Different Analytical Frameworks
I’m doing this as a separate post because I want to keep the arguments distinct… Let’s go back to this example from Scott Sumner:
NGDP is $10, and each of ten workers [gets] a dollar in wages. Now they negotiate a 10% wage increase, in anticipation of 10% more NGDP. So wages rise to $1.10. Now there is only enough NGDP to emply nine workers, because NGDP unexpectedly stayed flat at $10. And that is true no matter how high productivity rises.
What is so intriguing to me about Scott’s worldview is that he looks at things that, in my mind, are effects, and attributes causal power to them. And yet, it’s hard for me to attack his position, since our differences are almost metaphysical.
So for one thing–and I don’t mean this as a cheap shot–when is the last time you negotiated a wage increase “in anticipation of 10% more NGDP”? It’s not even true that employers do that. They might concede to wage hikes because they anticipate higher P, and for sure if they anticipate higher PxQ of their output, but I don’t think too many people are walking around, thinking about what NGDP will be next year. I say this, because I have to be careful to define NGDP whenever I write about Scott in polite company.
Let me reiterate my reasons for bringing up productivity in the original gauntlet I threw down to the quasi-monetarists. Remember, they are saying that the main problem with the economy is that total spending fell in late 2008. They concede that with perfectly flexible wages and prices, that wouldn’t be a problem; it would just change nominal values, but nothing “real.” But shucks, in the real world, some prices and especially wages don’t fall easily, and so a sudden drop in total spending (NGDP) will lead to high unemployment.
OK, so then I pointed out that NGDP has recovered, and in fact is currently the highest in US history. So why hasn’t full employment resumed?
Now if I were going to explain this, using sticky prices and wages, I would give a simple numerical example like this: Before the recession, each of ten workers got $1/hr in wages, each produced 1 widget per hour, and the price of widgets was $1.
But now, productivity has risen. Each worker can produce 1.1 widgets per hour. Yet because wages and prices are stuck at $1, the employer can’t afford to keep all ten workers employed. Since he is stuck paying them $10 total per hour, consumers only have $10 to spend on each batch of widgets. That was fine before, when widgets cost $1 each and there were ten produced per hour.
But now, if the employer holds all 10 employees, every hour an extra widget piles up, because the workers produce 11 per hour but can still only collectively afford to buy 10 per hour.
Now if things were flexible, it would be simple: The employer could either raise wages to $1.10 per hour, or he could cut the price of widgets to about 91 cents each. Either way, the real wage would increase, and workers would earn enough income to be able to buy enough product to keep them all employed.
Now note, I hate thinking in these terms, but if I were forced at gunpoint to do it, this is how I would go about it. I don’t even know what it means to talk about, “What if total spending is $10, but everyone expected it to be $11?” We know what the determinants of “total spending” are, so I would rather discuss theories of what moves those things.
Let me make sure you get what I’m saying: In my example above, I think you could tell an NGDP story to “explain” why there was unemployment, and then how it got solved. When W and P were stuck at $1 each–while worker productivity went up 10%–NGDP didn’t grow; it stayed flat at $10.
Now consider the solution scenario where W goes up to $1.10 per hour. In this case, the workers are earning $11 total per hour, and they produce 11 widgets total per hour, so they spend the $11 buying it. So NGDP (per hour) rose from $10 to $11. “Aha!” Sumner exclaims. “Once we boosted NGDP by 10%, the unemployment problem was solved!”
Now consider the other solution scenario, where P drops to 91 cents per hour. In this case, the workers are still getting paid $1 per hour. They can each afford to buy 1.1 widgets per hour, and so the 10 workers collectively buy 11 widgets for $10 total. So NGDP stays constant at $10. Sumner says, “Aha! Just as my theory predicts. Constant NGDP is consistent with rising real GDP and full employment, so long as prices can adjust downward.”
I haven’t quite put my finger on it… I just think there is something fishy in reasoning from “NGDP.”
Let me take one more stab at this and I’ll drop it for a while… If I’m looking at the world in terms of NGDP, where “total spending” is a concept that has explanatory power, I might reason like this: “During a recession, consumers are only spending, say, $13 trillion on output, but at the current level of output prices, that only corresponds to 97% of last year’s output. So that means employers have no choice but to lay off, say, 10% of the workers, so that the remaining (and most productive) 90% of the workers can produce 97% of last year’s output. So the unemployment rate goes up to 10%, and real output falls by 3%; we’re in a bad recession. The way to fix this, is to reduce the unit price of output. That way, with $13 trillion in spending, consumers can now afford to buy the same amount of stuff as last year. So employers can go ahead and hire back those laid-off workers, since there is now the demand to soak up the excess capacity.”
I think that has a certain plausibility, if you reason in terms of NGDP causing recessions. But if you think of it in terms of microeconomics, it makes no sense: It says the way to fix a glut in the labor market, is to make real wages go up. When macro reasoning seems to contradict micro reasoning, I feel on much safer ground by going with the micro.
Now I think there must be some resolution to this apparent paradox, in that things happen with “the velocity of money” (another term that doesn’t make sense at the individual level) and so on, so that NGDP changes as it needs to, to correspond with what we know from micro analysis.
Either that, or I’m going down a blind alley. It’s been a long week, you guys can hash it out in the comments.
NGDP is $10, and each of ten workers [gets] a dollar in wages. Now they negotiate a 10% wage increase, in anticipation of 10% more NGDP. So wages rise to $1.10. Now there is only enough NGDP to emply nine workers, because NGDP unexpectedly stayed flat at $10. And that is true no matter how high productivity rises.
Wow, Sumner’s paragraph can be criticized on multiple levels here.
You already mentioned (no wage earner or employer bargains using NGDP as a conditional).
There is an even more pronounced problem.
If wages rise to $1.10 (per time period), then this must imply that employers are providing at least 10 x $1.10 = $11.00 in total wage payments. 10 workers are now employed at $1.10 each. I trust that it is clear now on why his argument is problematic. NGDP is the total dollar spending for goods and services (including labor). It is not necessary that NGDP be this or that in order to “employ” those workers. For workers use their wages to spend on goods and services and investments!
If we assume that each worker takes their $1.10 in wages and use the entirety of it to spend on consumer goods, then NGDP must be at least $11.00, on account of the wage earners spending their money on consumer goods. Of course the employer would have to consume as well, so NGDP would be that much higher, say $12.00 (employer spends $1.00).
It appears that Sumner is switching cause and effect. NGDP is the RESULT of spending from wage earners and those who pay wages. If Sumner says that wages for each worker is $1.10, then it must mean those wages have already been paid to the workers to help the employer produce goods and services for sale later on.
It is absurd to say that wages of $11.00 in total have been paid, which is fine so far, but then claim that since NGDP is $10.00, there can allegedly be only room for 9 employed workers. NGDP spending does not pay wages. Employers pay wages out of their capital (savings).
Sumner appears to be committing the common fallacy of assuming that consumer spending pays wages. Consumer spending does not pay wages. As John Stuart Mill remarked almost 200 years ago, “Demand for commodities is not demand for labor”. Wages are paid in advance of payment for output.
The level of NGDP is due in part to the spending that wage earners engage in using the already paid wages they earned. To the extent that they save and invest any of their wages, then NGDP would see more investment spending and less consumer spending. If they “hoard” any portion of their wages, then NGDP would fall from where it otherwise would have been. But as Jesus De Soto has shown, hoarding cash will just make capital goods stages relatively more profitable than consumer goods and generate a revolution in the capital structure of the economy by making it more capital intensive and thus more productive, resulting in an eventual rise in real GDP.
“I haven’t quite put my finger on it… I just think there is something fishy in reasoning from “NGDP.”
Yes Bob. I am with you there. One thing that is fishy is that I’m afraid some of these guys suffer from Hayek’s fatal conciept. Let me prove my case. Let’s take the current policy recommendations of four quasi monetarists. Sumner is gung go that it’s a green light for QE2, and they shouldn’t stop printing until the nominal spending growth path returns to its pre 2008 trend. Beckworth is pretty darn sure about this as well, but with some butterflys in his stomach that he could be wrong. Selgin says maybe, and Horwitz says hell no. Now all four of these guys know the same theory, and have the same basic rule of targeting NGDP. However, if one of them were Fed chair, what tea leaves would they read to decide which way to go? My point: Despite and NGDP rule, there is no way to accurately initialize the present condition. We are always late, and often wrong. Now I agree with them that a productivity norm would probably work with free banking, but under central banking, it is like a blindfolded dart game.
Second, as an emperical example Bob, you may want to go back and look at the 1970’s, and try to apply an NGDP rule in the example from the period of say 1970-1982. Generally, the quasi-monetarist position will only actively accomodate shocks to aggregate demand, and not supply shocks. But in the 1970’s due to the oil supply shocks and surrounding recessions, an NGDP target would have had some bizzarre consequences of possibly being very inflationary. That is, unless one is able to distingish between elastic and inelastic demand for money. How do you know? You don’t, but thankfully Friedman and Schwartz do, so you read the tea leaves through several Friedman research papers. However, when the recession comes, excess demands for money are still accomodated.
In a very odd twist, it turns out that one wrong move by the quasi-monetarist, and their policy become highly inflationary.
They are also in the very uncomfortable position of needing to argue that Friedman’s advocacy for rapid disinflation to the low single digits was too tight. Then when Volker actually did it in the early 80’s, they have some evidence to say see, we were right. I suspect even Milton Friedman might have thought this was a nutty position to take given the double digit inflation.
Friedman knew about this type of NGDP targeting, but interestingly did not favor it.
Ultimately, the non-Austrians never bother to understand the basic concepts of Austrian theory: ignorant acting man, subjective value and the importance of pricing and economic calculation. Everything flows from those basic ideas. Plus the Rothbardian non-aggression principle. Non-Austrians seem to think that each of our policy positions is ad hoc or something.
Basically, there are the technocrats and there are the Austrians and an-caps. The technocrats see the population as lab rats, while we insist that the population must be left alone at least to allow the pricing process to operate. There is no place for the technocrats whatsoever in the an-cap vision. They are very resistant to even thinking about that as there would be lots and lots of serious re-calculation resulting from such a changeover with their market value suffering a serious drop.
On the productivity and sticky wages point you are looking at W/P=MP (real wage=marginal product) but the quasi-monetarists are more interested in (loosely) M/P=W/P (real money balances are proportional to real wage. Note that you can have a stickiness problem in the latter without having a stickiness problem in the former.
Yeah thanks Alex. After I posted I realized that I was ignoring money altogether, which (of course) is not something a quasi-monetarist would do.
Why do I get the feeling we are talking about microeconomics and Human Action and the aggregatists are talking about lever-pulling?
“If wages rise to $1.10 (per time period), then this must imply that employers are providing at least 10 x $1.10 = $11.00 in total wage payments.”
Captain_Freedom,
I disagree. Sumners didn’t say that they got actually paid $1.10. He said they negotiated the wage increase. If they actually got paid $1.10 there would be no problem in Sumners’s opinion. The problem arises, however, if the economy as a whole is obliged(!) to pay more cash in nominal terms than is actually available. The problem is that legal contracts that define mortage and wage obligations don’t care about real purchasing power. They state nominal terms. It’s not about the wages that were paid last month. It’s about obligations for the future. So if all employers in the economy combined are obliged to pay $11 but there are only $10 actually available, two things can happen: first, nominal wages go down or a tenth of the working force will be unemployed. In reality, alternative one is highly unlikely to happen.
Scott,
For what it is worth, I think you are both right. Austrians certainly have a point when they say that interest rates too low can(!) lead to malinvestments. And I feel the same way as others here do about the lazyness of monetarists when it comes to searching for the real reasons that caused the bubble and the recession. So I think Austrians are right in explaining the reasons why the money supply contracted and NGPD fell in 2008. But Sumners is right about the consequences of such a decline in NGPD in an environment where future obligations are written down in nominal dollar terms.
Just think of an island with two inhabitants. One is making Sushi and the other is making soy sauce. Now obviously they want to trade their products, but for some reason the price of sushi is fixed at $10 per unit and soy sauce at $5. But they only have 3$ in total. They aren’t able to trade any products and will both end up unemployed despite the fact that both of them have products that the other person has demand for. Now, the easiest solution would be to let prices adjust, but in a real economy that is not always possible.
Christopher,
Why won’t ‘real’ economies adjust?. By a ‘real’ economy do you mean an economy in which government intervention keeps prices from falling? If you do mean this, you didn’t state it. If you don’t mean this, can you explain why prices won’t adjust, absent government intervention?
Richard,
I think there are several possible explanations. One is the one you mentioned. So say in the initial example where everybody is employed at $10 the government decides to enact a minium wage law of $11. Many people will become unemployed. Now, you are right, the best thing would be to get rid of the minumum wage law. But what if you don’t have the political power to decide on that right now because you lost the election, but you run the FED. You have to wait for the next election and hope you win in order to abolish the minimum wage law. But in the meantime, I think increasing the money supply could at least ease the symptoms of the law.
