A Tiger by the Tail A Tiger by the Tail A 40-Years’ Running Commentary on Keynesianism by Hayek With an essay on ‘The Outlook for the 1970s: Open or Repressed Infl ation?’ by F.A. HAYEK Nobel Laureate 1974 Compiled and Introduced by Sudha R. Shenoy Introduction by Joseph T. Salerno Third Edition Published jointly by The Institute of Economic Affairs and the Ludwig von Mises Institute First published 1972 Second Impression 1973 Second Edition 1972 and 1978 © The Institute of Economic Affairs Third Edition 2009 © The Institute of Economic Affairs New Material 2009 © Ludwig von Mises Institute, Creative Commons 3.0 All rights reserved. Written permission must be secured from the publisher to use or reproduce any part of this book, except for brief quotations in critical reviews or articles. ISBN: 978-1-933550-40-4 ACKNOWLEDGEMENTS We are grateful to Routledge and Kegan Paul, the Editors of The Economic Journal and Professor Hayek for permission to reproduce extracts or articles. — Editor CONTENTS Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Guide to Extracts and Articles. . . . . . . . . . . . . . . . . . . . . . . . . . . xi Introduction to the Third Edition by Joseph T. Salerno . . . . . . xiii Preface by Arthur Seldon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxi Preface to the Second Edition by Arthur Seldon . . . . . . . . . . . .xxv The Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xxvii I. The Debate, 1931–1971: Sudha Shenoy . . . . . . . . . . . . . . . 1 Challenge to Keynes . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Approach to an Incomes Policy. . . . . . . . . . . . . . 5 ‘Micro’ Dimensions Acknowledged . . . . . . . . . . . . . . 9 Is There a Price ‘Level’? . . . . . . . . . . . . . . . . . . . . . . 10 Further Implications of Hayekian Analysis. . . . . . . . 13 II. The Misuse of Aggregates . . . . . . . . . . . . . . . . . . . . . . . . . .15 1. Infl ationism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 2. N o Causal Connection Between Macro Totals and Micro Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3. Fallacy of ‘The’ Price Level . . . . . . . . . . . . . . . . . . . . . 17 4. Economic Systems Overleap National Boundaries . . . 18 Misleading Concepts of Prices and Incomes. . . . . . . .19 5. Dangers of ‘National’ Stabilisation . . . . . . . . . . . . . . . 20 Theoretical Case Not Argued. . . . . . . . . . . . . . . . . . 21 Relative Price and Cost Structures . . . . . . . . . . . . . . 22 6. Monetary Danger of Collective Bargaining. . . . . . . . . 24 vii A TIGER BY THE TAIL III. Neglect of Real for Monetary Aspects. . . . . . . . . . . . . . . . 27 7. Keynes’s Neglect of Scarcity . . . . . . . . . . . . . . . . . . . . 27 Investment Demand and Incomes . . . . . . . . . . . . . . 28 Final Position of Rate of Return. . . . . . . . . . . . . . . . 29 Mr. Keynes’s Economics of Abundance . . . . . . . . . . 30 Basic Importance of Scarcity . . . . . . . . . . . . . . . . . . 33 8. Importance of Real Factors . . . . . . . . . . . . . . . . . . . . . 34 Signifi cance of Rate of Saving . . . . . . . . . . . . . . . . . 35 9. Dangers of the Short Run . . . . . . . . . . . . . . . . . . . . . . 37 Betrayal of Economists’ Duty. . . . . . . . . . . . . . . . . . 39 IV. International versus National Policies . . . . . . . . . . . . . . . . 41 10. A Commodity Reserve Currency . . . . . . . . . . . . . . . . 41 An Irrational but Real Prestige. . . . . . . . . . . . . . . . . 42 11. Keynes’s Comment on Hayek . . . . . . . . . . . . . . . . . . . 43 Conditions for National Price Stability . . . . . . . . . . 44 Different National Policies Needed . . . . . . . . . . . . . 45 12. F.D. Graham’s Criticism of Keynes . . . . . . . . . . . . . . . 47 The ‘Natural Tendency of Wages’ . . . . . . . . . . . . . . 48 Gold Standard ‘Dictation’ . . . . . . . . . . . . . . . . . . . . 50 Unanchored Medium of Exchange. . . . . . . . . . . . . . .51 The Real Problem of Unemployment . . . . . . . . . . . . 53 Professor Hayek’s ‘Intransigence’ . . . . . . . . . . . . . . . 54 13. Keynes’s Reply to Graham . . . . . . . . . . . . . . . . . . . . . 56 V. Wage Rigidities and Infl ation . . . . . . . . . . . . . . . . . . . . . . 59 14. Full Employment, Planning and Infl ation. . . . . . . . . . 59 Full Employment the Main Priority . . . . . . . . . . . . . 60 Unemployment and Inadequate Demand. . . . . . . . . .61 Main Cause of Recurrent Unemployment . . . . . . . . 63 Expansion May Hinder Adjustment. . . . . . . . . . . . . 65 viii CONTENTS 15. Infl ation Resulting from Downward Infl exibility of Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Importance of Relative Wages . . . . . . . . . . . . . . . . . 68 Infl ation—A Vicious Circle . . . . . . . . . . . . . . . . . . . 70 The State of Public Opinion . . . . . . . . . . . . . . . . . . 72 16. Labour Unions and Employment . . . . . . . . . . . . . . . . 73 Changed Character of the Problem . . . . . . . . . . . . . 74 Union Coercion of Fellow Workers . . . . . . . . . . . . . 78 Wage Increases at Expense of Others . . . . . . . . . . . . 80 Harmful and Dangerous Activities. . . . . . . . . . . . . . 82 Acting against Members’ Interests . . . . . . . . . . . . . . 84 A Non-coercive Role . . . . . . . . . . . . . . . . . . . . . . . . 87 Minor Changes in the Law . . . . . . . . . . . . . . . . . . . 90 Responsibility for Unemployment . . . . . . . . . . . . . . 93 Progression to Central Control. . . . . . . . . . . . . . . . . 96 ‘Unassailable’ Union Powers. . . . . . . . . . . . . . . . . . . 99 17. (a) Infl ation—A Short-term Expedient (b) Infl ation—The Deceit is Short-lived. . . . . . . . . . . .101 17. (a) Infl ation—A Short-term Expedient . . . . . . . . .101 Infl ation Similar to Drug-taking . . . . . . . . . . . . . . 102 Accelerating Infl ation. . . . . . . . . . . . . . . . . . . . . . . 104 The Path of Least Resistance . . . . . . . . . . . . . . . . . . . . . 105 17. (b) Infl ation—The Deceit is Short-lived . . . . . . . 106 Limited Central Bank Infl uence. . . . . . . . . . . . . . . 107 Weak Opposition to Infl ation . . . . . . . . . . . . . . . . 108 VI. Main Themes Restated. . . . . . . . . . . . . . . . . . . . . . . . . . .111 18. Personal Recollections of Keynes. . . . . . . . . . . . . . . . .111 Keynes Changes His Mind . . . . . . . . . . . . . . . . . . .112 Thinking in Aggregates . . . . . . . . . . . . . . . . . . . . . .114 Full Employment Assumption . . . . . . . . . . . . . . . . .115 Wide Intellectual Interests . . . . . . . . . . . . . . . . . . . .117 19. General and Relative Wages . . . . . . . . . . . . . . . . . . . .119 ix