28 Nov 2011

Murphy Smackdown: DeLong on Mises

Economics, Gold 113 Comments

I am going to do a full write-up for Mises.org once I get my day job under control, but those of you who have been following DeLong’s assaults on Mises might be interested in his latest post. For the context, DeLong hasn’t been able to figure out why Mises says printing paper money won’t fix a depression, since (DeLong claims) Mises says that mining more gold would do the trick. DeLong speculated that maybe Mises believed in a labor theory of value when it comes to money, because that was the only way DeLong could make sense of Mises’ strange views.

In the comments of his original volley, I said to DeLong that the solution was easy: Though he supported the gold standard, Mises didn’t think digging up more gold would fix a depression once it started. (To me this was obvious, since for Mises the depression is caused by the unsustainable real configuration of the capital structure, which developed during the prior inflationary boom.) I invited DeLong to provide me a quote where Mises said that digging up more gold would cure a depression.

Here is DeLong’s response. Make sure you read my comment. What’s really funny is that I’m sure both of us are walking away from this thinking, “Boy I just crushed that guy.”

113 Responses to “Murphy Smackdown: DeLong on Mises”

  1. Nick says:

    Here’s a question.

    Greece is in a mess because it can’t print money. It spent too much (the original mistake), and now can’t get out by having its currency depreciate. It’s locked in to the Euro.

    Now, if Greece was on the gold standard, wouldn’t it face the same problems in getting out from its current mess, because it can’t devalue gold?

    • MamMoTh says:

      Yes.

      • Bob Roddis says:

        At least we can agree on that point, right? It’s not really an “economics” issue, but a moral issue. You like funny money because it allows contractual terms to be altered via funny money (without due process). Gold stops that process cold which is why we like gold and you don’t.

        • Gene Callahan says:

          Gee, Bob, the people who lent Greece money weren’t aware they had a fiat currency? And why are you OK with contractual terms that can be altered by people discovering gold? If I find a mine that doubles the world’s gold supply, your loan to me will be repaid in gold worth roughly half as much as it had been.

          Gold is immoral!

          • gienek says:

            Wouldn’t the only reason why it would be profitable to dig up so much gold be the increased demand for gold(=cash balances) which would roughly keep the “real value” of the loan unchanged?

            • Anonymous says:

              This man gets it.

          • Bob Roddis says:

            The difference is that a new discovery of gold merely changes market conditions and prices. Funny money dilution is intentional and purposeful government policy intended to artificially lower real prices, wages and debt extra-judicially without due process, without taking into account the specific nature and identity of the parties or contract terms and generally without the parties themselves knowing what has hit them.

            It’s a trick. The Keynesian Hoax.

            I suppose you are right that everyone should understand the nature of fiat money. Thus, if there are now some unemployed innocents living in cars due to the bust, it serves them right. They should have known better and taken precautions.

            http://www.cbsnews.com/8301-18560_162-57330802/hard-times-generation-families-living-in-cars/

          • Bob Murphy says:

            Gene, you’re ignoring how much extra bling there would be, if the quantity of mined gold suddenly doubled. We’d all be Mr. T.

            • Yancey Ward says:

              How would you get your Mohawk?

          • Anonymous says:

            Gee, Bob, the people who lent Greece money weren’t aware they had a fiat currency?

            Greece does not print its own currency.

            And why are you OK with contractual terms that can be altered by people discovering gold? If I find a mine that doubles the world’s gold supply, your loan to me will be repaid in gold worth roughly half as much as it had been.

            If that happens often enough in a free market of money, then considering how a free market process that resulted in gold being the money is not binding by law, i.e. violence, it means that each individual who freely and without coercion accepted gold for money purposes, would be voluntarily taking on the risk of devaluation from gold mining. He would be responsible for that risk because he willingly took it on. Hence, the MINOR devaluation in a free market system would not be immoral.

            But when we are coerced into accepting fiat money, through legal tender and taxation laws by government, then the money creation takes on a different characteristic. It is no longer a question of the individual voluntarily taking on the risk of future devaluation. It is now exploitative, since the individual is now forced to take on that risk, and his savings are now up for grabs by whims that are violent, and not free choice.

            The gold and the paper are not what is immoral and moral. It is the VIOLENCE that is immoral. A free market in money, which Roddis is in favor of, which resulted in gold being the money of choice, wouldn’t suffer from funny money VIOLENT exploitation from monopolists taking advantage of people by devaluing the currency they are COERCED into using by printing money for themselves and then coercing people into using it.

            By your crap logic, if I were to say that individuals should be free, like you, to take on the risks of adopting fallacious and destructive economic and philosophical claims in their minds, that there is no difference between that, and being forced through threats of violence to take written tests and accept those same fallacious ideas in mandatory indoctrination camps, and if you don’t agree to it, you have to leave your own land property after which land confiscators will take ownership of it.

            Just because people would more than likely choose gold if the free market process were not interfered with in the realm of money, and thus voluntarily accept the risks of devaluation (which are way smaller than with fiat money) that doesn’t mean that the risk of devaluation in accepting gold as money somehow proves that individuals are willing to be stripped of their savings by force through government inflation.

            Wake up and smell the roses.

            • scineram says:

              No one forced investors to lend to Greece in Euros in whatever terms.

        • MamMoTh says:

          Contracts in nominal terms are not altered, so there is no moral issue there for people who have subscribed such contracts.

          One moral issue is to what extent people holding money should keep its value at the expense of those who don’t have it.

          Another one is why should creating new money entail polluting rivers, hazarding the health of human beings to dig up some shiny useless rock, instead of creating it out of thin air to reward someone who teaches.

          • marris says:

            If only we could create institutions where students (or student parents) *pay* teachers for their services. Oh well.

            • MamMoTh says:

              Like the existing ones where reach kids monopolize the best teachers?

              • marris says:

                What is a reach kid?

