04 Dec 2012

Resolution of the Sumner/Richman Showdown

Debt, Economics, Federal Reserve, Inflation, Market Monetarism, Scott Sumner 97 Comments

[UPDATE below.]

You may recall that I was earlier puzzled at Scott Sumner’s commentary on a Sheldon Richman article talking about Cantillon effects. If you care, I now have the resolution, because of Scott’s follow-up post. Scott actually doesn’t dispute anything in what the Austrians have in mind when they say “it matters who gets the Fed money first.” It’s just that Scott calls such outcomes “fiscal policy” and thus, by definition, “monetary policy” can’t help some and hurt others in terms of who gets the money first.

To get the full story, you need to read Scott’s follow-up post, then skim the comments and see his responses to everybody, but especially to me. (I don’t mean that I necessarily asked the best questions in the comments, I’m just saying for this one issue, you can just read the comments by Scott and me and you will see what I’m talking about.)

UPDATE: I’m pretty sure Nick Rowe is indirectly confirming my resolution of the dispute here. My comment on Nick’s post:

So…Sheldon Richman was right, and Scott Sumner should apologize? I don’t get the sense that’s what you’re trying to say, Nick.

It’s as if Jesse Jackson says, “It matters whether the police shoot at a fleeing bank robber vs. an innocent teenager!”

Then the NYPD chief says, “No it really really really doesn’t matter.”

People flip out, and then the NYPD chief (and his Canadian lawyer) elaborate, “Oh, we were assuming we were talking about scenarios in which the bullets all miss their targets. When they actually *hit*, we don’t classify that as ‘shooting,’ we classify that as ‘hitting.’ You whiners need to use standardized nomenclature before you complain next time.”

97 Responses to “Resolution of the Sumner/Richman Showdown”

  1. Major_Freedom says:

    Scott actually doesn’t dispute anything in what the Austrians have in mind when they say “it matters who gets the Fed money first.” It’s just that Scott calls such outcomes “fiscal policy” and thus, by definition, “monetary policy” can’t help some and hurt others in terms of who gets the money first.

    So…monetary policy doesn’t exist then?

    • Tel says:

      That’s a very sensible position, now you mention it.

      Any authority with money-printing monopoly powers can only do so because government offers the authority. In all cases there are some favourites and the easy money is not distributed even-handedly so right there you would have to call it fiscal policy. Government decides to create money and hand it to someone.

      That clears up a lot of things for me. Throw Market Monetarism out the window because it describes a state of affairs that can never exist.

      • Joseph Fetz says:

        “Throw Market Monetarism out the window because it describes a state of affairs that can never exist.”

        I realized this some time ago, but never mentioned it. Like Friedman, the market monetarists envision the impossible, but then add another impossibility (i.e. an independent and neutral CB, as well as NGDP targeting).

        However, on the question of fiscal vs monetary policy, there is a good insight from Mises, and that is that while fiscal policy can direct funds or extract funds with some sense of control as to who benefits and/or suffers, with monetary policy this isn’t so true. Sure, the first receivers benefit, as do debtors, that is clear. But once that new money enters the system, there is no way to then control how that new money will affect prices. That is the distinction that has never left my mind when thinking about fiscal vs monetary policy.

        Since I’m not the best at explaining such concepts, here’s the link to Mises.


      • Joseph Fetz says:

        Well, there is that, as well as the whole creating money by arbitrarily adding digits to the face of a piece of paper or an electronic account.

    • Matt Tanous says:

      Nah, it’s just “not important in a macro sense”. Because who cares about the little guy, right? Except anyone who rejects the macroeconomic aggregates approach, like the very people he’s attempting to criticize (i.e. the Austrians)…..

      • Gene Callahan says:

        The “structure of production” is an aggregate concept.

        • Bob Murphy says:

          No it isn’t Gene, not at all in the same way that “GDP” is. C’mon that was too glib.

          • Gene Callahan says:

            One cannot have “artificially lengthened the structure of production” for an economy unless there is some aggregate structure of which you speak. (And no Austrian I’m aware of has ever attributed a slump to Joe Blow artificially lengthening HIS structure of production.) Whether it is an aggregate “in the same way” as GDP I’m note sure: I’d have to hear what Bob thinks the salient differences are.

            Oh, and I know of a PhD thesis that shows that the concept of “a” natural rate of interest is also an aggregate, theoretical concept, having no corresponding real world correlate.

            • Major_Freedom says:

              There is a difference between understanding reality by using aggregative concepts, and hypostatizing them and believing they have a causal force of their own on the very components of the aggregate.

              For example, it’s not wrong to understand the totality of expenditures on goods as a singular concept “aggregate demand.” It is quite another to infer that it has a motive force of its own, such that if various means can be used to increase it, that it necessarily has the desired effects on a particular component, say wage payments.

            • Bob Murphy says:

              Oh, and I know of a PhD thesis that shows that the concept of “a” natural rate of interest is also an aggregate, theoretical concept, having no corresponding real world correlate.

