Was Hayek Really a Sumnerian?
I know that some people use the term “Sumnerite” to refer to disciples of Scott Sumner, but I think Sumnerian sounds like something Indiana Jones would study.
Now when trying to convince free-market economists of the wisdom of his views, one of Scott’s arguments has been to claim Friedrich Hayek as one of his own. I don’t want to get into the weeds of what Hayek may have written in the 1930s about the theoretical ideal of stabilizing MV blah blah blah. Go ahead and have that argument in the comments.
Instead, what I want to do is quote from a Hayek article that the hospitable von Pepe showed me while I crashed in his apartment. The Hayek piece has been given (by an editor?) the title, “Choice in Currency: A Way to Stop Inflation,” based on an address Hayek gave in 1975. I really don’t think a Sumnerian says this kind of stuff:
The chief root of our present monetary troubles is, of course, the sanction of scientific authority which Lord Keynes and his disciples have given to the age-old superstition that by increasing the aggregate of money expenditure we can lastingly ensure prosperity and full employment.
…
It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized. He had attempted by a succession of new theories to justify the same…intuitive belief: just as there cannot be a uniform price for all kinds of labour, an equality of demand and supply for labour in general cannot be secured by managing aggregate demand.
…
The claim of an eminent public figure and brilliant polemicist to provide a cheap and easy means of permanently preventing serious unemployment conquered public opinion…
…
[Hayek quoting himself from 1939:] [I]t has…never been denied that employment can be rapidly increased…by means of monetary expansion…All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations.
…
One of our chief problems will be to protect our money against those economists who will continue to offer their quack remedies, the short-term effectiveness of which will continue to ensure them popularity.
I like to think Hayek somehow had Sumner in mind when he wrote that last sentence.
I think a great article & follow up would be to tackle the FAQ section of Scott Sumner’s blog point by point. I feel it would make for a very informative piece for this blog (…and the Mise’s Daily) and an excellent introduction for questioning monetarist as you’re one of the best ‘modern’ Austrians at articulating the position in a clear and intelligible way.
Cheers
Should have done some more research before my post….
http://mises.org/daily/5826 (Bob’s counter to Sumner’s argument against the Austrians interpretation of the 1920s Boom & Crash)
Hayek is attacking the targeting of full employment and using AD to achieve that target.
Sumner also opposing targeting full employment and using AD to achieve that target.
There are 4 or 5 places where Hayek endorses preventing a total income stream crash, and at least one place where he endorses doing so with a pre-announced public promise to do so.
Hayek discusses the problem of a post-boom shadow money crash in Prices & Production, and from ’31-’32 to the 79s Hayek talked of the problem of the secondary deflation/depression and lauded even Keynes’s inventions for doing something to block it in its tracks, and even to help out the out of work empoverished laborer in the process, if possible.
Aw Greg, you are one of the few rational posters on Sumner’s blog, and you too have been brainwashed on this.
Hayek is attacking the targeting of full employment and using AD to achieve that target.
What does the difference between targeting a growing NGDP for employment reasons, and targeting an identical growing NGDP for praising the Sun god reasons, have to do with whether or not targeting a growing NGDP is destabilizing/destructive/harmful/etc?
Sumner also opposing targeting full employment and using AD to achieve that target.
So you’re saying Sumner would be against 5% NDGPLT for the purposes of maximizing employment and output, but would not be against 5% NDGPLT for some other reason? That makes no sense. That would be like me being against the existence of laissez-faire if the reason you give for it is not to my liking. You want laissez-faire because you think it will help you become ruler of the world? Then I say let’s not have laissez-faire existing, and bring on socialism instead! Only if you tell me your reason is to maximize my prosperity, will I be in favor of laissez-faire existing.
There are 4 or 5 places where Hayek endorses preventing a total income stream crash, and at least one place where he endorses doing so with a pre-announced public promise to do so.
At what level? City level? State level? Country level? Remember, Hayek said that the only “rational” monetary policy is at the world level, with a world central bank.
That means fluctuating NGDPs at the country level.
Hayek discusses the problem of a post-boom shadow money crash in Prices & Production, and from ’31-’32 to the 79s Hayek talked of the problem of the secondary deflation/depression and lauded even Keynes’s inventions for doing something to block it in its tracks, and even to help out the out of work empoverished laborer in the process, if possible.
Is it fair to say Hayek was….inconsistent…in his arguments on NGDP? I think so.
I still don’t see how Sumner can be against 5% NGDP targeting if the reason is employment. Why should the reason matter? What matters is the 5% NGDP targeting itself.
Then explain this Greg, from the Nobel speech:
“The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.”
I’ve always been skeptical of this claim too Bob. But now Greg Ransom thinks you’re defaming Hayek – watch out!!!!
Hayek was against using AD ‘management’ to target full employment.
What difference does it make what the REASON is for maintaining total money expenditure at an appropriate level?
Hayek was not talking about active AD management, of AD going up and down whenever employment would have gone this way or that.
He was talking about MAINTAINING total spending AT AN APPROPRIATE LEVEL.
That’s rigid. That’s constant. That’s not fluctuating NGDP.
That’s NGDP targeting.
Daniel,
Imagine an AD and AS curve. What Hayek is saying here is that the AD-curve should not be moved to offset shifts in AS. Rather Hayek’s preferred policy is to choose the shape of the AD-curve in such a way that movements along it due to shifts in AS are – for a lack of a better word – optimal from the perspective of economic calculation.
This optimal shape is the one consistent with a stable MV.
Well he talked about different things at different times, and a stable MV in the manner you describe was definitely one of the things he talked about.
But that’s a very different proposition than Sumner’s NGDP targeting, which builds in price level growth (i.e. – a growth rate of MV that is high enough to necessitate some growth in P, although Sumner doesn’t care exactly how it falls out between P and Y in any given period).
That is absolutely not what Hayek wanted.
For what it’s worth (probably little), this is one of those rare times I agree with you.
Daniel,
what was then so weird about Hayek’s Nobel prize address?
Also
“That is absolutely not what Hayek wanted.”
Could you substantiate this?
Kuehn:
I think you are mistaken.
Sumner does not favor getting some increase in P.
For example, if productive capacity rose 5%, and P stayed the same, Sumner would not favor changing nominal GDP growth to 7%.
If potential output rose 7%, and the result was 2% deflation, he would not favor adjusting nominal GDP growth.
He wants 5% because productivity has historically been 3%, and inflation has historically been 2%.
So in this sense, he does want “some” P.
“The moment there is any sign that the total income stream may actually shrink [during a post-bust deflationary crash], I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.” — F. A. Hayek
The quote from F. A. Hayek was made in reply to a question from his old friend Gottfried Haberler in a talk given at the American Enterprise Institute in 1975.
Did you read what he said about this?
He said this is best accomplished by a mechanical system such as a gold standard, and that if central banking should exist, the only “rational” solution would be a world central bank, that issues a world currency, and that if country level central banks should exist, then they should mimic as closely as possible a world central banking system, which of course means fluctuating country level NGDPs.