Peter Schiff often uses doctor analogies. So how is that one: If your patient needs a surgery but you can’t do it right now because you lost the key for the surgery door. Won’t you at least give him some medicine to keep the disease from spreading to other organs?
But even if there were no interventions at all, the adjustment wouldn’t be that easy. There are contracts that people have to obey. If you sign a contract saying that you will pay me a certain salary over the next 12 month but then after six month the overall price level falls sharply, the purchasing power of my salary rises dramatically. But you can’t react to that by cutting my wage because of the binding contract that states nominal terms not real purchasing power.
I am not saying that you can or should try to fix all problems by expanding the money supply. But I think a contraction in the money supply causes problems that Austrians tend to ignore.
Christopher,
With respect to contracts and loans – I disagree that people would necessarily have to fulfill them – especially if they couldn’t. People who are unable to pay contracts can try to renegotiate them. If they can’t, they stop paying. People depending on contract payments will lose income. Prices will fall. Better capitalized owners can purchase capital goods at prices that make sense given the new price level.
Wrt to problems associated with the contraction of the money supply that Austrians tend to ignore – which problems are you speaking of? And wrt to contraction in the money supply – are you talking about money, or money substitutes?
Christopher,
Also, as to your doctor example, your assuming I accept the fact that the cure for the disease is the medicine. I don’t. As far as I am concerned it was what caused the problem in the first place. Why would I prescribe more of the same?
Yes they can try to renegotiate them and ultimately they will. But the contraction in the money supply after a bubble is way faster than the ability of people to renegotiate everything. Also, you have psychological barriers. If you tell your employee that you want to cut his wage from $1000 to $500, it won’t be easy to convince him, if his rent is $600. You will probably say that he should renegotiate his rent, but the landlord has the same problem with his mortgage payments, and the bank that holds the mortgage has the same problem with its liabilites.
So much rather than accepting the wage cut and hoping that he can renegatiate his rent, your employee will go to a court and sue you for breach of contract if you don’t pay. The landlord will kick the guy out of the house, and the bank will forclose.
Ultimately the system will realign to the new amount of money but it will take a lot of time during which problems arise that could be avoided.
“I don’t see how using a heroin addict analogy can refute an “Austrian” position on what to do during a recession caused by a prior credit expansion.”
Well, it’s Peter Schiff’s analogy not mine. He said that just like a heroin addict has to go cold turkey the economy has to go into deflation. I pointed out a problem in his reasoning.
Christopher,
“Ultimately the system will realign to the new amount of money but it will take a lot of time during which problems arise that could be avoided.”
I don’t deny it could play out as you describe. (We might disagree on how long it would take, and what ‘too long’ means). But, how can these problems be avoided?
I can see why you would think that they can if you do not accept the Austrian theory of the business cycle. But an Austrian would have to explain why inflating during a recession solves problems, when it was inflation that caused the problems in the first place (e.g. Greenspan inflated to get us out of 2000-01, but that brought us 2007-09 – officially, anyway).
I see it the way ‘Austrians’ do; the recession, though painful for some, is necessary in order to re-allocate resources according to the actual consumer time-preferences. Inflation interferes with that, and causes further resource mis-allocation.
As for the business cycle,
you probably know Peter Schiffs mortgage bankers speech. At around 11:40 he makes that analagy with a heroin addict. And he says “If you want to get healthy, you go to rehab and go cold turkey.”
Well, that’s not right. In fact, cold turkey is a very dangerous strategy to end an addiction with lots of side-effects and a good chance to die. The sudden withdrawal of the drug causes tremendous stress on your body that also harms the healthy parts of it. In reality, no resonable doctor will make you go cold turkey but instead give you tons of medicine to slowly reduce your toxine level.
In that analogy Robert Murphy would be the scary cop who hunts down the drug dealer. And it’s good that he is there, but I wouldn’t want the addict to spend the night in Murphy’s cell going cold turkey.
Christopher,
I think you can take an analogy only so far. I don’t see how using a heroin addict analogy can refute an “Austrian” position on what to do during a recession caused by a prior credit expansion.
In that analogy Robert Murphy would be the scary cop who hunts down the drug dealer. And it’s good that he is there, but I wouldn’t want the addict to spend the night in Murphy’s cell going cold turkey.
Whoa this analogy is getting complicated. There’s a heroin addict, a drug dealer, and a scary cop? Or is the drug dealer the heroin addict too? Am I using drugs in this analogy? And can I have a cool street name?
You go by “Austrian Murph,” “A.M.” or just “Murph” on the streets. The Fed is making fat stacks of T-Bills slinging it, too.
>I disagree. Sumners didn’t say that they got actually paid $1.10. He said they negotiated the wage increase. If they actually got paid $1.10 there would be no problem in Sumners’s opinion. The problem arises, however, if the economy as a whole is obliged(!) to pay more cash in nominal terms than is actually available.
That makes little sense. The money that is available to pay wages is money that the employers actually have. Whatever price they intend to offer, must presume they have the cash to pay it. It makes little sense to say that a firm can offer $11.00 in wages when they only have $10.00 available.
Wages are almost always negotiated prior to the workers receiving their first paycheck. A firm that plans to pay workers $11.00 would have at least $11.00 in their bank account or else they would not offer it.
Let me see if I understand this.
If a company signs a contract saying that they will pay me $100000 per year for 3 years, it is fair to assume that they have $300000 lying around idle somewhere?
What you are saying basically means that companies don’t incur liabilites that they aren’t ready to pay right now. If that was true, why are there bankruptcies at all?
I think it is much more likely that they base their offers on expected future earning.
“If a company signs a contract saying that they will pay me $100000 per year for 3 years, it is fair to assume that they have $300000 lying around idle somewhere?”
Well, when the context is NGDP, where we include ALL spending in the economy, we would also have to include all wage. Such relatively larger sized 3 year fixed contracts are dwarfed by the much more common, relatively lower sized “open ended” wage contracts.
To answer your question though, a company that offers a fixed 3 year wage contract for $100,000 per year, would not be a *cause* for unemployment should that company experience a decline in sales revenues in say 2 years. If a company experiences a decline in sales revenues, then more than likely it will also lower their demand for labor, and such 3 year contracts would almost certainly have a renegotiation clause attached to it and be lowered. After all, the employee would probably have to choose between say $50,000 a year for the remainder, or be laid off. If they choose the latter, it would almost certainly mean they can get another job that has comparable pay, in which case there would no longer be any liability for the first company. A *guaranteed* wage contract is not common in the economy.
My main point is that changes in wages and employment are not caused by changes in NGDP, nor are they contingent on NGDP. Unemployment is caused by a failure of wage rates to fall down to where the demand for labor can buy the supply of labor. Furthermore, since NGDP is composed in part by the spending made by wage earners, it is incorrect to assume that NGDP can be increased totally apart from wage payments, such that a rise in NGDP can allow employers to keep paying those “sticky” higher wages that otherwise would have resulted in unemployment.
>What you are saying basically means that companies don’t incur liabilites that they aren’t ready to pay right now. If that was true, why are there bankruptcies at all?
We are talking only about wages.
A company will suffer losses if their total costs exceed their revenues, and will go bankrupt if their liabilities exceed their assets. A company that succeeds in lowering what is pays in wages will incur lower costs almost instantaneously, since wage payments show up as costs relatively quickly. A company that succeeds in lowering what it pays for say a factory, that operates for 30 years, will incur lower costs over a much larger time horizon. The shorter the time horizon, the more quickly will lower productive expenditures show up as lower costs.
Since wage payments show up relatively quickly as costs, it is very rare that a company would declare bankruptcy because it can’t afford to pay the wages it promised to pay. Companies almost always go bankrupt because of an inability to decrease their more long term liabilities, which cannot be lowered quickly if the company lowers their productive expenditures now because they experience a sudden decline in sales revenues.
Sound macro and sound micro are consistent.
Sound macro and sloppy micro may not be consistent.
In your example, if money expenditures drop, and firms lower their prices enough so that real ex=enditure is unchanged, then, yes, if firms continue to produce at the same level then they will be able to sell that output. Good on that count. However, with wages not dropping (and real wages rising) then profits will drop or even losses will follow. Generally, losses will be less if firms produce less. So they will cut production and raise prices. Of course, the more plausible scenario is that firms produce less and and lower their prices by less. Real expenditures fall and production and employment fall. Real wages rise.
This is consistent with basic supply and demand in the product market. Demand falls, and price and quantity both fall. In the labor market, demand falls, given money wages, there is a surplus. if we so the labor market in real wage space, the the lower product price is higher real wages, and so the quantity of labor demanded falls, and the quantity of labor supplied rises, there is a surplus.
I find it surprising that you came up with a supposed scenario where real wages need to rise.
If wages are more flexible that product prices, and money expenditures fell, then during the adjustment process, real wages would fall and then rise. I suppose there would be some sense in which they “should” rise for recover but really the entire problem would be that product prices need to fall more.
Think of a price floor and wages falling due to unemployment. Costs are falling. Each firm would make more profit by cutting prices and expanding its output and increasing labor demand. But, the price floor makes that impossible. If real wages haven’ fallen enough to clear markets, then getting rid of the price floor would allow prices to fall more than wages, real wages would rise, production would rise as would employment. That is only a puzzle if you assume that real wages were at equilibrium before. Think about shortages and surpluses, not market clearing.
Sumner doesn’t focus much on such scenarios. Rowe and I give him a hard time about it.
Sumner doesn’t believe that people look at NGDP, but rather that it corresponds to “good business” and relates to what we might call “business confidence.”
As I have explained before, the problem isn’t that wages won’t fall, it is that firms continue to raise money wages in the face of falling sales. The trajectory of prices and wages is sticky. Sumner argues, and I think there is some truth to the problem being that firms shows sales are stagnant or growing slowly keep on raising prices and wages. Firms with sharply lower sales don’t raise prices and wages.
What needs to happen is that the firms with slow or stagnant sales should tell their workers that they can be replaced by the unemployed, so they are all getting wage cuts. Then, the firms will all have great profits and each can make more profit by cutting prices a bit to expand sales. And then as their real volume of sales expand, they need more labor, and they hire the unemployed workers.
If they instead say, business is not all that great, sure, we are making money, but no pay increases. And if you don’t like it, too bad, we can replace you with the unemployed workers, then wages stop growing or at least grow more slowly. And a slow recovery will occur, much as above.
Also, I am sure that improved productivity helps solve the problem of sticky wages. And it is something to be celebrated always. I think Sumner would agree.
What should happen, then, is that product prices fall reflecting lower unit costs. However, if prices fall in inverse proportion to the increase in productivity of the given amount of labor, this leaves employment unchanged. However, real money balances increase. This real capital gain gets spend on consumer or capital goods. That is the increase in real expenditures that raises the demand for output more than in proportion to the increase in productivity.
The way I see it, ceteris paribus, wages and prices need to fall. Growing productivity means that wages don’t need to fall as much as before.
We know, however, that money expenditures are about where they were before (I should check exactly with the new data,) but wages have continued to grow and prices have grown though a bit more slowly. Real output is about where it started. How is that possible? Productivity. But real output should be higher. Either money expenditures should be higher or prices should be lower. And if we go with the lower prices option, wages should be lower too. But not as low as they would need to be if productivity hadn’t increased.
In your example, if money expenditures drop, and firms lower their prices enough so that real ex=enditure is unchanged, then, yes, if firms continue to produce at the same level then they will be able to sell that output. Good on that count. However, with wages not dropping (and real wages rising) then profits will drop or even losses will follow.
Only if you assume that unemployment does not change, that is, the number of workers being paid does not change even if wage rates remain the same in the face of a decline in the overall aggregate demand for labor.
Profits do not have to fall if wage rates remain the same, but there is a decline in the (money) demand for labor. As long as costs fall along with revenues, which will be had when the quantity of labor demanded at the original wage rate falls (unemployment rises), then there will be no change to business profitability, but there will be a decline in productivity as there are less workers working, which means real wages will fall.
Generally, losses will be less if firms produce less.
Only at the old (higher) nominal costs, which is transitory, not permanent.
If wages are more flexible that product prices, and money expenditures fell, then during the adjustment process, real wages would fall and then rise.
If by real wages you mean the quantity of consumer goods produced per unit of labor, then yes.
I suppose there would be some sense in which they “should” rise for recover but really the entire problem would be that product prices need to fall more.
If there is more produced, at lower prices, then this is not a problem, since twice the production at half the prices implies unchanged revenues.
Think of a price floor and wages falling due to unemployment. Costs are falling. Each firm would make more profit by cutting prices and expanding its output and increasing labor demand. But, the price floor makes that impossible. If real wages haven’ fallen enough to clear markets, then getting rid of the price floor would allow prices to fall more than wages, real wages would rise, production would rise as would employment.
Don’t look now, but you just made an argument that the market can alleviate unemployment if wage rates are allowed to fall freely, meaning price floors (minimum wage laws) are preventing the necessary fall in wage rates.
For all the quasi-monetarist talk about criticizing the Fed and government on countless scores, I see a gaping hole in criticisms of government caused wage rate inflexibility that increase unemployment when there is a decline in the demand for labor.
