Clarification on Cantillon Effects
Steve Horwitz’s thoughts reinforced my own inkling that I should spell out what I had always filed away as “the Austrian point about Cantillon effects.” So the following is what I would have said, had you asked me a month ago. Note that I speak for myself, and I’m not even saying this is what Cantillon himself would have stressed:
When we’re first getting students to think about money and prices, we might say, “Imagine the stock of money magically doubles overnight. Every single piece of currency creates a copy of itself. If you had $30 in your wallet went you went to bed, you wake up with $60. Now, after everything settles down into the new equilibrium, you see the community isn’t richer. All the prices doubled.”
But once the student gets that under his belt, you make it more realistic. You point out that all prices won’t just magically double. Commodity prices rise very quickly, whereas labor contracts are more rigid. If an old widow is on Social Security, she is clearly going to lose out, whereas a magician can just jack up the going rate for his performances pretty quickly. So we see that even though “on average” nobody is changed by doubling the money stock, in reality some people benefit and some people lose.
Yet another complication is that in the real world, new money doesn’t come in via a magical increase of currency, nor through a helicopter drop. Instead the government (or the owners of gold mines in a Rothbardian world) gets the money first, and then hands it out to its cronies. The new money then ripples out into the community. It’s best to be the government, it’s second-best to be the defense contractor or Wall Street banker who get sweetheart deals, it’s third-best to be the fancy restaurant that caters to the Wall Street bankers, etc. If you’re running a deli in Boise, you’re going to see your input prices rise before your customers are able to pay more for your sandwiches. So there will be a general redistribution of wealth to the people closest to the money spigot, every time there is a new injection of money that disturbs the price equilibrium.
Finally, to the extent that this new money comes into the economy via the credit market (as opposed to a helicopter drop or, say, running the printing press to pay the Army), then one of the prices that rise early on is the price of bonds. In other words, real interest rates are temporarily pushed down, until the new injection stops and then the price system re-equilibrates. This artificially low interest rate sets off the unsustainable boom.
==> Now in the above, especially given Nick Rowe’s concession to Gene’s brilliant point, I think the market monetarist objection is not over whether injection points matter–of course they matter! If the government buys bonds versus gold versus paying opera singers, this will clearly affect people and the allocation of resources. However, the market monetarists are objecting over how these disturbances manifest themselves. Once we allow for people to anticipate price changes, they don’t have to wait to receive the new money before reacting. The traditional Austrian exposition of Cantillon effects–looking at the new money as it ripples through the economy, with the poor saps at the end of the line looking at their watches impatiently so they can start jacking up their prices–is naive. This is what JP Koning was saying.
==> The problem is, the market monetarists overstepped. Scott Sumner could have said, “I agree with Sheldon Richman, the central bank certainly can make some connected players wealthy at everyone else’s expense, for example by buying up toxic assets or taking over AIG. Clearly it matters very much where the new money is injected into the economy. However, I don’t at all like the mechanism Richman cited. He said it has to do with people getting the money at an earlier date than other people. That’s totally wrong, and here’s why…”
But no, Scott didn’t say that. Instead he wrote a post with the palpably false title, “It makes very little difference how new money is injected.” On a plain English reading of that sentence, it is false; Scott doesn’t believe it for one second. If the new money is injected into the Tomahawk missile sector versus the MBS sector versus the Treasury sector, of course it will make a huge difference. That’s why some of us flipped out and were asking Scott questions that must have struck him as an absurd waste of time.
A similar thing happened with JP Koning. He made the great point about expectations–pointing out that the canonical Austrian exposition of Cantillon effects implicitly assumes adaptive expectations–but then he ended up saying this: “On the other hand, if rational expectations are assumed from the start, then the location of gold’s injection point is moot since everyone perfectly anticipates the repercussions and adjusts.” No, of course that is wrong. If I find 10,000 pounds of gold in my backyard, that will make the economy adjust one way, compared to the scenario in which a guy in France finds it.
Sumner is definitely channeling Frank Knight. What he is saying is as ridiculous as Knight’s argument on the homogeneity of capital. You should write an article called “The Mythology of Cantillon Effects”. On a serious note I don’t think he really believes it is irrelevant where money enters the market.
