I Agree With Krugman
…when he writes:
[M]onetarists — old-style Friedman-type monetarists who focus on monetary aggregates, or the new style which says that the Fed can and should target nominal GDP — are, whether they realize it or not, part of the axis of monetary evil as far as the demand-deniers are concerned. They may believe that they can limit the scope of demand-side reasoning, making it a case for technocratic policy at the central bank but no more than that. But from the point of view of those who can’t see how demand can possibly matter, they’re essentially in the same camp as Keynesians. And you know, they are; once you’ve accepted the idea that inadequate demand is the problem, the role of fiscal as opposed to monetary policy is just a technical detail (albeit one of enormous practical importance).
This is exactly why I classified David Beckworth’s National Review article as “monetarist Keynesianism.” Beckworth thought that was a contradiction in terms,* but no it isn’t. Don’t take my word for it, ask the Nobel laureate.
Now of course, Beckworth might still be totally right; tagging him with the K-word isn’t the end of the story. I was mostly making the point in my original critique of him, that it’s going to be hard to appeal to conservatives with arguments that would justify the Obama stimulus package. At some point in the near future I will address the purely technical aspects of Beckworth’s views.
* Actually it might not have been Beckworth who used the phrase “contradiction in terms,” since I can’t find him saying that right now. But I swear that one of those guys (Woolsey, etc.) responded to my critique of Beckworth by saying “monetarist Keynesian” is a contradiction.
Say it loud!
I’m a demand-denier and I’m proud!
I’m a demand-skeptic.
I think Yeager’s “The Keynesian Diversion” is appropriate in this context.
Even a cursorary reading of the history of economic thought shows that
“Keynesian” is a misnomer, but what is in a word?
What about Hayek? Does he also get cast into the outer darkness?
Whole people don’t get cast out so much as individual ideas get cast out.
Krugman should read “Milton Friedman Unraveled”, by Murray Rothbard, to get a sense on why Austrians consider monetarism just another Keynesianism.
http://www.lewrockwell.com/rothbard/rothbard43.html
Captain Freedom,
I read the portion of “Milton Friedman Unraveled” dealing with money and the business cycle. Rothbard’s counter to Friedman’s anti-deflation views seems to be that deflation is not always bad, because a falling price level might be the result of increased productivity and/or increases in the supply of goods. David Beckworth has made precisely this argument. His argument is not that deflation is always bad, but that it is bad when its causes are monetary rather than real. Imagine that we were on a 100% reserve gold standard and a third of the gold stock was destroyed. This would result in falling prices, but it hardly follows that everything would be hunky-dory. There would be a painful adjustment process involved, a process that could be avoided if you were able to somehow restore the gold stock to its previous level (or, better, prevent it from being destroyed in the first place).
You’re right about THAT particular point.
I posted that article to show the similarities in the overall “flavor”, “mindset”, “framework” of Monetarism and Keynesianism, which could be summarized as:
“The economist should conceptually divorce “micro” concepts such as supply and demand from “macro” concepts such as monetary forces/aggregate demand. The “macro” world must be controlled and stabilized/smoothed by the state, and the “micro” world of volatility can be left to the individual’s economic choice. The economist should believe that when left to their own devices, individuals in a private property and free trade setting cannot help but generate a poison in the macro world that only the good government doctor can cure with its violent power.”
Beckworth is far more intelligent than your garden variety Keynesian, because he is not prejudicially repulsed by sound “supply side” economics. However, I think his overall worldview regarding the economy is the same pseudo-Platonic view that insists on a conceptual separation between the micro world of the cave where the common folk reside, and the macro world of the Sun where only the enlightened statesman resides and who must guide the rest of humanity to prosperity, is ultimately philosophically Keynesian, because Keynesianism itself is based on the same ancient ideology as Monetarism.
Another way of putting this is that both Monetarism and Keynesianism want to slice the economy into two dialectical conceptual worlds, the “lower” and the “upper”, where the common man’s inability to understand the “upper” world necessitates a singular consciousness of philosopher kings who by benevolent intelligence and virtue, sitting in their “upper” world to help bring the common men up to where he is, in the morally superior intellectual world of societal control.