              Hey! That came out before Economics for Real People, so that’s a low blow to throw it in my face. Next you’ll say Krugman 1998 has relevance to today.

          • Gene Callahan says:

            Murphy clarifies:

            ==> “the length of the structure of production” is an aggregate, if you want to be able to say it went up or down. Just like “price level.”

            ==> “the structure of production” is not an aggregate. Neither is “network of market prices”

            I agree with the above. I was thinking “lengthening,” but failed to write it.

        • Greg Ransom says:

          What the hell happened to Gene Callahan?

        • Daniel Kuehn says:

          It really is. I hate it when people talk like Austrians don’t use aggregates.

          Can you think about these concepts in more or less aggregated ways? Of course. But that’s true of “non-Austrian” aggregates too.

          • Matt Tanous says:

            The structure of production is not an aggregate like GDP or whatever. In fact, I have never recognized it as aggregative at all – no one is discussing things in terms of $X in stage 1 and $Y in stage 2, etc. To do so – to treat it like an aggregate and ignore the fact that different structures are necessary and desired for different goods – would be absurd, to my mind. It’s always been a concept at the level of the individual producer to me, and the problem arises from effects on multiple producers – but they are still individual producers.

            • Ken B says:

              Sometimes producers are aggregates.

              Which individual of the City of Birmingham Symphony is producing the performance of “The Chairman Dances” I am listening to?

              • Major_Freedom says:

                The individual who is producing, not the individuals not producing.

              • Matt Tanous says:

                Oh, right. Obviously, the fact that multiple people may work together to produce a thing is the same as adding up all the stuff that is X time from consumer good production as an aggregate. Totally the same.

          • Andrew Keen says:

            I lost track, how many structures of productions is the U.S. up to these days?

        • guest says:

          What if Austrians just started couching their worldview in Keynesian/Marxist terms? Because, apparently, we already believe in aggregates:

          “Aggregate demand: The effect of everyone’s time preferences on everyone else’s.

          “Other-mindedness: Recognizing that EVERYONE has a right to individual liberty and private property.”

          “Labor Theory of Value: The value that one party of a transaction places on his trade good, after having accounted for the labor of acquiring it. If the other party still values the trade after having considered his own labor costs, then the trade can happen; If not, then either party might consider supplementing his labor costs with capital.”

          Power to the people!

        • Tel says:

          I disagree, but it’s a fair comment.

          Suppose I hold up a big fresh red rose in one hand and an old pine cone in the other hand. Now I’m going to ask, “Is the structure of the rose longer or shorter than the structure of the pine cone?”

          It’s a bit of a whacky question to ask. I think we would all agree that some sort of structure exists, and it is observable that there are structural similarities between the rose and the pine cone. Does that make an aggregate? Hmmm, not in my opinion. As an empiricist I would have to say if it isn’t possible to measure then it doesn’t exist. That said, there’s a big difference between, “is not possible” and “I just don’t know how.”


          Sadly, neither the rose nor pine cone are in the list, but the lung is higher than the brain which in turn is higher than the broccoli. No doubt there are many other measurements that could be applied.

          Collecting data in a useful way is itself a challenge.

      • Blackadder says:

        Except anyone who rejects the macroeconomic aggregates approach, like the very people he’s attempting to criticize (i.e. the Austrians)

        Isn’t inflation an aggregate?

        • Joseph Fetz says:

          Blackadder, it depends upon what definition you use for “inflation”. Most Austrians define inflation as the increase in the supply of money, with the relative changes in prices being the result of such inflation. In this sense, since it is a stock of a homogeneous good, then no, it is not an aggregate.

          • Joseph Fetz says:

            Sorry, that should read “since it is an increase in the stock of a homogeneous good”.

            • Ken B says:

              Money is homogeneous?

              • Joseph Fetz says:

                In the Austrian definition of the term, yes it is. Remember, Austrians make a distinction between what money is as opposed to a medium of exchange.

              • Joseph Fetz says:

                Also, I am speaking in terms of *a* money, not moneys. So, while there can exist moneys that each serve as the monetary unit for a particular economy, one cannot call a single one of these moneys “the money” outside of their respective economies. We would not call Swiss Francs money in the United States, because it is not the generally accepted medium of exchange, rather it is merely one of many mediums of exchange. However, when speaking of the money of a particular economy, it is most assuredly a homogeneous good. If it were not homogeneous, one could not use it for calculation.

              • Ken B says:

                In other words, no.

              • Jonathan M.F. Catalán says:

                If money is fungible, it must be pretty close to homogenous (perfectly substitutable).

              • Ken B says:

                Ahhh, so fungible money is homogeneous.

                Is all money perfectly fungible at a fixed rate of exchange? After all if the rate of exchange can vary it’s not homogeneous.

              • Joseph Fetz says:

                Ken, can you list for me a heterogeneous money? In fact, can you list any calculating unit that is heterogeneous?