Why no talk of snowballing shadow money and the endogenous creation of money by the financial sector, and the relation of all this to the changing value and liquidity of assets which act as substitutes for money and which are tied to different streams of shorter or longer production processes?
Ie why not more steps from Hayek beyond baby Cantillon.
And why not more pushback of the fraudulent notion of instant and perfect magical expectations, lacking any connections to channels in the real world structure of the net of prices relations and production processes ands consumption streams.
“When we’re first getting students to think about money and prices, we might say, “Imagine the stock of money magically doubles overnight. Every single piece of currency creates a copy of itself. If you had $30 in your wallet went you went to bed, you wake up with $60. Now, after everything settles down into the new equilibrium, you see the community isn’t richer. All the prices doubled.””
You’re implicitly assuming that money is a commodity, like gold, and not a debt of the bank. If a bank gives away money, then the bank is poorer but there’s no unavoidable hyperinflation (unless the bank gives away so much money that it goes broke – hyperinflation is to money what default is to bonds).
A bank can’t give away money unless you’re assuming it steals deposits and gives those. That’s theft not “giving away”.
Dollar bills.
I think the point of the thought experiment is to show how the nominal values in an economy can scale without affecting the real values… so to really push the example home, you’d need to also tell the students that their bank balances double, and the notional value of all outstanding contracts double. Then you ask the student to think about what would happen to non-contractual prices, like the spot price of bread.
Non-contractual…….prices?
I think he was trying to differentiate between things like the price of bread and the rent contract where I have to pay $X each month for some set amount of time.
There is more to Cantillon effects than even that. Someday I may write something about it (or maybe not).
I think money as it exists in the free market is actually based on the non-aggression principle. In an interventionist fractional reserve banking society/market what is actually created “out-of-thin-air”, whether credit based or printing based, is not really money but something else which has characteristics of a slave-master to slave relationship. Let’s called this form of not-money a “sklav” (from the Greek “sklavos” which means slavery)
Legal tender laws mask the differences between free market money and sklavs although I think it might be possible to enumerate the differences with the help of computer simulations of Cantillon-like effects.
Correction: sklavos means slave
I regard modern fiat currency as a commodity currency, and that commodity is violence.
In essence, the only thing that fiat money is intrinsically good for is paying your tax, and if we are honest with ourselves we must regard tax as protection payments. Thus, anyone powerful enough to collect tax at the barrel of a gun, must also be powerful enough to have justified that they are rightful to sell protection to the masses and fiat currency is merely a convenient token to represent this sale.
I believe that satisfies your “characteristics of a slave-master to slave relationship” although it is a bit over the top to invoke slavery here. You are after all given a perfectly reasonably option to have a go at defeating the USMC with your bare hands (or with anything else you can get hold of) but if you don’t like the odds they give you a fallback option which is paying your tax and thus helping the USMC extract the goods out of some other poor sap.
The MMTers also support this perspective, they just use nicer words than “protection racket” but the result is much the same. It’s about the only point that I agree with them on.
Buddy, ya need protection. We all do.
“I regard modern fiat currency as a commodity currency, and that commodity is violence.”
Sir, this is one of the best quotes I have seen on this site. This theme has been touched on many times, but never so pithily.
Tel is always great at thinking outside the box, he is very intelligent and has a good grasp of language. So it is no surprise that he often comes up with great ways of explaining something from a new perspective.
I don’t always agree with him, but I always enjoy his commentary. And where I do agree with him, often it is because he provided me with a different way of thinking about a certain concept, one that usually sticks with me.
I’ll admit that he is one of the few commenters here that I actually have some admiration for, which certainly is no small feat. Also, he is rarely ever repetitive, there’s always something new.
+1
Box?
What is this box of which you speak?
Look at your picture, and tell me you don’t see a box. It may be one dimensional, but if you look outside it you can see it.
However, I don’t at all like the mechanism Richman cited. He said it has to do with people getting the money at an earlier date than other people.
In the sumnerian argument, would it make a difference if someone had an online connection to the NYSE that completed transactions in 0.000001 ms as opposed to another guy who needed to call his broker?
You’re assuming that someone also had a computer program able to trade and that speed?
You might not actually need that fast an online connection; you just need predict, with a high rate of accuracy, the price of a stock/transaction some seconds in the future.
Are ssummer, nick rowe arguing that money only includes base money (central bank liablilities) and does not include debt money (demand deposits of commercial banks)?
