01
Nov
2011
Don’t You Dare Show Scott Sumner This Rothbard Excerpt
I’m working on tomorrow’s lecture from Chapter 11 of Man, Economy, and State, and came across this passage on page 849:
It is thus clear that the exchange-value of money cannot be quantitatively separated from the exchange-value of goods. Since the general exchange-value, or PPM, of money cannot be quantitatively defined and isolated in any historical situation, and its changes cannot be defined or measured, it is obvious that it cannot be kept stable. If we do not know what something is, we cannot very well act to keep it constant.
Great. Now Sumner is going to claim that Hayek and Rothbard agree with him.
We have people seriously insisting now that Hayek supported NGDP targeting, and a massive welfare state. Where does it stop?
Those are actually true.
Hayek was both an economist and sociologist/political philosopher.
Economically, he tended towards laissez faire, but sociologically, he tended towards social democracy.
Just as both socialists and libertarians like to pick and choose passages from Adam Smith and JM Keynes that correspond to their existing beliefs, so too do people do that with Hayek. People also do that with the Bible too.
For some reason, contradictory writers get the most attention, whereas clear thinking, systematically logical writers get the least attention. It reminds me of that old saying, “Poets muddy the waters to make it look deeper.”
For some reason, contradictory writers get the most attention
Herman Cain, anyone?
http://original.antiwar.com/justin/2011/11/01/herman-cain-nein-nein-nein/
Four pages prior to the Ransom quote, Hayek said this:
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“. 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 dose 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.
1975 Hayek speech at page 8
Leaving aside the issue of trend growth (where Hayek favored zero,) there is no contradiction.
Sumner (and I) favor keeping nominal GDP on a stable growth path. If it falls below, we favor returning it to the growth path.
We do not favor shiftintg to a higher growth rate or growth path if there is a recesion. Raising the growth rate or growth path of nominal GDP to a new target is something we would oppose.
If, like Hayek, you favor a “growth path” with a growth path of zero, then keeping nominal GDP at the target level is best. If it should fall, returning it back to where it was should be done. Raising it to try to end a recession is a bad idea.
So, suppose there is malinvestment. The productivity capacity of the economy will be depressed because the malinvestments won’t produce what people want. This will tend to raise the price level given the level of nomijnal GDP. As more appropriate capital good are produced and labor is reallocated, the price level will fall back.
If the realization of the malinvestment is assocated with an increase in the demand to hold money, and the quantity of money failed to increase. Nominal income falls. Even though the productive capacity of the economy deceases, the price level might decrease.
Hayek favors increasing the money supply after the fact, to get nominal GDP back to its intial value. This would tend to raise the price level, reversing any deflation and further, raising it to reflect the reduced productivity.
He would not favor raising the quantity of money so that nominal GDP rises above its long run value.
This is more or less the way Sumner and I look at things.
Of course, Sumner favors a 5% growth path. This is mostly because that is what the U.S. was on.
I favor a 3% growth path because it generates a stable price level on average.
So, I favor keeping to the growth path. If were were on that growth path, and unemployment should rise, perhaps because malinvestments turn out to be unprofitable, I would favor staying on the growth path. I would not favor shifting to a higher growth path or growth rate in an effort to reduce the unemployment or make the malinvestments profitable.
On the other hand, if nominal GDP falls below the growth path, I would favor raising it back up to the growth path. This might involve higher inflation, in the sense of a lower purchasing power of money. For example, it might reverse recent deflation. But it could be that the price level would rise above the long run trend.
For example, if there had been malinvestment, then the capacity of the economy to produce what people want is lower. The inappropriate capital goods could produce something, but not what people want.
If, the realization of the malinvestments was associated in an increase in the demand for money, and there was a failure to accomodate it, then nominal GDP would grow more slowly or fall at the same time the productive capacity of the economy is depressed. The rule for nominal GDP targeting is to get nominal GDP up to the target growth path. The path of prices could be at first falling and then rising back up to the previous equlilibrium price level and then past that point.
However, trying to shift the growth path of nominal GDP up, or shift to a higher growth rate, in an effort to prevenue the reallocation of resources would be a mistake. Or so I believe.
So, suppose there is malinvestment. The productivity capacity of the economy will be depressed because the malinvestments won’t produce what people want. This will tend to raise the price level given the level of nomijnal GDP. As more appropriate capital good are produced and labor is reallocated, the price level will fall back.
Aren’t you ignoring the increases in the demand for money holding, which typically accompanies such depressed economies? Wouldn’t the money printing into the loan market that would be required to offset the increase in the demand for money holding, in order to maintain a given NGDP target, generate malinvestment of its own?
What if, like today, the desire to hold money is so great that credit expansion would have to be so great in response that short term interest rates are brought down to, oh I don’t know, 0.25%?
The only way I can see NGDP targeting not leading to the business cycle would be if the Fed simply wrote checks to everyone, “money out of helicopters” so to speak, the more that people hoarded cash.
Money holding would then become the best “investment” one can make. All you need to do is hold higher cash balances, which depresses NGDP, and the Fed will send you a check in the mail!
So basically the “target NGDP” crowd are giving us two choices. Either we get the business cycle (if money printing enters the banking system as is traditional) or we get a perverse system where the more money people hold, the higher the payoff they will get.
Or, if we consider reality, the Fed would most likely print and spend money only on their friends. The Fed will buy up worthless mortgage backed derivatives from the politically connected primary dealers, but they won’t send me a check to buy my old Commodore 64. So the Cantillon Effect will set in at my expense.
Rothbard, typically, is well stating the standard Austrian understanding — one you’ll find repeatedly in Hayek, e.g. at the end of The Pure Theory of Capital.
