Hayek, The Pure Theory of Capital

The European Central Bank has announced a programme of bond-buying of €60 billion a month, to be carried out at least until end-Sept 2016.

Monetary policy around the world remains in the midst of a remarkable experiment: money creation is expected sustainably to solve real economic problems. It is possible that there is something dangerously wrong with mainstream economic thought.

Hayek’s conclusion to The Pure Theory of Capital is a spectacular rant against those economists who consider only the short-run, surface effects of monetary policy and not the real effects which they set in train. He wrote:

[W]e are certainly entitled to conclude from what we have already shown that the extent to which we can hope to shape events at will by controlling money are much more limited, that the scope of monetary policy is much more restricted, than is today widely believed. We cannot, as some writers seem to think, do more or less what we please with the economic system by playing on the monetary instrument.


[T]he problem is not so much what we can do, but what we ought to do in the short run, and on this point a most harmful doctrine has gained ground in the last few years which can only be explained by a complete neglect – or complete lack of understanding – of the real forces at work.

Before getting into his stride with:

I cannot help regarding the increasing concentration on short-run effects – which in this context amounts to the same thing as a concentration on purely monetary factors – not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilisation.


It is not surprising that Mr. Keynes finds his views anticipated by the mercantilist writers and gifted amateurs: concern with the surface phenomena has always marked the first stage of the scientific approach to our subject. But it is alarming to see that after we have once gone through the process of developing a systematic account of those forces which in the long run determine prices and production, we are now called upon to scrap it, in order to replace it by the short-sighted philosophy of the business man raised to the dignity of a science. Are we not even told that, “since in the long run we are all dead”, policy should be guided entirely by short-run considerations? I fear that these believers in the principle of apres nous le deluge may get what they have bargained for sooner than they wish.

Many years ago, the intellectual errors underpinning the economics of Keynes won the day and here we are. This video explains:

Eventually, human flourishing will be best supported by free markets in the context of balanced budgets, lower taxes and sound money. This is a recognisably Conservative policy. In the meantime, the experiment in extraordinary if not emergency monetary policy continues.

I hope the market order does not take the blame for what is being done by authority.

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