If so, they clearly ignore bid effects of redistribution since M0<<<M1…
“Instead the government (or the owners of gold mines in a Rothbardian world) gets the money first, and then hands it out to its cronies. … Finally, to the extent that this new money comes into the economy via the credit market (as opposed to a helicopter drop or, say, running the printing press to pay the Army), then one of the prices that rise early on is the price of bonds. “
Credit money (i.e., bank deposit money, negotiable debt instruments) is a major part of the broad money stock. Every time a private sector business person creates a negotiable bill of exchange, promissory note or sight draft they are expanding the money supply. These people usually buy factor inputs with these instruments. So all those wicked, evil business people are getting the new money first and then their cronies! The business people will enjoy a general redistribution of wealth too. Those wicked criminals!
More seriously, if your argument about Cantillon effects really provided any argument against government money creation, it would require that private sector money creation must be unconscionably wicked or should be made illegal too.
Yet a further problem with these arguments is that they ignores the reality of how many prices are set: by price administration. In reality, in real world economies, the prices of a considerable number of goods respond slowly or incompletely to changes in demand. According to empirical studies in the Western economies, firms only rarely change their prices, perhaps on average once a year (Melmiès, J. 2012. “Price Rigidity,” in J. E. King, The Elgar Companion to Post Keynesian Economics [2nd edn.]. Edward Elgar, Cheltenham. 452–456 at p. 450).
http://socialdemocracy21stcentury.blogspot.com/2012/07/more-on-prices-in-real-world.html
http://socialdemocracy21stcentury.blogspot.com/2012/06/price-rigidity-in-new-keynesianism-and.html
A surge in demand will not necessarily result in price increases for many products, because business will just increase output and employment by using excess capacity.
The Austrians live in a fantasy world with no idle resources, no excess unused capacity at industrial enterprises or businesses, no unemployment, and no price setting by businesses.
Promisory notes aren’t money; They’re IOUs. They represent an incomplete transaction.
With commodity money, however, is not an IOU. You have an actual thing of value that you hope you can trade for some other good.
“Promisory notes aren’t money; They’re IOUs. They represent an incomplete transaction.
Even if you want to play the semantics game of saying they are not money, these “fiduciary media” (as Mises et al. called) them function very much like money: you can buy goods and services with them, especially factor inputs.
If “fiduciary media” did not use resources and potentially bid up prices the whole Austrian business cycle theory would be false!
Of course, that didn’t occur to you, did it.
The only reason we can buy goods with fiat money is because the government forces us to use it.
Why do I want to use paper as money? That’s ridiculous.
If fiat money is so great, then help the Austrians get rid of government’s monopoly on monetary policy, and let’s see what people do.
Nobody is claiming the Cantillon Effect is inherently evil. Just that they occur with our current monetary system, and quite substantial at that. The reason it is brought up is because some people (initially) didn’t even accept they exist.
This is really just an attack on businesses who refuse to sell at a loss.
Idle resources are a fantasy.
One of my cars has been sitting in my garage for 1 month. It is “idle”? If not, when does it become “idle”?
An owner of a machine has been trying to sell it, but at the current price, there are currently no takers. How long does the owner have to own the machine before it is “idle”?
The doctrine of idle resources was demolished by William Hutt. You Keynesians are living in a fantasy world because you’re arrogating your own subjective judgments concerning the disposition of other people’s property, as if it were some objective law of the universe, and wouldn’t you know it? That supposed “law” is used an excuse for you to rabble rouse the state to devalue people’s money, reduce their standard of living, and, because you’re so foolish you believe fantasy government only builds roads and bridges, to finance wars that kill innocent people.
Idle resources are a fantasy.
http://www.shadowstats.com/alternate_data/unemployment-charts
Yes, I am sure you’re right!!
LK,
I haven’t read Hutt’s work on this so I don’t know what his argument would be, but take MF’s example of an unsold machine and back up a bit. Suppose I open a business (or expand an existing one) to produce/sell widgets and over a course of 6 months I plan on acquiring various equipment to manufacture the widget and employing 10 people (and we’ll assume all are unemployed at the moment) to manufacture/sell it. Are the capital goods that I have acquired first that are awaiting other capital goods to be put to use, and the unemployed workers that I plan to employ later on, “idle” prior to final production and sale of my widgets? If so, do you consider this a problem that requires policy action to mobilize those resources sooner? If not, how do you define “idle” resources?