              • Matt Tanous says:

                “Is all money perfectly fungible at a fixed rate of exchange?”

                What is the rate of exchange between two dollar bills?

                The Austrian conception of money as a good is limited to A money – the dollar, the Euro, the pound, etc. are all separate monies. This is why Austrians would say the world is actually working under a partial system of international barter.

              • Ken B says:

                Are bank accounts money Joe?

              • Joseph Fetz says:

                In response to your question regarding exchange rates, you must remember that, ceteris paribus, at any given time the purchasing power of a money is equal for each unit of that money (i.e. each unit is equally interchangeable). As I said before, if money were not homogeneous, then it could not serve as a calculating unit. In fact, it would be an impossibility.

                What you’re attempting to do is take all of the moneys and aggregate them, and then call that money. That’s very sloppy.

              • Matt Tanous says:

                “Are bank accounts money Joe?”

                Oh, I see now. Dollar bills in a bank are different than dollar bills in my hand. By MAGIC.

              • Joseph Fetz says:

                “Are bank accounts money …”

                No, bank accounts are bank accounts, not money. If you had asked whether dollars are money, I would say yes, dollars are a money. The same would be true if you had asked if yuan is money, I would respond that yes, the yuan is a money.

              • Ken B says:

                No Joe, my question about exchange rates is to poke a hole in JMFC’s answer.

                I asked if it’s homogeneous. He said *yes*, citing fungibility. I pointed out you need fixed rates *in addition to* fungibility to show homogeneity. Just fungibility won’t do it.

              • Ken B says:

                Matt: “Dollar bills in a bank are different than dollar bills in my hand. By MAGIC.”

                I assume that is sarcasm.

                Not by magic, by FRB. A bank account is a promisory arrangement not specie.

                So Joe, I think you disagree with Matt here. Is that correct?

              • Joseph Fetz says:

                Why would the rate need to be fixed? There’s no reason that the exchange rate of a money should impact its homogeneity. At any given time, one unit of a money is equally interchangeable with another unit of that money, therefor it is homogeneous, even if the exchange rate is allowed to float.

              • Ken B says:

                WTF Joe. JMFC is saying the Euro and the dollar are homogeneous because they are fungible. He asserted that fungibility implies substitutibility implies homogeneity.

              • Joseph Fetz says:

                No, I agree with him. Fiduciary media, while not exactly preferable in Austrian circles, is obviously and empirically money. Obviously, Austrians classify it differently than commodity money, but it is still money because it is the generally accepted medium of exchange, and it is equally serviceable with a unit of the same denomination of physical currency (i.e. they are both units of the same money, only their creation method is different).

              • Joseph Fetz says:

                That last comment was in response to your question about Matt.

              • Joseph Fetz says:

                As for what Jonathan said, that is not the impression that I got. Jon is speaking about *a* money, not moneys.

              • Ken B says:

                By him you mean Matt I think. Then I am right. A dollar bill in a bank account is NOT the same as a dollar bill in hand. You would not accept $10M in SlimShady’s bank as the as fully equivalent with $10M in bills, or even as $10M in some other bank. If money includes abnk accounts it’s not homogeneous anymore.

              • Joseph Fetz says:

                So, you’re telling me that checkbook money is not equally serviceable with physical currency? Considering that I haven’t received pay in the form of physical currency ever in my adult life, I’d have to disagree with you. Both are equally serviceable and both are denominated in the exact same unit. A dollar is a dollar is a dollar as far as I am concerned, and I am sure that most everybody would agree. Now, if you’re asking about bank notes, then you must remember that they are promissory notes, so whether you accept a promissory note or not, that’s a different question. A promissory note isn’t money, it is a money substitute (i.e. a promise to pay money).

              • Ken B says:

                I’m saying you’ve changed your definition of money again.

                “Amongst our definitions …”

              • Joseph Fetz says:

                No, there exists money and money substitutes. I will admit that I did make one error, and that is that I said that checkbook money is in fact money. The Austrian literature actually defines checkbook money (fiduciary media) as a money substitute. So, yeah. I was wrong there.

                However, since we currently have a full fiat system, and I don’t have more than $250k in the bank, under these circumstances I would personally accept fiduciary media as a money equivalent, even though it is not defined as such in the literature.

              • Joseph Fetz says:

                I haven’t read an economics text in a few years, and I am away from my library, so I am pretty much going from memory here. However, at least I cop to my mistakes, unlike some other people I know. However, after having admitted my mistake in attributing a money substitute as money, that doesn’t change the fact that a particular money is always homogeneous, that each unit is equally interchangeable with another unit of the same money.

              • guest says:

                A free market wouldn’t be where each person is isolated and never trades with anyone.

                The division of labor makes those who participate in it wealthier than if they did not.

                So we realize that we need other people in order to become wealthy – that’s not the point.

                The point of a free market is that each person accepts or rejects, based on his own preferences, whether he wants to trade with this or that person.

