Hayek's Monetary Theory and Policy : A Critical Reconstruction

Hayek's critique of price level stabilization was based on the theoretical claim that only a constant money stock (M), or constant volume of nominal spending (MV), allows intertemporal price equilibrium. The claim is not generally correct. Hayek's case (in principal) for constant MV, and his critique of the automatic gold standard for not delivering it, are thus uncompelling. The injection effects of his business cycle theory provided a sounder basis for his prescription. In the 1970s Hayek switched to endorsing price-level stabilization. In doing so he was logically compelled to repudiate his business cycle theory