              • skylien says:

                I guess he meant “rich”…

              • marris says:

                Heh. I thought it might be the name of some new education program: No Child Left Behind, Race to the Top, and Reach for the ???

                Anyway, my folks were not rich, and I had some very good teachers. The “trick” is to work hard and develop marketable skills, not gripe about how “those guys” monopolize good teachers.

                One of my best teachers did not complain about not getting paid enough. He wanted to teach. He complained about all the bureaucratic idiocy which punished the best teachers so the mediocre could hang on to their jobs. And now we’re.talking about bailing out, rather than firing those guys? Nice.

              • Bharat says:

                Reach for the sky

          • Major_Freedom says:

            One moral issue is to what extent people holding money should keep its value at the expense of those who don’t have it.

            There is so much wrong here it is sickening.

            No Mammy, people holding onto their earnings for longer than what you believe is “justified” is not them incurring EXPENSES on others. It is wrong to say that one person holding cash for longer than 1 second, or 1 day, or 1 year, is somehow coming “at the expense” of others. It cannot come at their expense, because it’s not their money. It’s the property of the money holder.

            If I earn $100, and hold it for longer than what you yahoos believe is “justified”, then that is not me incurring any EXPENSES on anyone else.

            Individuals holding their earnings for longer than what you believe is “justified” for them to do, that somehow magically changes “money balances for spending” into “money balances for hoarding”, which by the way totally ignores the fact that EVERYONE “hoards” money for some positive period of time, and is just a matter of their values and their preferences of WHEN they want to spend it, since all this is NON-VIOLENT behavior, it means that morally, there is no justification for using violence against them to “punish” them, either directly in the form of taxation, or indirectly in the form of inflation, which is based on a direct use of violence to coerce people into accepting fiat money.

            Another one is why should creating new money entail polluting rivers, hazarding the health of human beings to dig up some shiny useless rock, instead of creating it out of thin air to reward someone who teaches.

            LOL, how pathetic. Anything that sticks, huh? If you understood the institution of PROPERTY RIGHTS, then you would have known that one land owner cannot pollute another land owner’s property, even if they are digging for gold. If the government interferes with the market not only in money production, but in land ownership as well, and prevents land ownership over lakes and streams, thus engendering the tragedy of the commons, then this is only another mark against state intervention. It’s not a mark against free markets.

            You’re setting up a false dichotomy. You’re fallaciously claiming that the choice is either “clean, pollutionless money printing” (which by the way affects the environment through linen and cotton manufacturing, but we don’t see you complaining about the disaffected birds, bugs, and worms), and “dirty, polluting gold production that harms people’s property and their lives.”

            Roddis is right. You yahoos lost the debate. Now it’s just pathetic appeals to dirty fight tactics and ignorance of the that which you are attempting to refute.

            • MamMoTh says:

              Private property is violence, it can be guaranteed only through violence and submission.

              The fact you consider some forms of violence legitimate and others not, doesn’t matter.

              I agree that banknotes and coins are a waste of resources and we should rid ourselves of them and have only electronic money stored in computers powered with renewable energy.

              • Major_Freedom says:

                Private property is violence

                No, private property is peaceful. Original appropriation and homesteading is peaceful, because it doesn’t aggress against anyone else’s person or property. It not violent any more than giving effort to change your body, and defending it from aggression, is inherently violent.

                Just because property can rightfully be PROTECTED by violence, against initiations of violence, it doesn’t mean property is inherently violent. It means that violations of property rights are inherently violent.

                It is false to claim that property can ONLY be “guaranteed” through violence and submission. If nobody chooses to be violent and if nobody chooses to seek to submit other people’s property as their own, which is POSSIBLE, then peace is guaranteed and violence is not guaranteed.

                Yes, positive numbers of people have used violence in the past, which was rightfully met with protective violence. But that initiation of violence is not guaranteed either. That’s a product of choice as well. Therefore, if some people choose to act violently against other people’s peacefully derived property rights, then the RESPONSE of protective violence does not mean that property is inherently violent.

                Just like me protecting my body against would be beaters and torturers and aggressors doesn’t make my claim over my body inherently violent, so too would protecting one’s property rights over material goods doesn’t make that claim inherently violent.

                Inherent violence is created through initiations of violence, not the violent response to those initiations of violence. If people choose peace, then the property rights won’t just disappear. They would still be ever present. They would be respected.

                The fact you consider some forms of violence legitimate and others not, doesn’t matter.

                Of course it matters. If I were to call for violence only in defense, to protect one’s life and well-being, then this is totally different from INITIATING violence against peaceful people. I could choose to be peaceful and deal with other peaceful people, and my property rights would still be present.

                If I am stranded on a desert island with someone else, and that other person would not dream of using violence against my person or my homesteaded land, and I likewise respected his property rights, then we have chosen peace, and our property rights are being respected, and they are still present every day. They are a necessary product of our voluntary actions. Each of our property rights is established by original appropriation, production, and exchange. Not violence.

                I agree that banknotes and coins are a waste of resources and we should rid ourselves of them and have only electronic money stored in computers powered with renewable energy.

                I agree that you don’t understand the concept of money, and I agree that your mentality is corrupted through mystical metaphysics that you find optimality in human life via escaping the physical world, which is “dirty” and “evil.”

                Digital money is but a fuzzy attempt at this. You sound like the perfect stooge candidate for the loonies over at the Venus Project.

              • marris says:

                > Private property is violence, it can be guaranteed only through violence and submission.

                Chill out, Proudhon. I think your confusing is and ought again.

                Property is an ought idea. If X is my property, then violence is not required for this claim to be true. If someone comes and takes X, then we can say that he *stole* it only because some property rights says that I am the rightful owner.

                I could just as easily say that there are no violent acts, unless we presuppose some property rights norm that the acts are violating.

