04
Jul
2014
Getting My Hands Dirty in the Mud With Noah Smith
Here’s my response to Noah Smith. An excerpt:
So note the contradiction: On the one hand, mainstream economists ridicule Misesians for their “medieval” approach to economic theory, in which they deduce results logically rather than producing falsifiable propositions. But then these same critics tell the world that the outcome of a CPI movement destroys the foundations of Austrian theory. Huh?
You pwned him on the Star Trek point.
Beating him at Star Trek is one of the few known ways to hurt the inner Noah.
Josiah wrote:
You pwned him on the Star Trek point.
I led with my strongest point.
But Noah Smith is now star because of this. Expect to see him soon on his own MSNBC show.
Murphy loves making people happy. It’s a Christian thing (so they tell me).
Re: “Federal Reserve money-printing is a government plot to boost big banks”
Austrians, along with many others, tend to conflate the bank bailouts with monetary policy. However, they are two separate things.
In late 2008, the Fed combined (1) tight money with (2) bank bailouts. I should have been the other way around. They should have combined (2) 5.0% NGDP growth (neutral money) with (2) no bank bailouts.
The central bank is the enabler.
.Austrians, along with many others, tend to conflate the bank bailouts with monetary policy.
Apparently, then, the Fed is included amongst “the many others” you are referring to…
Believe it or not, the Fed can be wrong.
… making the Austrians right about the Fed and bank bailouts.
Nope. That the Fed can be wrong doesn’t entail that the Austrians can be right.
When I wrote that the Fed is included among those* that conflate monetary policy with bank bailouts, and you wrote the Fed can be wrong, were you not referring to being wrong about conflating monetary policy with bank bailouts?
If the Fed is wrong about it, then how are Austrians wrong about the Fed being more interested in bailing out big banks?
* Never-mind Travis V.’s comments that Austrians tend to conflate the two. Bob acknowledged the Fed could have pursued an expansive monetary policy without bailing out big banks;
For example, did the Maiden Lane LLCs buy up underwater homes from struggling middle-class families? Did the Fed’s “extraordinary lending facilities” give loans to self-employed plumbers and dry cleaners to help them get through the crisis? No, all of the Fed’s activities directly shored up the balance sheets of huge banks.
“If the Fed is wrong about [conflating monetary policy with bailouts], then how are Austrians wrong about the Fed being more interested in bailing out big banks?”
Those two propositions aren’t contraries.
On the other hand, it may well be the case that the Austrians are wrong. My point is that the Fed being wrong about the relation between monetary policy and bailouts doesn’t tell us that the Austrians are right.
Those two propositions aren’t contraries.
I am arguing a law of identity. If the Fed conflates monetary policy with bank bailouts, then Austrians can’t be wrong for saying the Fed conflates monetary policy with bank bailouts.
That is Travis point. The FED was wrong in 2008, it tightened policy with IOR. No IOR, NGDP 5% or hayekian money stream 5%, and no bailout would gave been the correct policy.
The economy would have gone through a mild negative supply shock recession with inflation. Rather than the wrong policy they followed, negative NGDP, which always lead to a real contraction.
Tight money!? In what universe?
In the sense of a deflationary monetary policy, i.e. increasing the money supply by less than is needed to meet the demand for money and keep M*V on trend, or as Mises puts it-
“In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur. Again, Deflation (or Restriction, or Contraction) signifies: a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur.”
The Theory of Money and Credit p.272
Tight money is also the most plausible explanation of continued low interest rates in a low inflation (in Mises’s sense or the modern sense) environment.
W. Peden Mises doesn’t say “keep MV growing on trend” in that quote. It’s almost creepy that you think he’s backing up Sumner’s view in this quotation.
It is what these MM types do. They are also name dropping Hayek in the same way. Hayek in his pre-denationalization of money days makes a mention that he would want a central bank to ensure total spending does not fall, and that makes him an alleged supporter of Sumner’s view.
The same thing can be done with Friedman. Friedman is his later life mentioned that he has long been in favor of abolishing the Federal Reserve System, and that during his pre-abolition days he favored a fixed rate of increasd in money supply, not spending.
MF I get what you’re saying, but Hayek at least had some passages where Sumner et al. could plausibly claim he (Hayek) was an proto-market monetarist. In contrast, except for maybe 4q2008, even consumer prices have been rising since the Fed’s allegedly super-tight monetary policy. So on Mises’ definition from TOMC, that’s inflationary because obviously the Fed was adding to the supply of money more quickly than the demand to hold it was increasing.
I didn’t say that he said “keep MV growing on trend”. That’s a normative statement, whereas that quote is descriptive economics.
W. Peden, you are right, sort of, Mises doesn’t say that, however; you said, “…i.e. increasing the money supply by less than is needed to meet the demand for money *AND* keep M*V on trend…” and then you go on to say “*OR*, as Mises put it…”
The use of the conjunction OR implies that you are equating the two statements on the left, which are linked together with the conjunction AND, with the Mises quote.
Hence, the confusion.
I think that the confusion is due to the problems of defining a “tight monetary policy”.
Is a tight monetary policy one that is more deflationary (or put another way, less inflationary) than before? If so, then under Mises’s use of the term, the Fed’s policy since 2008 has been tight.
On the other hand, if a tight monetary policy is defined in some other way, you could obviously say that monetary policy isn’t tight.
I suppose that, if we asked Mises for his opinion, he’d simply say that we should ask TravisV if he meant “tighter” monetary policy, which is a more easily clarified concept.
Well, what I was referring to was Bob’s statement, “W Peden, Mises doesn’t say ‘keep MV going on trend’ in that quote”, which you then followed-up and said. “duh, I know he doesn say that”.