Hayek not wanting total expenditure to fall does not mean he would have been in favor of country level central banks targeting country level money and spending. Hayek specifically said such a thing would cause international instability.
” I think it is certainly true that ending an inflation need not lead to that long-lasting period of unemployment like the 1930s, because then the monetary policy was not only wrong during the boom but equally wrong during the Depression. First, they prolonged the boom and caused a worse depression, and then they allowed a deflation to go on and prolonged the Depression.”
F. A. Hayek, 1977, interview.
“If I were responsible for the monetary policy of a country I would certainly try to prevent a threatening deflation, that is, an absolute decrease in the stream of incomes, by all suitable means, and would announce that I intended to do so. This alone would probably be sufficient to prevent a degeneration of the recession into a long-lasting depression.”
F. A. Hayek, “Full Employment at any Price?”, 1975
Seems like the older Hayek didn’t agree with the younger Hayek.
Younger Hayek said the same thing in 1932, MF…
…although its true there are some Younger Hayek passages where he seems more insistent on this point than others.
No. He said in Prices and Production and MTTC that you cannot achieve anything by monetary policy and that stabilizing MV did not make sense from a practical point of view.
Younger Hayek said the same thing in 1932, MF…
Where?
I think this is unfair to Sumner, which is obvious as you allude to the fact that based on many of his writing about stabilizing nominal income, Hayek was a Sumnerian.
I would like to see you have a proper debate with Mr. Sumner.
I think it was fair to Sumner, precisely because of the allusion to Hayek’s talk on stabilizing nominal incomes.
But this quote:
“The chief root of our present monetary troubles is, of course, the sanction of scientific authority which Lord Keynes and his disciples have given to the age-old superstition that by increasing the aggregate of money expenditure we can lastingly ensure prosperity and full employment.”
I mean come on, that’s NGDP targeting right there he’s attacking. The key word is “lastingly”. That means the “increase” is lasting too.
Here’s an honest question:
If Sumner is saying he wants 5% NGDP targeting, and he and his acolytes insist that it’s not to maximize employment and output, then that invariably means Sumner wants 5% NGDP targeting for the sake of 5% NGDP targeting.”
Why would any economist, let alone Fed chairman, consider 5% NGDP targeting if the very advocates of it are saying it’s not to maximize employment and output?
What the heck would be the purpose of it?
I think Sumner and Sumnerites actually DO believe that 5% NGDP targeting will maximize employment and output, and I think they also hold is the reason why everyone should welcome it.
I see an epic contradiction here, and I think I know why it exists.
Major Freedom,
Major Freedom,
All arguments for different monetary arrangements have been pretty much along the lines of how to stabilize the nominal economy by either fixing aggregates or by fixing the purchasing power in some way or form.
The reason for wanting a stable nominal economy is that the nominal economy affects the real economy in a bad way; to stabilize the nominal economy therefore is a necessary but not a sufficient condition for maximizing employment/output.
All arguments for different monetary arrangements have been pretty much along the lines of how to stabilize the nominal economy by either fixing aggregates or by fixing the purchasing power in some way or form.
I disagree. I think targeting “price stability” (remember Bernanke pleading to Ron Paul a while back?) is independent of AD.
The reason for wanting a stable nominal economy is that the nominal economy affects the real economy in a bad way; to stabilize the nominal economy therefore is a necessary but not a sufficient condition for maximizing employment/output.
I also disagree, because the free market is by its nature the most optimal standard, and AD would fluctuate at all levels: firm, city, state, country, and world.
I think it’s possible for the market process, of individual exchanges subject to private property rights to result in an AD that deviates from 5% NGDP.
Central planners artificially stabilize NGDP is just as destructive and counter-productive as central planners artificially stabilizing prices.
One simply MUST have a sound, coherent standard from which to gauge what money and spending should be. Without one, you make yourself believe you’re making sense, when you’re really not.
If NGDP falls, then instead of asking what real effects that has, you instead should ask what real effects brought about the fall in NGDP.
NGDP is not a primary force in the economy. It is a derivative consequence.
If NGDP fell by 90%, then it won’t matter to me if my sales don’t fall. NGDP is not a concept that is economizable by the individual. It is not an object of action. It is an abstract statistic that refers to individual choices and actions.
“I disagree. I think targeting “price stability” (remember Bernanke pleading to Ron Paul a while back?) is independent of AD.”
An AD-curve is mapped in a hypothetical (Y,P) space… Are you arguing that the AD curve is always vertical and that all changes in P are always due to movements in the SRAS?
In addition this would mean that the long-run price level is indeterminate if the long run AS is also vertical.
I am bit puzzled; how would you draw the AD and AS-curve?
Martin, you’re asking for serious thought from the Major.
You don’t ask your dog to do calculus for you, do you?
Douchebag Gene Callahan strikes again. You are pathetic, you no-talent academic hack. Go write a book that no person will read.
It’s incredible to witness that Callahan is still butt hurt.
I see you don’t ask your dog for witty ripostes either.
I appreciated it Gene.
Yawn.
I like that you called him ‘the Major’
It’s greatly ironic that Gene did far, far more damage to Austrianism with his crappy book in defense of Austrian econ, than he ever will as the internet’s resident bitter ex-Austrian.
There are few things more likely, in the preferred argot of FA, to make me throw up in my mouth than defending Gene, but Economics for Real People actually did not suck.
Suck donkey parts? Now you’re cheating. You were using suck intransitively.
I always thought at least half of Murphy’s readers were here precisely for the donkey parts.
No, we’re all here for the horse’s ass.
Ba-dum-ba!
No, I’m just arguing that price inflation is different from AD. They can move in opposite directions.
As for the slope of the AD curve, I hold the LONG RUN AS curve to be vertical. All sellers I view as price takers, because I assume they do not gain direct utility from their own supplies.
I do not hold that inflation can boost production. It can only redistribute existing production.
Sure they can, but I was wondering how you would draw the AD-curve then if it is independent from P.
So is my answer sufficient? I’m not sure if you were just reiterating what you said before, or if you’re still wondering.
Major Freedom,
“As for the slope of the AD curve, I hold the LONG RUN AS curve to be vertical. ”
This is what you said; this still leaves me wondering as to how you would draw the AD-curve.
Oh sorry. I guess my eyes saw AS even though you said AD. My bad.
I would draw the long run AD curve as sloping downward. The higher the output (horizontal axis), the lower the price level (vertical axis).
It’s been hilarious enough watching Sumner try to claim Hayek would be in favor of his market monetarism, despite the plethora of quotes that suggest otherwise.
Watching him try to spin this latest set of quotes will only make it that much more funny.
He forgot to mention hyperinflation!
He forgot to mention that you’re a sword-swallower.
He couldn’t have known
What you should really tell Sumner is that ad-verecundiam arguments aren’t worth much anyway.
Sumner’s idea is to target GDP (only), completely ignoring unemployment. It’s true that Sumner blames the current unemployment on the Fed, but that’s not because he wants to Fed to manage the unemployment rate. He wants the Fed to ignore the unemployment rate.