                No one is obligated to trade with anyone in a free market. But if we choose to, then one of the consequences is that some are going to do it more efficiently than others and become more wealthy – not by “concentrating wealth” into a relatively few hands, but by a relatively few hands CREATING wealth which they are then entitled to enjoy.

                The free market is not a zero sum game.

                Central planning – especially of the money supply – is the source of monopolies and “wealth concentration”, not the free market.

              • Jonathan M.F. Catalán says:

                Money ≠ money substitute

        • Tel says:

          Isn’t inflation an aggregate?

          Any given measure of inflation (e.g. CPI, or “Core”, or cost of living) is an aggregate… but also any given measure of inflation is wrong, from someone’s point of view.

          Since every person sees inflation differently (depending on what they buy) you can never really capture the result in an aggregate but you can produce approximations which might be good enough for some tasks.

    • Rick Hull says:

      Sure seems like major backpedaling to me. From the comments on the original Sumner piece:

      David R. Henderson > Scott, Just so I can make sure what you’re saying: are you denying Cantillon effects?

      ssumner > David. Yes.

      Regardless of how he wants to classify Cantillon effects, is he still in denial that they exist?

      From the followup:

      > My entire blog is devoted to the proposition that money is non-neutral–I don’t need convincing. But that has no bearing on the claim that the effect of money policy depends on who “gets” the money first.

      Does he mean only intended effects?

  2. Greg Ransom says:

    I think Scott Sumner does dispute what Austrians have in mind — he just doesn’t know what it is that Austrians have in mind. That is one thing that *allows* him to dispute it, he doesn’t have any idea what the alternative to his own view actually is.

    Here is why Sumner unwittingly and unintentionally but in effect disputes what Austrians have in mind.

    Scott believes that the EMH makes money and credit markets and asset markets essentially perfect and instantaneous — its impossible to be fooled by money and credit and asset prices. So there cannot be a “loose joint’ in the domain of money, credit and production — there can’t be erroneous malinvestment, stretching and contracting in a boom and bust cycle. EMH means perfect and instantaneous expectations, perfectly coordinated across the future, don’t you know.

    And, likewise, because of the EMH, no one can really benefit via a transaction with the Fed, you can’t beat the market, and so there are no gains to be made, and certainly no increased marginal gains to be made in the expansion of an artificial boom. Artificial booms can’t exist.

    When we drill down, that is what we are drilling down into.

    Scott doesn’t think in the categories of heterogeneous production goods with varying production times and output — he doesn’t think he needs to imagine such stuff. It’s all perfectly and instantaneously coordinated thru time via EMH and EMH expectations.

    • Major_Freedom says:

      That may be true, but even then, even if there was perfect foresight, perfect information, instantaneous price adjustments, etc, then it still would not eliminate the Cantillon Effect.

      Imagine I printed $100 trillion in my basement (and assume everyone knows about it, and knows exactly where I will spend my money, and oh, let’s assume for the sake of argument that I am going to spend it all at Filthy Fred’s Hooker and Beer Emporium.

      Even if everyone knows what I am going to do, even if everyone has perfect information about what the price of Hookers and Beer at Filthy’s Fred’s is going to be, even if everyone has perfect information about where the owner of Filthy Fred’s will spend the $1 trillion I spend at his place, even if everyone instantaneously adjusted their factor prices accordingly, no matter what anyone does with their money and their resources, Filthy Fred will still become a trillionaire and everybody else will still NOT become a trillionaire, at that time.

      In short, just because I can expect something to happen to me in the future, it doesn’t mean that that something no longer has any effect on my life. Correctly expecting something to happen does not eliminate it from existence.

      On a side note, this kind of thinking is often used by pro-taxation advocates. They often say if you can correctly anticipate taxation, it’s not theft.

  3. Keshav Srinivasan says:

    Bob, didn’t Scott also say that almost none of what the Fed does is in his view fiscal policy anyway? So aren’t you left with the same disagreement, since you’re saying that it does matter who the Fed gives money to, while he’s saying with regard to what the Fed does, with very rare exceptions, it does NOT matter at all who the Fed gives money to?

  4. Silas Barta says:

    Can’t blame him, I guess. I like to define any problems with my ideas as a “separate issue”.

  5. Major_Freedom says:

    I wrote this on Sumner’s blog:

    If the Fed buying t-bonds doesn’t affect the markets selling t-bonds, then, logically, those t-bond markets would not change the way they affect other markets, and those tertiary markets would not change in the way they affect quaternary markets, and so on. Thus, by claiming that the Fed buying t-bonds does not affect the markets selling t-bonds, one is literally denying that the Fed has any effect on “the economy” in totality, since the t-bond market is the sole “conduit” from which the Fed affects the greater economy.

    • Bob Roddis says:

      Come on now, MF. That’s just you trying to fool us with one of those tricky Austrian logic mind games. We can’t begin to think that might be true unless and until we repeatedly test your hypothesis in a science lab.