But rather than challenge the government on this score, quasi-monetarists seem to only want to challenge the central bank not inflating the money by enough so that one government intervention can solve the problems another, previous government intervention caused.
Sumner doesn’t believe that people look at NGDP, but rather that it corresponds to “good business” and relates to what we might call “business confidence.”
So NGDP rises not because of the Fed, because of business confidence? That seems exactly opposite to the entire purpose of the Fed targeting NGDP!
Does NGDP really need to actually rise by inflation? It seems that what needs to happen is for business in general to acquire a psychological optimism, a “positive outlook”. All the Fed needs to do here is say they’re going to inflate, but then they don’t inflate. Or they could send letters out to everyone saying “You can do it!”.
If the Fed targets NGDP via inflation, then it can’t be a statistic that relates to market confidence.
As I have explained before, the problem isn’t that wages won’t fall, it is that firms continue to raise money wages in the face of falling sales.
That is, quite frankly, an imaginary problem. Firms aren’t as stupid or short sighted as you make them out to be here. If firms anticipate falling sales in absolute terms, then they will attempt to lower their costs, and that includes wage costs. A firm that expects rising sales will tend to increase investment, and thus costs, and that will almost invariably include an increase in the demand for labor and thus increase in wage costs.
The way I see it, the only reason why a firm would not cut wages in the face of a short term expectation of falling sales is because they have become so accustomed to rising prices and rising sales, that they “trust” the Fed to make money a lot looser in the near future, thus justifying the current relatively high wages.
To then look at this and say “Aha, we’re right, firms aren’t lowering wage rates so we are justified in our desire to inflate”, is to fail to see that it is precisely the desire to inflate, and the consequent inflation and rising demand for all things, that plays a huge role in the reaction of businessmen to not lower wages as soon as they otherwise would have.
The trajectory of prices and wages is sticky.
Do you ever consider that this may have something to do with the psychology generated by decades of actual inflation, and minimum wage laws?
Do you ever stop to think WHY prices or wages would be “stickier” than some optimal flexibility? As soon as you say the free market inherently generates wage and price inflexibility, you are going onto a path that already implies your conclusion that you think is “unbiased” and “value-free”.
I find that when those who don’t fully understand the free market, or don’t want to understand it, or resent it, or who just want government to control it, most of their errors reside in just taking a perceived problem for granted and fail to understand why they are taking place. Or, what’s even worse, they know full well why the problems exist (government intervention) but do not focus on how to solve them directly, by removing the government imposed restrictions, but rather by piling on more violence backed action from the very same people who caused the prior problems to occur in the first place. Incidentally, this capitulation from quasi-monetarists quite literally sickens me. So many are aware of why wage rates and prices are inflexible due to government, but they refuse to challenge those responsible, and instead call for them to use even more violence elsewhere, to “make up for it”, as if social problems can be solved if only violence is initiated in the way quasi-montarists want.
The only “blinders” here are those on quasi-montarists and monetarists and Keynesians, who are so blind to the negative effects of previous violence that they can deceive themselves into believing that them calling for more violence is just “pragmatism”.
Sumner argues, and I think there is some truth to the problem being that firms shows sales are stagnant or growing slowly keep on raising prices and wages. Firms with sharply lower sales don’t raise prices and wages.
So they’re all idiots and must be deceived by central banks for their own good? “There is some truth” is a weaselly phrase that doesn’t say anything. Is it true or is it not true?
What needs to happen is that the firms with slow or stagnant sales should tell their workers that they can be replaced by the unemployed, so they are all getting wage cuts. Then, the firms will all have great profits and each can make more profit by cutting prices a bit to expand sales. And then as their real volume of sales expand, they need more labor, and they hire the unemployed workers.
That is what would happen if the free market were allowed to function and firms had a good reason to cut wages and costs, since their psychology of inflation is absent and prices were therefore more concomitant with the requirements of market conditions.
But, in a government hampered market, if firms don’t do that, then the market failed, and central banks must impose even greater action, and more violence must be used against innocent people for their own good because they aren’t reacting to previous violence they way they are supposed to react.
Quasi-monetarists are like mad scientists experimenting with chemicals and compounds, not realizing that the chemicals and compounds they are using force against are actually people who have their own preferences and goals.
Also, I am sure that improved productivity helps solve the problem of sticky wages. And it is something to be celebrated always. I think Sumner would agree.
Improved productivity does not help solve the problem of sticky wages, for it is not a lack of productivity that generates sticky wages in the first place. Sticky wages is a monetary phenomenon, and productivity is a “real” phenomenon.
A firm that has sales revenues of $1000, wage costs of $500, and capital goods costs of $400 per time period, and they employ 500 people who are each paid $1.00, then should that firm innovate and increase productivity such that it can, say, double their output such that each units sells for half the price, then that firm can continue to employ 500 workers at $1.00 each, they will sell twice the goods at half the price, thus earning the same $1000 of revenues. The firm can continue to grow and innovate in this way and there will be no employment that necessarily results from increased productivity.
The only way that there will be unemployment is if the demand for labor in money terms does not clear the market for labor supplied. The old wage rate was $1.00 for each worker. The demand for labor was $500. That sum of $500 is the “wage fund”. The ONLY way that there will be unemployment here is if the price of labor (wage rate) is HIGHER than $1.00 (on average). If the price of labor were say $2.00 each, then the $500 demand for labor would only be able to buy 50 workers, which means the remaining 50 would be unemployed.
In a free market, where wage rates are allowed to fall and rise to ANY price, then a $500 demand for labor and 500 supply of labor will tend to generate a $1.00 market price.
Suppose that the demand for labor fell from $500 to $400, due to monetary deflation. If the government uses threats of violence to enforce a price floor of $1.00, then that will generate “wage stickiness”, and for $1.00 each, the firm that has $400 demand for labor would only be able to buy 400 workers, leaving 100 unemployed.
At this point, quasi-monetarists will scratch their heads and say “Wage rates are sticky, thus we are justified in calling for inflation, so that firms will borrow more money, invest more in their business, and then…..increase the demand and thus price of labor”.
Inflation through the loan market primarily affects net investment. Most consumer spending in the economy is paid for by the wages that workers earn in production. How can inflation only affect aggregate demand but not wage rates?
Roddis:
Many quasi-monetarists have had Austrian training.
None of us are assuming perfect information or objective values.
I do think that one difference is that Rothbard’s nonagression principle plays little or no place in quasi-monetarist analysis.
How much of your economic analysis is ideological special pleading for Rothbardian laissez-faire? You know, sound economic analysis must prove that any deviation from the Rothbardian plumbline is evil, and as long as there is no initiation of force, there is no sense in which any economic activity is undesirable?
Sumner is a libertarian, but one, who like me, took those blinders off a long time ago. (Well, maybe Sumner never put them on.)
I do think that one difference is that Rothbard’s nonagression principle plays little or no place in quasi-monetarist analysis.
Rothbard’s nonaggression principle has EVERYTHING to do with quasi-monetarist analysis.
Central banking is based on a violation of the nonaggression principle. The Federal Reserve System for example has a government enforced monopoly in money production. Through violence backed legal tender laws, to anti-counterfeiting laws, to not allowing money production competition, all through the initiation of force from government, well, to take all of this and your denial that the nonaggression principle applies, seriously confounds me to no end.
as long as there is no initiation of force, there is no sense in which any economic activity is undesirable?
Sumner is a libertarian, but one, who like me, took those blinders off a long time ago. (Well, maybe Sumner never put them on.)
If there are any blinders, they are those you and Sumner put on once you accepted the doctrine that the “good” is not in the individual, but in the collective, and that violence against innocent individuals can be used for the “good” of the collective.
The question is, now that there is a FED, what is the least interventionist monetary policy they can pursue. I agree that having no FED in the first place would be the least “violent” solution.
But as long as you don’t succeed in abolishing it you have to think of what policy they should be pursuing in order to keep the level of violence as low as possible. And my impression is that what Sumners says is the least violent and least interventionist monetary policy I have heard of so far. But I’d be happy to hear other suggestions.
Christopher,
How is Sumner’s monetary policy the ‘least’ interventionist? Doesn’t he argue that Bernanke should have printed more money than he has?
So taking the blinders off means accepting the initiation of force as legitimate if it serves some economic activity you deem desirable? How noble of you guys.
Yeah, that comment was rather paradoxical. Glad I am not the only one who noticed it.
I give up.
Too many typos.
Couldn’t the employer just reduce the hours each employee works instead of laying workers off?
“and that violence against innocent individuals can be used for the “good” of the collective.”
I just hate it when the Fed beats me with paper currency!
That’s hardly a reductio ad absurdum, Gene, since no one here considers you innocent.
Death by 2+ trillion paper cuts.
Y’all are funny.
Economics is mostly about understanding the consequences of alternative institutional frameworks.
It is not about building a case for Rothbardian laissez faire.
I never said that I favor the initiation of force against anyone.
However, when I try to teach you a bit about economics, I am not propagandizing in favor
of anarcho-capitalism.
Contrary to the Rothbardian view of History, I am not much interested in proving that everything ever
done by the state was bad. Nor am I intersted in defending it.
Given where we are today, I don’t think instituting a gold standard is desirable.
On the other hand, I don’t favor prohibiting people from developing alternative monetary institutions if they want. I just don’t think that instituting a parallel monetary system is easy or likely to happen.
Given the monetary system we do have, the least bad way to operate it is so that it generates slow, steady growth of money expenditures for final goods and services. I think the growth path should be such that prices, on average, are stable. That is the same thing as money incomes growing with the trend growth of real income. The quantity of money should grow with the demand to hold money, and market interest rates shold match the natural interest rate that coordinates saving and investment.
The claim that fractional reserve banking is fraud is somewhere between a sad joke and a cynical lie. That fractional reserve banking is consistent with freedom of contract is certain, but the value of its consequences is less certain. My view is that it is just about as imperfect as any other financial institution, and really, just about as imperfect as any market institution. I see nothing desirable about a 100 percent reserve gold standard, but people who want to invest in gold, store it in a warehouse, and even try to use is to make payments–go for it.
I favor lower taxes and even lower government spending, and so a modest budget surplus that gets smaller when the economy slows and grows when the economy booms. One day, I would like to see the national debt disappear.
I aways favor having the Fed change the quantity of money to match changes in the demand to hold money, but never favor bailing out banks. While slow, steady growth in money expenditures would benefit banks, it also benefits everyone else.
Slow, steady growth on output doesn’t require asset bubbles. But if assets bubbles develop and pop, slow, steady growth in money expenditures on final goods and services should be maintained the entire time.
When productivity grows faster than trend, I think the price level should fall, and when it grows more slowly than trend, I think the price level should rise. While the trend growth rate of money expenditures should keep the price level stable on average, that isn’t the same thing and keeping the price level stable all the time.
I don’t think the Fed should try to control total production, employment, or unemployment. Just slow steady growth in money expenditures on output. Given that environment, the market determines both the composition of output and total output and the composition of employment and total employment.
You should know that 33 years ago, I was a doctrinaire Rothbardian. I think I understand things a bit better now. To some degree I came to that understanding kicking and screaming. While I grant that there may be some who have a deeper understanding of the Rothbardian dogma than I ever had, that is not true of most reading this. Keep that in mind.
Bill,
You wrote “Given the monetary system we do have, the least bad way to operate it is so that it generates slow, steady growth of money expenditures for final goods and services”
Isn’t this what the U.S. monetary system did in the 20’s? At the time, this is what Mises said would lead to a recession, but the monetarist Fisher said was not a problem because prices and interest rates were “stable.” Do you reject Mises’s explanation?
Why should one continue to support a ‘least bad’ monetary system when it causes the business cycle?
correction …Why should one continue to support a ‘least bad’ monetary system when one believes it causes the business cycle?
Economics is mostly about understanding the consequences of alternative institutional frameworks.
It is not about building a case for Rothbardian laissez faire.
Economics is mostly about understanding individual action, and the concomitant consequences of violent institutional frameworks.
It is not about building a case for some good that can come out of violence-based central banking, nor is it about building a case for the status quo.
To argue that because the Fed has existed in the past, it therefore must be accepted and manipulated, is a non-“value-free” economics prescription of advocating for a status quo ethic.
I never said that I favor the initiation of force against anyone.
By advocating for action on the part of an institution that only exists because of initiations of force, one is advocating for an initiation of force. Sorry, but no amount of “well in the first best world I would get rid of it, but I will advocate for the second best world instead and declare…”
Suppose the central bank was instead an institution that secured a violence backed monopoly privilege from government to lower the quality of everyone’s food, by adding non-nutritious “filler”. He who accepts such an institution “because it’s here and so we might as well accept it”, and who designs an “optimal rate” of food deterioration, is in fact advocating for a continued initiation of force against innocent people.
It seems you have a tremendous hate on for Rothbard. Why? Is it because his writings conclusively expose your ideology as incredibly immoral and economically destructive?
If you are against initiations of force, then you must favor the abolition of the force that backs our fiat money standard, and hence favor not only the abolition of the central bank, but immediately cease and desist advocating for it to act!
However, when I try to teach you a bit about economics, I am not propagandizing in favor of anarcho-capitalism.