Von Mises exploded this artificial conceptual separation between macro and micro monetary worlds, in his book Theory of Money and Credit in 1912. Keynes just rehashed the same old dialectic separation of reality into two worlds that Fisher popularized from 1900-1920. Friedman repopularized Fisher’s framework, but he only differed in terms of how the philosopher kings are to think and act. The Austrians reject the separation and the alleged necessity of philosopher kings to control the higher realm. In a word, Austrians are trying to bring Keynesians and Monetarists down to Earth where the reality of humanity resides, where scarcity exists, where economic laws are ubiquitous, and where the limitations of the human mind preclude it from understanding the entirety of the dispersed knowledge contained in a modern, money based division of labor economy.
Captain Freedom,
I’m not sure that most Monetarists would recognize themselves in your description.
Friedman, for example, didn’t think you needed philosopher kings to steer the economy; all you needed was a simple automatic rule for money growth. Scott Sumner (and, I believe, David Beckworth) believe you could just target NGDP using a futures market. No philosopher kings needed. Hayek (who counts as a “monetarist Keynesian” on Bob’s definition) thinks that you could have private competitive currencies and everything would work out fine.
What distinguishes these thinkers from Rothbardians is not that they believe in rule by philosopher kings instead of the market. It’s that they aren’t “demand-deniers,” i.e. they believe the economy can suffer from a lack of aggregate demand. What is amazing to me is that so many Austrians seem to want to deny that you can have problems with aggregate demand *even* in the actual far from free market world where the Fed controls the money supply and there are countless laws and regulations impeding the flexibility of wages and prices.
What is amazing to me is that so many Austrians seem to want to deny that you can have problems with aggregate demand *even* in the actual far from free market world where the Fed controls the money supply and there are countless laws and regulations impeding the flexibility of wages and prices.
Which Austrian denies that the government impedes a post-boom repricing? The solution is to identify that as the problem, not further dilute the funny money supply to surreptitiously lower everyone’s wages and prices in real terms allegedly because the masses are too dumb to understand what is going on. And which, of course, will only start another round of malinvestments and surreptitious wealth and asset shifting.
Philosopher kings, indeed.
Which Austrian denies that the government impedes a post-boom repricing?
Austrians don’t deny that government could impede wage or price adjustments (indeed, I believe that the standard Austrian story of 1929-32 is that Hoover was able to keep wages from falling mainly by asking employers not to cut them). The issue is whether government effects on the demand-side of things can factor either as a cause or a solution. Friedman/Hayek/Sumner/Beckworth/Selgin/Horowitz/etc. say yes, potentially. Rothbard says no.
The solution is to identify that as the problem, not further dilute the funny money supply to surreptitiously lower everyone’s wages and prices in real terms allegedly because the masses are too dumb to understand what is going on. And which, of course, will only start another round of malinvestments and surreptitious wealth and asset shifting.
Suppose that the money supply contracts such that prices fall by 20%. Then it increases by a corresponding amount, such that prices go back to where they were before. Whatever else you might say about this process, you can’t really say that it is “further dilut[ing] the funny money supply to surreptitiously lower everyone’s wages and prices in real terms.” Prices aren’t any higher at the end of the process than at the beginning, nor is the money supply any larger. Nor is it clear how returning the money supply to where it was before is supposed to induce malinvestments.
>I’m not sure that most Monetarists would recognize themselves in your description.
This may be true, but it is not relevant to understanding the philosophical foundation of ideas.
>Friedman, for example, didn’t think you needed philosopher kings to steer the economy; all you needed was a simple automatic rule for money growth.
An “automatic rule” that he intended philosopher kings to accept, plan, carry out, and enforce.
>Scott Sumner (and, I believe, David Beckworth) believe you could just target NGDP using a futures market.
Who’s the “you”? Philosopher kings of course.
>No philosopher kings needed.
So then you will permit me and everyone else to do whatever it is you think philosopher kings don’t need to do? Or do you say no, I am not allowed to do that, only A SELECT FEW can do that? Well, those are just the philosopher kings in different clothing. Instead of a staff and a toga, they’ll have an armed guard and a suit.
>Hayek (who counts as a “monetarist Keynesian” on Bob’s definition) thinks that you could have private competitive currencies and everything would work out fine.