However, the way you wrote the sentence with the OR conjunction implied that you were claiming that Mises says, “keep MV going on trend”, which is why I think Bob made that statement.
Again, if you make x number of statements, whether positive or normative, and you conjoin them with AND, if you then say, “OR, as so and so says…”, then based on basic rules of logic, you are implicitly claiming that the statements to the left of OR are equal to the statements to the right of OR. Perhaps, that’s not what you meant, and perhaps that’s not even what Bob meant, but this is how I interpreted Bob’s reasoning for making this statement.
W. Peden:
You say there are confusions in defining “tight money.”
Do you believe such confusions are necessary, or likely, for market produced goods like cars or iPods?
No, because the meaning of “tight” supply of cars or iPods can only be garnered from the market process. Only the market can tell you if there are too many cars or too few iPods.
The same thing is true for the money commodity.
Money is only meaningfully tight or loose in relation to the information that only the market process can reveal.
Sitting on one’s armchair and declaring “5% NGDPLT” is as arbitrary as declaring “Tight iPods means less than 5% iPod supply or sales growth per year”.
You are only confusing yourself by pretending that if we don’t have a free market in money, then all of a sudden, free market in money loses all meaning in addition to its empirical reality.
Free market in cars still had meaning in the old USSR when cars were not produced in a free market there.
*sigh* OK W. Peden we can make this excruciating if you want.
Mises wasn’t saying that tight money means MV growing below trend.
Rather, Mises was saying inflationary monetary policy occurs when the supply of money outstrips the demand, such that the objective exchange value of money falls. I.e. what has happened from 1q 2009 to the present, even using CPI as the gauge.
So can we then say that a tight monetary policy is one that makes conditions less inflationary?
Who do you think the Fed will send checks to if it inflated more post 2008? Main Street? Please. Inflation benefits the banks. “Monetary policy” is a pro-anker’s policy.
Can someone please tell me where this Austrian=Hyperinflation allegation originated from?
Ron Paul
Nice answer, Bob.
Goodness Murphy, that was the funniest smackdown of an economically illiterate ignoramus I’ve seen in a long time.
Well-played sir.
“But Noah’s claim that my prediction about CPI movements has something to do with Austrian theory is nuts.”
You mean your prediction that Fed money printing via QE would cause high inflation had NOTHING to do with Austrian theory and was not derived from any Austrian theory in any way??
Where, pray, did it come from then?
“Historically the word “inflation” did indeed mean what (some) Austrians currently insist is a better definition–namely an increase in money rather than an increase in prices–and beyond that, there are good theoretical reasons to prefer the original definition.”
The Austrian definition of “inflation” as an increase in the money supply was not the original definition.
The word has been used in BOTH senses — inflation of prices and in money supply — from the very beginning:
http://socialdemocracy21stcentury.blogspot.com/2013/08/austrians-and-definition-of-inflation.html
It is you who are ignorant of history.
https://www.clevelandfed.org/research/commentary/1997/1015.pdf
That article does not prove that the original or first definition was “expansion of the money supply” only.
On the contrary, both senses have existed alongside each other from the time when “inflation” was used in an economic sense.
He claims:
“The era between the mid-1830s and the Civil War— … It is during this period that the word inflation begins to emerge in the literature, not in reference to something that happens to prices, but
as something that happens to a paper currency.”.
Yet all through that period, you can find instances of “inflation” meaning a general increase in prices, as I already noted.
E.g.,
“The question recurs, what were the causes of the unusual mania of speculation — the excessive and long continued inflation of prices, and the confidence that this inflation, after it was known to be excessive, would continue, and the expectation that it would still further increase?”
Nathan Hale (ed.), Chronicle of Events, Discoveries, and Improvements, for the Popular Diffusion of Useful Knowledge Nathan Hale. S. N. Dickinson, Boston. 1840. p. 11.
1. LK is still engaged in peripheral hair-splitting, I see.
2. In 2009 I recall Mish predicting deflation employing Austrian theory. Follow the money. It’s an empirical question. Predictions are hard.
3. In 2009, I seem to recall me suggesting that we call funny money growth “money dilution”.
The fact that the 1840 quote says inflation of prices, suggests that the author is trying to make sure the reader does not think money supply. And why would they do this? Likely because he is faced with the fact that inflation as a term on its own referred to money supply, not prices.
It would make more sense if inflation on its own were used and the context was prices with “prices” not stated explicitly. That would be more convincing evidence that inflation was used both ways from the start.
The fact that inflation “of prices” was written, tells me that inflation on its own meant something else at the time.
And at the same period, people frequently spoke of “inflation of the currency”.
By MF’s absurd argument, this must prove that “inflation of prices” was the original definition of the term.
Of course as we see from the empirical evidence, BOTH senses were used from the beginning.
http://socialdemocracy21stcentury.blogspot.com/2014/07/austrians-and-definition-of-inflation.html
Inflation of the currency would suggest that, exactly like inflation of prices, that inflation on its own means something OTHER than what immediately follows it.
So inflation of currency would mean inflation in its own is not currency.
Inflation of prices would mean inflation on its own is not price changes.
If inflation meant prices rising, then there would be no need to include “prices” after it.
And no, it is highly highly highly unlikely, near impossible, without super accurate information, that inflation in terms of money supply and prices arose at the exact same time. No, inflation was first used one way or the other, and because the writings you have posted all say inflation OF PRICES, that suggests the writers are distinguishing their meaning from other, necessarily historical, meanings.
Your argument collapses into dust.
It looks like everything Bob said was technically correct. As far as I can tell, it’s original (economic) definition was only prices (Merriam Webster, 1864), even though some people were using it to mean prices. So, it could be a stupid, poor definition but it appears to be the original.
Can you point to an earlier definition?