Correct. You are propagandizing in favor of socialist money production.
Contrary to the Rothbardian view of History, I am not much interested in proving that everything ever done by the state was bad. Nor am I intersted in defending it.
Contrary to the Woolsey view of history, I am not much interested in proving that violence against innocent people can be used for good. Nor am I interested in defending violence.
Given where we are today, I don’t think instituting a gold standard is desirable.
The alternative to violence backed monopoly privilege of paper money production is not a violence backed monopoly privilege of gold money production.
Rothbard did not favor a government that enforced a gold standard. He favored a free market in money production, and he predicts that such a free system would spontaneously result in a gold standard, which is why he used free money production and gold standard interchangeably.
The form of your argument is illogical. You said “given where we are today”, the gold standard is not desirable. Desirable for whom my good man? The state? “Society”? The “collective”? Men with guns who enforce a monopoly on money production that you are trying to apologize for?
On the other hand, I don’t favor prohibiting people from developing alternative monetary institutions if they want. I just don’t think that instituting a parallel monetary system is easy or likely to happen.
So you’re for fiat money, but against it. You want the Fed to act, which means you want monopoly money production, but you are in favor of competing money, which means in favor of an abolition of the Fed. You are against violence, but you are in favor of violence. You will keep holding contradictory positions because who cares, the monetary system will probably not change.
Given the monetary system we do have, the least bad way to operate it is so that it generates slow, steady growth of money expenditures for final goods and services. I think the growth path should be such that prices, on average, are stable.
Which means you are in favor of credit expansion induced business cycles, capital structure distortions, widespread unemployment, and in favor of attacking economic freedom.
“Stability” of prices is a mystical ideology. Apologies for inflation backed by gunpoint is a statist, violent, ideology.
You’re funny.
Economics is not supposed to be about all this violence apology and state control. It is supposed to be about fighting for individual freedom. A (good) doctor is ethically against poison and ethically for health. A (good) economist is ethically against violence and ethically for freedom.
That is the same thing as money incomes growing with the trend growth of real income.
Money income does not have to grow along with real income, or, in other words, total spending does have to grow at the same rate as total supply.
Money is a medium of exchange. The money supply and hence total spending can remain fixed and real productivity can keep growing indefinitely, as prices fall. Once a given money, say gold, becomes too scarce to adequately facilitate small trades, secondary money will also appear, say silver. Once silver becomes too scarce to facilitate small trades, tertiary money will also appear, say copper. And so on.
The quantity of money should grow with the demand to hold money, and market interest rates shold match the natural interest rate that coordinates saving and investment.
No, the quantity of money should NOT grow with the demand to hold money, because the reason individuals decide to hold money is because they are trying to acquire higher purchasing power now and in the future. By advocating for a violence backed monopoly of money production to depreciate his money, you are attacking his goals and preferences and trying to impose your goals and preferences on him by force.
The claim that fractional reserve banking is fraud is somewhere between a sad joke and a cynical lie.
The claim that granting two separate ownership titles over the same property is not fraud is somewhere between a pathetic ignorance of basic property rights principles and a vicious apology for property misappropriation.
That fractional reserve banking is consistent with freedom of contract is certain, but the value of its consequences is less certain.
No, fractional reserve banking is NOT consistent with freedom of contract. It is consistent with fraud and economic destruction.
That A and B voluntarily agree to defraud C does not imply that the contract between A and B is not fraudulent. If A the client agrees with B the banker to lend A’s demand deposit money out to some third party, then A presenting a transferable claim to money (e.g. debit card payment) to C the merchant is fraudulent because C is not receiving money, but a credit from bank B.
My view is that it is just about as imperfect as any other financial institution, and really, just about as imperfect as any market institution.
Really? A private warehouse company owner that agrees to keep your furniture and belongings safe and available at all times is only acting “imperfectly” by letting his nephew take it all to his house, but putting it back before you come and seek to acquire your property?
You need to understand the difference between a loan contract and a demand deposit contract, and the nature of property rights.
A demand deposit contract is one where the receiver keeps the property safe and available, i.e. physically with him or under his direct control, at all times for the client. It does not mean that the receiver can grant ownership of it to someone else.
A client who allows the receiver to loan the property to someone else is attempting to create a loan contract, where the property title transfers from the client to the receiver and then to a third party.
I see nothing desirable about a 100 percent reserve gold standard
I see nothing desirable about a fractional reserve paper money standard.
So why don’t you stop advocating for your system being imposed on me and everyone else by violence, and instead respect other people’s preferences such that you attack anyone who seeks to forcefully deny people of this and defend those who are forced?
but people who want to invest in gold, store it in a warehouse, and even try to use is to make payments–go for it.
People have already tried that (see Liberty Dollar). The government uses violence to quash competition in money production.
I favor lower taxes and even lower government spending, and so a modest budget surplus that gets smaller when the economy slows and grows when the economy booms.
I favor no taxes and no government spending, because I favor peace and I am against violence.
One day, I would like to see the national debt disappear.
One day, I would like to see quasi-monetarism disappear.
I aways favor having the Fed change the quantity of money to match changes in the demand to hold money, but never favor bailing out banks.
Sorry for being so rude here, but that is the most ignorant and hilarious thing I have ever read regarding central banking. The whole PURPOSE of the Fed is to bail out banks so that they can continue to engage in fractional reserve banking!
Before the Fed (and after the second bank of the US), the banks constantly found themselves going bankrupt as their practice of frb made calls for redemption from other banks greater than their deposits. So, the larger and more politically connected bankers wanted to keep creating new money out of thin air without limit, and they (and government) knew that if all banks inflated together, then the chances of one bank not being able to honor calls for redemptions would be minimized. But they could not do this without violence. They knew that only if they could secure a government backed privilege, a lender of last resort, then the banks could continue to inflate by more than what the gold standard imposed, all together at once. The government was in favor of this because the banks promised to inflate the money supply by lending to the government. The government could secure higher purchasing power before everyone else.
You need to understand the real world of banking. Central banks were not created by enlightened economists who only had the greater good in mind. They were created by bankers and government to secure for themselves an ability to earn profits by exploiting everyone else who is forced to use paper money by legal tender laws.
A central bank that did NOT bail out banks would not even be a central bank at all. It would be a fantasy land storybook read by misguided economists to their children to allow them to sleep at night.
While slow, steady growth in money expenditures would benefit banks, it also benefits everyone else.
Hahahahaha, no, it most certainly would not benefit everyone else. Look up the Cantillon effect. Inflation generates a wealth transfer from those who receive the new money last to those who receive the new money first. Lenders on fixed incomes like pensioners and widowers certainly do not benefit from inflation because they only experience inflation by paying higher prices.
If inflation truly benefited everyone, then why does the central bank always inflate the money supply and give the new money to the banks and government first, rather than mailing every citizen a check? How in the world can some people who receive money without producing a single good or service in return, result in anything other than others producing for the benefit of others with no benefit to themselves? That the purchasing power of people’s wages and other fixed incomes are continuously eroded over time is the tax that they pay the bankers and government as a result of them receiving the new money first.
Slow, steady growth on output doesn’t require asset bubbles.
Inflation via credit expansion does.
But if assets bubbles develop and pop, slow, steady growth in money expenditures on final goods and services should be maintained the entire time.
…so that the Federal Reserve System can create another boom and bust! We can create a perma-boom! Keynes couldn’t have said it better himself.
When productivity grows faster than trend, I think the price level should fall, and when it grows more slowly than trend, I think the price level should rise.
That’s what the gold standard does, and what inflation via credit expansion does not.
While the trend growth rate of money expenditures should keep the price level stable on average, that isn’t the same thing and keeping the price level stable all the time.
4 more PCs, 10 more T-shirts, 14 less cars, 4 more factories that produce 10×10 foot metals sheets, and 3 more eggs were produced this year compared to last.
How much paper money should the overlords print and give to their friends before everyone else? Answer this question without recourse to past prices (since prices are a function of the supply of money, which means money supply is endogenous to the problem at hand). If you can answer this, you win a cookie.
I don’t think the Fed should try to control total production, employment, or unemployment. Just slow steady growth in money expenditures on output. Given that environment, the market determines both the composition of output and total output and the composition of employment and total employment.
The market can’t, because you are preventing people from hoarding their money and altering the productive structure as a result on their own.
You do want the Fed to control the capital structure, you’re just too blind to see it because all you care about is an aggregate statistic the central planners can allegedly control without affecting the micro sphere.
Mises has already exploded the myth that the macro cannot be separate from the micro in money and interest rates.
You should know that 33 years ago, I was a doctrinaire Rothbardian.
You should know that 10 years ago, I was a doctrinaire Fisherite like you.
I think I understand things a lot better now.
To some degree I came to that understanding kicking and screaming.
That was your morals and ethics collapsing into a morass of violence and statism.
While I grant that there may be some who have a deeper understanding of the Rothbardian dogma than I ever had, that is not true of most reading this. Keep that in mind.
Yes, most of us are all morons because we’re not dogmatic quasi-monetarists.
Woolsey,
I’m one of those pip squeek amateurs who happens to be sympathetic to allowing the money supply (and prices) to adjust to changes in productivity and factors of production, but I also think many of your “heels dug in” ideas are nutty, and carry the concept too far. You need to distinguish between applying your ideas in the context of a central bank (where many of your concepts are good thought experiments and analytical tools to analyze past monetary policy), and those of a deregulated free banking system, where the theory is likely to be implimented in a much more effective way. You pay lip service to this, but I’m not really certain you’ve fully come to grips with just how difficult it will be to put in practice NGPD targeting in the world of central banking, without setting off some very non-linear and unanticipated perturbations. You need to re-read your Hayek, and understand some of the very insightful realizations he is making about knowledge problems in a complex world. You also need to re-read your Friedman, and come to grips with why he did not support what you are advocating.
As I recently commented to David Beckworth, the current fed policy is inflationary somewhere, just not here in the U.S. (yet). We are simply exporting our inflation overseas currently, but the drain goes both ways, and eventually price rises and shortages may show up here. Be very, very careful to avoid overconfidence my friend. Again, I caution you that we are dealing with a very non-linear system, and things don’t always go the way our tidy little linear equations might suggest (I speak math, so don’t insult me here).
Applying an NGDP rule in a way that does not distort information transmitted by the price mechanism is trickier than you are leading people to believe, and you very well may be wrong about current fed policy.
Be very careful here, lest your good ideas are thrown out with the bathwater when your monetary prescription turns out to be disaster.
Mises vs. Fisher–
To the degree Mises believed that if money expenditures had continued growing in the thirties as it had in the twenties, there would have been a Great Depression, and presumably a 30% increase in the prices of consumer goods, he was wrong.
Fisher was very wrong in his view that the Fed would never allow a massive deflation and that stable prices exist into the future.
I think I made the same error as Fisher in thinking the Fed would never allow money expenditures to drop 13 percent below trend. That doesn’t mean they couldn’t, or that real output would have dropped the same amount anyway if they hadn’t and that the result would have been 13 percent inflation.
Mises was always too fixated on the thought experiement of doing what it takes to keep the market interest rate below the natural interest rate. A policy of slow steady growth in money expenditures allows the market interest rate to rise when market forces make it rise.
I don’t favor stablizing the price level, but only slow steady growth in money expenditures so the trend of the price level is stable. That policy is sustainable. If that policy results in malinvestment when it is initiated, those malinvestments will be liquidated in the context of growing money expeniddtures. Some areas of the economy will grow and others shrink. Some prices will rise and others will fall.
Sralla:
I am not sure how easy it is for a free banking system or a central bank to implement slow steady growth in money expenditures.
One key insight from Sumner is that the key is expecations–the goal is for expected future money expenditures to be on target. Actual expenditures will inevitably deviate from target.
Rothbardians often make the wrong assumption that monetary policy is about keeping interest rates lower than they should be. I don’t think this has ever really been true. it isn’t true today with the current flawed policy of the Fed. And, of course, that shouldn’t be the policy.
The story you tell about excessive money growth resulting in too much spending overseas, and then that excessive spending rising overseas, is a story of a growing trade deficit and then a shrinking trade deficit.
It is a story of a net capital inflow (for the U.S.) then a net capital outlfow.
And these things happen all the time independent of monetary policy errors.
As long as some of any excess supply of money is spent on U.S. goods, (and that means foreigners spending any of the dollars they receive from goods they export to the U.S. on U.S. imports, then it will raise money expenditures on output in the U.S.
I think the notion that all of those foreigners have excess money holdings and only after a along time they will spend them on U.S. goods, and the resulting shrinking trade deficit will result in massive sudden inflationary pressure is an error. But, if it happens, then the quantity of money needs to decrease.
As for Milton Friedman, he did support changing the quantity of base money to stablize money expenditures growth. He just thought that M2 was the perfect intermediate target and M2 velocity would hardly change at all.
To bad we have no such perfect intermediate target. We are left with trying to offset changes in velocity.
Didn’t Beckworth hunt up the quotes where Friedman congratulated Greenspan for offsetting changes in Velocity? Sumner is always quoting the Friedman’s support for using Tips markets to gauge monetary policy.
