregating wages and other prices is probably not justified; that jobs adjust by total employment and not just by hours, and so forth. He also, however, has trouble distinguishing these theories from those of Milton Friedman and the monetarists, which have survived the test of time a little better. Even against those, he does point out some issues that remain hardy perennials in the literature, such as the truth that monetary injections have distributional consequences, which therefore have real effects; that changes in total spending can affect current investment and savings, which therefore have long-term real effects; that inflation can happen in the absence of monetary injections; that given sticky prices some inflation may have positive real consequences. He also, in a point occasionally mentioned but not enough discussed, argues that to know how information effects a market you have to know the "model" by which the market processes that information. These are all points worth pondering.

But mainly, Hahn overplays his hand. He acts like any number of his comments are fatal for his opponent's views, as opposed to potential addendums to them, addendums which may not have very important empirical effects. So this book is an example of one of the final rearguard actions of Keynesianism against the monetarist onslaught. Historically, the book got inundated, but that doesn't mean all of it should be forgotten.