So he wants 5% instead of -10% or 35% why exactly? Because it’s “worked” in the past? That is an implicit argument for NGDP for the purposes of employment and/or output.
The only other alternative is NGDP targeting for the sake of NGDP targeting, in which case it becomes a self-fulfilling prophecy circular logic tautology thing.
So he wants 5% instead of -10% or 35% why exactly?
Because that has been the recent trend. It’s what people are used to and expect to continue.
Ideally a 0% growth trend (which is what Hayek advocated) would be best, but the transition costs required to get there from here aren’t worth it.
Because that has been the recent trend. It’s what people are used to and expect to continue.
How recent? Should the Germans run 50% NGDP today, because of Weimar?
How far back is “correct”, and why?
Ideally a 0% growth trend (which is what Hayek advocated) would be best, but the transition costs required to get there from here aren’t worth it.
Ideally from what perspective? In a free market, money and spending would not be perfectly rigid.
How recent? Should the Germans run 50% NGDP today, because of Weimar?
How far back is “correct”, and why?
What matters are people’s current expectations, which are built into wage demands, long term contracts, loans, etc.
Ideally from what perspective? In a free market, money and spending would not be perfectly rigid.
From the perspective of NGDP targeting.
What matters are people’s current expectations, which are built into wage demands, long term contracts, loans, etc.
Expectations are a function of policy. Policy is not a function of expectations. If policy changes, and its credible, so will expectations. I don’t see how you can say that it has to be the recent trend, for the recent trend is itself a function of policy.
From the perspective of NGDP targeting.
I think I used the wrong word. I meant from what standard, what foundation, is 0% growth trend ideal.
You can’t answer this by saying “NGDP targeting”, because that would be circular logic.
Expectations are a function of policy. Policy is not a function of expectations.
Policy needn’t be based on expectations, but it can be.
I think I used the wrong word. I meant from what standard, what foundation, is 0% growth trend ideal.
There are two questions here: 1) should monetary policy target NGDP? 2) If so, what should the growth path be?
My claim that ideally the growth path would be 0% is in response to the second question.
If what you were really after was an answer to the first question (not why a 0% growth path, but why NGDP targeting at all) then you might try this.
Policy needn’t be based on expectations, but it can be.
If policy was based on expectations, then expectations would just become based on the expectations based policy. it would become a game of cat and mouse. I don’t see how that can be long run sustainable, especially when policymakers have the control over the mechanism.
“I think I used the wrong word. I meant from what standard, what foundation, is 0% growth trend ideal.”
There are two questions here: 1) should monetary policy target NGDP? 2) If so, what should the growth path be?
Actually I had only the one question about the foundation. It was an ontological/epistemological question, not an ethical question.
My claim that ideally the growth path would be 0% is in response to the second question.
What is the foundation for that being the ideal?
If what you were really after was an answer to the first question (not why a 0% growth path, but why NGDP targeting at all) then you might try this.
Soltas is quite intelligent, but he’s still in high school. I think I am asking for a more worldly explanation that doesn’t just spout the same fallacious talking points I have heard many times already.
I mean he is a believer of the fallacy “recessions are caused by declines in aggregate demand” story that’s been refuted a zillion times already.
If policy was based on expectations, then expectations would just become based on the expectations based policy.
That’s true but I don’t see why that’s a problem. The Fed decides to target a 5% NGDP growth path because that’s what people expect. In response, people’s expectations of a 5% NGDP growth path are strengthened. Nothing wrong with that.
What is the foundation for that being the ideal?
If the growth path were zero, then productivity gains would express themselves in the form of falling prices, rather than in wage increases outstripping price increases. It’s not a big advantage, certainly not big enough to outweigh the costs of transitioning to the new growth path, which is why I qualified by saying “ideally.”
Soltas is quite intelligent, but he’s still in high school.
And you are an anonymous guy writing on the internet. If what matters is your credentials rather than what you say, then why should anyone pay any attention to your arguments? For that matter, if we are going to go just by credentials then Austrians are going to lose to Keynesians very badly.
I mean he is a believer of the fallacy “recessions are caused by declines in aggregate demand” story that’s been refuted a zillion times already.
LOL
That’s true but I don’t see why that’s a problem.
Not saying it’s a problem, just trying to emphasize that expectations are based on reality, not the other way around.
The Fed decides to target a 5% NGDP growth path because that’s what people expect.
People expect a 5% NGDP growth path because that’s what the Fed would target.
In response, people’s expectations of a 5% NGDP growth path are strengthened. Nothing wrong with that.
There is a problem economically.
“What is the foundation for that being the ideal?”
If the growth path were zero, then productivity gains would express themselves in the form of falling prices, rather than in wage increases outstripping price increases.
Why is that what makes 0% ideal? Why is falling prices superior to wage increases outstripping price increases?
“Soltas is quite intelligent, but he’s still in high school.
And you are an anonymous guy writing on the internet.
Just some guy who knows Soltas is wrong.
If what matters is your credentials rather than what you say, then why should anyone pay any attention to your arguments?
It’s a question of wisdom, and Soltas does not have it.
For that matter, if we are going to go just by credentials then Austrians are going to lose to Keynesians very badly.
If Keynesians were all high school students, I’d say the same thing.
“I mean he is a believer of the fallacy “recessions are caused by declines in aggregate demand” story that’s been refuted a zillion times already.”
LOL
???
Note well, this is not a description of NGDP targeting:
“by increasing the aggregate of money expenditure we can lastingly ensure prosperity and full employment”
This is an attack on Keynes’s notion that a demand for goods is a demand for labor, and upon the idea that simply manipulating aggregate demand vis “stimulation’ was a permanent or non-problematic mechanism for securing full employment.
This is where Hayek’s total income stream stabilization / targeting notions are different that Sumner’s — Hayek has something like a productivity norm of the kind discussed by Selgin.
Sumner has no guidance whatever for coming up with an NGDP target — often he seems to imply that the bigger the annual percentage NGDP increase, the better. And certainly he has no principle for setting it at 5% or 15% or higher.
Greg,
I believe that Scott considers 5% to be a good target for it worked well in the past; I am sure Hayek would agree with that kind of reasoning 😛
On a more serious note, long term growth seems to be around 2.5 – 3%, nominal wages seem to be sticky downward, this leaves 2 – 2.5% a year to deal with that: i.e. employers don’t have to cut nominal wages, but can increase them whilst cutting real wages.
I don’t see what’s unprincipled about that? Could you care to define what you mean with “principled”?
That is too many seems, too many assumptions. To me it seems people who try to target certain arbitrary aggregates overlook that this very often if not always creates a permanent arbitrage at some point in the economy, and the markets tend to spot them and exploit them until the target needs to be changed because the arbitrage increases and threatens to destroy the system completely if the target isn’t moved or given up. See bimetallism with a fixed exchange ratio, or e.g. have a look at the Swiss peg to the EUR. Does anyone believe the Swiss can keep this peg up forever? Ask Argentina.
In that case, Sumner _is_ targeting full employment, and he simply isn’t being honest with us — if he’s using NGDP targeting to solve a sticky wages problem.