The M2 money supply rule was contingent on a statistical regularity. It is gone. We live in a more difficult world.
I don’t favor a mechanical feedback rule based on past observations of the money expenditures.
Captain Freedom, I do think that the sticky trajectory of wages is due to expectations of higher prices and wages in the future, and that this has to do with the experience of the past.
Temporary excess supplies or demands for money, however, will always cause problems regardless of the expected trajectory of wages. For example, if money wage rates are expected to be constant, then a correctly perceived temporary increase in money demand (or decrease in the quantity of money) will still result in unemployment rather than an immediate decrease in prices and wages.
And if there is a permanent increase in money demand, it will also have that effect, though certainly the wage deflation will occur more promptly and completely than if people expect the quantity of money to rise to match any increase in money demand..
Taking this into account (as I have, of course,) the least bad option is slow steady growth in money expenditures on output, which is the same thing as slow steady growth in money incomes.
The least bad option for either a temporary or permanent increase in the demand to hold money is an increase in the nominal quantity of money. Changes in the quantity of money such that it creates a shortage or suplus of money is a bad idea.
Bill Woolsey wrote:
The way I see it, ceteris paribus, wages and prices need to fall. Growing productivity means that wages don’t need to fall as much as before.
We know, however, that money expenditures are about where they were before (I should check exactly with the new data,) but wages have continued to grow and prices have grown though a bit more slowly. Real output is about where it started. How is that possible? Productivity. But real output should be higher. Either money expenditures should be higher or prices should be lower. And if we go with the lower prices option, wages should be lower too. But not as low as they would need to be if productivity hadn’t increased.
(Note I’m putting the reply lower in the thread, in case that makes it easier for people to see.)
Thanks for your extensive replies; I definitely feel like I understand your position a lot better now.
I’m glad that you are saying the grand solution would be for prices to fall; I always thought it was weird for people like Mankiw to say, “Holy cow, prices are falling [in late 2008]! Quick Ben, print a trillion dollars before prices fall much further! And why? Well, prices are sticky in a market economy, so that’s the danger of deflation.”
So let me paraphrase what I think a fairer rendition of your view is:
“The demand to hold money increased sharply in late 2008. If prices and wages were perfectly flexible, then a constant stock of money would have been fine, because P would have dropped until people held the real money balances they wanted, and W would have dropped to make sure real wages were still consistent with full employment.
However, in the real world not all prices can fall, although a lot of them can. That’s why CPI did in fact fall in late 2008. So that fact alone would have been OK, especially after say 6 months. But the big problem is that wages are very sticky downward, and so we could have cleared the market for cash holdings with lower P, but only at the expense of real wages well above the market-clearing level.
So, the only option is to in increase M. We need to inject not only enough to equilibrate money demand with the (new) stock at the lower P, but we need to pump in even more, in order to boost P back up to lower real wages and restore equilibrium in the labor market.
It’s ironic in a sense, then, that we are advocating a policy that raises P, when the ‘solution’ to an increased demand for money would be falling P. But once you account for very sticky wages, it’s no contradiction.”
Is that about right?
“Captain Freedom, I do think that the sticky trajectory of wages is due to expectations of higher prices and wages in the future, and that this has to do with the experience of the past.”
Then it would not make much sense to take wage stickiness as a “given” problem, and then propose inflation as a means to solve it!
It would be like taking a drug addict’s withdrawal symptoms as a “given”, and then propose a dosage of drugs as a solution.
“Temporary excess supplies or demands for money, however, will always cause problems regardless of the expected trajectory of wages.”
Only in the short term, which by no means requires inflation as a solution. Hoarding does not cause problems in the long run, where rational economic thinking should be focused.
Politically, people who “hoard” money are not violating anyone else’s property rights, which means there is no justification in continuing to initiate force against people to compel them into the paper money standard controlled by the government’s enforcement of monopoly in money production.
Economically, individual cannot “hoard” unless others “dishoard”, and should everyone seek to “hoard” money, then that will just make prices of everything fall, which will reduce both costs and revenues; revenues instantly and costs with a time lag.
Yes, profitability will fall in the aggregate if everyone increases their cash preference, but in an economy with sound money, there is no reason inherent in the sphere of respect for private property rights that would generate such a thing. The main reason why there are periodic large increases in the demand for money is because of a PRIOR undue increase in the quantity of money via credit expansion, which distorts the economy and puts it onto an unsustainable path of inevitable bust and increases in the demand for money!
To call for more of the very thing that caused the rapid increase in the demand for money in the first place is misguided.
Quasi-monetarists who advocate for inflation via credit expansion are only calling for what they are trying to eliminate (hoarding money)!!
“For example, if money wage rates are expected to be constant, then a correctly perceived temporary increase in money demand (or decrease in the quantity of money) will still result in unemployment rather than an immediate decrease in prices and wages.”
If the demand for money is correctly perceived to grow in the future, if only for a temporary length of time, then those who pay wages will put forth a lower demand for labor. They won’t pay the same wages if they expect revenues to fall in the future on account of an increase in the demand for money. You are going to have to explain why a firm would pay higher wages even though it perceives a future fall in revenues that would cause it to suffer losses if it continued to pay those higher wages.
If investors take into account a risk premium in pricing stocks that includes temporary future declines in cash flow, then why don’t employers who pay wages do the same in your scenario?
Money wage expectations tend to be constant (or more accurately, gradually rising) if future revenues are also expected to be constant (or more accurately, gradually rise).
It’s easy to create for yourself a situation where an increase in the demand for money generates unemployment when you artificially hold as constant the very thing that is a major reflection of expectations of future increases/decreases in the demand for money!
“And if there is a permanent increase in money demand, it will also have that effect, though certainly the wage deflation will occur more promptly and completely than if people expect the quantity of money to rise to match any increase in money demand.”
Exactly. So *because* people expect, correctly, that the central bank will inflate and not allow massive deflation and thus rapidly declining prices to occur, they are more psychologically antagonistic in lowering prices and wage rates as a matter of habit, even when the central bank engineered massive inflation via credit expansion and thus inevitable deflation, and the new monetary conditions call for lower prices and wage rates!
The quasi-monetarist position can be summed up as expecting a drug addict to clean up his act by giving himself any amount of drugs he wants with legal authority, and when he crashes, Austrians say stop giving him the violence backed authority to give himself as much drugs as he wants, and quasi-monetarists say no, we should not stop this, we just have to convince him to use his power to give himself any quantity of drugs he wants, in a more wise manner. Instead of targeting his shaky hands withdrawal symptoms, he should instead target his shaky feet withdrawal symptoms.
Sorry if 90 years of repeated failures has made me question the faith in central planning of money production.
“Taking this into account (as I have, of course,) the least bad option is slow steady growth in money expenditures on output, which is the same thing as slow steady growth in money incomes.”
The least bad option is abolishing the Fed. I think it’s wiser to cease claiming that quasi-monetarism is the least bad option.
“The least bad option for either a temporary or permanent increase in the demand to hold money is an increase in the nominal quantity of money.”
No, the least bad option is the good option, which is understanding why there are periodic rapid increases in the demand for money, and understanding why further inflation will only exacerbate the very problem you are trying to solve, by engineering inflation via credit expansion now and thus the prospects for future deflation and increases in the demand for money.
“Changes in the quantity of money such that it creates a shortage or suplus of money is a bad idea.”
I intend to hold 15% more money as cash compared to my previous demand for money, because I intend to spend more in the future compared to today. Is my additional cash preference destructive because it generates a “shortage of money” since my previous cash preference was “acceptable” or “too low”, or is my additional cash preference constructive because it generates an “acceptable demand for money”, since my previous cash preference was “too low”?
And after answering this question, how in the world can you believe to yourself that whereas my subjective demand for money is anything other than exactly correct (because it matches my preferences in the monetary based division of labor society in which I live, and I am not violating anyone else’s property rights), it is somehow the case that your subjective beliefs concerning my life, and my preferences, is what I should be doing, and if I don’t, you advocate for continued initiations of force against me through the government backed monopoly that is central banking and legal tender laws?
Why can’t you just let me disagree with you and then you simply say OK, I will respect your preferences because they are based on voluntary trade of private property, without you calling for a gun to be pointed at me? Why can’t you just let me and everyone else demand whatever cash balances we want, and not be initiated with further violence through forced inflation tax?
I know exactly why you seem to be so antagonistic towards Rothbard. You know his writings expose your desire for violence in society. You claim you don’t want violence, but then you nevertheless refuse to adapt and peacefully respond to those who disagree with you. You refuse to accept what other people want in terms of their demand for money. You want them to be victimized by further inflation tax, and then, to top it all off, you have the temerity to claim that it is GOOD for us? Wake up and smell the roses Bill. What is good for other individuals besides you is what they prefer, not you.
Is it really so much to ask to just be left alone and free from violence, and not be victimized by arrogant technocrats who believe there is an economic case to be made for initiating violence against others via the inflation tax? If your morality is such that you refuse to challenge those who initiate force against others, and you JOIN IN with them by accepting the violence, you only want it to be directed in a slightly different way, well, I’m sure you can understand why us “dogmatic” Rothbardians know full well how utterly immoral and economically destructive quasi-monetarism really is.
If being a moral and peaceful individual who respects other people’s subjective preferences as long as they don’t initiate force against others, means we have to be subjected to vicious assaults by the likes of quasi-monetarists who poke fun of our integrity, and who claim to have “outgrown” that goodness, to have “moved on”, well then, excuse me for rejecting your entire program as being a worthless apology for violence and economic destruction.
Thank you for clarifying your position. You have made distinctions between your views and those of Selgin quite clear. Though you share some of a common analytical framework, you carry your ideas much further than he is willing, and other proposals you have are quite different. I would say you are much closer to Sumner than Selgin. My My, how far you have strayed from your days as a Rothbardian. Even Beckworth remembers some of his Austrian lessons, but I think you have intentionally scrubbed your brain of everything Austrian. It reminds me of the theology professor who becomes an atheist and can’t wait to tell his students.
As for Friedman, as far as I can tell was a zero inflationist after the 1970’s. That is quite different from what you are advocating. I doubt Friedman would have ever supported the significant inflation that can emerge at times from targeting money expenditures.
Also, the story with the trade deficit is more than a simple story of a trade deficit. It is directly being empowered by the Fed’s money printing, as the Chinese are hording dollars in attempt to peg their currency. I have seen figures where China’s holdings of foreign currency mostly in the form of U.S. dollars has balooned to nearly 50% of its GDP.
Even in your worldview, this has make it harder for people in the U.S. to restore their level of desired cash holdings. Without the big drain of dollars, the current Fed policy would likely be highly inflationary right here, but with it, the Fed can’t inject enough money to hardly make a dent. You should ask yourself why this is the case.
However, there are shortages of raw materials developing all over the world currently, and this is a direct result of the inflation that is showing up in the far east and China due to U.S. printed money. I travel internationally, and let me report to you that the Chinese are everywhere frantically looking for raw materials to keep their factories going.
My prediction is that prices for consumer goods are going up at Walmart and Best Buy.
If a company signs a contract saying that they will pay me $100000 per year for 3 years, it is fair to assume that they have $300000 lying around idle somewhere?
Well, when the context is NGDP, where we include ALL spending in the economy, we would also have to include all wage. Such relatively larger sized 3 year fixed contracts are dwarfed by the much more common, relatively lower sized “open ended” wage contracts.
To answer your question though, a company that offers a fixed 3 year wage contract for $100,000 per year, would not be a *cause* for unemployment should that company experience a decline in sales revenues in say 2 years. If a company experiences a decline in sales revenues, then more than likely it will also lower their demand for labor, and such 3 year contracts would almost certainly have a renegotiation clause attached to it and be lowered. After all, the employee would probably have to choose between say $50,000 a year for the remainder, or be laid off. If they choose the latter, it would almost certainly mean they can get another job that has comparable pay, in which case there would no longer be any liability for the first company. A *guaranteed* wage contract is not common in the economy.
My main point is that changes in wages and employment are not caused by changes in NGDP, nor are they contingent on NGDP. Unemployment is caused by a failure of wage rates to fall down to where the demand for labor can buy the supply of labor. Furthermore, since NGDP is composed in part by the spending made by wage earners, it is incorrect to assume that NGDP can be increased totally apart from wage payments, such that a rise in NGDP can allow employers to keep paying those “sticky” higher wages that otherwise would have resulted in unemployment.
>What you are saying basically means that companies don’t incur liabilites that they aren’t ready to pay right now. If that was true, why are there bankruptcies at all?
No, I did not say that companies do not incur any liabilities at all. We are talking only about wages.
A company will suffer losses if their total costs exceed their revenues, and will go bankrupt if their liabilities exceed their assets. A company that succeeds in lowering what is pays in wages will incur lower costs almost instantaneously, since wage payments show up as costs relatively quickly. A company that succeeds in lowering what it pays for say a factory, that operates for 30 years, will incur lower costs over a much larger time horizon. The shorter the time horizon, the more quickly will lower productive expenditures show up as lower costs.