              • Major_Freedom says:

                Chill out, Proudhon. I think your confusing is and ought again.

                marris, the funny thing about the whole “property is theft / property is violence” stuff that admirers of Proudhon overlook, is that while he did say “Property is theft”, he ALSO said “Property is freedom.”

                The full quote is this:

                “Property is theft, property is impossible, property is despotism and property is freedom.”

                When he said property is theft, he meant the property of capitalists. When he said property is freedom, he meant the property of worker producers who sell products and not their labor.

                So Proudhon was not against property per se, he was just against wage-labor. How a ban on wage labor can be enforced without a state is a mystery.

                Also, he wrote in “Theory of Property,” that:

                “Property is the only power that can act as a counterweight to the State.”

                Some ammunition for you the next time some follower of Proudhon chants the slogans to you.

    • Bob Murphy says:

      Nick, yes. That’s why Mises is being consistent. If Mises thought that Greece would be able to get out of its mess by “printing” more gold, then DeLong would have a point.

      But Mises doesn’t say that, and so DeLong doesn’t have a point (I claim).

      • TGGP says:

        What about Delong’s fallback claim that Mises is inconsistently shifting his argument between the importance of nominal vs real factors? I don’t need to add an extra link to his comment, since he inserted it as an edit into the comment you already linked.

        • Bob Murphy says:

          TGGP, DeLong is mistaken about what Mises is doing there. The whole point of that entire section is to refute the idea that there is an insufficiency of gold. So Mises says (paraphrasing), “Yes, it’s true that if more gold had been dug up, then we’d have higher prices.” DeLong thinks Mises is thus admitting more gold would fix the depression. But no, that’s not what Mises is saying, as his next sentence (!) indicates.

          When DeLong says that Mises is talking about how the prior inflation leads to the deflation and hence bust, it just shows DeLong doesn’t understand Mises’ theory. The bust occurs because of real factors, not because of falling prices.

          • konst says:

            What is it about Keynesians that they can’t grasp the simple concept, even for the sake of argument, that depressions are NOT caused by deflation of prices. Are they not willing to just entertain the possibility?

            • Bob Roddis says:

              Just by acknowledging our basic concepts, our opponents would know in their hearts that they had lost the argument because it is self evident that we know how the world works. That’s the reason for all of the off-topic hysterics on their part.

    • Tel says:

      Nick, I’m going to disagree with the very premise of your question. Greece is in a mess because its government consistently and always spends much more than it collects. It’s not a matter of (past tense), “It spent too much”, it is a matter of, it spent too much and it intends to go on spending too much for the foreseeable future.

      You say that Greece is “locked in to the Euro”, well locked how? If tomorrow Greece said, “Sorry but we default on all foreign loans, and we are shifting to our own currency,” then what? Who can stop them?

      The worst that I could think of is the European powers block the shipments of oil into Greece (certainly they would not invade) but realistically Russia will trade oil and gas with anyone so who cares? There is nothing actually locking Greece into the Euro.

      However, if they did decide to default and drop off the Euro, they would not be able to borrow more and that there is your problem, they are addicted and need to keep borrowing. Gold won’t fix this unless they discover a big reef and it is easy to get, even then it will run out. Money printing won’t fix it either because once they become free floating they will just free float themselves down as they print more.

      The only way to fix it is either become more productive or spend less.

  2. Daniel Hewitt says:

    Hey, how did you get through? I tried to post on his blog this morning but DeLong deleted my comment, and sent an email saying that “You didn’t read what I wrote, did you?”

    • Bob Murphy says:

      Daniel, I put the D in PhD.

      • Daniel Hewitt, PhD says:

        OK, I will try again now…..

  3. Bharat says:

    Haha, I was about to ask “Where does Mises say that avoiding deflationary prices would mean that the crisis would not have taken place?” but I had a good laugh finding out Mises said the exact opposite in the next sentence.

    • gienek says:

      That’s some credible quoting by DeLong, isn’t it? 😉

  4. Patch says:

    Don’t waste your time, I actually posted a reply much similar to yours earlier in the day. He never posted it. Furthermore, about a week ago I posted a quote of Mises that directly contradicted his interpretation. He stated that Mises believed gold could never cause a business cycle, I provided the quote from Human Action then directly contradicted him. Never posted.

    • Bob Murphy says:

      Patch can you give me the HA quote? I want to make sure I have all my ducks in a row before I go with a Mises.org piece.

      • Patch says:

        Its on page 571 of human action. I posted it on Daniel Kuehn’s blog.

        • Patch says:

          Bear in mind I was rude in my reply to Delong on Kuehn’s blog because he never posted my response, and I find it extremely irritating he cherry picks his quotes and edits other people’s responses. I am normally not like this. He especially irked me off.

        • Danny Sanchez says:

          Here’s the Mises quote Patch posted:

          “It is beyond doubt that credit expansion is one of the primary issues of interventionism. Nevertheless the right place for the analysis of the problems involved is not in the theory of interventionism but in that of the pure market economy. For the problem we have to deal with is essentially the relation between the supply of money and the rate of interest, a problem of which the consequences of credit expansion are only a particular instance.

          Everything that has been asserted with regard to the effects of any increase in the supply of money proper as far as this additional supply reaches the loan market at an early stage of its inflow into the market system. If the additional quantity of money increases the quantity of money offered for loans at a time when commodity prices and wage rates have not yet been completely adjusted to the change in the money relation, the effects are no different from those of a credit expansion. In analyzing the problem of credit expansion, catallactics completes the teachings of the theory of money and of interest.”

          • Bob Murphy says:

            Danny let’s make sure we’re on the same page: Do you think Mises is here saying that if extra gold production happened to hit the loan market first, then we’d get a mini-ABCT?