Hayek is not a thinker in the same vein as Keynesians and nor a Monetarists. It is precisely because of his advocacy of decentralized, competitive, market driven money production that separates him from the others.
>What distinguishes these thinkers from Rothbardians is not that they believe in rule by philosopher kings instead of the market. It’s that they aren’t “demand-deniers,” i.e. they believe the economy can suffer from a lack of aggregate demand.
And who do they champion to be society’s “fixers” for this alleged “aggregate demand” problem? I don’t see any Keynesian or Monetarist saying individuals in society through the market process should “fix” it. They only champion for a small oligarchy in government, i.e. Treasury and the Fed, to “fix” the alleged problem.
>What is amazing to me is that so many Austrians seem to want to deny that you can have problems with aggregate demand *even* in the actual far from free market world where the Fed controls the money supply and there are countless laws and regulations impeding the flexibility of wages and prices.
Austrians do not deny that there can be problems of aggregate demand. What Austrians are saying is that “aggregate demand” problems arise precisely from the very same Federal Reserve System Keynesians and Monetarists say should fix it, through inflationary credit expansion, which puts in motion the possibility for monetary deflation.
The problem of deflation exists because of fiduciary media issued by the banking system. This money is not backed by anything tangible. It is simply debt issued from thin air. When this debt is defaulted on, or when the lender calls the loan in, “money”, meaning that which is used in commerce for medium of exchange, can literally disappear from existence. That is deflation.
Austrians are saying that the Fed makes the problem of aggregate demand WORSE, not only by inflation of the money supply, which is a real problem of “aggregate demand” that no Keynesian or Monetarist considers as inherently problematic, but also by deflation of the money supply, which typically arises once the credit expansion induced bust wipes out business profitability, generates debt defaults, and thus a drop in aggregate demand.
This is why precious metals are the best money. In competition, precious metals will invariably “win” in a competition between monies, and the benefits of precious metals standard compared to a paper standard is that a precious metals standard is deflation and inflation proof. Money is not destroyed by debt default. Money is also not inflated by computer key strokes.
As for your words on the inflexibility of wage rates and prices, the Austrian solution is for the government to lessen the extent of regulations. That will allow the price system to adjust to changing monetary conditions.
When there is a prolonged depression, due in part by wage and price inflexibility on account of government intervention, then it is dishonest to claim that Austrians ignore problems of aggregate demand here. The Austrian position is that there would be no economic problems if the government didn’t interfere such that wages and prices are inflexible!
As Mises emphasized, government intervention tends to generate unintended consequences, which begets more government intervention, and on and on, until there is no capitalism left.
When it comes to problems of aggregate demand, the only reason why aggregate demand is targeted is because of the already existing intervention in the micro sphere. Do you see how since economic regulations that make wages and prices inflexible have the unintended consequence of preventing quick adjustment of wages and prices in the face of monetary deflation (which is itself another unintended consequence of government sanctioned inflation and credit expansion), those who champion central monetary planning can only see more central monetary planning as the solution?
You probably already know the unintended consequences of central monetary planning.
You need to LET GO and stop believing in the myth that “aggregate demand” has to be controlled by a centralized group of philosopher kings.
Hayek is not a thinker in the same vein as Keynesians and nor a Monetarists.
Hayek’s views are different than those of Monetarists and Keynesians in a lot of ways (just as Monetarists and Keynesians differ with each other). Where they all agree is in thinking that demand-side issues can be a cause of economic problems. If the fact both Monetarists and Keynesians believe this is grounds for lumping them together (which is what Bob seems to think), then Hayek must be lumped in with the others too. However, since you think that Hayek is different from the others in that he supports a purely free market ideal, I will focus on him.
And who do they champion to be society’s “fixers” for this alleged “aggregate demand” problem? I don’t see any Keynesian or Monetarist saying individuals in society through the market process should “fix” it.
Ideally the problem would be fixed via the competing currency system. However, until such a system exists we are stuck with central banking, and so a second-best solution is to try to get the central bank to better approximate what would happen in a free market.