      • Major_Freedom says:

        We don’t need to test it in a lab. We just need to call them by different names, and the underlying actions will thus be different.

        Sound familiar? Calling theft “taxes” makes it different. Calling murder “collateral damage” makes it different. Calling torture “enhanced interrogation” makes it different.

        Calling printing to buy something other than bonds “fiscal policy” makes the answer of whether or not the Cantillon Effect applies, different.

        Is it a coincidence that a state money scheme called “NGDP targeting” would have such semantics masquerading as identifying concretes?

        Orwell would be proud.

    • Bob Roddis says:

      Then there is the problem of “monetary policy” causing the adulterated prices that distort the investment and capital structure to be unsustainable. The whole purpose of “monetary policy” is to induce those adulterated and distorted prices.

      • Major_Freedom says:

        No no no no, when uncomfortable things happen, that’s called “fiscal policy.”

  6. Nick Rowe says:

    Bob: here is the reply I left to your comment:

    [Bob: In all except maybe scenario 5 (where the government sells bonds to purchase IBM shares) I am using an absolutely standard definition of fiscal policy. Changing G and/or T. But 5 is just the government buying shares on margin, which is something that a lot of people do every day.

    Why does fiscal policy, or somebody buying IBM shares on margin, cause a total discombobulation in the Hayekian time structure of production?

    And if it does cause a discombobulation in the time structure of production, why aren’t Austrians yelling about that every time the government changes G or T by 0.4% of GDP? Or somebody buys IBM shares on margin?

    Man, but you Austrian guys must think the market economy is an awfully fragile flower.}

  7. Nick Rowe says:

    And J. V. Dubois left this good comment, along much the same lines:

    J. V. Dubois says:

    “You guys really do not get the gist of what Nick is saying?

    1. Seigniorage of government controlled money IS TAX on base money
    2. “Where” and how much of newly printed money is injected – even if that has any effect on redistribution IS FISCAL POLICY.

    If you say that it makes a great deal of difference (deforming long-term capital structure etc) if money is injected into salaries of government employees vs purchase of bonds, then you by the same argument think that it makes a great deal of difference if government decides that from now on it spends 0.25% of GDP gathered in taxes on one versus another.

    If you for instance say that Bond Dealers gather undue profits from these bond operations of the size of 0.25% GDP – then by the same account you have to be outraged that those very same bond dealers gather undue profits from regular yearly government deficits an order of magnitude higher. It is a problem of interest group capturing government and preventing competition from access to the bond market, it is not a problem of money printing.”

    • Bob Murphy says:

      Nick Rowe said:

      If you say that it makes a great deal of difference…

      Whoa. Scott said it “really really really” doesn’t matter. I don’t have to prove it “makes a great deal of difference,” I just have to show that it matters a teensy-weensy bit and then Scott needs to apologize.

    • Matt Tanous says:

      ““Where” and how much of newly printed money is injected – even if that has any effect on redistribution IS FISCAL POLICY.”

      Right… so monetary policy doesn’t exist. I guess Krugman’s just an idiot. You can’t get the economy going with a policy that doesn’t exist!

    • Major_Freedom says:

      “Where” and how much of newly printed money is injected – even if that has any effect on redistribution IS FISCAL POLICY.

      Since there is always a “where” and “how much” when it comes to central bank operations (inflation), then you’re just saying there is always fiscal policy along with monetary policy. In other words, monetary policy always has to deal with the “where” and “how much”, and so you are defining inflation as BOTH “fiscal policy” AND “monetary policy.”

    • guest says:

      There’s no such thing as central planning without the capturing of government by interest groups – they’re the same thing:

      How Cronyism is Hurting the Economy

      The power to “regulate the economy” is the same as the power to “distribute favors”.

      Anti-Trust and Monopoly (with Ron Paul)

      … [I]sn’t it practically impossible, for even the most sincere business man, to interpret the laws?

      ‘Cuz if the price is all the same, we’re in collusion;

      If it’s too high, that means we control it and we’re gouging the public;

      If it’s too low, we’re trying to kill our competitors.

      Seems like the government can define the Anti Trust laws no matter what you do.

  8. Andrew Keen says:

    There’s a major problem with Sumner and Rowe’s line of argument, but I’m having trouble articulating it. Their argument implies: (1) If the Federal Reserve could magically give every dollar holder an equal percentage increase in nominal holdings, this would have the same effect as targeted purchases. I guess the question here is, the same effect on what? I’m sure you could find some macro variable that doesn’t care where the money enters the economy, but theoretically, wouldn’t a perfectly even nominal increase of dollar holdings have zero real impact on the economy? (2) If you say, “Spending the money the wrong way is a fiscal problem,” doesn’t that imply that there is a right way to spend the money? In other words, by saying that where the money goes is a fiscal matter, you imply that there is indeed an objectively fair way to distribute said money. If this isn’t the case, (And how can it be? “Objectively fair” is an oxymoron.), then we must say that there is indeed a problem with inflationary monetary policy, because someone has to get the money first.