            • Danny Sanchez says:

              I believe so, yes. That’s how Rothbard interpreted him too. In America’s Great Depression Rothbard wrote,

              “In his Human Action, Mises first investigated the laws of a free-market economy and then analyzed various forms of coercive intervention in the free market. He admits that he had considered relegating trade-cycle theory to the section on intervention, but then retained the discussion in the free market part of the volume. He did so because he believed that a boom–bust cycle could also be generated by an increase in gold money, provided that the gold entered the loan market before all its price-raising effects had been completed. The potential range of such cyclical effects in practice, of course, is severely limited: the gold supply is limited by the fortunes of gold mining, and only a fraction of new gold enters the loan market before influencing prices and wage rates.”

              • Patch says:

                Damn, you beat me to it!

              • Danny Sanchez says:

                Also, in the same section as the above Mises quote (chapter 20, section 8), Mises talks about why any distortions caused by commodity money inflation have been very limited:

                “What differentiates credit expansion from an increase in the supply of money as it can appear in an economy employing only commodity money and no fiduciary media at all is conditioned by divergences in the quantity of the increase and in the temporal sequence of its effects on the various parts of the market. Even a rapid increase in the production of the precious metals can never have the range which credit expansion can attain. The gold standard was an efficacious check upon credit expansion, as it forced the banks not to exceed certain limits in their expansionist ventures. The gold standard’s own inflationary potentialities were kept within limits by the vicissitudes of gold mining. Moreover, only a part of the additional gold immediately increased the supply offered on the loan market. The greater part acted first upon commodity prices and wage rates and affected the loan market only at a later stage of the inflationary process.”

              • Bob Murphy says:

                Wow I had forgotten about that! Danny can you give me the exact cite for the Rothbard thing?

              • Danny Sanchez says:

                It’s on page 34 of America’s Great Depression.

              • Bharat says:

                Thanks Danny, I too had been wondering about this.

                Professor Murphy, would you think this would be a fairly conclusive piece of evidence that Mises believed a business cycle could occur on the free market? (Although its coming from Rothbard) You were telling me the other day that there was an argument between Austrians about this, and that both sides could cite evidence.

              • Bob Murphy says:

                Bharat right. I want to go look it up in HA and Rothbard just to get the context (like 2 pages on either side of each quotation), but this looks pretty definitive to me.

              • Joseph Fetz says:

                I am fairly certain that Rothbard believed that the business cycle could occur in a free market, especially when I read his last work ‘Austrian… Economic Thought’.

                Sure, we could not call that particular influx of precious metals from America a free-market arrangement. But, it is not inconceivable that such an influx could occur in a free market arrangement (i.e. unowned land).

                It should be obvious (at least to me) that any marked increase in the abundance of a good will reduce its price, this is also true of the money and interest. The difference is that it is the market that is determining this, not a central authority; so the market would adjust rather quickly in comparison.

              • Bob Murphy says:

                Joseph, can you dig up the passage you have in mind from Rothbard’s history? You have about 72 hours before I write my official reply to DeLong…

              • Joseph Fetz says:

                Woops! I was talking about the Spanish inflation from the influx of metals from the “new world”.

              • MamMoTh says:

                The difference is that it is the market that is determining this, not a central authority; so the market would adjust rather quickly in comparison.

                Another faith based economic dogma.

              • Dan says:

                Dr. Murphy, I’m fairly certain that Joseph is talking about page 99 in Economic Thought Before Adam Smith.

                “The great secular depression of the fourteenth and first half of the fifteenth
                century began to give way to economic recovery in the second half of the
                fifteenth. The overland trade from the Mediterranean to northern Europe, cut
                off by the French king’s depredations against the fairs of Champagne, was
                increasingly replaced by sea trade off the Atlantic coast. Vessels now went
                through the Straits of Gibraltar and up the coast, increasingly sailing to
                Antwerp and making that city the big trading centre in northern Europe
                during the sixteenth century. Commerce moved away from the restrictions
                and high taxation of Flemish Bruges, and shifted to and expanded in free
                market Antwerp, where business and trade could flourish free of hampering
                legislation, privileges, and high taxes. In addition, Atlantic ships headed
                south and west, and the famous explorations and discoveries of the late
                fifteenth century changed the face of world history by making European
                countries world powers, and began to integrate Africa and the New World
                into the European economy. Spain and Portugal, the leading explorers of the
                new continents, became the dominant nation-states and empires of the sixteenth
                century. Slowly but surely, the Italian city-states which had been in the
                forefront of economic advance and the spearhead of Renaissance culture,
                began to be left behind in the advance of economic and political power.
                Along with commercial expansion came inflation, fuelled by the immense
                increase of gold and silver brought to Europe by the Spaniards from the
                newly found mines of the western hemisphere. An approximate tripling of the
                stock of specie in Europe resulted in a century of inflation, with prices
                tripling during the sixteenth century. The new money flowed first into the
                main Spanish port of Seville, then into the rest of Spain, and finally into other
                countries of Europe, and the geography of price rises followed accordingly.
                As Atlantic powers, England and France grew in strength along with the
                other Atlantic nations of western Europe. They were greatly aided by the end
                of the destructive Hundred Years’ War between the two nations in 1453. The
                doctrines of the absolute state, previously limited largely to theorists and
                rulers of the Italian city-states, now spread to all the nation-states of Europe.
                Absolutism eventually triumphed throughout Europe by the early seventeenth
                century. The victory was fuelled, as we shall see below, by the rise of
                Protestantism and a bit later of secularism, beginning in the sixteenth century.

                http://mises.org/books/histofthought1.pdf

              • Joseph Fetz says:

                It starts on the bottom of pg. 103 and ends somewhere around pg. 114. There is also this article from Mises.org, from the same book.

                Granted, this is a 16th century inflation in Spain, so it a different part of the business cycle.