An analogy: suppose the government took over the production and sale of apples. Demand for apples increases, but the government does not respond either by growing more apples or by raising prices. As a result, you get apple shortages. Ideally the thing to do here would be to get the government out of the apple growing business, but suppose that isn’t politically possible in the short term. In that case, the second-best option is to try to get the government either to increase apple production or to raise prices. At the very least, you wouldn’t condemn the government for raising prices or increasing supply.
>Hayek’s views are different than those of Monetarists and Keynesians in a lot of ways (just as Monetarists and Keynesians differ with each other). Where they all agree is in thinking that demand-side issues can be a cause of economic problems.
Austrians in general also agree that there can be “demand-side issues” that cause economic problems, specifically, governmental manipulation of demand and thus interest rates.
Austrians do not hold that money is neutral. They hold that money has real world, supply side effects that alter the capital structure of the economy.
Where Austrians differ is in the solution, and in identifying the fundamental cause.
>If the fact both Monetarists and Keynesians believe this is grounds for lumping them together (which is what Bob seems to think), then Hayek must be lumped in with the others too.
On this small point, perhaps yes. It is not controversial to do so. But the differences are too great to “lump” Hayek in with any of these other thinkers.
>Ideally the problem would be fixed via the competing currency system.
That is neither Keynesian nor Monetarist.
>However, until such a system exists we are stuck with central banking, and so a second-best solution is to try to get the central bank to better approximate what would happen in a free market.
This is just the position of Beckworth and Sumner, which I personally find to be a moral and intellectual capitulation.
Second best cannot ever be rejected in favor of first best if people focus their arguments on second best all the time.
>An analogy: suppose the government took over the production and sale of apples. Demand for apples increases, but the government does not respond either by growing more apples or by raising prices. As a result, you get apple shortages. Ideally the thing to do here would be to get the government out of the apple growing business, but suppose that isn’t politically possible in the short term. In that case, the second-best option is to try to get the government either to increase apple production or to raise prices. At the very least, you wouldn’t condemn the government for raising prices or increasing supply.
There would be no apple shortage if the exchange ratio of other-goods-to-apples rises, i.e. apples-to-other goods exchange ratio falls.
Shortages are only possible when the government enforces price controls. If there are no price controls, then a rise in the demand for apples will result in a higher value of apples relative to other goods, and people will start exchanging shirts, shoes, potatoes and socks for less apples.
Your hypothetical example already presumes the very problem you believe only government can solve through apple inflation.
Furthermore, your “solution” to inflate the supply of apples fails to consider the full consequences of doing so. You believe it will only affect aggregate demand in apples. But, if the supply of apples was inflated through the apple loan market, then it will artificially depress interest rates for borrowing apples, and hence will distort the economic structure of the economy, which will generate malinvestment, and future depression and apple deflation once more, only it will be even worse because not only did the previous errors not get fully liquidated on account of the government responding to past “aggregate demand” problems with apple inflation, but there will be even more errors made on account of the new round of apple inflation.
Your mind is fallaciously fixated on only a single issue, namely “aggregate demand”, as if nothing else matters than seeing a line rise all straight and pretty on a piece of paper. You are ignoring what created the aggregate demand problem arise in the first place, interest rates, capital structure distortions, and malinvestment.
Stop treating a fall in aggregate demand as if it were a magical act of Zeus, or “animal spirits”.
Captain Freedom,
Suppose Bernanke were to take Bob Murphy’s advice and announce that the Fed was going to peg the dollar to gold. I suspect that a lot of Austrians would view this as a positive move. They would still getting rid of the Fed altogether, but so long as there was a Fed setting monetary policy they would view that policy as preferable to the status quo ante.
Suppose that some conservatives and libertarians started condemning the move as government interference in the economy, claiming that the policy was too tight. It seems to me that an Austrian would be justified in defending the Fed from these attacks, not because he supports the Fed, but because he views this policy as less of a deviation from what would happen in a truly free market.
Government price fixing is a bad idea because because governments do a worse job than markets at setting prices, and will tend to set prices either too high or too low. Likewise, Fed control of the money supply is a bad idea because it will tend to be either too loose or too tight in its policies. On that point Hayek and Rothbard are in agreement. Where they differ is that Rothbard seems to think that Fed policy can only ever bee too loose, never too tight. But this is like thinking that because government price fixing is bad, therefore governments always set the price too low. From the fact that the Fed is a bad idea, nothing follows about whether current Fed policy is too loose or too tight. So if you want to argue that current Fed policy is too loose, you can’t simply note that the Fed shouldn’t exist.
