03 Apr 2012

A Note on ECON MOMENTS and Ron Paul vs. Non-Neutrality of Money

Economics, Federal Reserve, Ron Paul 76 Comments

[UPDATE below.]

Just to give you a quick update, over the weekend I bit the bullet and bought a new camera that takes a mic. However, my parents are coming into town this week for Easter, and then I’m traveling like CRAZY for two weeks. (As Dennis Miller would say, I’m going to make Kerouac look like an agoraphobe.) So don’t think I’m pouting and holding off on the videos because some meanies complained about the sound (though they were indeed meanies and I am indeed pouting).

In the meantime, here’s something that has been bothering me about this fancy-pants economist critique of Ron Paul. (I’ve seen at least three economists make this argument.) It goes like this (paraphrasing):

[RPM’s PARAPHRASING OF ACTUAL ECONOMIST CRITICS OF RON PAUL:]

Ron Paul is either a liar or a fool. The fact that the USD has lost 95% or whatever of its purchasing power since 1913, is completely irrelevant. To a first approximation, if the prices of goods have risen 20x (or whatever), then wages have risen 20x too, because of the printing press. Now in reality, wages have actually risen faster than most prices, and that is because productivity has risen over the decades. But if money is non-neutral at least in the long-run–and even Austrians claim they agree with this proposition–then the printing press doesn’t affect the real marginal productivity of labor. So nobody is really made poorer by the Fed, or at least, the factoid about the dollar losing 95% of its purchasing power since 1913 is a complete non sequitur. What would be scarier–if Ron Paul realizes this and cites the stat anyway, or if he is considered an expert on monetary policy and doesn’t know these elementary things?!

OK like I said upfront, I am super busy so I’m not going to be as cool as Krugman and literally do a formal model on this. But go ahead and write up a general equilibrium model with all the i’s dotted and the t’s crossed, where one agent has a printing press. Characterize an equilibrium where the agent with the printing press has the money stock grow at (say) 5% per year, and the agent uses this newly-produced money to buy a constant stream of consumption goods. Make the workers and the owners of capital have cash-in-advance constraints so that in equilibrium, they want to hold money.

OK so when you get that all pinned down, it is clearly the case that every year, the agent with the printing press siphons real consumption away that the workers and capitalists physically produce. If you set the rate of inflation to 0%, then clearly the printing press owner would consume 0% from that point onward, leaving the full product to the workers and capitalists. But at a positive rate of monetary inflation, there is a systematic flow of real goods out of the bellies of the other people and into the belly of the guy with the printing press.

So already we see that the “wages adjust in the long-run” isn’t quite right. It’s leaving out the crucial issue that the Ron Paul people are complaining about. (And this can happen with rational expectations, even with perfect certainty, in the model.)

Now here’s the point I’m not as sure about: I think I could come up with a pretty standard model, with “normal” utility functions blah blah blah, where we have a class of equilibria such that the proportion of total output transferred to the money-producer rises with the rate of price inflation, at least within a certain range. So in that class of equilibria, if somebody asked at time 87, “Hey, how much have we gotten ripped off in this timeline?” it would be an adequate answer to say, “Well, the price of a unit of food quoted in the money has risen by X%.”

UPDATE: I realized my last paragraph was very confusing. I don’t mean that I could come up with a model where an X% rise in the CPI corresponds to X% of GDP going to the money-producer. Rather, I meant that I think I can come up with a family of equilibria where there is a direct relationship between the total depreciation of the currency from time T=0, and the proportion of total GDP over the timespan that was diverted into the belly of the money-producer. So in that sense, if the dollar had lost 95% of its value since 1913, that would mean “the people” got ripped off a lot more over the years than if the dollar had only lost 2% of its value. Thus, the “naive” layperson applause for Ron Paul’s statements is a lot more defensible than the economist who cites “money neutrality” would have us believe.

76 Responses to “A Note on ECON MOMENTS and Ron Paul vs. Non-Neutrality of Money”

  1. Bob Roddis says:

    You, Ron Paul and those Austrians are such cranks. Just ask Daniel Kuehn.

    http://tinyurl.com/6lwaasv

    • Daniel Kuehn says:

      No, Bob isn’t a crank. Ron Paul I was long ago convinced is (and he’s a crank with a lot of power – which is the worst kind), you might be – or you might just be an excitable guy. Some Austrians are cranks. Many are not.

      If you “ask me”, that would be my answer.

      • Richie says:

        Ron Paul has “a lot” of power? Really? That’s funny considering one of the main arguments against him that I keep reading is, “How many bills has he gotten passed! None!!! He’s insignificant!”

        We don’t really care about your answers anyway, Kuehn.

        • Daniel Kuehn says:

          Bob Roddis said “just ask Daniel Kuehn”. I’d rather not leave that rhetorical and leave it to Bob’s inuendo to fill it in. You may not care, but obviously Bob cared enough to link and mention me by name. Why he cares so much is a question you can direct to him.

          • gienek says:

            I hope that while writing this post you were on high enough level of “internet witty talk” to be sarcastic about sarcasm.

            Otherwise you’ve just written something quite dumb.

        • Gene Callahan says:

          That’s right, Daniel! Your answers might disturb the echo chamber.

          • Ken B says:

            Oh yeah, we’re an echo chamber. I can’t speak for others nut, Bob and I, we worship at the same church, we sing from the same hymn book, we’re BUDS. And so many of us here are juuuuuuust right Bob clones. Total obedience the man demands, TOTAL.

      • Silas Barta says:

        Ron Paul … has a lot … of power?

        Are you high?

        • Ken B says:

          I want some of what DK is on.

      • Robert Fellner says:

        Your insult of Ron Paul as a crank is about as accurate as your statement that he has a lot of power. What adjectives would you use to describe the people who are actually in power, I wonder?

  2. Daniel Kuehn says:

    So it seems like this would depend critically on expectations about the money supply. It’s hard to imagine people being consistently fooled by this sort of thing, so you would think over a 99 year span things would even out pretty well. Once you toss in productivity growth and the actual good that monetary expansion could do in the handful of depressions we’ve had, that “people won’t be consistently fooled/it would be zero in expectation” issue becomes even less of an issue.

    You also have to remember the whole Phelps critique of Friedman’s optimal inflation level: seiniorage that produces public goods REDUCES distortions from over-reliance on taxation. A minimally distorting revenue plan would rely on seiniorage to at least partially finance government spending.

    So I could see how, because of some cognitive biases perhaps, you could find that persistent inflation might make some people somewhat poorer. But it seems like that would have to be really, really small given human rationality.

    And I should note – nobody has ever denied the point that if prices rise faster than wages people will be poorer. You don’t need Ron Paul to tell you that – you need a freshman in college, that’s all. That point was never in question. The question was whether a congressman who claims to be an authority on money should get away with talking so much about how much purchasing power the dollar has lost.