LK’s problem is that he isn’t connecting resources back to the intentions of the owners.
To answer your question, he would have to fall back on asking what the intention of the machine owner is. But then he would immediately lose the argument, because as soon as you talk about intentions, you are validating every single resource as intended to be used the way it is currently being used. After all, if a machine owner isn’t selling right now at this instant, it is because he is trying to hold out for a higher price.
This process of price discovery cannot be cured by inflation. It only tricks the owners into selling at the prices that do not reflect actual marginal values.
“LK’s problem is that he isn’t connecting resources back to the intentions of the owners.”
>> It’s either not making the connection or acknowledging that it doesn’t matter. At risk of sounding hyperbolic, I honestly don’t know what’s worse: those who would advocate outright socialism/fascism to control production – or – those who advocate more insidious methods of inducing economic activity thru financial means (ie inflation). At bottom, both presuppose that someone else’s plan supercedes your own. Despite this, it’s not an easy argument to win especially when you are repeatedly faced with… “Well so what? There are 20 million unemployed or underemployed people right now you heartless fool!”
Yes, I am sure you’re right!!
Unemployment statistics do not prove idle resources exist.
Only an economist could think that a bank would repeatedly buy and sell assets (like, oh, say, a treasury bonds) without making a profit off of the transactions.
This comment from Callahan is wrong:
Since when did replicating the effect of something, by doing something else, imply that the something is not the cause of the effects?
Consider the put call parity relation. If I can “replicate” a stock investment return by: longing a call, shorting a put, and longing the discounted) strike price, then does that mean when I invest in Microsoft stock, I am actually not, but rather I am longing and shorting options and longing a discounted strike price? Nonsense.
The mere fact that one can “replicate” effect A by bringing about any one of many different causes, it doesn’t mean that the cause that actually takes place, isn’t the cause of effect A!
I distinctly recall Callahan making this exact same mistake with the OLG model, and I distinctly recall correcting him on this point, but it seems like he’s not interested in truth.
MF the reason I said Gene’s point was “brilliant” was that he showed Nick Rowe was taking the opposite stance from the OLG debate. I.e., back in that debate, Nick would have agreed with you, MF, that you don’t dispose of the claim that “debt makes future generations poorer” just by demonstrating its equivalence to a tax-and-transfer scheme.
But now in this debate, Nick is saying Sumner is right vs. Sheldon Richman, because Nick can demonstrate that monetary injections are equivalent to a tax and spending scheme.
Is Rowe saying that “monetary injections are equivalent to a tax and spending scheme.”, or is he saying that govt policy has a monetary aspect (increases the money supply) and a fiscal aspect (has distributional effects) and that only the latter can be reproduced via “tax and spending scheme” ?
Transformer gets it. I am saying the second.
This is problematic. If monetary policy (printing money) necessarily includes fiscal policy (distribution of said money), then to say “only the fiscal aspects can be reproduced via taxing and spending” would seem to imply that taxing and spending replications are somehow independent of the monetary policy.
But if fiscal policy (distribution) and monetary policy (increase in that which is to be distributed) are two sides of the same coin, then what relates to fiscal policy must also relate to monetary policy.
————–
At any rate, it’s not even true that the fiscal policy side of the inflation coin can be replicated with taxation and transfers. Taxing and transfers does not generate the same effects that inflationary redistributions generate. Sure, if you consider inflationary redistribution scheme X purely in the mechanical sense, then we can imagine a supremely complex taxation scheme where each individual is taxed differently, and each individual who is transferred money, is transferred money differently. If the tax authority was an all knowing God, who can know every individual’s circumstances, then yes, they can be “reproduced.”
But in the real world, there is no feasible taxation and transfer scheme that can really duplicate the effects of inflation.
There is a difference between saying “this matrix of numbers can be generated using a different formula”, and “this matrix of numbers can be generated using a different formula that only a God would know.”
The government offers to allow taxpayers to buy long term government bonds rather than pay their taxes.
Monetary policy or fiscal policy?
If this has no effect on the money, credit and liquid asset sector of the economy, I need help understanding why.
I got all that, Murphy. It was a good gotcha. But my intention was to address that comment above.