              • Joseph Fetz says:

                Darn, I almost forgot to post the link to the Mises article:
                http://mises.org/daily/4310

              • Joseph Fetz says:

                Dan, you were close, but not dead on. That particular book tends to weave in and out of time, constantly referencing and reinforcing things said prior, or simply mentioning something with the disclaimer: we will examine this below.

                But, I remember reading specifically about Spain and its influx of metals with regard to the business cycle. I remember thinking that Rothbard entertained the idea that the business cycle could occur due to an abundance of specie.

              • Joseph Fetz says:

                Unfortunately, in the case of Spain, they did not allow the market to work.

              • Dan says:

                Yeah, I actually started that book recently and I’m about 10 pages away from that chapter. He amazes me with the wide scope of knowledge he had. It seems the guy could speak intelligently on virtually anything you could think of. I really wish he would’ve been around with the internet.

              • Joseph Fetz says:

                Dan, I will warn you that many people question his treatment of Smith in this book , even Austrians (Catalan comes to mind). Granted, that section comes toward the end of the first volume (i.e. you have a ways to go).

                I read that particular book about 6-9 months ago, but what always stuck in my mind was Spain and the New World, as well as Rothbard’s treatment of Smith. Sure, there are other things that I remember, but those are the parts that I remember predominantly.

              • Dan says:

                I’ve actually heard about the debate on how he handled Smith. I haven’t really read much on it but it wouldn’t surprise me to see Rothbard going after Smith. You get a good taste of how Rothbard would rip apart the intellectuals who supported the State in one manner or another in Rothbard vs. The Philosophers.

                From what I gather, all second hand, is that Rothbard would think of Smith as the Keynes of his time. Someone who took giant steps backwards for economic thought.

                Does Catalan argue that Rothbard incorrectly interpreted smith or that he was too hard on him?

              • Joseph Fetz says:

                On Catalan,

                That’s a rough one, because that was back when he still had his blog (before it got hacked). My memory is that he did agree that Rothbard’s interpretation was quite harsh, but that it was not quite out of bounds.

                Yes, you’re correct. My feeling on the Smith section of that book is pretty much exactly as you’ve described it.

            • Patch says:

              Yes, Rothbard acknowledged this in America’s Great Depression. He disagreed with it though. I find Mises’ argument better.

              p.34 and 35

            • skylien says:

              I think absolutely clear its in following quote in HA not long after the quote provided by Patch and Danny:

              “Thus three tendencies toward a lowering of the gross market rate of interest were operating at the same time and strengthening one another. One was the outgrowth of the steady increase in the quantity of commodity money, the second the outgrowth of a spontaneous development of fiduciary media in banking operations, the third the fruit of intentional anti-interest policies sponsored by the authorities and approved by public opinion. It is, of course, impossible to ascertain in a quantitative way the effect of their joint operation and the contribution of each of them; an answer to such a question can only be provided by historical understanding.
              What catallactic reasoning can show us is merely that a slight although
              continuous pressure on the gross market rate of interest as originating from a continuous increase in the quantity of gold, and also from a slight increase in the quantity of fiduciary media, which is not overdone and intensified by purposeful easy money policy, can be counterpoised by the forces of readjustment and accommodation inherent in the market economy.
              The adaptability of business not purposely sabotaged by forces extraneous to the market is powerful enough to offset the effects which such slight disturbances of the loan market can possibly bring about.”

              That should settle the question clearly.

  5. Major_Freedom says:

    Wow, look at what DeLong did. He ADDED this to your own post!

    “[Yes. Let’s understand the context. Von Mises has been blathering about how public-sector monitary base expansion and private-sector money multiplier expansion are the roots of microeconomic evil because they set the economy up for a big deflation. He then says that if the monetary expansion had been the result of gold mining there would have been no deflation.

    And he immediately shifts his ground and says that the problem is not–as he has been blathering about–a money-side problem but a real-side problem: that the problem is that unions are keeping the labor market from clearing.

    You may not think that changing your model in midstream is the mark of a bad economist. But I tend to think that one’s models are not streetcars from which one can disembark whenever one pleases, but rather vehicles to be ridden to the end of the line.]”

    Notice how he doesn’t understand Mises’ argument and makes an implicit Keynesian argument that depressions are caused by deflation.

    Mises said that the cause of the business cycle is monetary, but the effect, the thing that is problematic thereafter, is the real economy. That Mises said there would not have been deflation if gold production were greater, is not Mises arguing that the bust could have been overted. Like you mentioned, in the very next sentence after the one DeLong quoted, we know that Mises held that rising prices could not have averted the depression, since the depression is a depression because the real side of the economy is distorted, which was caused by prior credit expansion.

    It seems like DeLong is unable to think outside the Keynesian box, and cannot help but believe that depressions are caused by falling prices. His belief in this is so rigid in fact, that he will even say that Mises was arguing the same thing in that passage! He sees Mises writing about the ability of gold production to reverse falling prices, and DeLong thinks “Mises right there is claiming that more gold production can stop the depression!”

    Major facepalms are called for here. Not only does DeLong get the context of the Mises quote wrong, but he also attributes to Mises the Keynesian dogma of falling prices causing depressions as well. I mean, one couldn’t have made a more uninformed argument.

    Why are there so many bad economists who conflate good falling prices with bad falling prices? Falling prices based on productivity growth is a good thing. Falling prices based on monetary deflation is bad, but not because of the falling prices per se, but rather because of the monetary deflation (which itself was caused by prior credit expansion and real economy distortions). So if monetary deflation takes place, because of the real economic distortions, then more money and spending in the hopes of raising prices back up cannot possibly be the solution. This is the point Mises was getting across.

    I am not even a PhD economist, and yet it’s so easy to see bad economics coming from the likes of DeLong. Are all Keynesians this bad, or what?

    • Bob Murphy says:

      MF, well, I’m sure Daniel will tell us Russ Roberts or somebody is as bad in interpreting Keynes.

