Earlier there was a discussion about the importance of "Big" questions. A set of Twitter posts by Noah Smith were linked by /u/gorbachev.

Noah Smith wrote in reply to Branko Milankovic:

1/This thread argues that prizes like the Econ Nobel should be given based on the importance of the questions people ask, not on how sure we are that they got good answers.

I pretty strongly disagree.

2/We used to award Nobel Prizes to people for thinking long and hard about big issues. For example, Friedrich Hayek, who thought a lot about the causes of economic fluctuations and the political effects of the welfare state, won the prize in 1974.

3/No one can accuse Hayek of avoiding the big questions.

But did he get any of those big questions right?

One of Hayek's core theses was that countercyclical policy would lead to totalitarianism. This turned out to be completely wrong.

4/Hayek also had lots of thoughts about what caused business cycles, but I think it would be fair to say that right or wrong, his thoughts have not helped us deal with business cycles any better.

But he thought about them! He asked the big questions, and he got a Nobel for it.

Should we think less about the "Big Questions" (whatever those are)? Maybe, I won't go into that directly in this RI. I'm going to talk about the things Noah claims as evidence in his favour....

One of Hayek's core theses was that countercyclical policy would lead to totalitarianism. This turned out to be completely wrong.

Did Hayek claim this? I can see why people think he would. As you probably know, I'm a great fan of Hayek. I don't know of anywhere he expressed this view.... I challenge anyone to find a place where he did.

Certainly Hayek criticises various monetary policies and fiscal policies in several places. But, not on the grounds that they could cause Totalitarianism. He criticises Foster and Catchings, for example, on the basis that they get capital theory wrong. He criticises some public works plans on the same basis.

Here is Hayek from "The Road to Serfdom":

There is, finally, the supremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them. This is, of course, one of the gravest and most pressing problems of our time. But, though its solution will require much planning in the good sense, it does not — or at least need not — require that special kind of planning which according to its advocates is to replace the market.

Many economists hope, indeed, that the ultimate remedy may be found in the field of monetary policy, which would involve nothing incompatible even with nineteenth-century liberalism. Others, it is true, believe that real success can be expected only from the skillful timing of public works undertaken on a very large scale. This might lead to much more serious restrictions of the competitive sphere, and, in experimenting in this direction, we shall have to carefully watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure. But this is neither the only nor, in my opinion, the most promising way of meeting the gravest threat to economic security. In any case, the very necessary efforts to secure protection against these fluctuations do not lead to the kind of planning which constitutes such a threat to our freedom.

I don't see anything particular strident here. This is really very weak lemonade.

The whole "Road to Serfdom" thing was about large-scale planning, not stimulus programs. In that book the index entry for "money" mentions only one page.

Smith is on more sure ground when he says that Hayek's ideas on recessions ideas have not helped deal with recessions any better. But that just because they didn't doesn't necessarily mean that they couldn't have done. Besides, that was only one of several things that the Nobel prize committee mentioned when awarding the prize to Hayek and Gunnar Myrdal.

The first thing that the Nobel website mentions in it's blurb is theory of Money (this gives me an opportunity to obey rule VII).

If you set aside the initiation of recessions, I think Hayek's view on Money was fairly simple, I'll give a version of it here. We have an equation-of-exchange:

MV = PY

MV is the stream of total spending. M is determined by monetary policy, though indirectly through Commercial Banks. V is determined by the demand to hold money. I.e.:-

D = k / V

Where k is some factor that's roughly constant in the medium-term. Money demand rises with real income, at least weakly. It also falls as inflation rises. Lastly, money demand rises as economic uncertainty rises, and things associated with it such as unemployment.

dD / dY > 0

dD / dU > 0

dD / dP < 0

This is just my interpretation, of course. I think these are things that can be tested though.