    • Bob Murphy says:

      So it seems like this would depend critically on expectations about the money supply. It’s hard to imagine people being consistently fooled by this sort of thing…

      Right, I’m saying draw up a bare-bones model that has perfect certainty. If people hold money in equilibrium, and if the central bank doesn’t just hand the money out for free, then it has to be the case that monetary inflation means the workers and capitalists consume less than they otherwise would.

      I don’t have the time right now to draw up the model, but I’m 93% sure I am right. The next time I’m on a plane I’ll pull out a notepad and do it formally.

    • Bob Murphy says:

      DK wrote:

      So I could see how, because of some cognitive biases perhaps, you could find that persistent inflation might make some people somewhat poorer.

      For those who didn’t understand the jargon, I want to point out the cognitive biases that the Ron Paul people have to rely on for their theory to be true:

      (1) People don’t appreciate how inflation during the 1930s and in 2008 spared us from worse disasters.

      (2) People don’t appreciate all of the good things the federal government can now buy, because the printing press gives the government more command over real resources.

      (Also note that #2 seems to directly contradict Andolfatto’s main point. And that’s mostly what I’m getting at in this blog post. There is something very wrong with implying “wages and prices even out in the long run” and yet believing in the possibility of perpetual seigniorage.)

      • Daniel Kuehn says:

        #1’s fair enough I guess. #2 I think is missing the point a little. Yes, I’m accepting as given that government goods can be welfare enhancing. Accepting that for the sake of argument, it’s optimal to support that spending with a variety of taxes – it’s just the equimarginal principle. An inflation tax has a role to play if we accept that government spending can be welfare enhancing and deserves to happen. That’s not to say that everything that the government can buy as a result of inflation automatically gets the stamp of approval.

        Put it this way – ceteris paribus, if we didn’t have the inflation tax since 1913 to support some of the spending, whatever combination of other taxes would have been used would have been a less optimal combination by virtue of the equimarginal principle.

        • Bob Murphy says:

          DK wrote:

          Put it this way – ceteris paribus, if we didn’t have the inflation tax since 1913 to support some of the spending, whatever combination of other taxes would have been used would have been a less optimal combination by virtue of the equimarginal principle.

          That’s fine. But suppose Ron Paul had said, “Whoa! According to these records, the IRS has taken $50 trillion from the American taxpayer since 1913 through the income tax measured in today’s dollars!” Then Andolfatto comes back and says, “Huh? That $50 trillion is meaningless. He’s making people think that they are somehow made poorer by the government’s income tax.” Then I come back and say, “Huh? Of course Ron Paul’s statement is defensible.” Then you (Daniel) say, “Well, given that the government is going to spend that money, the income tax doesn’t make us poorer. They just would’ve hiked tariffs or the printing press more, if we hadn’t had the income tax. So you can see why Ron Paul’s statement is misleading.”

          I submit that if the above were what happened, you and Andolfatto would be nuts and everyone would agree with Ron Paul. I am claiming that the real situation–with it being the Fed and inflation, instead of the IRS and the income tax–is fairly close to that hypothetical scenario.

        • Major_Freedom says:

          Yes, I’m accepting as given that government goods can be welfare enhancing.

          Welfare enhancement only makes sense at the individual level. There is no such thing as “social” welfare apart from individual welfare.

          Governments goods invariably encompass taking from some and giving to others. While you can confuse yourself into believing that a rich person who is robbed and a poor person who is given free goods at the rich person’s expense, somehow increases “social” welfare, due to it making wealth distribution “more equal”, there is only one person who is worse off in the short run in terms of welfare, and another person who is better off in the short run in terms of welfare, and in the long run, both are worse off, because the more productive of the two is being deprived of the means to produce more, and the less productive of the two is being deprived of the incentive to produce more.

          Put it this way – ceteris paribus, if we didn’t have the inflation tax since 1913 to support some of the spending, whatever combination of other taxes would have been used would have been a less optimal combination by virtue of the equimarginal principle.

          I don’t think you know what the equimarginal principle means, nor how it applies to inflation tax versus direct tax, nor what constitutes “optimality” in economics.

          You’re ignoring that without inflation, prices would be lower, so government programs financed by direct taxation would not carry with it a higher REAL burden.

          Instead of the price of eggs going up by $1.00, from $2.00 to $3.00, while your income remains the same during that time, there is instead a $1.00 tax on your income, while the price of eggs remains the same $2.00 during that time.

          In both cases, you are losing the same $1.00 worth of eggs in real terms.

          The equimarginal principle just means people will buy goods in an equal price to utility ratio (which by the way dubiously, and CRUDELY, uses the concept of “utils”).

  3. Daniel Kuehn says:

    btw – since some people think I complain about misrepresentation of arguments, I thought that paraphrase was perfectly fine.

    • Bob Murphy says:

      Yes! And note I called you an economist, even though you don’t have the three magic letters after your name. (Some people complain that I care about such things.)

      • david stinson says:

        ” Some people complain that I care about such things.”

        I had noted that in the past – it seemed unlike you somehow. You’re not credentialist, are you?

        In any case, it’s always worth remembering that William Hutt and Coase each had only a B. Comm (I think). One of my old profs, Michael Parkin, at one-time (and still?) a prominent monetary economist, had only a MA. Etc.

  4. Bob Murphy says:

    BTW just to be clear for outsiders: Daniel and I agree on the basic economics, we are just disagreeing on the interpretation. We both agree that the Federal Reserve has the power to transfer real purchasing power into its hands and hence the government (through preferential treatment). So nobody is denying that the agency controlling the printing press can extract resources from everybody who uses the currency, even though it is still true that workers get paid a wage equal to their marginal productivity in equilibrium, etc. etc.

    The only real thing I am contributing in this post, is to point out that in such a world, the degree of this transference of real purchasing power might very well be proportional to the rate at which the currency depreciates. (I’m being vague because I would want to write out a little model before saying anything more definite. But clearly, if the rate of monetary inflation is 0%, then the monetary authorities aren’t able to extract any resources and so the workers and capitalists must be getting all the real output.)

    • david stinson says:

      Hi Bob.

      Your point, as I understand it, relates to monetary inflation and not price inflation per se. Increases in the money supply, whether expected or not and whether generating price inflation or not, are exchanged for real resources when they enter circulation.

      So, back in the real world, even if the increases in the money supply are necessary only to meet the increases in money demand and thus do not result in a loss in purchasing power (inflation), the act of increasing the money supply gets the government some real resources. The quantity of real resources thus depends on the extent of increases in the money supply tweaked by the extent to which any resulting price inflation is expected (a negative effect) or not (an offsetting positive effect). This is independent of the transfer of real resources to government via the effect of unexpected or uncompensated (via interest) inflation on government debt repayments.

      If I have that right (?) then the real resources directly transferred as a result of money production might be proportional not to the reduction in the value of the dollar per se (= cumulative percentage inflation) but to: the amount fo monetary inflation minus the effect of expected inflation plus the effect of unexpected inflation.

      In a sense, expected inflation (and its impact on one’s own price) is a means for people to partially protect themselves from the transfer.