During the OLG debate, Callahan insisted that because the debt can be replicated by taxing and transfers, it’s really the tax and transfer that is responsible, not the debt.
So when I saw that comment above, I didn’t interpret as only part of a gotcha against Rowe, but also as what Callahan would actually believe himself.
The national debt is equivalent to an intergenerational tax/transfer scheme (like an unfunded social security scheme) and both are equivalently bad or good. A $1 trillion unfunded SS is equivalent to a $1 trillion national debt.. I add the two together, and treat them the same. (I don’t know whether the US SS is or is not funded, and how big it is. Not my country.)
Austrians make a big fuss over where the new money is spent, even though it is 100 times smaller than regular fiscal policy.
If I were making a big deal over the debt, but ignoring an unfunded SS 100 times bigger than the debt, then Gene could argue I am being inconsistent.
One reason for that is that inflationists make a big fuss over deflation. Also, where the new money is spent is related to the ABCT.
Regular fiscal policy doesn’t generate the kind of booms and busts we experience.
OK Nick, so you’re the equivalent now of Dean Baker in this debate. You concede that the effect is real, and are just saying it’s not empirically important. Scott seemed to be saying something much stronger.
And if we’re talking about certain individuals profiting from having political connections, then even if something is “only” 0.1% of GDP, that’s still important. Sheldon’s piece wasn’t about business cycles, it was about ways that (some) rich people benefit from an activist government.
even if something is “only” 0.1% of GDP, that’s still important.
Is that not sufficient for them to at least advocate redesigning the monetary system such that every dollar owner earned the same rate of interest paid directly from the printing press? And that if they want 5% NGDP growth, then set the rate at whatever level can do this?
Shouldn’t be hard to do.
“The national debt is equivalent to an intergenerational tax/transfer scheme”
Well that’s my position, and Krugman’s, and Landsburg’s, and Gene’s debated hotly here. But weren’t you on the other side at that time? Just asking, not playing gotcha, pleased you’re over on our side now. Just wondering if you changed your mind or were misunderstood earlier.
Ken B: See Frances Woolley’s comment on my first blog post on burden of the debt, and my reply a couple of comments down. I haven’t changed my mind.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html?cid=6a00d83451688169e201675f8b4b98970b#comment-6a00d83451688169e201675f8b4b98970b
Damn. Link didn’t work. Go here, and scroll down to the fifth comment:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html
Mare-see as we canucks say. I think I found the right comment, from SS?
In a model with no inheritance, like Bob’s OLG Apple Island, (no savings, apples rot if not eaten, no increase of decrease in yield each period, no investment,) does Ricardian Equivalence hold?
Bob:
Suppose the government decides to increase tank production. It might fund this by printing currency, by borrowing money, or by raising taxes. The tank manufacturers benefit the same amount regarless of this choice.
Suppose they go with the money creation. They issue new money with big picutres of Ben Franklin. They use that money to buy the tanks. Then we can imagine that the new money is used by the tank manuctuers to buy supplies and so on.
Now, suppose instead that the increase in government spending is on tanks, but only money collected in taxes or borrowed is used to buy the tanks. Every new dollar, with the big picture of Ben Franklin ,is used to pay the salaries of postal workers. They get no raise. They are paid as they aways have been. They spend the “new” currency on the same things they always did. The grocery stores they patronize, their landlords, and so on get the new money, but it is exactly the same amount as the money they have been receving.
Or suppose that the government pays for some of the tanks with the new money, but others with the old money. What difference does that make to the tank manufacturers. Both the new and the old money impacts them in the exact same way.
Most importantly, the government can keep on printing money and buying tanks forever. The government doesn’t just get to buy tanks until prices all rise. (Prices would have to be infinite for the government to be unable to get any tanks with newly created money.)
Now, who is impacted by the decision to create moneyrather than borrow or tax to buy the tanks? Isn’t it the people whose taxes don’t increase? Or the people who don’t buy the government bonds? Those who couldn’t sell to them continue to earn money–old money–that they otherwise would not earn. They are the ones who “benefit” from the “new money” and they aren’t seeing any of it.
It is the change in the pattern of demands that counts, and imagining that we can identify this with where the new “new money” is spent a mistake.