Since wage payments show up relatively quickly as costs, it is very rare that a company would declare bankruptcy because it can’t afford to pay the wages it promised to pay. Companies almost always go bankrupt because of an inability to decrease their more long term liabilities, which cannot be lowered quickly if the company lowers their productive expenditures now because they experience a sudden decline in sales revenues.
Great post, so much to say, but you said a lot of things I’ve been thinking, and wondering why it’s so hard to communicate them to others. Especially these:
“What is so intriguing to me about Scott’s worldview is that he looks at things that, in my mind, are effects, and attributes causal power to them.”
Indeed, I see it as a very common problem that they get cause and effect confused, and it isn’t limited to these areas. For example, a while back I found a popular press article “reassuring” people about inflation that said, almost exactly, “Historically, inflation has been associated with a growing economy. So the economy could really use some of Bernanke’s plans to create inflation.” (There it even admits that inflation is a *sign* of economic growth, and then infers, somehow, that causing inflation can cause economic growth. Goodhart, anyone?)
“So for one thing–and I don’t mean this as a cheap shot–when is the last time you negotiated a wage increase “in anticipation of 10% more NGDP”? It’s not even true that employers do that.”
Yes, I called Sumner on this, and his reply was a giant fallacy of composition. He said that, “all industries negotiate in anticipation of that industry’s growth, therefore, in the aggregate, industries negotiate in anticipation of the aggregate growth”. But this is a confusion of expectation of a sum vs. sum of the expectations.
And it’s a really sad world when you can build an entire career around such confusion and never have a worry about being corrected on it.
When money expenditures fall, real income falls, and the demand for normal goods fall.
When money expenditures rise, real income rises, and the demand for nominal goods rise.
This is all that is needed for there to be a connection between price and wage setting strategies and expectations about nominal GDP.
It is _bad_ economics to assume that all firms keep prices and wages unchanged and then response to shortages or surpluses. Instead, prices and wages are set based upon expectations and then revised based upon shortages or surpluses.
Is someone arguing that the trajectory of wages cannot possibly change? (That wages are stuck?)
That is all about arguing about the claim that there is an underemployment equilibrium. The quasimonetarist view is all about the disequilibrium process created by an excess demand for money. There is no claim that there can never be a return to equilibrium.
When money expenditures fall, real income falls, and the demand for normal goods fall.
When money expenditures rise because of inflation via credit expansion, it is inevitable that money expenditures will fall in the future.
When money expenditures rise because of inflation via credit expansion
Let me put it in a slightly different shape. When money expenditures rise because when a lot of IOU-s are believed to be as good as money, it inevitable that money expenditures will fall when the a good part IOU-s will turn out to be phony.
Is that it?
Pretty much, but the “realization”, in Austrian terms, arises out of actual action. People can know and understand that most money is fiduciary media, but their actions related to debt defaults and calls, where human action causes fiduciary money to actually disappear, is when Austrians say “the market realizes that what used to be money is no longer money”.
A thing is money only when people act in making it money. If people act and cease making it money, it’s no longer money.
China has suffered from high inflation for some time. The inflation is worsening, and in your view, the problem must be caused by the Fed’s policy in the U.S. The Fed is creating too much money or maybe keeping interest rates too low.
I would say that the problem is entirely the responsibility of the Bank of China. It is creating too much money in China. They are operating a crawling peg against the dollar. They should stop and let markets clear the dollar-renembi exchange rate. Yes, that would result in higher prices for goods imported from China. And a substition
from chinese imports to domestic U.S. goods. From the Chinese perspective, that is a decrease in the demand for chinese products reducing their inflation. Similarly, it would cheapen U.S. goods for the Chinese, allowing them to obtain them. This would reduce inflation in China. Of course, the greater demand for U.S. products by the Chinese would raise the demadn for U.S. products.
When money expenditures on U.S. goods and services are on target, then great. If it moves above, that is when there is an excess supply of dollars and a need to reduce money growth.
If the Chinese insist on pegging the remindi to the dollar, then what happens is that yes, there prices and wages must rise so that chinese goods become suifficently expensive that americans buy us goods instead, and U.S goods look move attractive to the Chinese.
If the Chinese state accumulates U.S. bonds, and so balances trade by sending chinese national savings to the U.S., this avoids the inflation. But this additional of savings to the U.S. is a reduction of the natural interset rate in the U.S.
Perhaps Mises has covered all of this somewhere. (I suspect he did.) But seeing every phenomenon only as an element of an excess supply of money is a mistake.
Captain Freedom:
You are wrong. Generally, growing money expenditures on output will be associated with growing lending, borrowing, and the quantity of credit. There is no reason why the amount lent and borrowed cannot expand forever.
I think good Austrian economicsts understand this. You need to think about it more.
I think in the back of Mises mind was always the notion that the point of monetary policy was to lower interest rates and promote “social justice” by increasing the share of income going to labor at the expense of the share going to capital. He thought this wouldn’t work. I am confident that it wouldn’t work more than some small amount and don’t think it would be desirable anyway. Well, the effect of this policy would be a falling purchasing power of money. But perhaps improved productivity would increase the quantities of goods so that, for a time, the price level wouldn’t rise. Still, the policy of trying to lower interest rates would fail.
Now, I don’t favor lowering interest rates through monetary policy at all. To the degree that an effort to maintain stable growth in money expenditures and, so, a stable price level on average, results in interest rates lower than the level needed to coordinate saving and investment, this would be a bad thing.
Well, it shouldn’t lower market interest rates because the nominal demand for credit will grow, mostly based upon expectations of nominal spending on goods in the future and nominal incomes in the future. And so, the nominal demand for credit grows with the nominal supply of credit, and there is no impact on interest rates.
The demand to hold nominal money balances grows with the nominal quantity of money. The nominal demand for credit grows with the nominal supply of credit at an unchanged interest rate.
If you consider instead the deflationary equlilibrium, the given nominal supply of credit is a growing real supply of credit as the prices of goods fall.. The given nominal demand for credit is a growing real demand for credit, which reflects the growing real volume of goods sold and real incomes earned in the future.
Shifting from a deflationary regime to a price stability regime might well result in a growing nominal supply of credit and an unchanged nominal demand for credit and a lower market interest rate so that the quantity of credit demanded rises to match the growing supply. But this is all assuming that people think that we are still under the deflationary regime. The nominal supply of money grows, but if the price level continues to fall, the real supply of money is growing faster than the real demand for money. Before, the nominal demand for money was constant, but the real demand for money was growing. The falling price level raised the real quantity of money to match that growing real demand for money. If prices continue to fall, and the nominal quantity of money rises, then the real quantity of money is rising faster than the real demand for money. This is matched by an excess supply of credit at the current interest rate. The market interest rate falls.
Once price stop falling, then the growing real demand for money requires a growing nominal demand for moeny. The growing nominal quantity of money just matches the growing nominal demand for money. There is no more excess supply of money. The nominal and real supply of money are both growing with the nominal and real demand for money.
When people figure out that sure enough, money incomes are growing all the time, that money sales are growing, then the noimnal demand for credit will grow faster, and market interest rates will rise. In the back of the mind of the typical Austrian this defeats the point of the policy. But no, the point of the policy was never to lower interest rates. Ideally, they would never have fallen.
To the degree people responded to the low interest rates by changing what the bought, then the pattern of demand would be distorted. Well, those distortions will go away when interest rates rise again. But at no point in the process must money expenditures fall. They rise for those things that were especially stimulated by low interest rates and rise more slowly for a time for things that were especially stimulated by the lower interest rate. For some thing, they may actually stay the same for a time. There may be even somethings were they shrink. However, spending on all the other things grow, so that total spending continues to grow.
The error you are making (and not Mises) is to assume that lower interest rates are necessary for spending to rise. No. Spending can rise with interest rates falling, staying the same, or rising.
Sorry Bill, but it is you who is wrong.
“Generally, growing money expenditures on output will be associated with growing lending, borrowing, and the quantity of credit.”
These are all nominal quantities. A stable quantity of money is also associated with growing lending, borrowing, and quantity of credit….*in real terms*.
Bringing more paper money into existence will raise nominal lending and borrowing. But so what? People don’t become wealthier because of more money sloshing around the economy. They become more wealthier because of more real productivity.
“There is no reason why the amount lent and borrowed cannot expand forever.”
It doesn’t have to keep growing in nominal terms forever in order for economic growth to take place. A fixed yearly quantity of nominal lending and borrowing can facilitate indefinite economic growth. As long as the rate of real capital goods production can not only replace used up capital goods, but add to it besides, that physical increase in capital (factories, machines, etc) can then be used to produce more capital goods and consumer goods, which then sets the stage for further economic growth. And all this can be done with the same quantity of lending and borrowing in nominal terms that buys more and more capital goods as the prices for them fall on account of increased economic productivity in general.
You seem to be confusing an increase in nominal investment that has to take place along side an increase in the quantity of money and thus nominal incomes (in order for businessmen to remain competitive) and in order for capital consumption to be avoided, with the actual requirements for competition and economic growth, which is enough capital goods production to replace and more than replace used up capital goods.
A fixed quantity of money, a fixed quantity of lending and borrowing, will only eventually eliminate net investment that is financed out of net income in dollar terms. In gross terms however, where savings and investment really matter, capital accumulation takes place by falling prices of capital goods. Constant gross spending on capital goods, constant spending on consumer goods, and constant quantity of lending and borrowing, can all take place alongside increased productivity, falling prices of capital goods, capital accumulation, economic growth, and full employment.
“I think good Austrian economicsts understand this. You need to think about it more.”
No Bill, good Austrians understand what I am saying and know that you are incorrect. Good Austrians understand that increased productivity, adequate lending and borrowing, and full employment, do not require a growing nominal quantity of spending, nor a growing nominal quantity of lending and borrowing, nor inflation in general.
What good Austrians understand is the importance of relative prices and capital structure.
I’m quite baffled as to how you actually believe that Austrian economists are more partial to your fallacious claims than my actually Austrian arguments.
“I think in the back of Mises mind was always the notion that the point of monetary policy was to lower interest rates and promote “social justice” by increasing the share of income going to labor at the expense of the share going to capital. He thought this wouldn’t work. I am confident that it wouldn’t work more than some small amount and don’t think it would be desirable anyway.”
That is a straw man “bourgeoisie” reactionary position against Marxism. Mises was not against central banking an an economist. As an economist, he was only against the thought that central banking can do what it’s supporters say it can do. He showed the errors in thought that were prevalent during his time. As a civilian, he was pro-capitalist and laissez-faire and anti-central bank.
Rothbard on the other hand went beyond Mises and showed not only why central banking is economically destructive (yes, even if they target NGDP), but also why it is immoral and vicious.
“Well, the effect of this policy would be a falling purchasing power of money. But perhaps improved productivity would increase the quantities of goods so that, for a time, the price level wouldn’t rise. Still, the policy of trying to lower interest rates would fail.”
Yes, he did hold that, but quasi-monetarists have to understand that targeting NGDP through inflation via credit expansion will also reduce interest rates. Inflation that enters the loan market first (which is what the quasi-monetarist position calls for), in addition to credit expansion based on frb (which is also quasi-monetarist), they operate to reduce the market rate of interest from where it otherwise would have been. This is the case even if the Fed doesn’t target interest rates.
It’s silly for quasi-monetarists to ignore the full effects of targeting NGDP and banks engaging in frb, and then claim that quasi-monetarists are not in favor of the Fed manipulating interest rates.
So I find very puzzling that you then say:
“Now, I don’t favor lowering interest rates through monetary policy at all.”
Lowering interest rates is EXACTLY what targeting NGDP through inflation via credit expansion generates! The monetary policy quasi-monetarists advocate in fact lowers interest rates!
>To the degree that an effort to maintain stable growth in money expenditures and, so, a stable price level on average, results in interest rates lower than the level needed to coordinate saving and investment, this would be a bad thing.
Which means always if you support inflation entering the banking system first, and if you support frb.
You cannot target NGDP the way you want it to be targeted and then claim that it won’t affect interest rates. Interest rates are affected by inflation entering the loan market first and by frb, both of which quasi-monetarists desire as the means to achieve growing NGDP.
It’s funny. You almost come close to admitting that maintaining inflation and credit expansion is bad because it discoordinates savings and investment. But alas, you then say:
“Well, it shouldn’t lower market interest rates because the nominal demand for credit will grow, mostly based upon expectations of nominal spending on goods in the future and nominal incomes in the future. And so, the nominal demand for credit grows with the nominal supply of credit, and there is no impact on interest rates.”
Here you incorrectly think that as long as absolute (nominal) interest rates do not change, then monetary policy has not depressed interest rates. What you are missing is that the problem is not that interest rates fall in nominal terms. When Austrians say that inflation via credit expansion lowers interest rates, they mean interest rates are depressed from where they otherwise would have been absent the practices, where the free market would have coordinated consumption and investment over time via the market interest rate that results from voluntary savings.
Interest rates could rise in nominal terms, and Austrians would still argue that monetary policy is depressing interest rates…*if the Federal Reserve System is inflating and expanding credit beyond the level of real savings*.