      • Major_Freedom says:

        At the end of the day, I am responsible for my own views, so if yahoo one corrects yahoo two, then it won’t matter to yahoo me.

        Besides, Kuehn has his own problems, as you have consistently exposed. I don’t consider his opinions credible.

  6. RPLong says:

    Be wary of engaging people like DeLong. It isn’t a victory if you completely disprove his argument and his readers still end up thinking “Boy, those Austrian guys are loonies.” DeLong will edit and chop apart your comments or quote them out of context, just as he does with Mises, the whole purpose being to make people who disagree with him look insane. If you by chance offer an argument that he can’t even respond to, he’ll simply delete it.

    That’s how he rolls. He’s not interested in the debate, he’s interested in the war of public image.

    • Bob Roddis says:

      DeLong’s “readers” will always think “Boy, those Austrian guys are loonies”. Further, if DeLong were interested in “debate”, he might learn some basic Austrian concepts. He hasn’t and he won’t.

      Get used to it.

      However, the fact that our opponents must ALWAYS resort to this type of behavior demonstrates that we have already won the debate.

      • MamMoTh says:

        DeLong’s “readers” will always think “Boy, those Austrian guys are loonies”.

        Sure, you can always infer conclusions that are true from false premises.

        • Major_Freedom says:

          Which false premises?

      • RPLong says:

        True enough! I just think the best tactic with the really nasty folks like DeLong and Krugman is to pretend they don’t exist.

        It’s like fighting a champion boxer who always plays dirty. You’re forced into either losing or playing dirty yourself. Austrian School economists consistently demonstrate that they won’t play dirty, no matter what the other side does; therefore, we can only stand to lose in debates with DeLong.

        Far better to engage people who don’t fight dirty, and gradually win over the public with good, open-faith discussions.

        IMHO.

        • Major_Freedom says:

          Far better to engage people who don’t fight dirty, and gradually win over the public with good, open-faith discussions.

          That’s a good long run strategy.

          In the short term, dirty fight and bad faith arguments tend to dominate most people’s minds. I mean, that’s why Keynesianism is dominating right now.

      • Gene Callahan says:

        “However, the fact that [in my mind] our opponents must ALWAYS resort to this type of behavior demonstrates that [in my mind] we have already won the debate.”

        • Anonymous says:

          Minds can and do contain facts.

          You say “fact that in my mind” as if saying “in my mind” disqualifies it from truth.

          Well, actually, that would explain why your beliefs are so often contrary to truth.

      • MamMoTh says:

        I’d say Murphy’s obsession with Krugman is clear evidence that you’ve lost the debate long ago. You just can’t accept it.

        • Major_Freedom says:

          So then by your argument, your obsession with Murphy is clear evidence that you’ve lost the debate long ago.

          Furthermore, you antagonize Murphy more than Murphy antagonizes Krugman. For not only do you antagonize Murphy EVERY TIME he antagonizes Krugman, you do so even when he’s not antagonizing Krugman. That means you’re more obsessed with Murphy than Murphy is of Krugman.

          So that must mean you think you lost the debate with Murphy by a wider margin than you believe Murphy lost the debate with Krugman.

          You just can’t accept it.

          • JFF says:

            It’s the same with that “Lord Keynes” character and Bill Anderson.

          • Joseph Fetz says:

            “So then by your argument, your obsession with Murphy is clear evidence that you’ve lost the debate long ago.

            Hahaha. That was pretty awesome if I do say so myself.

  7. Bob Roddis says:

    If Bernanke and DeLong were Rumpelstiltskin and could spin cotton into gold, such production could artificially distort the price, investment and capital structure.

    See. Those Austrian gold bugs really are a bunch of nuts, aren’t they?

    If. If. If.

    • RPLong says:

      Then all we’d have to do is say their name three times and they’d go away. I like the way you think! If only! 😉

      • skylien says:

        I am wondering how an American would pronounce Rumpelstiltskin. I am not entirely convinced Rumpelstiltskin could be driven off by Bob. I rather like to see him doing it with sound economic reasoning.
        🙂

  8. kavram says:

    I guss Keynesians/Mainstreamers just take the whole Defation=Depression thing for granted. Austrians obviously don’t take this as a given, and I think this is where the communication starts to break down

  9. noiselull says:

    People, read Horwitz/White on Mises as a fre banker. The guy wasn’t opposed to expansion of fiduciary media, he just thought that given other factors, government doing it would have bad consequences. The Misesian view is that a free banking system can solve the problem of an excess demand for money and more effectively reduce business cycles than a pure gold standard. Political expendiency is the only reason to advocate for the gold standard over true free banking.

    • konst says:

      free banking aka fractional reserve banking is fraud plain and simple.
      Depositors may agree to have their money lent out but what gives the bank the right pass off notes on it’s deposits as “money”, when in fact they are really depreciated money, to purchase the same goods that would be sold to 100% reserved money?

      • BigC says:

        umm the fact that people are willing to accept it?

        • konst says:

          Accept what – notes that are presented as full value when they are in fact devalued? That’s fraud.

          • Bharat says:

            If you sign a contract with a fractional reserve banking, you are taking account of that. And if you accept a fractional reserve bank’s notes in an exchange, you are taking account of that as well. If the fact that it is a fractional reserve bank isn’t told to you, THEN it is fraud.

            • konst says:

              If the fact that it is a fractional reserve bank isn’t told to you, THEN it is fraud

              That’s what I meant. I don’t think that “fract-res” notes, or a better name for them would be “unstable notes”, can function in a society if people ARE told the notes they’re accepting may not be redeemable.

              Besides actually having these notes circulate damages the free market.

              • Bharat says:

                Then if the market turned out as such, no one would use fractional reserve bank notes. However, there are plenty of people who know how fractional reserve banking works and still believe it is a better system than 100% reserves. Those people would disagree with you. As long as people know it is fractional banking though, it isn’t necessarily fraud.