I don’t get your point here, Bob. Is Rothbard wrong here?
No, but I’ve been ripping Sumner lately for his stance that the word “inflation” is meaningless. A lot of his specific arguments are just like this Rothbard quotation.
Bob, I know that your have been on this NGDP thing for a while, and I agree with many of your points regarding the inconsistencies of Sumner’s ideas. But, I was just curious how interest rate policy fits into all of this. Is he coming from a purely monetary angle, where interest rates adjust with relation to increasing supply (money), or does he have an interest rate policy to go along with his NGDP theory?
Sorry, I have been engaged in other things lately and may have missed some details.
Hard to see Rothbard as giving much support to Market Monetarism though given that his next paragraphs contains the following:
“I If the total supply of money in the community has remained constant, falling prices will be caused by a general increase in the demand for money or by an increase in the supply of goods as a result of increased productivity. An increased demand for money stems from the free choice of individuals, say, in the expectation of a more troubled future or of future price declines. Stabilization would deprive people of the chance to increase their real cash holdings and the real value of the dollar by free, mutually agreed-upon actions. As in any other aspect of the free market, those entrepreneurs who successfully anticipate the increased demand will benefit, and those who err will lose in their speculations”
Which is about as elegant a statement of anti-interventionism as you could find.
Let’s not forget that under a gold standard there is also a tendency to stabilize MV. The very entrepreneurs mentioned in the above passage will start to dig up gold from the ground as soon as they expect V to drop. His policy norm is not that different therefore from that of the MM’s.
When it comes to who should do the forecasting and who should do the digging, Rothbard differs, but not from Hayek, merely from the mainstream and from some/most of the MM’s. Rothbard differs from Hayek on the prediction what free banking would/should look like.
Free fractional reserve banking is the most obvious free-market vehicle for MV stabilization. Rothbard wanted to make it a criminal activity !
Can’t deny he was a great writer though.
Yes, there is a lot of questions regarding Rothbard’s position on fractional-reserve banking. He does make a decent point that if you are going to lend the money, why not just do it through time accounts such as CDs. I’ve also read some of Selgin’s work, who supports fractional reserve free banking. I still haven’t quite come to a conclusion. But, I guess if the people are aware that when they deposit money that it is no longer their money, then I can see Selgin’s point. But, most people haven’t a clue.
I don’t see why it should matter that people have a clue or not. The banks will be stable regardless of people having a clue or not. People do not have to have conscious knowledge that they can bring a bank to its knees with a bank run, it’s sufficient that there is herd behavior when a few people notice that it becomes difficult to withdraw or expect it to become difficult to withdraw. “Bank A suffered heavy losses” is sufficient a signal to start off the run.
The interesting question is whether banks are capable to remain stable and whether or not the ‘institutional set up’ is stable, that is, whether government intervention will be unlikely after the system is set up.
The latter is mostly a question of the prevailing ideology and the stability of said ideology vis-a-vis other ideologies.
Whether people know that what they deposit into the bank is their property or that of the bank is very important, I think. The stability of a bank or banks is not the concern that I have, the concern that I have is ownership of property, and I believe that this was the heart of Rothbard’s distaste for FRB. His warehouse/grain elevator argument is pretty clear in this regard.
Well, there was a case in the 19th century in the UK – forgot its name now – that basically said that the money in the bank is not your money, you only have claim against the bank for the amount. So the law is pretty clear on that.
Regarding your second post: banks offer both deposit accounts as deposit boxes where you can store your valuables.
What you have in mind is something that also functions as a means of payment or? I am all for it, it doesn’t seem like too difficult an innovation to make. Not only, but I’d be curious as to how it will play out.
You are correct, I was referring to a fee based warehouse deposit account that can be drawn upon by issuing of a check, wire, online transfers, etc.
Essentially, an account that acts just as demand deposit accounts do today. The people can then choose whether they wish to loan the bank funds by way of FRB, or whether to simply warehouse their money. Those that are more risk averse have an option that suites their needs, and those less risk averse have an option, as well.
Obviously, the type of money has great implications here, but that is a discussion for a different time. I will say that it is my opinion that the more conservative banks will probably have a higher proportion of FRB account than that of other banks. And, of course, a lot of this is dependent upon depositors actually having some idea of each banks standing.
Either way, it was an idea that I came up with to help to find a happy medium with regard to the Rothbardian and Selgin ideas of free banking.
“I am the great weaver”- Bill Hicks
😉
Probably an easier way to deal with this problem is to offer both variations of deposit accounts, one being a standard FRB demand deposit account, the other being a warehouse deposit account (for a fee).
Not only do the depositors need to know and agree to the precise nature of these notes and deposits, but so do the people you attempt to pay with these FRB notes. I cannot see widestread acceptance of them in a world with competing 100% specie notes. Hardly anyone in Detroit accepts Canadian money even when it is at par with US and you really can know day to day the exchange rate you can get from your bank. Full disclosure probably defeats the purpose and without full disclosure, I think it’s fraudulent.
To me, the subject is about as interesting as whether there will be a market for bad disco records under an an-cap regime 35 years from now.
Bob, I agree that if we had competition between warehouse receipts and FR notes, that the tendency would be to carry receipts. However, my aim is to create a bridge between the two and allow the people to decide.
Obviously, under current monetary reality (fiat notes, legal tender laws, etc), it really isn’t a viable alternative.
“If the total supply of money in the community has remained constant…As in any other aspect of the free market”
But a fixed money stock has nothing to do with a free market. A fixed money supply would never happen in a free banking system. A constant money stock is the ultimate government intervention. Why is this government intervention the one intervention that does no harm?