  9. Ken B says:

    Joe, here is what we’re arguing:
    “Most Austrians define inflation as the increase in the supply of money, with the relative changes in prices being the result of such inflation. In this sense, since it is a stock of a homogeneous good, then no, it is not an aggregate.”
    But if you can include bank accounts etc then indeed it is an aggregate not a stock of some pre-existing homogeneous good. Blackadder is right in other words.

    • Joseph Fetz says:

      Go back and read my last two comments. Next time, at least give me a hint that you’re moving to the bottom of the page.

      • Ken B says:

        OK, but I thought all places where homogeneous.

    • Tel says:

      Yes, a lot of Austrians presume that measuring the money stock is inherently easier than measuring price inflation. I see plenty of difficulty in measuring money stock.

      Suppose I write you an IOU note in exchange for some goods and you accept the note. Have I added to the money stock? Suppose you pass on that IOU note at a discount to someone else, is the money stock measured at the full value of the IOU note (which is probably what that person will ask me to pay when they catch up with me), or is the money stock measured at the discount value of the IOU note (which is presumably what you thought it was worth)?

      I suggest there isn’t a clean way to measure it that fits all criteria.

      Once again, you can make an aggregate and to some extent it is meaningful, but only as an approximation.

      • guest says:

        IOU’s and notes are two different things.

        With an IOU, the transaction isn’t complete. If I give an IOU to someone, they can’t just trade it to someone else; I owe THAT person.

        These are helpful:

        Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.

        “What is Money?” with Joseph T. Salerno — Ron Paul Money Lecture Series, Pt 1/3

        • guest says:

          Scratch that.

          Notes are IOU’s for money.

          Brain fart.

          Those links are helpful, though.

          • guest says:

            And I would say that notes that represent money in excess of specie add to the CREDIT supply, not the money supply.

            Right now, we use credit as the money. We are screwed.

        • Tel says:

          Sure but when you get a Federal Reserve Note the transaction is not complete either. The government can declare it complete (by fiat) but that declaration does not make it so. Only when you spend the money on something is the transaction really complete (i.e. you got goods and services that you actually wanted).

          FRNs are just government printed IOU notes after all. No one wants government printed IOU notes for their own *intrinsic* value. Some call this “Say’s Law”, I’d call it bleedingly obvious.

          Business regularly ships goods on account, 30 day, 60 day, etc. most of these accounts are paid on time, or perhaps a month late, but if they get sufficiently late the business will usually sell the account to a debt collector (at a 10% to 20% discount). That’s exactly the same as IOU notes being exchanged as money.

          The debt collector chases those for the full amount and generally makes a profit.

          By the way, there are billboards up around Sydney offering a new car on account with three years interest free as the basic terms. You get the car, no money changes hands for three years. Liquidity?

    • Joseph Fetz says:

      Ken, I now see why you were so hung up on the homogeneous goods thing. You basically thought that that was central to my argument stating that “inflation” is not an aggregate, at least not in the way Austrians define inflation. Certainly, it does help my argument if the good in question is homogeneous, but it was only part of what I said. (granted, I actually was quite drunk in our exchange yesterday, so my wording was a little sloppy).

      As you’ll notice, I defined inflation as the increase in the supply of money, or an increase in the stock of a homogeneous good (money). So, there are two arguments against aggregation being made. You identified one, the other you did not.

      In the Austrian definition, the term “inflation” is describing a process or an occurrence, not a figure, not a total, not a sum, etc.

      So, while it is true that mainstream economists refer to inflation as the increase in prices (which is also a process or an occurrence), they also use aggregative measures to refer to this increase in prices (often referring to these measures as inflation). So, yes. That would tend to make one think that “inflation” is an aggregative term. However, Austrians tend to see the increase in prices as being the result of an inflation of the money supply (i.e. “inflation” is a term used to describe the process of increasing the stock of money, not the sum of the actual increase).

      Of course, it is true that we can look at the money aggregates (i.e. the sum of money and money substitutes) to reveal an inflation of the money supply, and it would be correct to describe these particular measures as an aggregate, but the measure of money supply is not the actual process being described by the term “inflation” in Austrian circles.

    • Joseph Fetz says:

      Since you’re pretty good with language, I am going to take a slightly different tack. However, I must first point out that the statement of mine that you quoted is incomplete, because I immediately corrected myself by stating that the line referring to the stock should read, “since it is an increase in the stock of a homogeneous good”.

      Okay, let’s leave that aside (I forgive you) and get into some language fun.

      If you say that the word “inflation” is an aggregate, then you must also conclude that the word “saturation” is an aggregate. Further, you must also conclude that the words “mitigation”, “desecration”, “animation”, “procreation”, “termination”, “deletion”, “ignition” and numerous other words suffixed by -tion to be aggregates. Obviously, it doesn’t make any sense to call these things aggregates, because they are purely descriptive.