              • konst says:

                However, there are plenty of people who know how fractional reserve banking works and still believe it is a better system than 100% reserves.

                I think very few people in the population know what it is or how fractional reserve banking works. Especially today. Don’t think because of the growing liberty movement that all people know it.

  10. David S. says:

    The difference is, DeLong is relevant and you never have been and never will be.

    • Richie says:

      You are disappointing me. Are you running out of witty insults? Of course, I do realize your brain has extremely limited capacity.

    • Bob Roddis says:

      It is because we are so irrelevant that DeLong is feverishly blogging about Mises and it is because we are so wrong that DeLong must misrepresent our positions, right?

    • MamMoTh says:

      It is because we are so irrelevant that Murphy is feverishly blogging about MMT and it is because we are so wrong that Murphy must misrepresent our positions, right?

      • Dan says:

        Can you point to an example where Dr. Murphy used a quote from someone like Warren Mosler where he accused him of saying the exact opposite of what he actually said. Does he block MMTers from commenting about a mistake they think he made in describing the MMT position? I would suggest you go to Delong’s blog and try to post the same type of comments you post here. See if it is justifiable to accuse Dr. Murphy of treating opposing ideas the same way Delong does.

      • Major_Freedom says:

        Murphy isn’t “feverishly blogging” about MMT.

        Only 11 blog posts have the tag “MMT”, and out of those, I count only 4 that are specifically devoted to MMT. The others mention either the nonsense you spew forth, which Murphy tagged as MMT, or else it is related to accounting and only tangentially related to MMT (since MMT does not have a monopoly on basic accounting tautologies).

        And which “misrepresentations” are you talking about? Has Murphy accused DeLong of arguing the exact opposite of what he was in fact arguing, the way DeLong did with Mises in his last post regarding the gold standard and prices? Does Murphy censor criticisms and corrections the way DeLong does?

    • Dr. Obvious says:

      He is relevant enough for you to comment here….regularly.

    • marris says:

      I never understood what “relevant” means in economics. Does it mean that DeLong sits with the cool kids at lunch? That he writes the most popular textbook? Maybe he gets elected to the Fed?

      Bob, I think you have a shot at the first two.

      • Major_Freedom says:

        It means David S. doesn’t want to be an independent thinker, because he fears or hates his own self.

        By the vitriolic and acerbic pretentions David S. unfortunately leaves on this blog, and given my background of being raised in a family of mental health professionals, leads me to strongly suspect that David S. was mentally and/or physically abused growing up, either from his parents or from an older sibling, and so he now views the world and everyone in it from such a dysfunctional family perspective.

        When he says “The difference is, DeLong is relevant and you never have been and never will be”, David S. is almost certainly playing the role of abusive parent(s), most likely his father, since David S. is a leftist. He more than likely heard his father telling him: “David, you’re a loser.” “David, you’re never going to be relevant in this world.” “David, you’re a failure.”

        He speaks to Murphy the way David S.’s father probably spoke to him.

        I am also strongly suspecting that David S. also considers himself a failure, and can only find meaning in his life through attaching his mindset to various figures like DeLong who represent the “good” parent he never had, such as his mother. DeLong of course supports the government “coddling” and “helping” and “assisting” the people. David S. therefore considers DeLong to be identified with a “good parent”, who will not abandon him, will not say he’s a failure, who will help people when they are in need and when they are vulnerable.

        The reason why David S. loathes Murphy is because he identifies Murphy with the parent who will abandon him. All free market economists are viewed by other adults in this way, if those adults don’t understand why they so hate free markets.

        Murphy is writing about the government, the parent, being eradicated. To David, that means destroying “the family.” This destruction of the family imagery is what brings up David’s abusive upbringing, and the dysfunctional family he had to go through. He years for a “good” family he never had, and so he believes he can find it by being a “family member” of the “good” government-parent, citizen-child dynamic.

        Murphy is viewed as trying to break up the family that David S is trying to form in his mind.

        The way to approach people like David is to understand that you’re talking to an abused, tormented individual, who won’t easily self-reflect on a deep level on why he so wants the government to take care of him. He doesn’t see the violence behind the state, because he doesn’t want to believe that the good parents he thinks he has found, are just as abusive as his father.

  11. Jack the Ripper says:

    Ridiculous ad hominem criticism from an amateur refuted by ad hominem amateur pyscho-analysis. Quite the collection of characters you’ve gathered, Murphy.

  12. briantheprogrammer says:

    On the question of equating deflation and depression. My understanding is that falling prices are a symptom of falling aggregate demand, and falling aggregate demand is a function of money being in the hands of those who would like to save rather than those who would like to spend. Faced with this situation the only real choices are:

    1) Reduce production overall leaving both spenders and savers unhappy.
    2) Tax savings directly and redistribute the money to spenders.
    3) Print new money and put it in the hands of spenders.

    While any of these policies should allow prices to remain stable, only option 3 is consistent with the goal of maximizing real wealth and respect for private property.

    What am I missing?

    • Bala says:
      • briantheprogrammer says:

        Really? 1500 Pages? I would like to wrap my arms around austrian economics, but is there not something I could read to get started that is more in the 150 page ballpark?

    • Tel says:

      Falling prices could be a symptom of increasing production efficiency. Consider when chess pieces were all carved by hand, and then someone invents injection molding… down goes the price, up goes the production quantity. This is sometimes known as “technology shock” and it happens in the IT industry a lot. For example 5 years ago there were no laptops under $1000 but now there are quite a lot under $500.

      Falling prices could be a symptom of falling demand, although the meaning of “aggregate demand” in this context is very rubbery — what do you measure aggregate demand in? If you measure in dollars then the measurement itself is subject to inflation/deflation so it can’t also be used to explain inflation/deflation.