I think it does make a difference if the money is created in the credit markets, (including the odd, not selling bonds to buy tanks,) but your paragraph suggesting that this is especially beneficial to wall street restaurants is mistaken. If the market interst rate is pushed below the natural interest rate it is beneficial to borrowers. That includes the guy going to the pawn shop in Charleston. The primary securities dealers who actually trade with the Fed aren’t getting special benefit because they get the money first before it loses value.
But really, the people who are like the tank manufacturer are the people who sell to those who borrow. And so, the housing consrtuction industry (for example) might benefit differnentially than the movie industry
Now, what is different about this credit market injection rather than the tanks is that once prices for the products rise, the nominal demand for credit rises, and so the interest rates rise again. (That is why it isn’t persistent and the larger scale of construction activity cannot be maintained.)
If the prices rise immediately, then the demand for credit rises immediately, and while the new money was an injection in the credit market, the real interest rate doesn’t go down. There is no benefit to all borrowers (including average folks buying new homes) or to the contruction industry.
I am not saying that this scenario (all prices rise to the new equilibrium instantly) is likely, it is just possible and there are incentives for it to happen that way. That the goverment can persistently fund tanks with newly created money even if all prices instantly rise to the new equilibirum level is consistent a disequilibrium impact on market interest rates.
As I have said for sometime, I think there is confusion of two sorts of phenomenon in the Austrian literature, and it is worse in popular writing.
This is incorrect. The “benefits” and “losses” the Cantillon Effect refers to, and it cannot be emphasized enough, are relative.
If the government prints money to pay for the tanks, then the tank owners benefit relative to others because while everyone now owns depreciated money, only the tank sellers receive more money which offsets the depreciated money loss. If they want to buy more tanks at wholesale, they can do so with the money they received from the printing press. If everyone else wants to replace their used up resources, they have to use depreciated money instead.
If the government borrows the money, then the lenders relatively benefit, the tank sellers relatively benefit, and the taxpayers relatively lose (taxpayers include the tank sellers and the lenders but the taxes fall on everyone, not just the tank sellers and lenders).
If the government taxes the money, then the taxpayers relatively lose (again, taxpayers include the tank sellers, but the taxes fall on everyone, not just the tank sellers), and the tank sellers relatively benefit.
Therefore, the postal workers are benefitting at the expense of others, since, without the new money, the spending of tax dollars would have been diverted to tanks and away from postal workers.
(Of course, any taxes which are contrary to the Constitution [as lawfully amended] is just theft. With inflation, I’m being tricked out of my wealth; but unlawful taxes are direct theft on the part of the government.)
The demand for SAVINGS increases when prices rise, and the demand for that for which the artificial credit was intended to create reveals itself to be insufficient. This is why it isn’t persistent.
Why no talk of the snowballing of shadow money and the endogenous creation of purchasing power by the banking sector, or of the relation of all this to the changing value and liquidity of assets which act as substitutes for money and which are tied to different streams of shorter or longer production?
If we want to get Nick’s “how big” question, we’ve got to expand the playing field. Cantillon story Cantillon Effects is just battlefield preparation for the real stuff of Hayek and Mises.
I’d also like to see more push bak on the fraudulent notion of instant and perfect magical expections with “no hands, ma” need of push-me, pull-me relations between nodes in the net of relative prices, a magical conception lacking any connections to the channels in the real world structure of the net of price relations and production processes and consumption streams.
Why no talk of the snowballing of shadow money and the endogenous creation of purchasing power by the banking sector, or of the relation of all this to the changing value and liquidity of assets which act as substitutes for money and which are tied to different streams of shorter or longer production?
You’re not alone. I tried to bring that up more than once. It takes time to help the critics understand Austrian theory. Most of where the boom and bust cycle “resides” is in the market, where market actors become discoordinated.
It takes time to help the critics understand Austrian theory. Most of where the boom and bust cycle “resides” is in the market, where market actors become discoordinated.
I don’t think Austrian critics want to understand Austrian theory. Market actors become discoordinated by the distorted prices caused by the policies advocated by Austrian critics. They see themselves as heroic figures saving the world. It’s not likely that a little light will suddenly go on in their heads and they’ll admit that the causes of all these horrible problems are the very policies they have devoted their lives to spreading and imposing.
And it begins with the envious complaint that someone has more than someone else, and therefore we need Anti Trust laws or fiat money and goons to force people to use the fiat money.