Blackadder,
>Suppose Bernanke were to take Bob Murphy’s advice and announce that the Fed was going to peg the dollar to gold. I suspect that a lot of Austrians would view this as a positive move. They would still getting rid of the Fed altogether, but so long as there was a Fed setting monetary policy they would view that policy as preferable to the status quo ante.
Not necessarily. Austrians would hold that removal of all regulations that generate wage and price rigidity be abolished.
>Suppose that some conservatives and libertarians started condemning the move as government interference in the economy, claiming that the policy was too tight. It seems to me that an Austrian would be justified in defending the Fed from these attacks, not because he supports the Fed, but because he views this policy as less of a deviation from what would happen in a truly free market.
The policy would not be “tight” if the gold price were such that the total quantity of US dollars was splayed across the total quantity of gold held by the Treasury/Fed.
>Government price fixing is a bad idea because because governments do a worse job than markets at setting prices, and will tend to set prices either too high or too low.
There would be no “market price” of gold if the dollar were DEFINED as such and such weight of gold.
>Likewise, Fed control of the money supply is a bad idea because it will tend to be either too loose or too tight in its policies. On that point Hayek and Rothbard are in agreement. Where they differ is that Rothbard seems to think that Fed policy can only ever bee too loose, never too tight.
Tight money does not generate business cycles. Tight money only appears because of previous loose money. If money isn’t loose before, it won’t be tight after. Rothbard argues that “tight money” only appears that way because of previous unsustainable loosening.
>But this is like thinking that because government price fixing is bad, therefore governments always set the price too low. From the fact that the Fed is a bad idea, nothing follows about whether current Fed policy is too loose or too tight. So if you want to argue that current Fed policy is too loose, you can’t simply note that the Fed shouldn’t exist.
Sure we can. Without the Fed, money will not be loose. Without loose money, money will not be tight later on.
Prof. Richard Ebeling said that Hayek would “leak” (be too agreeable with this hosts) on occasion back in the 1970s:
That summer of 1975, Hayek was a visiting scholar at the Institute for Humane Studies, when it was still headquartered in Menlo Park, California.
There was, also a group of young Austrians at IHS that summer including Jerry O’Driscoll, Sudha Shenoy, Roger Garrision, John Egger, Don Lavoie, Gary Short, Larry White, myself, and some others.
Hayek went off to the Meet the Press interview, and was then going on to the Second Austrian Economics conference at the University of Hartford in Connecticut, where many of us were also in attendance.
We told Hayek before he left that we would be watching carefully to make sure that he did not “leak.”
So I like to think that Hayek’s principled and uncompromising answers were (at least partly) due our collective “threat” of our monitoring what he said.
It was thrilling to see him live on U.S. televion on one of the most prominent and watched Sunday news shows.
It is a delight to hear his voice, once again. The Mises Institute has performed another valuable service.
http://austrianeconomists.typepad.com/weblog/2008/12/hayek-on-meet-the-press.html
There is a good chapter on exactly this (the monetarist-Keynesian similarity) in Jesus Huerta de Soto’s Money, Bank Credit, and Economic Cycles.
From pages 576-577:
From the standpoint of our analysis, it is clear that there are far greater similarities than possible differences between monetarists and Keynesians. Indeed Milton Friedman himself has acknowledged: “We all use the Keynesian language and apparatus. None of us any longer accept the initial Keynesian conclusions.” Peter F. Drucker, for his part, indicates that Milton Friedman is essentially and epistemologically a Keynesian:
His economics is pure macroeconomics, with the national government as the one unit, the one dynamic force, controlling the economy through the money supply. Friedman’s economics are completely demand-focused. Money and credit are the pervasive, and indeed the only, economic reality. That Friedman sees money supply as original and interest rates as derivative, is not much more than minor gloss on the Keynesian scriptures.