      The suffix -tion converts verbs into nouns of action or condition. Common and proper nouns can indeed be used to describe a thing that is an aggregate, but verbs that are converted into nouns by the suffix -tion aren’t measures, values, sums, totals, etc, they are descriptions of actions, conditions, mechanisms, etc (they are indeed verbs that have been converted grammatically into nouns, and thus retain their verb character, which is that of description).

      Further, because the word inflation is an abstract noun, that means that it cannot be detected by the senses, therefore it would be a complete impossibility for the word to be an aggregate (an aggregate being the sum or total of something, is dependent upon the senses to exist). Obviously, in order for something to be summed or totaled (an aggregate requires this), it must first be detected by the senses.

      So, as I said, the term “inflation” is describing an action or a process (or a thing), it is not summing anything or adding anything together of a thing and/or things.

      • Ken B says:

        “Since you’re pretty good with language,”

        I assume this comment is directed at me :)

        Yes, my interest here is solely in bolster Blackadder’s point and hence by extension Gene’s and Daniel’s: there is aggregation going on here.

        I’m not disputing over which definition of inflation; there are two separate ideas and the warring camps are arguing over ownership of a powerful word.
        So let’s talk as you want just about the amount of money (dollars). It’s not just the amount of printed paper and coined specie right? There are other kinds/forms of dollars. So it’s not as simple as counting bills; it’s made up of slightly different things considered as one for the purposes of simplification. That’s the ‘crime’ mainstream economists are accused of.

        You can say that the mainstream does it a lot more than Austrians do. That may be true. It may even matter. But that has to be fought out issue by issue, you cannot just wave the flag of anti-aggregation.

        • Joseph Fetz says:

          I am not waving any flags, when did I ever wave the “anti-aggregation” flag? I am not attempting some sort of methodological battle, I am merely telling you that the term “inflation” itself is not aggregative.

          Here, you know what? Do me a favor. Define “inflation”.

          • Ken B says:

            ” I am merely telling you that the term “inflation” itself is not aggregative”
            Using an argument that proves it is.

            If inflation means some over all rise in prices it’s an aggregate. If it means an increase in money even as you define it (including bank accounts etc) it’s an aggregate. Those are the 2 definitions that seem pertinent here.

            • Joseph Fetz says:

              “using an argument that proves it is”

              Which argument was that?

              “if inflation means some over all (sic) rise in prices …”

              Yes, it can mean that. But it isn’t the measure, rather it is a word describing the phenomenon.

              “if it means an increase in money …”

              Once again, it isn’t measuring this, it is describing this phenomenon.

              I can’t help but notice that you never responded to my grammar argument, that the term is an abstract noun, thus it cannot be used to measure anything, because measurement requires the senses.

  10. Transformer says:

    Can someone clarify exactly what is meant by the Cantillon effect ?

    If the govt gives me $1B in newly printed money, or if I counterfeit it it , then I’m clearly better off as a result. But one doesn’t need much of a theory to explain why getting more money makes you better off.

    After that it seems that people who correctly predict and act upon the knowledge that there will be inflation as a result of increased money may be able to benefit. I myself may maximize my benefits if I can spend the money before prices rise. But after I start to spend the money I don’t see any obvious reason why those who get it direct from me will benefit more than those who get it further down the line – in fact it would be easy to make a case that the exact opposite would be true.

    What am I missing about Cantillon and his famous effect?

    • Andrew Keen says:

      You’re missing the fact that the $1B you spent wouldn’t have been spent otherwise (or would have been spent in a different way). The recipients of your spending are getting more income than they otherwise would have as a result of that $1B that you received / counterfeited.

      Now, why does the first recipient benefit more than the second and so on? The answer is time. Because the effects of inflation trickle slowly throughout the economy, that $1B is worth the most when you receive it and the least once its been evenly dispersed across the economy (assuming this $1B is a one-time payment and not part of ongoing monetary inflation; in which case, the money would continue depreciating forever).

      The fact that you spent this money at the expense of every other dollar holder in the world reorganized the economy to suit your preferences. Because there is suddenly an extra $1B in the market of everything you want, prices in that market rise and businesses start or reorganize to meet your needs. As businesses enter your market, less resources are available in other markets until eventually all markets reach a new equilibrium with higher prices across the board, especially in the sectors you are subsidizing.

      Now, if for some reason your $1B were to dry up and no longer be able to sustain this new equilibrium (without sufficient warning; let’s assume people still aren’t taking Peter Schiff seriously), what do you think would happen to those businesses that adjusted to suit your preferences?

      • Transformer says:

        Thanks, that clears it up a bit.

        But if I buy up the entire stock of a certain good before prices rise, how does that benefit the sellers of those goods, assuming they would have sold them anyway ?