Bob I actually think you didn’t mention Steve Horowitz’s most important point. I think the real point Sumner makes that you don’t address is that according to him, there is a micro and macro effect to new money in hte economy.
Sumner’s argument is that the injection point matters on the inividual, micro level-obviously if the Fed is going to put $1 million into the economjy today it sure makes a big difference to me whether it gives it to Goldman Sachs-or decides to give it to say, me.
Sumner’s point is that these micro effects aren’t important, it’s the macro effedts taht count. Now right or wrong that’s more nuanced argument to refute-it seems to me.
Steve does a good job of answering that argument-rather than making the undenaible point that it can matter to individual actors. First here was Sumner’s argument:
” “People need to pay attention to the distinction between the micro level and the macro level. Bill Gates does not refrain by buying a Ferrari today because he doesn’t happen to be holding any base money. His nominal demand for goods and services is based on his nominal wealth. If the Fed buys $100 million in bonds from Gates and pays him cash, he doesn’t feel energized to go out and buy goods and services (his nominal wealth is unchanged), rather he puts the money in the bank and then invests it elsewhere. Of course the aggregate NGDP will rise a tiny bit, and for that reason everyone, including Gates, will spend a tiny bit more on goods and services.”
“”If the Fed spends $100 trillion on financial assets, then nominal expenditure in the aggregate will soar (mostly due to inflation, but output will rise slightly in the short run.) Monetary policy operates at the aggregate level, it cannot be explained at the individual level, except by using the concept of the supply and demand for base money. The hot potato effect. But here’s the problem. In the short run prices are sticky, and individual people’s nominal purchases of goods and services depends on their nominal wealth. So we have to get from here to there via some sort of “transmission mechanism.” In the apple market we often assume a Walrasian auctioneer. But in macro that assumption assumes away all that is interesting. Hence people flounder, unable to conceive that monetary policy is all about debasing the medium of account by increasing its supply relative to demand. They want some sort of understandable mechanism that they can visualize at the individual level–the Keynesian interest rate, the Austrian Cantillon effect, but there just isn’t any. Or perhaps I should say there are far too many, each of which plays only a tiny role.”
Here I think Horowitz does a good job of anwering that:
“”I have been both busy and traveling the last few days and haven’t been able to read all of the controversy set off by a Sheldon Richman column on Austrians and inflation, including the back and forth between Scott Sumner and Bob Murphy. However, I have read some of it and I think folks have focused too much on the question of the wealth effects of who gets the money first as opposed to the fact that money takes a particular path means that money affects prices differentially.”
“What I mean by that is that, yes, a bond dealer who sells to the Fed is just swapping one asset for another (which is also true of anyone who spends money of course), but that particular exchange leads to some banks having additional reserves, which translates into loans (well, normally anyway), which translate into borrowers spending. Those borrowers spend on some goods and not others. Yes, all of these are just swaps of assets, but the important point here is not the change in wealth but the impact on relative prices.”
http://diaryofarepublicanhater.blogspot.com/2012/12/joshua-wojnilower-and-steve-horrowitz.html
Seems to me if you don’t answer Sumner’s aggregate argument-that what’s important is the macro effect not the micro-you haven’t actually met his argument head on.
http://diaryofarepublicanhater.blogspot.com/2012/12/joshua-wojnilower-and-steve-horrowitz.html
“Bob I actually think you didn’t mention Steve Horowitz’s most important point. I think the real point Sumner makes that you don’t address is that according to him, there is a micro and macro effect to new money in hte economy.
Sumner’s argument is that the injection point matters on the inividual, micro level-obviously if the Fed is going to put $1 million into the economjy today it sure makes a big difference to me whether it gives it to Goldman Sachs-or decides to give it to say, me.
Sumner’s point is that these micro effects aren’t important, it’s the macro effedts taht count. Now right or wrong that’s more nuanced argument to refute-it seems to me.
>> Why would “macro” effects be more important than “micro” effects? It seems to me this strikes at the heart of what ails so many economists. Of what importance are economists if they are not concerning themselves the well-being of actual individuals (ie micro effects)?
Mike T I’m on your side here. In the end, it’s all about the micro. I believe the Marginalists in 1871 made the point, rather clearly, that economics begins and ends with individuals.