Link to the entire book as a pdf:
http://mises.org/books/desoto.pdf
Krugman is greatly helping us with these clarifications. The biggest roadblock to people understanding our positions has been the dishonesty, obfuscation and general incoherence of our opponents.
Dr. Murphy,
I imagine you’ve already read Krugman’s post “The War on Demand”. In it he links a short article he wrote in 1998 on “Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis”. According to Krugman, this “changed his life” and is one the main reasons he’s became so enamored with the AD theory of recessions. It supposedly demonstrates the inability of a decentralized system to adjust to changes in “hoarding”. In any case, the case-study is very interesting. Krugman’s take on it, though, demonstrates a tremendous amount of ignorance. If you read it, you’ll know where I’m coming from (e.g. he completely fails to mention that the prices of the tickets were pegged). In fact, I think the case could be made that the experiment demonstrates the superiority of the market system. The whole experiment was developed from the top-down, illustrating the impossible hurdles of complexity, and hence unforeseeable consequences.
Anyways, the reason I’m writing all of this is that I think you could make this a fantastic article (are suggestions allowed?). Given that it “changed his life”, by completely demolishing his perverted interpretation, it would be a pretty nice blow. I’ve only browsed the actual paper as of yet, but just at a glance, it looks like he completely butchered the actual conclusions drawn. Anyways, just a thought. I look forward to more of your future articles.
-EdP
If Krugman’s baby sitting coop had just used real money like gold and silver (plus paper receipts for such), there would have been no “demand” problem. Ever.
People aren’t going to “hoard” in the basement money that can earn high rates of interest in safe investments.
If people wanted to save and invest more than they wanted to engage in cooperative baby sitting, so what? That’s not a mysterious “paradox” that can only be solved by Uncle SWAT Team. The coop problem is caused by using worthless scrip, a form of funny money. This story is just another example of Keynesians attempting to bamboozle the weak-minded with alleged paradoxes that simply do not occur but for their wacky funny money regime.
The entire concept of “demand” is nonsense. In each transaction, there are at least two people. One (or more of them) exchanges something they want less for something they want more. Each party “demands” something and “supplies” something. There is no “demand side”. The concept was cooked up to make people think in collectivist terms about individual subjective valuations. There is no such “thing” as “demand” and no such “thing” as “aggregate demand“.
Also, I fail to see how an alleged “demand shock” isn’t Austrian. People bought houses with diluted funny money thinking they were doing the smart thing because they thought the prices of houses would go up forever. They miscalculated and malinvested. They are now much poorer than they previously knew. Poor people have less “demand” than rich people. They need to spend less and save more. Heck, anybody who malinvests will ultimately face a “demand shock” — a lot less rich people around to buy the end product of their malinvestment. I fail to see how this helps the Keynesians or hurts the Austrians.
As the warden in “Cool Hand Luke” said, “What we have here is a failure to communicate.”
Why were they babysitting in a coop?
http://everydayecon.wordpress.com/2011/01/17/is-david-beckworth-crazy/
Fourth paragraph–“an oxymoron”
Bob,
You are one of Keynes’ “Classical Economist” strawmen made flesh-and-blood.
Please, please read something by Selgin or Horwitz.
I have.
Incidentally, are you denying that Beckworth’s case was that aggregate demand had fallen? He showed a graph of it that Krugman could have posted. Sumner regularly uses just that terminology–“this is a problem of a shortfall in aggregate demand.” I’m not putting words in their mouths.
If you’re a Monetarist, Keynesian, Quasi-Monetarist or Fractional-Reserve Free-banker you can talk about “aggregate demand”. Personally I prefer to talk about the demand to hold money which I think is more closely related to the problem.
But, that doesn’t mean the Quasi-Monetarists or Monetary Disquilibrium Austrians are just Keynesians, not by a long chalk. Where each side proceeds from there is very different.
Bob,
Dude, don’t you realize that “demand” is just a nonsense concept cooked up to make people think in collectivist terms. There’s no such thing as “demand” and therefore no such thing as ‘aggregate demand”.
Blackadder,
Somehow I imagined you saying “Bob” in the appropriately Blackadderish way which makes your post even funnier.
Yep that’s just what I said. You nailed me.
Bob,
See here (4th paragraph).
