Gottfried Haberler, Some Comments on Mr. Kahn’s Review of Prosperity and Depression (1938)

Haberler’s reply to Kahn defends the monetary analysis of Prosperity and Depression by distinguishing terminological disputes from substantive disagreements about economic fluctuations. Its central contention is that criticism cannot advance without separating money holdings from monetary circulation and accounting identities from causal explanations. Although Haberler sees possibilities for convergence with Keynesian analysis, he argues that Kahn’s formulations obscure them.

The treatment of hoarding establishes the reply’s methodological stakes. Haberler rejects the proposition that, with a constant money supply, one person’s hoarding must necessarily be balanced by another’s dishoarding. His criticism extends beyond this particular claim:

It rests on a confusion which pervades much of what has come from Cambridge in recent years.

The alleged confusion concerns the relationship between stocks and flows. Hoarding cannot be identified merely by comparing quantities of cash held at different dates. Instead, Haberler relates average cash balances to transactions or income over a period. His explanatory note makes the negative part of this definition explicit:

¹ Hoarding and dishoarding either by an individual or by society as a whole is not defined, and cannot therefore be measured, in terms of a comparison of the amount of money held by one individual (or by all individuals) at different points of time.

This distinction permits unchanged aggregate money holdings to coexist with declining expenditure and income. A person whose cash holdings fall alongside income has not necessarily dishoarded in the relevant sense. Consequently, constancy of the money stock does not establish a compensating movement in monetary circulation:

But income (or the money volume of transactions) can change and does change, and this implies that some individuals hoard (or dishoard) without any compensatory dishoarding (or hoarding) by others.

Haberler next separates hoarding from saving–investment equality. If saving and investment both designate the value of unconsumed output, equality follows by definition, regardless of hoarding. His own Robertsonian terminology instead attends to the sequence of income receipts and expenditure. The issue is not that alternative definitions are illegitimate, but that an identity cannot simultaneously serve as a relationship requiring income or interest-rate adjustments to bring it into existence. Periodically distributed income also has substantive significance: transaction balances are necessary because payments are not absolutely continuous.

The same insistence on precise definitions governs his defense of “inflation” as an increase in MV. That usage does not imply that every increase is undesirable, nor does his cycle theory make departures from a neutral interest rate the exclusive cause of disturbance. Haberler seeks to detach analytical terms from evaluative associations and from doctrines that Kahn attributes to them.

Turning to investment and consumption, Haberler denies that the quantity-theory framework excludes the employment–income–consumption sequence. Such feedback is central to cumulative expansion and contraction. Nevertheless, reduced expenditure in one industry does not by itself demonstrate falling aggregate demand: expenditure might simply move elsewhere. The explanatory task is therefore to establish when reduced investment interrupts monetary circulation rather than redirects it. Conversely, entrepreneurial demand for funds can affect active circulation when their supply is elastic; causation need not run exclusively from money to output.

His discussion of wage reductions likewise rejects an opposition between recovery through lower interest rates and recovery through changes in MV. Lower wages and prices may release transaction balances, increase liquidity, reduce interest rates, and encourage investment. Alternatively, released balances may support consumption directly, while an unchanged money stream can purchase more output at lower prices. These are conditional mechanisms, not mutually exclusive theoretical explanations.

The concluding discussion accepts that public works can arrest contraction when their financing produces a net increase in total demand. Haberler’s qualification concerns possible offsets through reduced expenditure elsewhere or higher interest rates, with financing conditions varying across countries. Bank-financed borrowing appears more expansionary than borrowing from the public; deficit-producing tax reductions and subsidies also offer potentially more reversible measures. The reply thus combines qualified agreement about recovery mechanisms with a demand for clearer distinctions among definitions, monetary flows, and causal sequences.