  5. Daniel Kuehn says:

    Here’s a thought, though – if this were actually a problem – not just that purchasing power would be reduced, but that the reduction would be unanticipated – why have central bankers historically been so concerned with price stability? Price stability shoots the whole “transfering purchasing power” idea in the foot, doesn’t it:? Price stability allows agents to plan around the transfer.

    It’s seems to me that its precisely in an era of price level volatility that you consistently have the prospect of fleecing people who don’t know which way prices will go

    • Major_Freedom says:

      Price stability shoots the whole “transfering purchasing power” idea in the foot, doesn’t it:?

      So if I had a money printing machine in my basement, and I printed off dollar bills and bought goods and services produced by others, such that some crude aggregate calculation of price levels and price inflation for a continually changing basket of goods and services remained growing at “only” 2% per year on average, or heck, let’s make it interesting, let’s say 0% each year, that there is zero purchasing power transferring taking place?

      I think your cognitive bias of ignoring counter-factuals and instead getting side-tracked by temporal changes is leading you astray. Even if I printed dollar bills over time at such a rate in relation to real productivity growth over time that average prices did not rise over time, there is STILL wealth transferring taking place, by recognizing that without my counterfeiting operation in my basement, those who produce goods and services would be in a counter-factual world paying LOWER prices for the goods they buy.

      Sure, the initial receivers of my counterfeited money see an increase in their nominal incomes, so their purchasing power is only slightly reduced because of me. But for those who get the new money last, after everyone else’s nominal incomes have already risen, and after prices have already risen above what they otherwise would have been in a counter-factual world without my inflation of the money supply, then purchasing power WAS indeed transferred from others to myself and those who got the new money in the initial stages.

      The way you crudely think about economic phenomena reminds me of an unemployed roommate who eats the food in the fridge at such a rate that in combination with the rate at which OTHERS put food in the fridge, the overall supply of food in the fridge never falls. The looter will say “Hey, I am not living at anyone’s expense, because the supply of food in the fridge is not decreasing over time. It’s STABLE!”

      Then I chime in say the counter-factual world you’re ignoring is that there would have otherwise been MORE food in the fridge if you didn’t keep eating food, or more of other things that the other roommates money can buy.

      One of the most valuable lessons every economist has to learn is the art of understanding counter-factual argumentation. Too many do what you do, which is look at changes over time, and comparing a given cross section with prior cross sections in the past. Doing economics requires a little imagination. Narrowly focusing on historical events over time is a flawed way of approaching economic problems.

      • Robert Fellner says:

        I loved every word of this comment.

      • Daniel Kuehn says:

        “So if I had a money printing machine in my basement, and I printed off dollar bills and bought goods and services produced by others, such that some crude aggregate calculation of price levels and price inflation for a continually changing basket of goods and services remained growing at “only” 2% per year on average, or heck, let’s make it interesting, let’s say 0% each year, that there is zero purchasing power transferring taking place?”

        No, I’m saying if the money printer is not only well known – but actually constituted by the economic agents and contracts are written with the awareness of a steady increase in the money supply, unanticipated changes in the money supply are as likely to transfer resources too agents than away from them. You can fool people. You will have a much harder time consistently fooling people. And the very fact that central banks try to be predictable (indeed they depend on being predictable to enact policy) makes it very hard to buy into the idea of a broad fleecing over the course of a century.

        You also mention Cantillon effects. That could be an issue. I’d be interesting in you proving to me that it would be a large issue.

        I wish you could talk to people about their views without calling them “crude”. That’s why a lot of people don’t like you, MF. Your fridge analogy is wrong. As long as price setting behavior incorporates inflation expectations, no real resources are being transferred. You’re acting like there’s no difference between real and nominal resources here (just like Ron Paul, in fact). Bob is right that there COULD BE real resources transferred, but there’s no reason to believe that on average over the course of the Fed’s existence the expected value of that real resources transfers is particularly high – or even positive.

        I’m quite aware of thinking in terms of counterfactuals, MF. I’m guessing I do that on a much more regular basis than you do.

        • Anonymous says:

          You agree that Cantillon effects are an issue, but you are just not sure how big of an issue right? Can you prove that they are not a large issue?

          I guess It obviously is hard to draw a chart of them…

        • skylien says:

          You agree that Cantillon effects are an issue, but you are just not sure how big of an issue right? Can you prove that they are not a large issue?

          I guess It obviously is hard to draw a chart of them…

          • Daniel Kuehn says:

            With no context at all, we have to make a guess, and I just can’t base my guess on any great fear over this.

            I would be interested in any more detailed info people have on this. I’m going to be writing a chapter this summer on guaranteed basic income as monetary policy – specifically speaking to Austrian concerns about it, and part of my argument is going to be that it diminishes the issue of Cantillon effects relative to current monetary policy. So any estimation of Cantillon effects – if anyone has that – is something I’d be interested in.

            • skylien says:

              I am sorry I don’t have that of course, but I am looking forward to that paper.

              Thanks for the answer/info. Regards.

        • skylien says:

          About „the FED tries to act predictable“. My feeling is that it tries to mess (you would say steer) with people’s expectations, not tries to be predictable. You see this always when a boom is at its peak. They will never ever (even if they knew it) say “Guys sell all your stocks, stocks are about to fall 50% within the next months to come”. At max they say “We might have a transitory stagnation in prices for this or that”. But there is never ever a bubble in anything but Gold.

          And as far as it acts predictable. People and institutions near the FED clearly gain first and foremost. Primary dealers front run the FED in buying bonds and gain risk free premiums when selling to the FED… But those risk free premiums are not really paid by the FED. Of course you can say again, albeit a problem it is not a large issue..

        • Major_Freedom says:

          “So if I had a money printing machine in my basement, and I printed off dollar bills and bought goods and services produced by others, such that some crude aggregate calculation of price levels and price inflation for a continually changing basket of goods and services remained growing at “only” 2% per year on average, or heck, let’s make it interesting, let’s say 0% each year, that there is zero purchasing power transferring taking place?”

          No, I’m saying if the money printer is not only well known – but actually constituted by the economic agents and contracts are written with the awareness of a steady increase in the money supply, unanticipated changes in the money supply are as likely to transfer resources too agents than away from them.

          As expected of a collectivist, you just lumped every “economic agent” in together, which of course masks the context in which purchasing power is transferred.

          In reality a monopoly money printer who does not send checks to every individually equally, will invariably be transferring newly created money to only some people at some institutions in the economy. Those people who initially receive the newly created money have a higher purchasing power than they otherwise would have had if they didn’t receive that new money, and instead had to sell in the open market to economic agents who have only the lesser amount of money created in the past.

          You can fool people. You will have a much harder time consistently fooling people. And the very fact that central banks try to be predictable (indeed they depend on being predictable to enact policy) makes it very hard to buy into the idea of a broad fleecing over the course of a century.

          It’s interesting watching various inflationists defend inflation against this criticism. Depending on what school they approach it from, inflationists will either make up a “what if” scenario of constant expected money supply production, while others make up a “what if” scenario of constant expected aggregate nominal spending, while still others make up a “what if” scenario of constant price inflation. There are so many of these “what ifs”, and the funny thing is that none of them is what describes the monetary system we actually have, and even if any of them were the system we had, there would STILL be purchasing power being transferred by virtue of the money creation.