Greg,
No he isn’t; his choice for 5% is to reduce marketing/transaction costs of adjustment of real wages. People are more likely to accept an increase in nominal wages that reduces their real wage rather than accepting the same cut in real wages as a result of a cut in nominal wages.
See what I said above in response to Daniel: Sumner, like Hayek, advocates a shape for the AD-curve and like Hayek is against shifting the AD-curve in response to shocks to AD. Sumner draws a curve in (Y,P) space so that for each Y there is a corresponding P for each period. All the central bank needs and is allowed to do is to adjust M to hit P for each Y for each period. The sole difference with Hayek is that for Sumner MV should grow at 5%: i.e. for Hayek the curves overlap for all periods.
Point taken.
🙂
Someone who does advocate shifting the AD-curve to target full-employment is Paul Krugman when he advocates raising the inflation target.
Under inflation targetting the AD-curve is horizontal and raising it along an upward sloping SRAS”-curve in response to a shock to SRAS can raise Y” to Y’; the trouble is though that this rule requires knowing the CPI that is used as a proxy for P consistent with Y’.
Hayek acknowledged a ‘political’ rationale for using inflation to solve the sticky wage problem, but also identified the reality of costs to this solution — it’s not a cost free solution to a costly economic problem.
This is an attack on Keynes’s notion that a demand for goods is a demand for labor, and upon the idea that simply manipulating aggregate demand vis “stimulation’ was a permanent or non-problematic mechanism for securing full employment.
The first part is incorrect. He wasn’t attacking the notion that the demand for goods is a demand for labor (although that belief is quite common). He was attacking the notion that full employment and maximum output can be secured by setting a growing aggregate demand, i.e. a percent NGDP growth.
Sumner has no guidance whatever for coming up with an NGDP target — often he seems to imply that the bigger the annual percentage NGDP increase, the better. And certainly he has no principle for setting it at 5% or 15% or higher.
I agree with that.
Thank you for finally taking that argument on Bob. It drove me crazy when I heard Sumner invoke Hayek to justify his views. Some of the commenters should know that Sumner defines AD as NGDP.
Greg:
Good explanations, but Sumner doesn’t say that more rapid NGDP growth is always better.
He usually emphasizes that more rapid growth in nominal GDP creates problems because the tax system is not fully indexed. The inflation premium is taxed as if it is real income and nominal capital gains are taxed as if they are real capital gains.
However, he also recognizes all of the pedestrian costs of inflation.
The best reason for 5%, however, is that we appeared to be on a 5% growth path during the Great Moderation.
All Market Monetarists agree that shifting between growth paths is difficult and to be avoided.
If you have a target growth path, and it is missed, then moving back to it promptly, is a very good idea. Of course, that is what a target growth path means in an imperfect world.
As best I can tell, and you may be able to shed light on this, Hayek favored a zero percent growth path–fixed nominal GDP. Selgin favors a one percent growth path (well, that is population growth and really his productivity norm points to growth in total factor supplies,) which would be a 2% trend deflation. I favor 3%, and a stable price level trend. And Sumner favors accepting some of the down shift in the growth path, but returning to the the trend growth rate of the Great Moderation.
His primary positive argument for that path as opposed to 3% or 1% or 0% is that real wages can fall without nominal wages falling with the assumption that this would normally be necesary only in some labor markets.
And were did that lead:
“The best reason for 5%, however, is that we appeared to be on a 5% growth path during the Great Moderation. “
If that is the best reason, then I have a worthless MBS to sell to you.
It’s incredible how Sumner and other market monetarists are actually using naive extrapolation from past data to justify their entire scheme.
Hasn’t enough economic damage been done in the name of this fallacious foundation?
Human action isn’t constant. These people just never learn.
I’m not sure I understand this part:
“His primary positive argument for that path as opposed to 3% or 1% or 0% is that real wages can fall without nominal wages falling with the assumption that this would normally be necesary only in some labor markets.”
I don’t think 5% nominal GDP growth “lead” to anything.
Remember, we got on that growth path after a disinflation in the early eighties following an accelerating inflation of the seventies.
A thought experiment of starting at zero percent nominal GDP growth, and then shifting up to 5%, tells us little about what actually happened.
As for the sticky wages argument, the idea is that in some, usually most, labor markets, real wages should rise so that the quantity supplied and demanded for labor clear. However, in other labor markets, probably relative few, real wages should drop to keep quantity supplied and demanded equal. With a regime of 5% growth in nominal GDP then real wages drop roughly 2% year in the absence of nominal wage increaces. And so, by simply cutting off nominal raises, real wages in those particular sectors needing reduced real wages to keep quantity supplied and demanded equal can adjust without explicity money wage cuts. No pay hikes for atime, then back to “cost of living” increases, and real wages are lower.
Usually, for most labor markets, this isn’t an issue because real wages don’t need to fall. But sometimes, for some labor markets it is. And so, the surpluses in those markets will be a bit smaller. And this would result in somewhat higher employment and less unemployment overall.
It is true that this argument suggests that more rapid nominal GDP growth is always better, but there are costs of inflation as well. As I mentioned before, Sumner emphasizes an avoidable problem due to taxation of capital income and capital gains. But menu costs, shoe leather costs, etc. also must be traded off against this benefit.
Hayek, I think, was usually focused more on crazy union militancy, where a quasi-national union movement hikes up nominal wages and then the monetary authority generates inflation to reduce real wages back towards equilibrium. Nominal GDP targeting doesn’t allow for this approach. Such an upshift in wages would result in a decrease in the demand for labor and employment, roughly in inverse proportion to the wage hikes. This is becaue a stable growth path for money expenditures on output creates a kind of unit elasticity for output relative to prices.
Of course, there would really be substitions between different types of output and labor, even if there were some kind of near global wage agreement. And in the U.S., where nothing like that really occurs, if some union pushes up wages in their particular industry, then it is just a negative supply shock. With nominal GDP targeting, it does raise prices and reduce output much like a cotton blight would raise the price and reduce the quantity of cotton, and so the price level and aggregate real output.
“I don’t think 5% nominal GDP growth “lead” to anything.”
Well that’s heartening.
thanks Bill.
I think you are right about this:
“Hayek, I think, was usually focused more on crazy union militancy, where a quasi-national union movement hikes up nominal wages and then the monetary authority generates inflation to reduce real wages back towards equilibrium.”
I recently read “the denationalization of money”. There Hayek suggests that different competitive currencies may target different things – but he did express the view (if I remember correctly) that the public would probably prefer currencies that target some sort of price level stability – so at least in that book he favored (or at least seemed supportive of) inflation targeting.
By the Denationalization of Money, Hayek was advocating price level stability. The quanitty of money should adjust to the demand to hold money at a constant price level.
If you look again, you will see that he reiterates the problems caused by this policy, but considers them to be minor as a pratical matter.
That is, the difference between a constant level of spending in output and spending growth equal to the growth in productive capacity, is not likely to lead to serious malinvestment problems.
How many angels can fit on the head of a pin???