That the Federal Reserve System can generate “stable” market interest rates for relatively long periods of time does not imply that monetary policy did not depress interest rates.
Absent the inflation via credit expansion, interest rates would be lower. A society that practices respect for private property rights would generate higher interest rates compared to ours that contains monetary policy and violation of private property rights through violence backed legal tender laws.
“The demand to hold nominal money balances grows with the nominal quantity of money.”
That is not necessarily true. Inflation of the money supply can generate a lower demand for money as people spend their money sooner to avoid paying higher prices in the future. Look at how much debt the average US household is in. Decades of inflation is a major reason for this.
What you probably meant to say was that a constant rate of inflation of the money supply does not necessarily rule out nominally growing cash balances.
“The nominal demand for credit grows with the nominal supply of credit at an unchanged interest rate.”
The demand for credit is in part a function of interest rates. Interest rates are a function of the average rate of profit in the economy, which is a function of time preference.
That inflation increases the nominal average rate of profit, which then allows individuals to lend and borrow more money at higher nominal rates of interest, does not say anything regarding whether or not this is constructive to economic health.
The problem with credit expansion is not narrowly focused on nominal changes in interest rates. Market interest rates on loans can be very high or very low, and by itself this says nothing of employment or aggregate demand. Interest rates are determined by the societal rate of time preference, which is manifested by the average rate of profit, which then affects nominal interest rates on loans.
That people take on more debt because money is “cheaper” than it otherwise would have been, is not necessarily a good thing, if what brought it about is credit expansion. Since real savings do not justify such a low interest rate, investors are thrown off course in terms of what the consumers want when they want it.
“If you consider instead the deflationary equlilibrium, the given nominal supply of credit is a growing real supply of credit as the prices of goods fall. The given nominal demand for credit is a growing real demand for credit, which reflects the growing real volume of goods sold and real incomes earned in the future.
Shifting from a deflationary regime to a price stability regime might well result in a growing nominal supply of credit and an unchanged nominal demand for credit and a lower market interest rate so that the quantity of credit demanded rises to match the growing supply.
Bill, I don’t know what to say. This paragraph, which refutes everything you said prior, is exactly right. I can’t understand how you can hold such incorrect positions and such correct positions, in the same post.
“But this is all assuming that people think that we are still under the deflationary regime. The nominal supply of money grows, but if the price level continues to fall, the real supply of money is growing faster than the real demand for money. Before, the nominal demand for money was constant, but the real demand for money was growing. The falling price level raised the real quantity of money to match that growing real demand for money. If prices continue to fall, and the nominal quantity of money rises, then the real quantity of money is rising faster than the real demand for money. This is matched by an excess supply of credit at the current interest rate. The market interest rate falls.”
Ah, I see we’re back the same attacks on people’s preferences for hoarding, and again taking it as a market imperfection given that individuals find themselves setting prices and costs that are not justified given the prevalent aggregate monetary conditions.
If people think they’re in a deflationary (I think you mean falling prices, not decline in money supply and spending) regime, then chances are it is BECAUSE they are actually in a deflationary regime. If people are living in an inflationary regime, then chances are it is because they are living in an inflationary regime.
People don’t just come to these expectations out of the blue. People would not have inflation expectations if they did not live in an inflationary regime.
You can’t attack people for expecting inflation, living in an inflationary regime, when they should be expecting deflation because the inflationists unexpectedly “failed” to inflate. You can’t attack people for expecting deflation, living in a deflationary regime, when they should be expecting inflation because of unexpected counterfeiters “failed” to be stopped.
If people’s private property rights were respected, and money was sound, then people’s inflation/deflation expectations would be in line with what actually exists, because there is no single money producer to make a mess of things.
If a shoe producer or car producer or potato producer had a government backed monopoly based on violence, and they produced whatever quantity of shoes, or cars, or potatoes, and people come to have shoe, car and potato supply expectations, you can’t blame the people for being wrong when the monopoly producer screws up and doesn’t produce enough or produces too much.
Individuals make mistakes. You do accept that, right? If individuals make mistakes, then your advocacy for an individual to plan the entire economy’s money production is asking for their mistakes to be felt by everyone. And then to top it off, you call the people “imperfect” for behaving in a way that is not justified according to the monopolist’s errors and successes.
If you are willing to accept that individuals make mistakes, then if you say it is wrong for food production to be monopolized, then why would money production be any different?
I don’t want one person to use violence to take control of my food production, and I certainly don’t want one person to use violence to take control of my money production. Why do you say that because I am living in an inflationary regime backed by violence, I have to support it, and if I don’t, then I am just a “dogmatic Rothbardian”?
The most stable policy in ANYTHING economics-related is absence of violence backed monopoly, that is, decentralization based on individual choice.
If there are thousands of gold and silver producers say, as there would be in a free market of money production, then the supply of money will grow in a stable and gradual manner. One gold producer’s mistakes will not have as large a “negative” effect on money production compared to if there is only one gold producer and that single producer screws up.
Hayek convincingly showed us that central planners habitually suffer from a fatal conceit. Are you sure that one producer of anything is superior to thousands of producers of that same thing?
When was the last time there was an electronics market crash? When was the last time there was a potato market crash? When was the last time there was a PC market crash? These industries are more stable because they are decentralized, and one individual producer’s mistakes will not appreciably affect the entire market.
The good economist, forget about whether they are Austrian or quasi-monetarist, knows and understands that violence backed monopolies are inferior to competing producers.
In a society that respected private property rights, even if one kicked and screamed at a bank to lend them money, the bank would not be able to loan them money that belongs to someone else. If that means people feel a “shortage” of loans, then too bad so sad. I feel such a “shortage” when it comes to wealth everyday, as does everyone else. That doesn’t mean I am entitled to misappropriate another person’s wealth.
“Once price stop falling, then the growing real demand for money requires a growing nominal demand for moeny. The growing nominal quantity of money just matches the growing nominal demand for money. There is no more excess supply of money.”
Prices won’t stop falling if money production were open to competition and there is enough respect for private property rights to facilitate savings and capital accumulation.
You seem to desire economic changes to stop, to become “in equilibrium”, for prices to change but then stop when you say they should stop, for the demand for money to change but then stop when you say it should stop, for the quantity of money to rise, but stop when you say it should stop.
In other words, you seem to want to have intellectual control over economic changes and reserve for yourself the mental ability to make things stop and go according to your desire.
“The nominal and real supply of money are both growing with the nominal and real demand for money.”
Only because supply of production grows. Real productivity doesn’t grow because the quantity of money grows or because the nominal supply of lending and borrowing grows.
“When people figure out that sure enough, money incomes are growing all the time, that money sales are growing, then the noimnal demand for credit will grow faster, and market interest rates will rise. In the back of the mind of the typical Austrian this defeats the point of the policy. But no, the point of the policy was never to lower interest rates. Ideally, they would never have fallen.”
Again, you are conflating a nominal change in interest rates as being the decisive factor. It’s not important what the nominal interest rate does, as long as it reflects society’s real rate of savings. It does not reflect society’s real rate of savings if it is artificially lowered because of inflation via credit expansion due to the Federal Reserve System, targeting CPI or PPI or NGDP or any other non-individualistic based, collectivist metric that has no causal force of its own but is actually an effect of prior causes generated by individual choice.
“To the degree people responded to the low interest rates by changing what the bought, then the pattern of demand would be distorted. Well, those distortions will go away when interest rates rise again.”
Not if the Federal Reserve System keeps expanding credit beyond the rate of real savings!!!
“But at no point in the process must money expenditures fall.”
They should fall if people decide to hoard more money because they want to spend less today and more in the future.
“They rise for those things that were especially stimulated by low interest rates and rise more slowly for a time for things that were especially stimulated by the lower interest rate. For some thing, they may actually stay the same for a time. There may be even somethings were they shrink. However, spending on all the other things grow, so that total spending continues to grow.”
“The error you are making (and not Mises) is to assume that lower interest rates are necessary for spending to rise. No. Spending can rise with interest rates falling, staying the same, or rising.”
I never made the claim that lower interest rates are necessary for spending to rise. Are you sure you read my post correctly? I hold that total spending is primarily a function of the total money in existence. Any differences between the two, such as changes in demand for money holding, are primarily transitive and/or temporary. Long term, total spending cannot rise unless the quantity of money rises.
I think the confusion here is the result of my insistence that your desire to inflate and expand credit as the means to target NGDP will depress interest rates from where they otherwise would have been, at least initially. In order for NGDP to keep rising, continued credit expansion would have to take place, unless you want the government to spend money, or unless you want the Fed to mail everyone in the country free checks every month.
“Absent the inflation via credit expansion, interest rates would be lower.”
I meant “would be higher”.
Close the italics!
Does anybody know why everything is in italics? I suspect it has to do with sticky HTML tags.
Ahh, Captain Freedom swapped the “i” and the slash in a response about halfway through the thread, and it caused everything after that to be in italics.
I think this refutes the idea that blog posts are self-regulating. It is good that I could step in and restore equilibrium.
Timed “edit” options are a good market solution for this problem!
I thought that too, but then I did a test post of only two paragraphs, and I triple checked the and tags in the first paragraph.
The second paragraph still became italicized.
Not sure what you mean. I followed up the italics and it started in your post about halfway through the thread. I opened up your post to edit it, and one of your closing tags was wrong. It had the “i” followed by a space and then a slash, instead of the other way around with no space. After I changed it, everything was fine in the thread.
Bless you.
Trying again.
Woolsey,
Thanks for your thoughtful reply. I will try to digest what you have said.
I do not understand several of your lines of reasoning, but the problem may well be on my end. I will ponder and go back to the peer-reviewed literature.
However, here is my suspicion. The forcing boundary value change is the increased money supply injected by the central bank. Local changes in supply and demand for goods and services, along with the demand for money are initial values problems, and give rise to the “weather” or circulation of money within the economy. Aggregate demand or total spending can be a sort of barometer or metric for some of these changes in the economy, but is not the a driver, since by definition, it is only a type of measuring stick.
However, when the money supply is changed by the central bank through direct injections (open market operations), there is a global response to this perturbation. Relative prices move inside this, demand for money varies wildly, but in the aggregate, prices are bound to go up eventually by some hard-to-predict amount. The non-equilibrium response is the “long and variable lag” that is talked about.
The real question regards the path to a new quasi-equilibrium state. It is a highly non-linear response. There are feedbacks within the system to the perturbation that make it very hard to say how the systems components will react. What we should expect however, is that quick and global perturbations of the supply of money by a central bank will take time to work through the system, and along this path to a new quasi-eqilibrium state at least the local and regional effects (and likely the global full global response) are impossible to skillfully anticipate. This phenomena was brilliantly observed by Hayek, despite his lack of ability to formalize mathematically at the time. It also exposes the myth that a global economy can be consciously and skillfully “directed” by any type of centralized command and control authority. He realized this, and used it to attack the efficacy of socialism.
The response of the business cycle is a regional to global feedback to the monetary disturbance however, and that has potential to reverberate wildly. IMO, the Austrian story can give some meaningful expression to the types of responses that might be expected, yet each is unique in its own way. The Austrians were quite aware of this.
With this in mind, this is why I think the concept of free banking makes sense. Free banking generates changes in money supply locally and regionally, and these changes immediately satisfy local and regional demands for money, goods and services, and is responsive to productivity changes. The time lags are much smaller to changes in the money supply, and the global signals get mixed in much more rapidly yet gently, so they may be somewhat less likely to generate wild regional and global ossilations (the wild business cycle swings). Really, it eliminates changes in money as a boundary value problem altogether, and causes the economy to ossilate about another attractor. It also maximizes the information that the price signal gives for rationing scarce resources, and allowing local prices to reflect these realities.
Now that scares some people, since there is a question about stability of such a system. However, I think there is reason to believe it might be more stable than what we have now.
However, when the money supply is *increased* by the central bank through direct injections (open market operations), there is a global response to this perturbation. Relative prices move inside this, demand for money varies wildly, but in the aggregate, prices are bound to rise by some hard-to-predict amount
Captain Freedom:
You need to think about this more.
Growing money are sustainable as is growing nominal lending. Sustainable doesn’t mean desirable. I think it is desirable, but not because deflationary equilibrium is impossible.
You are wrong that growing money expenditures require lower real or nominal interest rates. Let me help. Mises explained that if the quantity of money doesn’t grow faster and faster, the malinvestments will be liquidated. OK. Suppose the quantity of money doesn’t grow faster and faster. Suppose it grows at a constant rate and the malinvestments are liquidated. Then what?
My view is that this process takes at most two years, but maybe less. And the amount of malinvestment created in this period could be zero, but most probably is a small amount.
Also, this assumes that the economy starts in a deflationary equilibrium. That has never existed in the real world, and in reality, money expenditures growing three percent is actually going to be a disinflationary move. The malinvestment that might be generated if we had a deflationary regime and moved to a contant money expenditure growth will not happen! We don’t have such a regime.
If the nominal quantity of money were fixed, the real quantity of money would start falling (because we have inflation.) That part of nominal quantity of money funded by money creation would be fixed. The real quantity of that part of credit would be dropping. We have inflation.