          You also mention Cantillon effects. That could be an issue. I’d be interesting in you proving to me that it would be a large issue.

          Ah, so you want to retain the power of subjectivity and judging when it is a problem or not, by proposing to me a standard of when it is a “large issue”, which is not objective at all, and of course means you can pronounce whatever I say as large or small according to any criteria you want.

          I am not here trying to convince you Cantillon effects are large versus small. I am here telling you that they exist, that purchasing power is being transferred. That’s it. Whether it is large or small in history is up to the counterfeiters. From 2008 onwards, it numbered in the trillions of dollars. Prior to that, it was less, but still positive.

          I wish you could talk to people about their views without calling them “crude”. That’s why a lot of people don’t like you, MF.

          You mean that’s why you don’t like me. Please do not speak on behalf of others. I call your views crude because I think they are crude. Your latest response is more crudeness, by crudely lumping in economic agents together as “the economic agents”, as if we’re all getting checks from the Fed in exchange for moldy hamburgers and other garbage that would have had a lower price if sold in the open market.

          Telling me “people don’t like you” is what I would expect from a school yard. I could not care less about your opinions on this matter..

          Your fridge analogy is wrong. As long as price setting behavior incorporates inflation expectations, no real resources are being transferred.

          Haha, you just ignored the counter-factual once again.

          EVEN IF the employed roommates who are stocking the fridge with food accurately know the rate at which the unemployed roommate is eating food, such that they fully “incorporate” his behavior into their expectations and actions, such that the supply of food in the fridge remains “stable” over time, all this cannot erase the fact that the unemployed roommate is living at the other roommate’s expense.

          Correctly expecting a loss does not mean the loss ceases to exist. You seem to have this fantastical notion that as long as people correctly expect making losses, that those losses don’t exist.

          Correctly expecting the rate of price inflation is just a correct calculation of losses. That’s all it is. The loss is not sterilized or neutralized by virtue of the expectation being correct.

          You’re acting like there’s no difference between real and nominal resources here (just like Ron Paul, in fact).

          “Acting like” is just another one of your worthless straw men.

          Bob is right that there COULD BE real resources transferred, but there’s no reason to believe that on average over the course of the Fed’s existence the expected value of that real resources transfers is particularly high – or even positive.

          There is reason to believe it. Just because you don’t have the wits to see it, it doesn’t mean the reason does not exist.

          If over the course of the unemployed roommates stay, the expected loss is “only” 2% per year to the other roommates (in your case you crudely lump them all in together as “the roommates” and apply the 2% to everyone), that’s still a loss to the other roommates.

          I’m quite aware of thinking in terms of counterfactuals, MF. I’m guessing I do that on a much more regular basis than you do.

          I highly doubt that, because you just failed to do so here…twice no less.

          I do it all the time. Since I do it all the time, and I pointed out to you that you did not do it not once but twice, in two consecutive posts, then that is strong evidence that I do it more often than you do.

          I’ve already gotten a PhD if that is what you were trying to strut in front of me like a peacock.

          • Robert Fellner says:

            “Correctly expecting a loss does not mean the loss ceases to exist. You seem to have this fantastical notion that as long as people correctly expect making losses, that those losses don’t exist.

            Correctly expecting the rate of price inflation is just a correct calculation of losses. That’s all it is. The loss is not sterilized or neutralized by virtue of the expectation being correct.”

            To my layman ears, that sounds like a definitive explanation of the harm of inflation. I would very much like to hear a response from that from someone in the opposing camp.

            • Major_Freedom says:

              You probably won’t hear it. And if you do hear it, it will almost certainly be accompanied with a red herring comparison to direct taxation of the form “direct taxation is upwards of 50%, while inflation tax is “only” 2 or 3%. Maybe you should pick your battles a little better!”

              To me that just sounds like a pickpocketer defending his actions by comparing himself to train robbers, bank robbers, and armies looting Iraq.

              But then I just tell them that the entire government collected around $3.5 trillion of taxes in 2011. The Fed on the other hand created and/or lent a cumulative $16 trillion out to banks and financial institutions around the world. Then when they say “Yeah, sure, but they were a series of loans paid back”, I say “Yeah, sure, the $3.5 trillion of taxes was also “given back” to through government spending.”

              Ah, statists. They spend so much of their time defending and apologizing for an unjust system, that they never spend the time to actually learn and understand how the free markets, and economics in general, actually works. Talk about picking your battles, huh?

      • Gene Callahan says:

        “The way you crudely think about economic phenomena reminds me of…”

        Major, the way you crudely *think* reminds me of my senile grandfather drooling on his own chest.

        • Robert Fellner says:

          I find MF’s substantive critiques to be much more beneficial than your empty insults. The fact that you take the time to criticize his posts by making a childish insult, and not by offering a substantive critique, implies you cannot do so. And in an odd, roundabout way, is more likely to be perceived as a sign of the strength of his argument, as opposed to exposing any weaknesses.

          Which is kinda neat!

          • Beefcake the Mighty says:

            +1. Bob, are you really still friends with this [hiney]-hole (Callahan)?

          • Richie says:

            And in an odd, roundabout way, is more likely to be perceived as a sign of the strength of his argument, as opposed to exposing any weaknesses.

            My thoughts exactly.

        • Richie says:

          Oh but don’t “personally” attack Callahan. He might get upset. What a douche.

          • Beefcake the Mighty says:

            @Richie:

            No, Callahan is not a douche. He’s a mega-douche.

    • david stinson says:

      Hi Daniel.

      Perhaps this is the way to look at it (not sure though):

      a) Bob’s point relates to monetary inflation (not price inflation per se) – every time the money printer expands the money supply, he exchanges it for a non-zero amount of real resources. Under an assumption of long run monetary neutrality, the long run cumulative loss in purchasing power will reflect the cumulative extent of monetary inflation. So in some sense the neutrality of money works against the anti-Ron-Paul argument Bob noted above.

      b) The quantity of real resources that people are willing to trade for the monetary additions (and how it is changed from the amount they might have traded for new money in the last period) depends on the price inflation that they expect to result from the monetary inflation. The money printer gets more real resources if any actual inflation is unexpected. Also, the demand to hold the money printer’s product goes down if inflation is expected.

      c) Consequently, the money printer has an incentive to mislead money holders as to the extent of expected inflation but has to be careful not to completely undermine confidence in his ability to manage the money supply. Thus, there’s probably an amount of unexpected inflation that maximizes the cumulative amount of resources he controls over time. One way to achieve that might be to evince all sorts of “concern” over the prospect and costs of inflation and perhaps to “target” inflation but, through careful of choice of statistics and not too overtly systematic forecasting “errors”, etc., occasionally fail to hit the target in substance. Oops!