I’m reading these comments from WordPress, so I can’t see the nesting. You technically were responding to “bobmurphy” when you said the thing about demand being meaningless. Maybe if I had seen the nesting, I would have realized you were trying to rip on Bob Roddis and not me.
Anywho.
Blackadder,
That is a post from Bob Roddis, not Bob Murphy.
Captain Freedom,
I know.
Bob,
Yeah, I was ribbing Bob Roddis, not you. My apologies if it didin’t come across that way.
In some ways Rothbardianism, Monetarism and Keynesianism are more akin to each other than the are to Monetary Disequilibrium economics.
To a Keynesian or conventional Monetarist the quantity of money needs controlling because a private market in money would cause instability. Rothbardians sometimes claim that they support free banking, but they wish to impose upon it a restriction preventing on-demand debts to force the market to produce the quantity of money they believe is suitable. They are really interventionists just like the Keynesians.
As a ‘Rothbardian’ when it comes to FRB, I disagree.
If people wanted to contract with FRB’s that is their business. I would not.
Tell me, if FRB banks failed under such a scenario, would monetary ‘disequilibriumists’ advocate ‘intervention’ to address a subsequent increase in the demand for money?
I wouldn’t. I don’t think Selgin or Horwitz would either.
The Quasi-Monetarist position is a bit different, some of them would.
People can and do “demand” things. The word has meaning.
Keynesians use the term in two distinct ways which they then conflate in order to confuse.
I suppose one can employ the term “demand” simply as statistical concept to provide an approximate measure of the collective wealth of individuals or how much they are spending (although it’s a confusing term). However, there’s no “thing” floating out in the atmosphere called “demand” which has a separate and distinct existence from the wants, dreams and desires of individual people. The term is used by Keynesians to make people think that there is such a separate and distinct “thing” as COLLECTIVE DEMAND and to suggest that this “thing” is responsive in an auto-mechanical sort of way to funny money dilution which is described as morally neutral and scientific.
It’s nothing but a scam and a hoax meant to confuse the weak-minded and provide an excuse to call in Uncle SWAT Team.
Demand in the economic sense is not desire. Read Human Action, Mises deals with this error there. Or any introductory book on economics.
I’m busy. You find the quote and post it.
I understand how Mises uses the concepts of demand and supply of carrots by various individuals, for example. That’s not what I’m talking about. Keynesians use the term to refer to the COLLECTIVE generic “demand” of everybody for everything.
Do you believe in aggregate supply, or is that just more collectivist mumbo jumbo?
Bob Reddis,
What you criticised earlier is the general concept of demand. Not specifically aggregate demand.
I agree that there are problems with aggregate demand. Those problems don’t extend to the demand for money which is different.
“The term is used by Keynesians to make people think that there is such a separate and distinct “thing” as COLLECTIVE DEMAND…”
And think of all those stupid businesses who keep insisting there is such a thing floating in the atmosphere as their TOTAL SALES rather just a whole bunch of individual sales. Sheesh.
Explain how “total sales” is different than a precise count of a whole bunch of individual sales. Once aggregated, they don’t turn into a Portuguese Man o’ War.
Isn’t an increased demand for money held as cash balances very similar to a decreased demand for goods and services now?
Now if this is considered in the aggregate, I’m not sure what the problem is. I am certain Mises used the concept of changes in the demand for money held. In fact, we can read him in his own words using these terms. In many of his arguments, he is carefully saying things like “all things being equal” the money supply increases. Rothbard also says that increased demand for money held is a symptom of the “depression”, which is a period of liquidation and partial salvaging of the malinvestments which are shockingly made plain to all upon credit tightening, and only later discovered to be out of phase with the public’s time preferences.
Now here is the key question that Mises addressed. Is this increased demand for cash balances a cause or symptom of the economic slump? Mises said no, and answered in the positive that credit expansion is the root cause. Keynes of course answered that it was “animal spirits” that spontaneously pushed down aggregate demand and caused the slump. Nowhere does Mises deny the concept of demand for goods and services or money, and his usage strongly implies that he thought about those quantities in the aggregate. Everyone needs to keep in mind that the question Mises sought to answer was not whether these aggregate quantities existed, but whether they were causal in the business cycle story. He said no, they were effects, not causes.