How many angels can fit on the head of a pin???
Seven.
42.
The answer is 42.
The answer is 42.
True, but only if they are stacked six high.
That’s how angels come, in the new packaging.
Bob,
I don’t see how the Hayek quote you provide is inconsistent with supporting NGDP targeting. Hayek could (and did) think that NGDP targeting would be a good idea, and would help avoid certain economic problems, without thinking that it would guarantee full employment. I know Sumner would say the same.
Of course, if your Hayek quote was inconsistent with supporting NGDP targeting, that wouldn’t mean that Hayek didn’t support NGDP targeting. He did (if you want we can go through those quotes). It would just mean that Hayek was inconsistent.
Also, to say that Hayek and Sumner agree about the desirability of NGDP targeting is not to say that they agree on all aspects of monetary policy. Clearly they didn’t, nor does Scott claim otherwise.
What’s the difference between 5% NGDP targeting for the purposes of maximizing employment, and 5% NGDP targeting not for the purposes of maximizing employment, have on the efficacy and actual economics of 5% NGDP targeting?
Major Freedom,
The effects of a monetary policy will be the same regardless of the purpose for which it is implemented. The goal is still important, however.
Suppose I douse your drink with a certain chemical concoction. The effects this will have on you will be the same regardless of whether my purpose was to poison you or to cure your halitosis. However, if my purpose was to poison you and the drink actually cures your halitosis, you can expect me to react differently than if my purpose had been medicinal.
Suppose we adopt 5% NGDP targeting and unemployment remains high. If our purpose in adopting 5% NGDP targeting was to achieve full employment, we will then advocate dropping 5% NGDP targeting in favor of some other monetary scheme. Sumner, though, explicitly says that in that situation you should stick with 5% NGDP targeting and address unemployment via supply side measures.
BTW Blackadder, how DOES one get a picture to appear by one’s comments?
Ken,
The honest answer is that I did it so long ago that I’ve forgotten how to do it.
Explains why you look so young.
🙂
The effects of a monetary policy will be the same regardless of the purpose for which it is implemented.
So if someone is against NGDP targeting that is founded upon purpose X, it would be silly to say that they would be in favor of that same NGDP targeting if the purpose is different, right?
The goal is still important, however.
Important why?
Suppose I douse your drink with a certain chemical concoction. The effects this will have on you will be the same regardless of whether my purpose was to poison you or to cure your halitosis. However, if my purpose was to poison you and the drink actually cures your halitosis, you can expect me to react differently than if my purpose had been medicinal.
Who cares about your reaction?
Suppose we adopt 5% NGDP targeting and unemployment remains high. If our purpose in adopting 5% NGDP targeting was to achieve full employment, we will then advocate dropping 5% NGDP targeting in favor of some other monetary scheme.
So you’re saying NGDP targeting is not being defended on the basis of employment, because if it were, then it would be subject to judging the results of it, so let’s just set a target for the sake of the target, that way, the only measure of failure or success is whether the target was hit or not, regardless of what is happening to employment and output?
Sumner, though, explicitly says that in that situation you should stick with 5% NGDP targeting and address unemployment via supply side measures.
What if the unemployment is a result of, or intimately tied up with, NGDP targeting itself? How can market monetarists know this if they don’t even care about employment as long as the target is hit?
if someone is against NGDP targeting that is founded upon purpose X, it would be silly to say that they would be in favor of that same NGDP targeting if the purpose is different, right?
I am against war for the purpose of imperial conquest. Is it therefore silly to say that I would be in favor of war for the purpose of self-defense?
Important why?
Asked and answered.
Who cares about your reaction?
You would care, assuming you don’t want to be poisoned.
So you’re saying NGDP targeting is not being defended on the basis of employment, because if it were, then it would be subject to judging the results of it, so let’s just set a target for the sake of the target
No, this is not what I’m saying. The purpose of NGDP targeting is to avoid certain types of demand side problems. These demand side problems can be a cause of unemployment, but they are not the only cause of unemployment. As such, NGDP targeting will not guarantee full employment.
Incidentally, there is something quite rich about an Austrian criticizing a monetary theory on the grounds that it cannot be tested.
What if the unemployment is a result of, or intimately tied up with, NGDP targeting itself?
Suppose we adopt NGDP targeting. Unemployment remains high. We respond by eliminating every plausible supply side cause of unemployment: we repeal the minimum wage, smash unions, cut taxes, etc. Unemployment doesn’t budge. At some point you would have to say that it is no longer plausible that the high unemployment is structural, and we would need to reconsider our support for NGDP targeting (the same would be true if we adopted a 100% gold standard).
I am against war for the purpose of imperial conquest. Is it therefore silly to say that I would be in favor of war for the purpose of self-defense?
You’re equivocating the term war here, when in the case of 5% NGDP targeting, they’re all the same.
A war of conquest and a war of self-defense are actually not the same thing. They are entirely different. One is aggressive, one is defensive. One is an attack on someone else, the other is a defense of oneself.
Maybe try to use a better analogy where the word you’re using refers to the same thing in both scenarios.
Asked and answered.
Where?
“Who cares about your reaction?”
You would care, assuming you don’t want to be poisoned.
But your reaction is an independent event from me being poisoned or not. Your reaction to an event has no bearing on a past event itself.
“So you’re saying NGDP targeting is not being defended on the basis of employment, because if it were, then it would be subject to judging the results of it, so let’s just set a target for the sake of the target”
No, this is not what I’m saying. The purpose of NGDP targeting is to avoid certain types of demand side problems. These demand side problems can be a cause of unemployment, but they are not the only cause of unemployment.
What other demand side problems? Output? If so, then NGDP targeting is to avoid declines in unemployment and output, is it not? Why would the middle-man of “demand problems” change this?
As such, NGDP targeting will not guarantee full employment.
I didn’t say I am inferring that it would guarantee full employment. I am saying the purpose of it is to boost employment and output from what they otherwise would have been.
Incidentally, there is something quite rich about an Austrian criticizing a monetary theory on the grounds that it cannot be tested.
Not if I am addressing positivists, which I am.
It’s showing that they are playing by their own rules. It’s not an advocacy for positivism.
“What if the unemployment is a result of, or intimately tied up with, NGDP targeting itself?”
Suppose we adopt NGDP targeting. Unemployment remains high. We respond by eliminating every plausible supply side cause of unemployment: we repeal the minimum wage, smash unions, cut taxes, etc. Unemployment doesn’t budge. At some point you would have to say that it is no longer plausible that the high unemployment is structural, and we would need to reconsider our support for NGDP targeting
At what point?
Given there is NGDP targeting, how can you eliminate every supply side cause if the state and the fed itself are supply side causes? It would be like saying let’s test the theory that the AIDS virus can be eliminated if all organic life is destroyed. You’d still be an organic lifeform.
And I don’t believe you when you say that many years of problems will make people drop NGDP targeting. Years of problems hasn’t made them drop central banking.
A war of conquest and a war of self-defense are actually not the same thing.