    • Bob Murphy says:

      Daniel wrote:

      Here’s a thought, though – if this were actually a problem – not just that purchasing power would be reduced, but that the reduction would be unanticipated…

      Daniel, you keep assuming we’re talking about unanticipated depreciation, and we’re not. You can do the model I have in mind with perfect certainty (i.e. stronger than just rational expectations). Everybody in 1913 can see with perfect certainty how much they are going to get bilked by the Fed over the next 100 years, and yet that path is still an equilibrium outcome, because they have to use money and the Fed is the monopoly issuer of monopoly. The workers and capitalists of course would strictly prefer to be in an alternate path where the Fed doesn’t rip them off, but shucks that’s not an option to any individual agent in the model. The choice is, “Use these depreciating dollars or don’t use money.”

  6. John Becker says:

    You said in this article that if inflation were set to 0%, then all the products would be left with the workers and capitalists. But wouldn’t this only be the case if the guy with the printing press chose not to use it at all? You could still have the guy printing money, producing the distributional effects you were getting at, and productivity gains would cancel out or even outstrip any rise in prices producing 0% or negative inflation. I know that may seem like nitpicking but I just wanted to see if I was getting your point clearly.

    • Bob Murphy says:

      John Becker: By “inflation” in that sentence I meant monetary inflation. I’m saying the Fed is able to gain access to some of each period’s output by creating new money and handing it over for real goods. If the Fed doesn’t print any new money after T=0, then it can’t gain access to any real goods.

      The “price level” might very well fall in that outcome, who knows. But for sure with 0% monetary inflation, the guy with the printing press doesn’t eat.

  7. Bob Roddis says:

    As long as price setting behavior incorporates inflation expectations, no real resources are being transferred.

    If EVERYONE in society understood the nature of the system, they would rise up, arrest the perpetrators and end the system. As things stand now, most people do not understand the criminal nature of the system and are oblivious to the fact that they are being robbed.

    Edwin Vieira explains that governments like to control the money supply because it facilitates the redistribution of wealth @ 3:25:

    http://www.youtube.com/watch?v=k6gMkKmQSW4

    It’s truly pointless to debate DK. He thinks the present system is just swell and he will twist himself into a pretzel to justify it.

  8. Bob Roddis says:

    The FINAL WORD from the real Lord Keynes.

    J.M. Keynes on inflation in The Economic Consequences of the Peace (p. 235-6):

    “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

    Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

    What a kook.

    • Daniel Kuehn says:

      Thanks for that from Keynes. He always was an important voice for stability in policy and liberty in society. That’s a big part of the reason why I like him so much.

      You might want to read elsewhere in the book – he also goes into the difference between anticipated and unanticipated changes in the value of money and whether fiat currency is fraudulent.

      • Major_Freedom says:

        Even if I perfectly anticipated Bernanke giving his bank friends $1 trillion to avoid bank failures, that doesn’t mean my employer and I can avoid being bilked of wealth transfer. My employer and I are limited to the money we have in the present, not what money we may have in the future after Bernanke’s bank friends spend the money and it percolates throughout the economy.

        Perfect knowledge of inflation cannot enable people to overcome the effects of it, no less than perfect knowledge of a robbery can enable people to overcome the fact that real wealth is being transferred.

  9. Bob Murphy says:

    Daniel, I think what’s happening here is that you still haven’t grasped the central claim of my blog post. I am trying to reconcile two apparently contradictory propositions:

    (1) If the monetary inflation and its effects on prices are perfectly anticipated, then everybody adjusts their contracts etc. at the start and is never caught by surprise. Everybody gets paid his marginal product etc. in this equilibrium.

    (2) If people hold money in equilibrium, and it has positive purchasing power, then necessarily if the money-producer enters the market each period with newly-created money, that agent can consume some of the real output from that period. (This is called “seigniorage.”)

    Both propositions are air-tight considered one at a time, and you and Andolfatto both endorse them. And yet, you and Andolfatto both are relying on (1) to somehow render (2) a non-issue.

    I myself have not fully thought through what it means for (1) and (2) to be simultaneously true. It’s kind of like the government debt debate; I know you are wrong, but I am not sure I fully understand why. 🙂

    • Bob Roddis says:

      Even if someone holding existing money (me) anticipates that other people (Bernanke’s bank friends) are going to get new money to spend first, why am I not being robbed?

      • Major_Freedom says:

        I think you’re on the right track.

        If you anticipate Bernanke’s bank friends are going to get the new money first, how in the world does that make it possible for you to all of a sudden ask for a raise from your current employer in the present? It makes no sense.

        For some reason, the concept of “2% inflation” is making people believe that everyone’s cash balances are rising at a 2% rate all at the same time.

        Since not everyone deals with the Fed directly, since most people deal with non-money printers, they can only contract for EXCHANGES according to the money that they actually have, not money that Bernanke’s bank friends receive first. Sure, once the money percolates throughout the economy, being spent and respent, and gradually increasing people’s bank balances, THEN people can contract for higher dollars in their exchanges. But by that time, wealth transfers will have already taken place by virtue of the money flowing away from the initial receivers, which of course means real wealth is going the other way away from those who receive the new money last.

    • Major_Freedom says:

      I object to the claim that (1) is true even in isolation.

      Suppose Bernanke said he is going to increase the money supply in the banking system by 100% next year, and people believed him.

      I don’t know about you, but I cannot, in the present, pay out, or insist that I receive, 100% more money. People are limited to spending what they have in the present, not what they might have in the future, even if their expectations are correct.

      Suppose your future self traveled from the future and told you that you will win a lottery of $100 million in the year 2020. Even if you were armed with this knowledge, you could not in the present pay $100 million more for goods or investments. You’d still be limited to what you have now.

      For some reason, a popular belief has arisen that correctly anticipating a loss, somehow means the loss is neutralized.

      Even if I correctly predict 2% inflation next year, I cannot ask that everyone who does business with me pays me 2% more in the present, or contract with me that they will pay me 2% more next year. The only people who can pay more money are those who receive more money, and inflation of the money supply doesn’t enter everyone’s cash account at the same time at the same rate.

      Another analogy. One could potentially predict with perfect accuracy the amount of taxes they will owe on April 15th. Does that mean that the tax loss ceases to be a loss? No, it is a loss because the counter-factual world of not paying taxes would have allowed for more money to be spent.

      The same thing is true for inflation. Even if everyone perfectly predicts exactly who gets the new money first, even if everyone perfectly predicts exactly which prices will change and where, even if everyone has full knowledge of the future, there will STILL be transfers of purchasing power. Why? Because we are comparing what will happen with inflation, to what could have otherwise have happened if inflation did not take place.

      • Bob Murphy says:

        MF I think you are getting close to resolving the apparent paradox. But look: Are you denying that (1) is true? So you think that even with perfect certainty, in a competitive labor market a worker will get paid less than his marginal product? Why wouldn’t a rival firm bid him away for $1 more?

        I’m not saying you’re going down the wrong path, I just think you’re wrong for saying (1) is false. The true resolution is more nuanced, I think.