I think it is also important to keep in mind that from an emperical standpoint, cause and effect may be hard to differentiate with confidence. I suspect that in technical terms (that are over my head), this is the essence of Bob’s arguments with the quasi-monetarists and Krugman types. He is looking for emperical data to isolate one small portion of the cycle, and establish causation.
Finally, I must make the disclaimer that I am an amateur, and would certainly welcome correction by a real monetary scholar.
>This is exactly why I classified David Beckworth’s National Review article as “monetarist Keynesianism.” Beckworth thought that was a contradiction in terms,* but no it isn’t. Don’t take my word for it, ask the Nobel laureate.
This isn’t really fair. Krugman was explaining why Monetarists and Keynesians look all the same to Austrian types. But that’s not the same thing as saying they actually are. Basically, he’s saying Austrian is so extreme that even monetarism is to the left of it, and looks closer to Keynes relatively.
It’s like if he said, “to Minutemen, there isn’t a lot of difference between Mexicans and Columbians”, and interpreting that as “all South Americans are the same! Don’t take my word, ask a nobel laureate!”
Why is it that people don’t believe Krugman means what his words say? Yes, he is for a while “in the head” of the moronic demand-deniers, but then he ends with, “And you know, they are; once you’ve accepted the idea that inadequate demand is the problem, the role of fiscal as opposed to monetary policy is just a technical detail (albeit one of enormous practical importance).”
So there, the “they are” means, “They really are, it’s not just a fantasy of the demand deniers.” Because he says, “Once you’ve accepted the idea that inadequate demand is the problem…” So he clearly is not in demand-denier-moron land anymore, he is in reality-has-a-liberal-bias land.
Seriously, why do I keep getting accused of misrepresenting people when I QUOTE them? “Bob, Beckworth never said lending would go up; all he did was say lending would go up. What the heck are you smoking? Krugman never called for a housing bubble–he just said “to fight this recession, the Fed needs to create a housing bubble.” For all we know, Krugman thinks the Fed shouldn’t fight recessions.”
It’s the same with the Lincoln cult. Nobody likes when people they follow say outlandish things.
I”ve been an Austrian/libertarian for 38 years this week originally triggered by reading Rothbard as Nixon ended the draft. I had a very low draft number and my deferment was about to run out.
http://tinyurl.com/dsa0
In all that time, 98.357% of all debates with non-Austrians have been stuck at the definition stage (“Oh, you’re just like that Milton Friedman—Oh no, the government isn’t a SWAT team!”).
Now that Krugman has conceded that Friedman isn’t one of us, I predict that soon he will announce that “aggregate demand” is more than just a precise count of a whole bunch of individual transactions or potential transactions, that it has magical powers and that Austrians are backwards aggregate demand deniers.
And then someone will comment here that Krugman really didn’t mean that.
Black Adder told a story about a government apple monopoly.
There is a shortage, and while getting govenment out of the apple business is best, if it doesn’t do that, it should raise the price and/or expand the production of apples.
I agree.
But…
Suppose that the government apple warehouses are full of apples and there are government trucks parked outside ready to haul them to the governement apple stores. The truck drivers and warehouse workers are playing cards and drinking coffee. Every once in a while, they take a few to a government store.
At the government store, there are few apples there. At the current price, there are plenty of buyers. People line up, and when a truck appears, they apples are soon gone, and the people at the end of the line go home empty handed.
The Rothbardian solution to this problem is for wages to fall so that the apple buyers will only be able to afford the number of apples in the shop. Further, with lower wages, other goods will be cheaper, and people will buy pears and cherries instead of apples. And so, pear and cherry production will rise.
But if the price of apples is increased or more apples appear in the shop, then horrible malinvestment will occur.
The quasimonetarist solution is to tell the coffee drinking card playing warehouse workers and truck drivers to get to work, and haul the apples to the store. Once that is done, if there is a still a shortage, then raise prices and/or expand apple growing. And if there is a surplus, lower prices or lower production.
You might find what I say here on the connection between Keynesianism and monetarism of interest:
http://zatavu.blogspot.com/2011/01/keynes-wages-inflation.html