If the nominal quantity grows at the same rate as inflation, the real quantity of money is constant and the real quantity of credit funded by money is constant. If the nominal quantity of money grows at the same rate as inflation plus the demand to hold money, then the real quantity of money grows with the demand to hold money. The real quantity of credit that is funded by money grows with the demand to hold money. The increase in the demand to hold money is saving, and so that real credit creation matches that aspect of saving.
Disinflation from that point is disruptive. But it doesn’t create an excess supply of money, an increase in the real quantity of credit, or low market interest rates. It really has the opposite effect.
And once disinflation hits zero, having the nominal quantity of money grow with the real demand to hold money, there is no excess supply of money or lower interest rates.
If disinflation continued to the deflationary equilibrium, there would be excessively high interest rates then too, but when the adjustment is complete, real interest rates are back where they would have been.
“You need to think about this more.”
Ok.
[Puts fingers on temples]
Hrrrrrmmppphhhhhh!!!!
“Growing money are sustainable as is growing nominal lending.”
I don’t deny that. What I am saying is that growing money via inflation through credit expansion changes the capital structure of the economy and distorts it, causing the real structure to be unsustainable vis a vis consumer spending patterns over time.
“You are wrong that growing money expenditures require lower real or nominal interest rates.”
You’re still not understanding what I am saying. I am not saying that growing money supply per se requires lower interest rates. I am saying that YOUR method of increasing NGDP, which is inflation through the banking system, which increases the supply of loanable funds beyond the level that would result from purely voluntary savings alone, THAT necessarily lowers interest rates from where they otherwise would have been had interest rates been a function of real savings only, as interest rates would tend to be in a free market of money production.
My position concerning aggregate spending, inflation of the money supply, and interest rates is that inflation and the consequent rise in aggregate spending puts upward pressure on interest rates. This is because inflation and the resulting increase in total spending enlarges the spread between aggregate revenues and aggregate costs. In a free market of money production, the difference between aggregate revenues and aggregate costs, and thus the rate of profit, would be a function of time preference, or, the difference in valuation that people attach to goods in the distant future versus goods in the present and near future. When people save and invest more, and consume less, that increases aggregate costs relative to aggregate revenues.
When the Federal Reserve System inflates, that WIDENS the difference between revenues and costs, for revenues rise instantly, but costs rise with a time lag, because costs are always a function of past productive expenditures.
Now, the way the Federal Reserve System lowers interest rates is by continually accelerating inflation *via the loan market*. If the Fed System just engaged in a one time round of inflation via the loan market, then what will happen is that interest rates will initially fall as the supply of loans increases beyond the rate of real savings, but then once that money is spent and re-spent ad infinitum, the original and very much real time preference of people will reassert itself, and that will put upward pressure on interest rates once again, since people are not actually saving as much as the artificially lowered interest rate communicated.
This is why the Fed System has to continually accelerate inflation through the loan market if they want interest rates to REMAIN low over time. This acceleration can go on for many years, after which time the Fed System’s current rate of credit expansion is not enough to continue to support the distorted economy. The market reasserts itself, either through real world scarcity, or, what usually happens, the Fed tightens up because it doesn’t want consumer prices to rise so much, and that exposes all the bad investments, as well as time preference derived interest rates.
My main argument is that your call for raising NGDP has, what is now clear, an unintended side-effect of lowering interest rates from where they would be if investment was financed by real savings only. This is because *the way you want NGDP to be raised by the Federal Reserve System* guarantees below market interest rates.
You want the Fed System to target NGDP. Fine. But they can’t do that and not affect interest rates. This is because the new money you want them to create enters the economy through the loan market. Banks that loan more because their reserves are continually “topped up” by the Fed are affecting the loan market by presenting more funds than a purely real savings mechanism would generate. Bill saves $1,000 and makes it available for lending, but the Fed System comes along and generates $10,000 of new loans out of thin air, unbacked by any prior decrease in consumption or increase in savings.
So when I say that your ideal society will lower interest rates below market, what I am saying is not that an impossible isolated increase in “spending” brought about by “inflation” will necessarily result in lower interest rates. I am only saying that if you want to raise aggregate demand using the Federal Reserve System, you will be calling for an artificial expansion in the loan market that is unbacked by prior savings, and that will act to lower interest rates to below market.
“Let me help. Mises explained that if the quantity of money doesn’t grow faster and faster, the malinvestments will be liquidated. OK. Suppose the quantity of money doesn’t grow faster and faster. Suppose it grows at a constant rate and the malinvestments are liquidated. Then what?”
It depends on where the inflation ENTERS the economy. Mises held that inflation that enters the economy through government spending does not generate the business cycle and will merely put a nominal premium on interest rates to reflect the declining purchasing power. He held that inflation which enters the loan market will lower interest rates and generate the business cycle. In order to keep the boom going, he argued that inflation through the loan market would have to accelerate, after which either real scarcity will bring on the bust, or the central bank tightens and the market begins to correct the malinvestments made during the boom.
If the central bank is going to inflate at a constant mechanical rate, and that inflation enters the economy through the loan market, then that is quite DIFFERENT from the quasi-monetarist advocacy of the Fed targeting aggregate SPENDING. What you are talking about is one of Milton Friedman’s ideas for having the money supply increase at a constant rate via computer.
If we assume the quasi-monetarist position of the Fed targeting aggregate spending, which again is different from targeting a constant growth in money supply, then they will bring about the business cycle as soon as people start “hoarding” cash, which would otherwise decrease aggregate spending in nominal terms, and the Fed reacts by STEPPING UP the increase in money production that enters the economy through the loan market, in order to “counter-act” the fact that people are increasing their cash holdings.
Since it is impossible to predict in advance what people’s demand for cash holding will be, a policy of targeting a constant growth in aggregate spending will generate the business cycle to the extent that the market rate is above the nominal rate, the latter of which is affected by NGDP targeting through inflation via credit expansion. Targeting aggregate spending at the expense of money supply will generate the business cycle if people decided to hold more cash and cut back on their investments to do it. The injection of new loans through the banking system, hoping that it will increase aggregate demand and offset people’s “hoarding”, will put interest rates below market, since real savings have not increased.
“My view is that this process takes at most two years, but maybe less. And the amount of malinvestment created in this period could be zero, but most probably is a small amount.”
If your ideal is for the Fed to increase the money supply at a constant pace, and not to target NGDP (which is spending related), then sure, I’ll agree that the business cycle will be less intense compared to the status quo.
But the business cycle will be even less intense, if not absent, if money production were market driven, for then the supply of money would only increase if the rest of people’s marginal preferences justified it, as people who wanted to “buy” more gold such that they cut back on their spending on other things, then the rate of profit will rise in gold production, and the rate of profit will fall in other industries. That will redirect investment away from those other industries, and into gold production. As the investment of gold rises, so will the supply. That will reduce the “price” of gold vis a vis other goods, and therefore the rate of profit in gold production will fall back down. Once the rate of profit in gold production falls back down, there is no further incentive to mine gold. Even if 1000 tons of gold were below the Earth, it won’t get mined if it cost 5000 tons of gold. This 5000 cost is important because it reflects the fact that the factors of production that can mine gold are more valuable elsewhere in the economy, where businessmen can bid up those factors because their revenues are higher on account of the consumer valuing those products so highly.
It won’t be until people start valuing gold more relative to other goods that they will spend less on other goods and more for gold, which will prevent those other industry producers from bidding up the resources so high, and the gold producers will be able to buy the needed factors at lower prices until they are lower than 1000 tons of gold.
In other words, a precious metals standard contains the closest connection between real productivity, marginal utility of wants, and money production, that is imaginable. No computer, or Fed chairman, can replicate this.
“Also, this assumes that the economy starts in a deflationary equilibrium. That has never existed in the real world, and in reality, money expenditures growing three percent is actually going to be a disinflationary move.”
Well, if by “deflationary equilibrium”, you mean gradually falling prices, then I will point you towards the mid to late 19th century, where the price level gradually fell as productivity increased in a relatively stable gold money supply (although the government and the banks did inflate to a degree, but this is a movement away from a precious metals standard, not a consequence of it). If by deflationary equilibrium you mean gradually falling money supply, then apart from isolated instances, you are right that it does not occur as a normal phenomenon. This is no more surprising than realizing that food production tends to be in a growth tendency. As productivity rises, the supply of almost everything rises, including gold money. And, what has also been true since the late 19th century, there has been a growth in the supply of irrational philosophy and violent statism, and that is why there has been a rapid growth in paper money.
“The malinvestment that might be generated if we had a deflationary regime and moved to a contant money expenditure growth will not happen! We don’t have such a regime.”
If investment exceeded real savings, which takes place whenever banks or the government expands credit from thin air, then there will be the business cycle. If on the other hand your idea is for the Fed to target a constant growth in the supply of money, then you might as well call for a gold standard, because that is exactly what it does, without the monopoly driven moral hazard and the incentive to create money out of thin air if one had the power do to so.
Remember, central banking was originally held by economists to be a lender of last resort. Now it’s centrally planning the economy by bailing out bankrupt banks, buying worthless risky assets, bailing out foreign central banks and hence governments, manipulating the stock market, trying to control unemployment, trying to control interest rates, etc, etc, etc.
The reason why it got so bad is because it is based on a bad philosophy, which is using violence to maintain monopoly control over an area of production, namely money production.
Quasi-monetarists cannot claim that it is realistically possible for humans to have the power to create money out of thin air, but then follow an artificial model of targeting CPI, or interest rates, or NGDP. They will create money for their own purposes as is expected according to human nature.
“If the nominal quantity of money were fixed, the real quantity of money would start falling (because we have inflation.)”
I am not sure what you mean when you demarcate “nominal” money with “real” money, nor do I see how you can equate a fixed supply of money and falling prices with “inflation”.
For the separation between nominal and real, well, they are same thing. If there is $1000 in nominal dollars, there are $1000 in real dollars. Unless of course by “nominal money” you mean there exists fiduciary money that is not backed by anything tangible or “real”.
For the inflation reference: no matter what definition of inflation one uses (money supply, or rising prices), a fixed quantity of money and falling prices is not inflation.
It is neither deflation nor inflation according to the money supply definition, and it is deflation according to “prices” definition.
“That part of nominal quantity of money funded by money creation would be fixed. The real quantity of that part of credit would be dropping. We have inflation.”
I’m not sure what you mean here. Are you talking about reserves being fixed and credit expanding? If so, then that’s what we have now.
“If the nominal quantity grows at the same rate as inflation, the real quantity of money is constant and the real quantity of credit funded by money is constant. If the nominal quantity of money grows at the same rate as inflation plus the demand to hold money, then the real quantity of money grows with the demand to hold money. The real quantity of credit that is funded by money grows with the demand to hold money. The increase in the demand to hold money is saving, and so that real credit creation matches that aspect of saving.”
This is incomprehensible to me. I think I lost your train of thought.
My view is that if the nominal quantity of money grows, then that IS inflation, by definition (well, the original definition). If, on the other hand, by inflation you mean “rising prices”, then prices cannot keep rising unless the nominal quantity of money keeps growing. In that case, it doesn’t make much sense to separate “the nominal quantity of money” with “the rate of inflation”, such that the Fed can be said to be increasing the former in pace with the latter. The latter is CAUSED by the former, at least in the long run.
Inflation is a monetary phenomenon. It appears to me that you are treating inflation as some exogenous variable that is causally unrelated to money printing, such that if this exogenous variable increases, we then look at the rate of money creation and ask whether it is keeping up with it or not, when in reality the rising prices is a consequence of the rise in the quantity of money. Maybe I am totally misunderstanding you, in which case I apologize, but from what I can tell, it looks like you are treating inflation as being separate from an increased supply of money.
“Disinflation from that point is disruptive. But it doesn’t create an excess supply of money, an increase in the real quantity of credit, or low market interest rates. It really has the opposite effect.”
“And once disinflation hits zero, having the nominal quantity of money grow with the real demand to hold money, there is no excess supply of money or lower interest rates.”
“If disinflation continued to the deflationary equilibrium, there would be excessively high interest rates then too, but when the adjustment is complete, real interest rates are back where they would have been.”
Excessively high interest rates would be transitive as the market’s time preference and real savings reassert themselves and correct the distorted capital structure that was generated by prior artificially low interest rates on account of inflation via credit expansion from the Federal Reserve System (which is the means by which quasi-monetarists would like the government to raise aggregate demand).
That interest rates rise is not something that should be stopped, if that is what a reduction in Fed intervention brings about. Interest rates should reflect time preference, which they would in a free market. They should not reflect the unintended consequences of the Fed System targeting NGDP by expanding credit from thin air.
I’ve been trying to figure out how Clayton Christensen’s disruption concept fits into these models:
http://www.claytonchristensen.com/disruptive_innovation.html
To me, it seems to model sticky wages / prices, misallocated workers, discourages governement intervention, and does so without referencing Austrian Economics at all, let alone ABCT. Meanwhile, I have never seen an Austrian Economist reference disruption. But this seems to model these concepts even more clearly than Mises’ examples. I’m not an expert in either one, but am I missing something here?