Consider the Six Day War. Was it a war of conquest or a war of self-defense? Well, it did involve Israel defending itself against aggression from its neighbors, and it also resulted in Israel conquering new territory. Whichever the purpose, though, it is still the same war.
Asked and answered.
Where?
In the very comment you were replying to.
But your reaction is an independent event from me being poisoned or not. Your reaction to an event has no bearing on a past event itself.
Suppose I try to poison you, but in fact all I do is cure your halitosis. Why should you care? Because if my goal is to poison you, then when I see my method hasn’t worked, I am liable to switch to some other method to achieve the same goal.
At what point?
That’s going to vary based on the supporter. It’s going to be a matter of how confident you are about NGDP targeting versus how plausible you view the candidates for supply side causes of unemployment.
And I don’t believe you when you say that many years of problems will make people drop NGDP targeting.
Maybe not for everyone. If the scenario I described occurred, no doubt there would be a guy on the internet named Captain NGDP arguing that NGDP targeting worked fine and that the persistent high unemployment was being caused by some comments the president made several years ago. But most people are not like that.
What other demand side problems?
You’ve been commenting on Scott Sumner’s blog for quite some time. Are you really still so unfamiliar with his ideas?
Consider the Six Day War. Was it a war of conquest or a war of self-defense?
Glad you agree they’re different, so saying war for both, is a misleading analogy for 5% NGDP targeting, which is the same in all scenarios.
Whichever the purpose, though, it is still the same war.
Attack is not the same thing as self-defense.
In the very comment you were replying to.
I don’t see an explanation of why the goal is important. If there is 5% NGDP targeting, then why does the goal matter, if that is the means?
Suppose I try to poison you, but in fact all I do is cure your halitosis. Why should you care?
If what you give me is a chemical, then what difference does it make to the effects of it on my body if your goal is one thing or another thing? Sure, your intention would determine whether or not you’re trying to kill me or help me, but the argument I am making is not whether or not the Fed wants to kill us, but the actual effects of 5% NGDP targeting. For that is what Hayek was referring to when he said it would be a bad idea to maintain spending at an appropriate level.
The actual effect of the chemical on my body would be the same regardless of your intentions. So when it comes to the effects of 5% NGDP, the intentions are irrelevant.
Because if my goal is to poison you, then when I see my method hasn’t worked, I am liable to switch to some other method to achieve the same goal.
So the goal of 5% NGDP targeting is to boost employment and output then?
That’s going to vary based on the supporter. It’s going to be a matter of how confident you are about NGDP targeting versus how plausible you view the candidates for supply side causes of unemployment.
Confident based on what? Plausible based on what? Reading tea leaves? Emotion? Throwing darts at a dart board?
Maybe not for everyone. If the scenario I described occurred, no doubt there would be a guy on the internet named Captain NGDP arguing that NGDP targeting worked fine and that the persistent high unemployment was being caused by some comments the president made several years ago. But most people are not like that.
Did you say Keynesians were the mainstream, which means most people ARE like that? They’ve been doing exactly that every time economic problems follow government spending. “There hasn’t been enough government spending.” etc.
You’ve been commenting on Scott Sumner’s blog for quite some time. Are you really still so unfamiliar with his ideas?
What is with you evaders?
I was asking you.
From “A Discussion With FRIEDRICH A. VON HAYEK”
Held at the American Enterprise Institute on April 9, 1975, pages 8-9. At the time, there was an inflationary recession.
For forty years I have preached that the time to prevent a depression is during the preceding boom; and that, once a depression has started, there is little one can do about it. My advice was completely disregarded as long as the boom lasted. Now suddenly, when my prediction has come true and we have reached the stage where, in my opinion, little can be done about the inevitable reaction which has set in, people suddenly turn to me and ask for my opinion. I am very much tempted to answer, “Well, if you had listened to me before, you wouldn’t be in that mess/7 Of course, I do not mean you—I mean the public in general.
What I want to discuss is policy in the long run—by which I mean not only the very long run in the Marshallian sense, but policy over the next few years. What we should absolutely avoid is any attempt to recreate employment, or diminish unemployment by a further does of inflation.
I will confess that I do not know whether, at this moment, even a strong additional dose of inflation would still be effective. I expect that it will be attempted, and I rather hope that it will not succeed and that we shall be forced to turn to the fundamental problem of the readjustment of the structure of production.
But the main point is: what can we do to avoid the same sort of mistakes in the future?
The public, having so long been taught false doctrines, is still convinced that the government has it in its power substantially to reduce or perhaps, in the short run, completely to abolish unemployment by such tricks as deficit spending, increasing the quantity of money, and so on. Is there any possibility of preventing the government, even if it should wish to act more sensibly, from being forced by public opinion into repeating its mistakes and being driven to more and more-inflation?
This leads me to a point where I am afraid I have persistently disagreed with many of my closest friends and associates. I believe that if we want to prevent the government from giving in to public pressure for quick and rapidly effective measures, we must put fetters on what the government can do and restore several institutions which were designed to prevent the government from abusing its powers, and particularly its powers to inflate.
A quote that show that Hayek was just inconsistent in his public statements on policy:
http://socialdemocracy21stcentury.blogspot.com/2011/09/did-hayek-advocate-public-works-in.html
“To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations, and not by directly stimulating particular kinds of investment or similar kinds of public expenditure which will draw labour into jobs they will expect to be permanent but which must cease as the source of the expenditure dries up.”
Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.
In Hayek’s essay “The Gold Problem” (originally published in 1937 as “Das Goldproblem,” but available in an English translation in Hayek 1999: 169–185):
“Even though there are many concerns about organizing public works ad hoc during a depression, everything speaks in favour of having public agencies perform during a depression whatever investment activities need to be carried out in any case and can possibly be postposed until then. It is the timing of these expenses that presents a problem, since funds are often extremely hard to raise in the midst of a severe depression and the accumulation of reserves in good times generally faces the objections mentioned above. There is little question that in times of general unemployment the state must intervene to mitigate genuine hardship either by disbursing unemployment compensation or, as in earlier times, by legislation to help the poor. (Hayek, F. A. von. 1999. “The Gold Problem” (trans. G. Heinz), in S. Kresge (ed.), The Collected Works of F. A. Hayek. Volume 5. Good Money, Part 1. The New World, Routledge, London. p. 184).
1. Hayek: “For forty years I have preached that the time to prevent a depression is during the preceding boom; and that, once a depression has started, there is little one can do about it. My advice was completely disregarded as long as the boom lasted.”
Don’t inflate and don’t employ Keynesian-style policies and we won’t have to stew about how to fix what should have not and would have not happened in the first place. Hayek is quite clear about this.
2. Providing public assistance and public works when people are starving due to the collapse of the prior Keynesian bubble amounts to providing people with the bare minimum to help protect them in their time of need. It is not the same as saying that SPENDING causes prosperity. Or that irresponsible spending is good for society.
BTW, I’m perfectly fine with LK calling Hayek an “idiot”. LK still does not understand the basic Austrian concept of economic calculation. And neither do those wacky MMTers over at Mike Norman Economics.