        I can see that eventually the new money will lead to prices being bid up – but I’m still not seeing why it will be early receivers who gain and late one who lose. By the time the late receivers sell good prices may have already risen so they will make extra (nominal) profits.

        • Transformer says:

          Additional point: I can see how a stream of payment to the same recipients over time would change the structure of production as you describe.

          Was that perhaps what Cantillon had in mind ? if so then I see how his effects work.

        • Tel says:

          The theory is that you would be unable to buy the entire stock of anything without bidding up the price.

          When you first counterfeit your money this is in effect a wealth transfer from everyone else to you (because printing money does not create new wealth). However, this wealth transfer is not realized until you spend the money so the Cantillon effect is the other side of the equation — figuring out who is the loser to balance your counterfeit gain. In other words, real goods and services are being redirected to you but they would have gone somewhere else.

          It is hard to calculate in detail because the loss is not even handed, so a debtor paying back their mortgage could benefit from your counterfeit operation (but not necessarily) if they can get their dibs on the new money. No one can observe the thing that did not happen so they can only infer it based on their belief of what is normal.

          • Transformer says:

            That’s a great explanation, thanks.

            In other words if I the use the new money to increase my consumption then its inevitable that someone , somewhere will lose as a result but it doesn’t necessarily have to be a later receiver of the money.

            So to try and apply this to monetary policy:

            The CB creates money and buys T bills from the current owners. The CB does not increase its own consumption as a result of this new money as far as I can see. Would there be Cantillon effects in this case ?

            I can see that they may have changed consumption patterns with their actions , but I assume that CB advocates would argue that they have changed things for the better if they have implemented a policy that leads to money being correctly valued and the economy moving closer to equilibrium

            • skylien says:

              Yes. It is the same effect.

              CB: The central bank
              X: T bill holder
              Y: Would be buyer of T bill
              Z: Fixed income earner

              Normally Y would buy the T bill for 1000 USD. Now the CB steps in and bids up its price to say 1100 USD and buys it from X. This now means that Y if he still wants to buy a T bill he will suffer a loss because T bills increased in value. So this means a part of the new money is already priced in the t bills.

              Then X uses the money to buy cars. Now X has 10% more than he otherwise would have to bid up prices of the cars. He gets more care than he otherwise would have. Y thinks T bills are too expensive now and will buy I-pads bidding up their prices. Though he lost already as well because his first choice would have been a t bill for 1000 USD not an i-pad.

              Finally now Z comes into play who gets a fixed income. He isn’t interested in T-bills but in i-pads and cars only.

              Who benefitted? In our example X and other T bill holders *1, car sellers and i-pad sellers.

              Who suffered? Y and other (would be) T bill, car and i-pad buyers. So Z is screwed definitely in this example.

              What does “money being correctly valued” even mean?

              *1 It is not so clear if long term T bill holders really benefit, since when the bill comes due and they get the money for the bill, they will already suffer higher prices. They at least do not get the return they expected when they bought the T bill. Those who definitely benefit are T bill traders who never hold them for long but always gain by the CB bidding up the prices for the bills.

            • Andrew Keen says:

              You are correct that CB advocates believe that the benefits of an inflationary monetary policy outweigh the damages caused by the associated fiscal policy. There isn’t an objectively correct answer to this issue either, but it seems obvious to me that the middle-class are typically savers and that they are the ones injured by a depreciating currency. I also think it is obvious that companies that will fail without government intervention are mismanaged and should be allowed to fail, thus freeing up their resources for well managed firms. This is not a popular opinion among employees of failing companies.

        • guest says:

          The printed money creates purchasing power out of nothing.

          When you “pay” someone with newly printed money, they are, in effect, just GIVING you what you want; You’re not paying for anything.

          Now THEY have some of that artificial purchasing power, since, without the newly printed money he took, he would have incurred further costs before he would have been able to “sell” his stock (or he would have had to lower his prices).

          And so on.

          That artificial purchasing power is spent at various places, such that many people now have some of that artificial purchasing power. Eventually, everyone’s has to spend on consumer goods, and this creates a bidding war.

          I like how Andrew Keen put it, because the implication is mindblowing. He said that the printed money “reorganized the economy to suit your preferences” – that is to say, YOUR PERSONAL preferences.

          At the moment someone spends new money into the economy, the economic world, in effect, revolves around that particular individual.

          This is why you should not consider it far fetched when people talk about the prospect of “one world government”, and how it is possible for a relative few to control governments.

        • Andrew Keen says:

          Keep in mind:

          (1) Even if you were able to buy the entire stock of a good before the prices could rise, the prices would still rise in the wake of your action as producers scrambled to fill the shortage created with your purchase. Your purchase did not eliminate the demand of the other consumers in the market for the goods you purchased.

          (2) If you are purchasing some theoretical good that cannot be mined or manufactured after your purchase has been made, you have still benefited the sellers by moving their sales from some indeterminate time in the future to the present and you have still increased the price of the good by virtue of your holding a monopoly on it.

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