      … money being in the hands of those who would like to save …

      As I’ve pointed out elsewhere, I’ve seen showrooms selling furniture on terms of no down payment and no interest for several years… yet people still don’t buy. If people don’t want to buy then they don’t buy, end of story. Money shuffling won’t fix anything, you should ask people why they are not buying and they will tell you they are nervous about the future.

      While any of these policies should allow prices to remain stable, only option 3 is consistent with the goal of maximizing real wealth and respect for private property.

      Unless that private property happens to be in the form of financial assets, in which case the extra money dilutes your assets. Also, in the long run (3) is very likely to produce inflation, as we are seeing in the USA (especially w.r.t food and fuel).

      • briantheprogrammer says:

        Thanks for your response,

        So when you see prices falling you think that there could be 2 causes; falling demand or rising productivity, one being bad and the other being good. But I see these two forces as being strongly linked. Increases in productivity lead to reduced demand (and income) for labor, which leads to falling demand for the product being produced, because the workers have lost the income that they would have used to buy it.

        This has been the case with manufacturing in the us. Increases in productivity (new overseas factories in lower wage countries) have reduced the income available to us workers. But those workers are still somehow expected to spend money to buy the products being produced. This is obviously unsustainable.

        But if US workers/consumers somehow came across a pile of new money they could spend on whatever they want, then they would spend it and that would restore demand and hence prices. Sure, if the pile of money discovered was too big, it could lead to demand and prices rising beyond their previous levels which hurts savers.

        So my theory is that productivity increases are the root cause of falling demand. But what do Austrians think causes workers desire to consume to suddenly change?

        • Major_Freedom says:

          Increases in productivity lead to reduced demand (and income) for labor

          That’s not true. That’s called the Luddite fallacy.

          You are ignoring that no matter how much production increases, people want more wealth, and because of that, the newly released labor from technological progress is needed to produce that which could not be produced before because the labor was tied up making the smaller quantity of goods before the technological innovation.

          If increases in technology really did reduce the demand for labor, then after 200 or more years of technological progress in the US, we should have something on the order of 90% unemployment.

          • briantheprogrammer says:

            I agree that people want more wealth no matter how much production increases. But it is one thing to want something and another to have the means to get it. The displaced workers, having lost their income, do not have the ability to buy more product even though they want it and the capacity to produce it exists.

            You say “newly released labor from technological progress is needed to produce that which could not be produced before…”

            Who needs them? The firms that just layed them off? Surely not.

        • Bharat says:

          Labeling falling demand as bad and increased productivity is good is fallacious. Was the falling demand for horse carriages when the car was invented a bad thing? Would we have wanted to print money and put it in the hand of those who wanted horse carriages over those who wanted cars?

          This example isn’t perfectly analogous to the situation, because we are talking about falling aggregate demand as opposed to falling demand for a specific product, but it will expose you to the flaw in thinking in such a manner.

          Meanwhile, falling aggregate demand is representative of people in general choosing to delay consumption, whatever their reasons. This is not bad; this is their decision.

          As for saving, saving and investing is again a choice to delay consumption in order to have increased consumption in the future. This allows businesses to lengthen their capital structure in order to be more productive, generally in the form of lower prices or higher quality.

          So you need to look at it in two different ways. Falling aggregate demand is not a bad thing and neither is rising aggregate demand. Increased savings is not a bad thing and neither is decreased savings (assuming these all are the freely-made choices of individuals). These are merely two sides of the same coin, representing what consumers desire with relation to time.

  13. briantheprogrammer says:

    For an individual, delaying consumption is a choice for which there could be many reasons. But if there is a rising net savings desire *in aggregate* I have to disagree with you that it is a very bad thing. First, if the individual has some significant natural bias towards consumption over savings (and I assume there is), then the likelihood that in any given period there is a overall net savings desire (due to the random free choice of individuals) is extremely improbable. It is definitely not an event that happens periodically. It is much more likely that these events have a more unfortunate explanation.

    My hypothesis is that productivity gains have landed too much of the nominal wealth (money) in the hands of a few successful entrepreneurs, such that the rest of the actors find it hard to get money in exchange for their labor and products. So they all want to cut back consumption and boost their savings at the same time. But this is not even mathematically possible unless someone agrees to spend money which become their income and savings. That is why the government has to spend during downturns.

    It is also logistically impossible for everyone to save at once unless some player (which must be the government otherwise it would not be true that private aggregate demand has fallen) is willing to build a buffer stock of goods to be consumed later, maintaining demand by buying those goods which it can only do with newly printed money. But this is not very practical because most goods and services have a short shelf-life.

    • Bharat says:

      I’m a little confused about your post.

      “But if there is a rising net savings desire *in aggregate* I have to disagree with you that it is a very bad thing.”

      Are you saying you believe it is a bad thing or are you saying I believe it is a bad thing?

      “First, if the individual has some significant natural bias towards consumption over savings (and I assume there is), then the likelihood that in any given period there is a overall net savings desire (due to the random free choice of individuals) is extremely improbable.”

      There’s a natural bias towards consumption over savings? I’m not sure what you mean by this. Each individual chooses to consume and to save based on their own preferences. Savings are for future consumption and consumption is obviously for present consumption. To say an individual has a bias toward consumption is a strange way to put it.

      An “overall net savings desire” is another strange way to word this. Again, individuals have a choice to make: consumption or savings. To say that rationally individuals in general could not periodically reduce consumption and add to savings is silly. You are speaking of the “animal spirits” that Keynes believed in: some mysterious force causing individuals to act irrationally in a way that wouldn’t benefit them.

      “It is also logistically impossible for everyone to save at once”
      No it isn’t. Every individual saves on a daily basis. Obviously this isn’t what you mean. However, it is indeed possible for aggregate savings to go up and aggregate consumption to go down. If an individual can do as such, to state that all individuals or most individuals could not do so is simply incorrect.