Bob: “Prices are ALWAYS based upon the subjective values and whims of the parties to the transaction.”
Tom Hickey: If Austrian economists believe this, they should get out of the ivory tower and start some businesses, and then tell me how price works.
http://tinyurl.com/bny4v9v
I think it’s marvelous that our opponents do not and cannot understand anything about the Austrian School.
Stop calling opponents those who choose to ignore your cult.
Mammouth: Look Einstein, did you read the TITLE of the MMTers’ post?
Reflections on David Gordon’s The Philosophical Origins of Austrian Economics
Tom Hickey then wrote oodles of psycho-babble about the Austrian School without mentioning the words “action” or “act”. I pointed that out to him.
http://tinyurl.com/898dp78
As a wrote earlier, I think it’s marvelous that our opponents do not and cannot understand anything about the Austrian School.
I don’t think pointing out each time that Austrian Economics is an act of faith is very helpful.
You are your own opponents.
Bob Roddis:
The reason why MMTers don’t address Austrian concepts when they try to hand wave it away, is the same reason they are not even attempting to analyze or critique the government’s monopoly over the money supply.
MMTers start with the proposition:
“We live in a society where money is monopolized by the state. You might not like it, but that’s what we have. Deal with it.”
They don’t even critique the state’s monopoly over money in any way. Ever. Either they refuse to do so, and are hence intellectually dishonest, or they can’t do so, and are hence intellectually bankrupt.
Either way, this is why they do not show any evidence that they grasp basic Austrian concepts.
Since they do not critique the state’s monopoly over money, they have shown themselves incapable of looking at the world in any other way than through a central planner’s eyes. They’re not central planners, but they can only understand the economy from that perspective. It is a mystical view of course, since they are not a central planner. They are viewing the economy from a perspective that is outside themselves. This is why they’re just airheads. They are not understanding the economy from their own perspective as an individual actor. They do not yet understand what they are.
My guess as to the reason why they refuse to even contemplate the possibility of acting in a state of ignorance vis a vis the facts concerning other people, is that doing so would invariably lead them to understanding themselves as ignorant, which is terrifying to them. That’s why they latch onto the “certainty” of the monopoly over money system they were born into. That’s why they do not grasp Austrian concepts.
Lord Keynes is the intellectual equivalent of a child molestor.
Which religion did he found?
Huh?
Hayek: You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general! The politicians didn’t want to hear anything more than that — to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.
http://www.youtube.com/watch?v=N364sN5E0hQ&feature=relmfu
That is just Hayek rewriting history like the idiot he was: in his mad world, no politician was ever deeply and sincerely concerned with the problem of involuntary unemployment or depression. No, they were just all “irresponsible spenders.”
How does that quote imply that being an irresponsible spender and concerned about the unemployed are mutually exclusive?
Awww, LK doesn’t like it when his precious power hungry murderers and thugs are viewed as irresponsible spenders of other people’s money.
Just world fallacy gone mad in the Keynesian cultist world.
Lord HaHa, just admit it. You’ve never read a word of Hayek.
And, then, leave the rest of us the ‘f’ alone.
Actually, I’m convinced that LK has read tons of Hayek. All without understanding the concept of economic calculation in the least. Which is an amazing feat in itself.
http://socialdemocracy21stcentury.blogspot.com/2012/06/debunking-austrian-economics-101.html
Mr. Buckley: Well, how would you account for the almost unanimous opinion of liberal Democrats that in order to reduce unemployment it is necessary for the government to pursue vast spending projects? Since you speak of this as being almost manifestly ill-advised, the question arises why such superstitions should survive?
Mr. Hayek: Well, it’s almost entirely the work of one man – in a way a genius, Lord Keynes – who is much more concerned about influencing current policies than about advancing the right sort of theories and he was operating then in a very peculiar situation. Now in Great Britain, a successful attempt was made after World War I – which brought a good deal of inflation – to bring prices down to the pre-war level. Prices came down but wages did not, so you had in the 1920s a position in Great Britain where wages were internationally too high and Britain had become noncompetitive on the world market. The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages. Notice these real wages had been artificially increased by increasing the value of the pound. So because the pound was par to its former level, people receiving the same wartime salary and wages, or inflated wages, could buy much more. Wages had not come down.
Now, his first argument was wages must come down. Then he found that was politically impossible, so he must find another way. Instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages and then by a curious intellectual somersault I would almost say he led himself to believe that even bringing down money wages was not of any use. It involves a complex economic argument and all he concluded was that – well, we must inflate, in short.
Now notice several things. Keynes was a genius, but a genius who spent only a fraction of his time on economics – one of the busiest men I ever knew. But he knew very little economics except particularly the Cambridge tradition, and he was much more concerned to influence policy at a particular moment than develop a true theory. In fact, the last time I talked to him was after the war. I knew him very well. When I asked him wasn’t he getting alarmed about what his pupils who swallowed all this theory were doing after the war when the danger was clearly inflation, his answer was:
“Oh, don’t mind. My theory was frightfully important in the 1930s. Then, we needed an expansion to correct a situation. Do trust me. If this theory becomes dangerous, I’m going to turn public opinion around like this”.
Six month later, he was dead. And as usual, what happened is that the very doctrine – pupils of this man did apply to completely different situation a theory which was designed to influence policy in a particular situation. The only thing I blamed Keynes for is to making his theory more attractive and effective, he called it THE general theory. In fact, he knew precisely that it was not a general theory, but it was an argument to persuade government in the 1930s to do particular things.
Mr. Buckley: It was an ad hoc?
Mr. Hayek: It was entirely ad hoc. He was one of the most fascinating men I knew, but the personal magnetism of this man not only persuaded the younger generation of economists. And if I had been a much younger man and a student, I probably would have been swept off my feet as were most of the people.
Mr. Buckley: Like Nixon.
Mr. Hayek: No, no. (laughter).
http://www.youtube.com/watch?v=gaQcbGoW2C0&feature=relmfu
Following on from the discussion above, I don’t really see any particular conflict here. The current motto of most of the Western world’s central banks is that they have a dual purpose: keeping inflation under control and maintaining employment. Hayek is merely pointing out that they can forget about the maintenance of employment, because they don’t have a chance of controlling that in the long term, and their attempts to give the system a short term sugar hit are ultimately harmful. I agree with that.
Once you abolish the idea that central banks should dabble with trying to maintain employment, what are you left with? Basically, the very best a central bank can do is keep inflation under control, but in an ideal world they would keep both inflation and deflation under control, and that implies some element of price and wage stability. Not hard price fixing of course, but merely levelling out the worst of the shocks, both inflationary shocks and deflationary shocks.
“The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.”
Which is exactly saying that central banks should not be in the business of targeting full employment, I agree completely.
“If I were responsible for the monetary policy of a country I would certainly try to prevent a threatening deflation, that is, an absolute decrease in the stream of incomes, by all suitable means, and would announce that I intended to do so. This alone would probably be sufficient to prevent a degeneration of the recession into a long-lasting depression.”