        • Major_Freedom says:

          But look: Are you denying that (1) is true? So you think that even with perfect certainty, in a competitive labor market a worker will get paid less than his marginal product? Why wouldn’t a rival firm bid him away for $1 more?

          Yes, I am denying that (1) is true.

          Why wouldn’t a rival firm bid him away for more money? It’s because I am insisting that what determines the demand people are able and willing to put forward is what money they have in the present, not what money they may have in the future.

          My logic is this: A rival firm would not be able to pay more wages unless they actually own more money with which to pay more wages. The mere expectation of future inflation is not enough. People actually have to own the money first before they can pay it out, which means the money has to exist already, which means inflation has to have already occurred in the past.

          I constrain nominal demand to the quantity theory of money, which has to do with money that exists, not mental images of future increased money supplies and future increased cash balances.

          Even if I had perfect foresight of the path of new spending that results from new money creation, that knowledge “locks in” a particular path of individual to individual purchasing power transfers, because it is physically impossible for new money to enter the economy everywhere at the same time. Money enters only certain people’s cash balances before others. Even if everyone were completely aware of what is happening, that knowledge alone cannot possibly enable people to transcend the fact that physically, money is entering the economy at certain points only, and only certain people are getting the new money first. Full, complete knowledge of this fact does not alter the fact itself. The knowledge of this fact is subsidiary to the fact actually taking place in the physical sense.

          Suppose there was a robot that printed out dollar bills. Suppose this robot only gives dollar bills to its “primary dealers”, namely you and nobody else. Here’s the point I am making: Even if I knew exactly what was taking place, even if you knew exactly what was taking place, even if everyone in the economy knew what was talking place, it is still physically the case that you get the new money before everyone else.

          If I am going to compete with you for goods and services from others in the economy, you will be at a distinct advantage, because people will still prefer to make more dollar bills than fewer dollar bills. So if I try to acquire goods and services from others in the economy, I will be constrained to the money I have. You on the other hand will have the advantage of bringing forth a demand that has been “goosed” by the money printing robot.

          Other people in the economy are not going to give me their resources at my lower bidding price, if they can sell their goods to you at a higher bidding price. This is how your spending brings about wealth transfer. You did not outbid me for more goods and services from others because you’re more productive, you outbid me for goods and services from others because you just happened to be first in line to the money printing robot.

          This will always be the case regardless if everyone knows what is happening. Everyone will know I have less money to offer, and everyone will know you have more money to offer. They will sell their goods to you and yet you did not produce more for others first. That’s wealth transfer.

          • Bob Murphy says:

            As usual MF I can’t read your whole comment. 🙂 However I really like the approach you’re taking in the opening paragraphs. It’s times like this that I wish more professional economists had the courage to post here. 🙂

            This is always something that bothered me about discussions of inflation and expectations. I imagine this is standard stuff in the literature, I just have never seen it spelled out. So for example let’s say next year the Fed will come into the market and spend $1 trillion in new money buying apples, and we all see that coming and so we all know that the market price of apples next year will be $10 / pound. That has effects on agricultural wages today, etc. etc., but you’re right it’s not obvious exactly how that all plays out.

            I think in one type of simple equilibrium, all prices adjust immediately. I.e. even today apple prices are $10/pound. Then over time, as the new money enters the system, the “velocity” slows down in perfect lockstep.

            I.e. I think you’re not quite right when you suggest that it’s impossible for prices to go up right now in anticipation of a massive money dump in the future; the same dollar bills could be flitting through, accomplishing it. (I grant this might get tricky at really high levels of inflation.)

            Anyway it’s all really interesting. But it’s neat to try to think through exactly what the equilibrium would be, if everybody has perfectly adjusted to the expected influx of new money in the future. Interest rates will have adjusted too; businesses should be willing to pay high nominal rates of interest in the scenario you’re describing, where businesses know that product prices will be (say) 100x higher in one year, and yet they don’t have the cash right now to bid away workers from other lines.

            • Major_Freedom says:

              I’m reminded of your reference to Silas’ post on rethinking the broken window fallacy.

              It’s “easy” to think of apple prices rising to $10 a pound on an inflation expectation, because one can conveniently ignore reducing spending elsewhere to make available more spending to buy apples to make their prices rise.

              But when you consider the economy as a whole, and all goods and services taken together, and then consider people expecting those prices to rise, then we cannot take it for granted that spending and hence prices will fall for other goods to make available more money and spending for the goods in question. For we are already considering all goods and services!

              Since we have to consider all prices rising, not just individual goods like apples, we require no reduction in spending for any goods to make available more money and spending for apples, but rather we must think as if apples are the only goods people can buy. Or, if you prefer, we can consider apples and oranges and computers and potatoes. If all the prices for these things is going to rise, because a central bank promises to inflate the currency in the future, then the only way that people can increase the prices of everything now, is if they actually have the money to do it.

              So if we expect aggregate prices to rise next year, on a foundation of expecting aggregate money and spending to rise next year, then it is impossible for individual market actors as a group to “adjust” prices in the present so that all prices are higher in the present. They can’t do it. They can’t do it because they are constrained to the money they own in the present, which is of course less.

              I link your point about distinguishing between “a lot” and “a little” inflation, because at first blush it does appear that with a small enough rate of expected inflation, people can adjust prices in the present out of their existing cash balances, by simply holding smaller cash balances and spending more sooner.

              But then thinking about that a little more, I believe we run into another paradox. For if the Fed promises to increase prices by 0.5% next year, and people in the present adjust current prices accordingly in the present, by slightly drawing down on their cash balances (which still is impossible for many people who live paycheck to paycheck, but for the sake of argument let’s grant that it’s possible), then that would mean the Fed’s monetary inflation it intended to use, would actually bring about only 0% price inflation next year.

              For the Fed promising to inflate by 0.5% next year is a promise of change on top of current prices. If current prices rise by virtue of the expectation of price inflation next year, then the Fed would have to inflate more money to bring the 0.5% price inflation about.

              In other words, the Lucas Critique makes another appearance. If the Fed is going to commit to a constant rate of price inflation, then it must print more money than people with their existing cash can put into demanding and hence pricing goods today to make current prices rise with an expectation of future price inflation.

              Another analogy:

              Suppose the money printing robot promised to make prices rise by only 0.5% next year. Since most people own at least some cash, let’s assume that most people in the present can increase their monetary demand by 0.5% out of their existing cash balances.

              So people increase current prices by 0.5% today. But the robot made a promise! It promised to make prices rise by 0.5% per year. So guess what? The robot will have to print more money and increase nominal spending that much more. If the people are still all knowing, they will just increase their spending again to counter the expected future price inflation.

              So back and forth it will go, until the people can no longer increase current prices because they are cash constrained. This is, I will argue, where we ALWAYS are. The Fed has to print more money and bring about a higher rate of price inflation than people are capable of bringing about in the present, or else price inflation simply couldn’t exist!

              In other words, wealth transfer is inevitable with inflation, and not only that, but the more informed people are, the more the Fed has to inflate and thus the more wealth transfer will take place.

