NGDP Targeting, Circa 1974
F. A. Hayek's iconic "pretense of knowledge" lecture and a "prebuttal" to Scott SumnerI was re-reading for no real good reason F. A. Hayek's 1974 Nobel Prize lecture, which came just in time for a backlash against Keynesian economics as the "stagflation" era began and inflation expectations rose. (Now, we have more complicated models of the aggregate supply function, but that's another story.) The lecture is stern, certainly, in its condemnation of "scientism" in macroeconomics. Hayek extended that to the macroeconomic discipline as a whole, frankly missing the boat on that old Say's-Law-is-Wrong thing, insisting that the all recessions can be fully explained by adjustment processes to correct relative prices. (Of course, structural adjustments are non-negligible causes of recessions, some more than others, but they are not even close to the whole story.)
What struck me as even more interesting, though, was a warning -- a "prebuttal," perhaps? -- against what we would now call NGDP targeting:
The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.Scott Sumner, watch out...