Which is saying that central banks should be in the business of targeting price and wage stability, at least as much as preventing large destructive swings (both in the inflation and deflation directions). I agree again. Sounds perfectly consistent to me.
Various Major Freedom objections:
What does the difference between targeting a growing NGDP for employment reasons, and targeting an identical growing NGDP for praising the Sun god reasons, have to do with whether or not targeting a growing NGDP is destabilizing/destructive/harmful/etc?
… and …
So you’re saying Sumner would be against 5% NDGPLT for the purposes of maximizing employment and output, but would not be against 5% NDGPLT for some other reason? That makes no sense.
The reason for something makes a big difference, because we are trying to decide which particular statistics (if any) a central bank should respond to when making monetary policy. Targeting full employment, or targeting price stability or targeting NGDP all result in the same tools being used to different ends… but the ends are the important thing.
There’s a good reason why price stability is good for an economy. People try to plan ahead, and the ability to plan ahead gives them the power to improve their lives and improve the overall efficiency of the system. Inflationary and deflationary shocks both destroy people’s planning and forces them to adopt a short-term strategy. Almost the entire world’s financial and investment apparatus is now in short-term wait and see mode. This destroys trust between individuals and between groups of individuals. Now if the real world is indeed changing rapidly, then there’s just no way people can keep their original plans, they have to change. The best to hope for is perhaps soften the blow a bit.
Of course, there’s other factors also at work destroying trust, such as the persistent departure from any resemblance of a rule of law once you get big enough to qualify for government protection, but that’s another story.
Why does it matter to you guys what Hayek thought, anyway?
Because Ghandi, Stephen Hawking, and Albert Einstein said it was a good idea.
You care for what Hayek said bacause Ghandi told you to do so?
The reason why I choose to do what Ghandi said was a good thing to do, which is to care about what Hayek said, is because Rothbard said it is a good idea to listen to Ghandi.
(Hopefully at this point you got my joke)
Damn it. I spent the last two hours looking for a quote of Gandhi where he embraces Hayek…
(Hopefully at this point you got that I had gotten it)
At this point I will continue my enjoyable life of not trying to become a stand up comedian.
You are not gonna comment on this blog anymore?
I sit when I type.
I quote Hayek because he won the Nobel Prize in economics for his work on Austrian School theory which completely eviscerates all things Keynesian before the Keynesian even opens his mouth. Basically, he won the Nobel Prize for showing that our economic problems are CAUSED by Keynesian-style policies. I actually enjoy watching the Keynesians avoid not only the substance of the theory, but even the nature and theme of the theory.
He constantly emphasizes the central Austrian concept, the problem of the lack of knowledge in society and how that is fatal to the schemes of the Keynesians and other statists. See “The Fatal Conceit”. As I pointed out in the quotes I posted yesterday, he was friends with Keynes and he stated that “The General Theory” was nothing more than an ad hoc polemical book designed to incite Great Britain to inflate in order to reduce real wages in the 1930s.
In February, 2011, the American Economic Review (specifically Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow) named its top 20 articles of the last 100 years. Included therein was:
Hayek, F. A. 1945. “The Use of Knowledge in Society.” American Economic Review, 35(4): 519–30.
http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.101.1.1
Then he says marvelous things like this:
“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.
****
In contrast, the modern fashion demands that a theoretical assertion which cannot be statistically tested must not be taken seriously and has to be discarded. As a result of this belief, a theory which, in my opinion, is the true explanation has been discarded as not adequately confirmed, and a false theory has been generally accepted merely because it happens to be the only one for which statistical evidence, even though very inadequate evidence, is available.”
Hayek speaks so eloquently of the basic Austrian concept of knowledge and lack thereof. Then, when one quotes him, the statists go spastic and start chanting “cult cult cult” without the slightest understanding of even the topic Hayek is discussing. Simply mah-velous.
Bob, you admire Hayek. So what?
I thought this was about NGDP targeting. And I don’t think that you can argue for an idea by listing people who might have agreed with it or not. Whether Hayek, Mises or Gandhi were “Sumnerians” is pretty irrelevant if you want to know whether Sumnerism(?) makes sense.
Where does Sumner address “the problem of knowledge in society”? And I thought the issue was whether Hayek was a “Sumnerian”.
Apparently, I’m the only person in the galaxy with the pamphlet “A Discussion With FRIEDRICH A. VON HAYEK” from 1975 which I quoted above. He’s quite clear that when you are in a post-boom depression, it might be wise to inflate just a bit in some situations simply to avoid the collapse of civil society or a takeover by Nazis. And he’s clear that the little burst of inflation is probably going to cause the very same price distortions about which he constantly warns
And he goes on after the part I quoted explaining how society needs a gold standard as an institution preventing the voters from voting for more inflation. I have not had the time to scan that and convert it to text.
Reread the quote above. I do not see how Hayek can be deemed a Sumnerian.
“Reread the quote above. I do not see how Hayek can be deemed a Sumnerian.”
Reread what I wrote. I do not care whether Hayek was a Sumnerian. What I do care about, however, is whether NGDP is a good idea or not. For that matter, it is, of course, useful to quote arguments including those given by Hayek to get a full picture of the discussion. But just saying “Hayek was against it, so it must be wrong” is a pretty strange statement, at least if you don’t believe that Hayek was an omniscient prophet.
Any form of money dilution/fiat funny-money printing scheme will impair economic calculation and thus impair the price, investment and capital structure especially if conducted on a permanent basis.
It’s 95 degrees in Motown today and I’m going boating today. Bye.
http://www.youtube.com/watch?v=Ud13_rpB7mA
“It’s 95 degrees in Motown today and I’m going boating today. Bye.”
You win…
This is an interesting graphic:
http://i.imgur.com/JavTr.png
Bob, who cares about what some ancient economist thought? I think it’s pretty clear he was wrong about policy during the Great Depression.
How long do you have to be wrong before you have to take everything you think you know and throw it out? Start exploring things from some perspectives opposite yours and maybe you’ll actually stop being wrong so often, and for such long periods of time.
There’s no shame in admitting ignorance. It’s the first step to learning and we’re all ignorant about most things anyway.
So am I to take this post of yours as a product of ignorance?
One has to read this comment to appreciate the depths of David’s ignorance.
http://consultingbyrpm.com/blog/2011/10/paul-samuelson-correspondence-regarding-my-papers-on-capital-interest-theory.html#comment-26098
Hey, what happened to my urbandictionary post? Bob, you suck!
You have been told many times not to post such comments on the blog.
What did you expect?
This isn’t a place for that. If you want to post stuff like that, start your own blog.
When you visit people’s homes, do you respect their desire for you not to swear if they asked you not to swear? Or would you be an obnoxious douche and continue to swear and say “It’s a free country, you guys suck!”?
A little respect for the rules of the blog owner can go a long way.
I’d be an obnoxious douche and continue to swear.
No you wouldn’t. You’d be too weak to stop visiting grandma from throwing you to the curb.
Uhh, I don’t get it.
Unreasonable Reason goes Sumnerian.
http://reason.com/archives/2012/06/21/strangled-by-tight-money/singlepage