              I think that’s why the Fed stopped publishing M3. They wouldn’t be able to fool people otherwise.

              With full knowledge, the only limitation left for humans is physical and spatial. Money is physical, so money still would be a limitation.

              Now in the real world, where people are not all knowing, the effects of wealth transfer become even more pronounced, for now the Fed can print MORE money than they otherwise could have printed since the rate of price inflation will be subdued on account of people not knowing enough to raise them when they could have. Just look how long it took for the information to get out that the banks got a cumulative $16 trillion bailout from the Fed. Imagine being someone who sold to the banks! They could have asked for more, but they didn’t know the banks got all that money, so they asked for less. Asking for less then puts a lid on prices, doesn’t it?

              I try not to think in terms of equilibriums, because the market never is in equilibrium. All the good stuff happens in the market processes. This makes it more challenging, but well worth it.

              • Bob Murphy says:

                MF wrote:

                f all the prices for these things is going to rise, because a central bank promises to inflate the currency in the future, then the only way that people can increase the prices of everything now, is if they actually have the money to do it.

                No MF you are totally wrong on this.

                Suppose the level of real output and the quantity of money are the same, year after year. Even so, all nominal prices could go up or down, with changes in the demand to hold money. Simple example: Suppose everybody all of a sudden wants to hold half as much in cash balances. Well they can’t do that in the aggregate, in nominal terms; if one person gets rid of a $1, somebody else must have accepted it. But what can happen is that all prices double, so now everybody is holding half as much in real cash balances as before.

                Sure, you can say in practice there will be Cantillon effects etc., but those are laid on top of the phenomenon which you seem to be claiming is impossible.

                Now what might make the demand to hold cash suddenly fall in half? Well, people might expect the quantity of dollars to double in 12 months. So they all try to get rid of their dollars now, while prices are relatively low, and in so doing they push up the prices ahead of time.

              • Major_Freedom says:

                Suppose the level of real output and the quantity of money are the same, year after year. Even so, all nominal prices could go up or down, with changes in the demand to hold money.

                I actually expanded upon that further down in my post. I said yes, in principle, prices can rise or fall SOMEWHAT by virtue of a change in demand for money holding. But with a central bank promising inflation in the mix, cash holders must be overruled by enough monetary inflation to make price inflation possible. For if people increase the prices of goods by reducing their cash balances, then that can only take price inflation so far, and it will do so very quickly.

                If the Fed is going to promise people that prices will rise next year, then it must be the case that people are already at their minimum in terms of cash holding. If they are not, then the Fed will fail to produce the promised price inflation, for people will be able to raise prices more in the present out of their existing cash.

                The thing I reject is the idea that there are no constraints to people raising or lowering prices out of existing cash balances at any given time.

                I hold that nominal demand is constrained to the money that exists, i.e. the quantity theory of money.

                Simple example: Suppose everybody all of a sudden wants to hold half as much in cash balances. Well they can’t do that in the aggregate, in nominal terms; if one person gets rid of a $1, somebody else must have accepted it. But what can happen is that all prices double, so now everybody is holding half as much in real cash balances as before.

                I agree with this in principle, but without a central bank.

                And as a small quibble, a desire to hold half the cash as before, may lead to doubled prices, if people were originally holding 50% of their assets as cash and spent the rest. But if people are holding only 10% of their assets in cash, then a halving of cash balance will make prices rise by less than double.

                OK, now imagine a central bank promising 2% price inflation per year to be in the mix.

                Suppose in response to this, everyone increases current prices to counter the future inflation loss. So assume prices rise 2% in the present. But then how will the Fed bring about 2% price inflation next year on top of current prices, if people already priced goods higher in the present? The Fed will be compelled to introduce more money and spending in the economy, to raise prices BEYOND what people can physically achieve given their existing cash balances.

                The Fed cannot bring about 2% price inflation in a world of full knowledge people, without introducing more money and spending in the economy.

                I know what you’re saying about prices rising and falling on the basis of changed cash balances. In principle, I fully agree, but only up to a point. Nominal spending is constrained to the existing money supply. So prices cannot rise or fall to an arbitrary degree by people’s cash preference changing.

                What I am trying to say though is that the context is an economy with a central bank promising inflation.

                The only way that a central bank can promise 2% price inflation and make good on it, in a world where people know everything, is if the central bank takes advantage of the physical limitation that people have in terms of how much money they actually have to spend.

                The following example is somewhat strange, but bear with me. It’s like me promising to make a thrown baseball rise in altitude by 2% each year. Sure, you can throw a baseball 2% higher than you did yesterday, as long as you still have some strength reserve (cash balance). But at some point, you’ll hit your physical maximum. At that point, that’s where I come in to make the ball go higher by means of an additional force propelling the baseball into the air.

                You’re saying something like this: “But MF, people can throw a baseball 2% higher today than they did last year, by simply utilizing their strength reserves.”

                I say “Yes, in principle I agree, but we’re not living in a free baseball throwing economy. We’re living in an economy with a central bank promising 2% increase in throwing height each year. Even if each individual threw the baseball as high as they could, they each have a physical limitation. In order to make the height grow each year then, the Fed has to introduce more force to the baseball beyond what individuals are capable of achieving with their existing strength reserves.

                Now what might make the demand to hold cash suddenly fall in half? Well, people might expect the quantity of dollars to double in 12 months. So they all try to get rid of their dollars now, while prices are relatively low, and in so doing they push up the prices ahead of time.

                Aha, but then if prices double in the present, on the basis that people anticipate double the money supply next year, then what will happen to prices once the doubled money supply actually enters the market next year? Prices of course will not stay the same, because there is now double the money supply! Prices will increase next year BEYOND what people could have achieved by drawing down their existing cash balances in the present.

                In other words, people cannot increase current prices to the levels that a doubled money supply will bring about once it is entered introduced in the market!

                Sure, people can increase current prices by drawing down their cash balances, but it’s all futile. Once the new money enters the market next year, prices will go up beyond whatever people did to prices in the present.

                Now, at this point, market monetarists might chime in and try to argue that it is possible that people’s desire to hold cash next year will suddenly double, thus making the doubled cash influx have no effect on prices. Woolsey told me once that the Fed can increase the money supply without affecting prices if people’s demand to hold money increases concomitant with it.

                I countered and said that the only way that individuals in a division of labor society can increase their cash balances is through trading with each other, through person to person exchanges. Hence, inflation cannot increase everyone’s cash balances unless whatever it is everyone is selling increases in price. After all, supply from each individual is limited. People cannot arbitrarily increase supply to any amount to “meet” the additional monetary demand, which would have kept a lid on prices. No, people are limited in what their productivity is, and so the only way everyone can increase their cash balances at the same time, would be if everyone sold what they sold for more money, i.e. higher prices.

                Do you agree with my argument now?

  10. david stinson says:

    I’ve made this point before, but time stamps on comments might be helpful in a thread like this.

    • Bob Murphy says:

      We can’t verify that you’ve made the point before, since there are no time stamps. Maybe you made the point tomorrow.

      • david stinson says:

        Good point. Perhaps I wasn’t being repetitive when I made the comment above.

  11. Max says:

    Are you talking about the Fed’s profit on paper money when the interest rate is greater than 0%? Or something else?

    • Bob Murphy says:

      Max well yeah, one way of seeing it in the real world is that the Fed is earning income year after year.

      But that gets really complicated. Just think of it instead as if they are literally printing up $100 legal tender notes, and the Fed’s employees get paid with that currency. Then they go to the grocery store and buy food with the money, the go buy cars every few years, etc. Their only contribution to society is to run the printing press.

      So I don’t care what happens with expectations, clearly these Fed employees are living at the expense of other producers.

      What’s interesting is to switch it to the owner of a gold mine, in a society that uses gold as money. You can make the same argument. So this isn’t necessarily an ideological point. You might argue that the gold miner provides some service etc.

      • Max says:

        Yes the Fed pays its employees (as well as a weird “dividend” to banks), but the bulk of the profit just goes back to the treasury. So it’s not as if the Fed is some giant leech on the economy. Maybe a small leech, like the Department of Energy or whatever.

        • Bob Murphy says:

          The Fed takes the money and gives it to the government. So when when Ron Paul says that the Fed steals from “the public” in order to help the government pay for its wars, he is correct.

          • Max says:

            Since currency facilitates tax evasion, it’s not clear that it helps the government pay for anything. The government’s finances might improve without it.

            • Bob Murphy says:

              Might improve without the Fed? So governments around the world have created central banks, even though it makes the governments poorer, as a public service?

              • Max says:

                Might improve without currency.

  12. Dan says:

    That “crank” Ron Paul just killed it at UCLA. He filled up a stadium that sat 7 thousand. It felt good to be surrounded by that many of my fellow people living in the echo chamber.

  13. Beefcake the Mighty says:

    “But if money is neutral at least in the long-run–and even Austrians claim they agree with this proposition”

    Hmm. All the Austrians here are OK with this claim, I take it? I don’t see any objections to it, just squabbling over some side issues.

    • Robert Fellner says:

      A central tenet of Austrian Economics, as I understand it, is that money is non-neutral.

      • Bob Murphy says:

        I am only talking about the long run, and I mean it in the sense that, say, whether the money stock (which could be due to gold mining, remember) grows at 3% or 6% annually, is not going to affect how many hours a worker must labor in order to buy a house in the year 2080.

        Anyway you guys are right that Rothbard explicitly denies that money is neutral even in the long run, but I am pretty sure I have heard other Austrians say matter of factly that they agree it is neutral in the long run, by which they are referring to the idea that prices will adjust and so in that sense the quantity of money is irrelevant.

        • Robert Fellner says:

          But in the long run we are all dead! 🙂

          I gotcha. My source for my original comment was The Handbook on Contemporary Austrian Economics which definitely acknowledges the relevancy of time in regards to the neutrality of money.

          • Beefcake the Mighty says:

            @Robert Fellner:

            Can you elaborate? What was the source/quote here?

            It’s worth noting Rothbard’s footnote #10 in in Ch 11 of MES on this point.

        • Major_Freedom says:

          I think that if one accepts that their life is what it is because of a particular long run historical series of events from the beginning up to the present, then any change will have permanent affects going forward.

          For example, WW2 destroyed wealth that humans could have otherwise used to create more wealth forever after. Even the Trojan war had permanent long run effects, if we trace out all the events that occurred after because of it.

          People work 40 hour weeks today because humans didn’t start capitalism until only a few hundred years ago. Imagine if humans had free markets since 400 BC! The world would be completely different.

          You said:

          whether the money stock (which could be due to gold mining, remember) grows at 3% or 6% annually, is not going to affect how many hours a worker must labor in order to buy a house in the year 2080.

          I think it will affect it. If you accept that money creation now has short run effects on the real economy, then right away we can say that the long run will be permanently altered, because the future is built on what happened in the past.

          I think the non-neutrality of money idea is a cousin of the very old and very persistent mental drive to think about the end of history.

          The idea that money changes the real economy in the short run, which then affects the slightly longer short run in a less intense way, which then affects the longer run in an even less intense way, and so on into the future, until there is no more effect felt at all, is kind of like the eschatological re-absorption story all over again.

          I think changes in money in the present will have an effect on how many hours a worker must labor in order to build a house in 2080, just like the Trojan War had a permanent effect on how many hours a worker must labor to build a house in 2012.

          And here’s the amazing thing about this: The further back we go in relation to the present, the MORE of a compounded effect it will have that results in a change in the present.

          It’s like compound interest. Suppose the Trojan War never happened, and the Achaeans and Spartans instead engaged in peaceful exchange in a division of labor. Let’s be very conservative and imagine that it would have increased productivity of the human race by 0.1%. Now extrapolate that increase in growth 3272 years out (Trojan War began 1250 BC, and the present year is 2012). A 0.1% increase in growth over 3272 years will result in an absolute multiple of growth difference of 26.

          In other words, given our assumptions, people would have been 26 times wealthier in 2012 had the Trojan War never taken place.

          Ironically, far from being neutral in the long run, current events have a increasing effect into the future in a compounding manner.

          Just imagine where we’d be if electricity wasn’t invented until only 2 years ago and we had the benefit of only those 2 years of making good on the discovery. Now imagine if electricity were discovered in 40,000 BC and people had 42,000 years of making good on the discovery instead. We’d probably be living like they do on Star Trek.

          If anyone feels disempowered, or powerless, or inconsequential, they can imagine how many lives they are effecting in the year 400,000 AD, by simply not showing up for work today!

          For better or for worse, each one of us, every single one, our actions are having such a profound effect on the future, that we are kind of like Gods in terms of how much power we have over future generations, and the further out into the future we consider, the more exponentially powerful our actions become.

          Everything that people did from 100,000 BC up to right before your birth, has completely DETERMINED your environment and thus what you can do given what you have. People are toiling all day in 2012 because our ancestors did not leave us with enough real wealth to work with. They either consumed wealth or did not produce enough wealth to make your life different.

          This is what every war monger should take pause in understanding. When they attack and destroy wealth, they are forever depriving future generations, including their own descendants, from what otherwise could have been produced.

          Of course leave it to the CRUDE Keynesians to ignore this counter-factual and instead focus on the immediate “employment” that takes place.

        • Beefcake the Mighty says:

          That’s right Bob, you’re thinking of the monetary equilibrium free bankers here. They get rightly mocked as Austro-Keynesians for their obsession with “price stickiness”, but a better monicker would be Austro-Walrasians, as their theory is based on the classical dichotomy (between a so-called “real economy” where relative prices are set, and a “monetary economy” where the absolute price level is set).

          Money is NOT neutral, even in the long-run, and it doesn’t make you any kind of Keynesian (post or otherwise) to understand this point. Even Rothbard did not fully grasp the full implications, although he was definitely on the right track. BTW, this means that the ERE is NOT a special case of GE, contra widespread impressions (you know who I’m talking about here Bob, right?).

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