Tuesday, November 15, 2011
Posted by dkuehn at 1:43 PM
"I would like to hear an alternative theory as to where this mammoth #economictheoryfail [i.e., Mises's theory of the business cycle] comes from--other than the theory that it comes from enslavement to a naïve cost-of-production theory of value, according to which gold-backed money's value is in some sense "real" because of the resource cost of mining, while fiat money's value is in some sense "fake" and thus bound to cause trouble [Brad's guess]."
As most of you know, my macroeconomics is generally in agreement with Brad's. But my interpretation of Mises is somewhat different from his. Mises, following Menger, clearly doesn't have a cost of production theory of value. It's really much simpler than that. It's not that gold mining is more genuine because you have to work at it. It's simply that gold represents a fixed measure of value. And for Mises, not only is that acceptable - it's preferable. Otherwise, adjustments of the money supply create the illusion of artificial wealth, which for Mises would distort market signals.
This is all fine as far as it goes. Brad DeLong doesn't want to distort market signals, after all - and neither do I. We are market-friendly guys. The problem is that in a world where people demand money for its liquidity, the interest rate is going to be influenced by the amount of whatever thing we artificially ascribe the qualities of "money" to. The amount of loanable funds available for investment are going to be determined by this interest rate, and the level of investment is going to be determined when entrepreneurs compare their probable rates of return to this interest rate. This means that the amount of money out in the world may be at such a level that there will be too few loanable funds available for investment (or, the same thing, too much kept liquid) to be consistent with full employment.
Ultimately all money is artificial -or to put it better - all money is a social construction. There is nothing intrinsic or natural about the stuff. It is perhaps the quintessential social construction. Mises is concerned about an artificial distortion of market signals, and that's a reasonable concern under certain circumstances. But I'm also concerned about an artificial underutilization of factors of production, which is only occurring because there are not enough little green pieces of paper with dead white men on them circulating. If we were to compare competing artificial distortions here, it seems to me resource underutilization is the one we're most at risk of suffering from.
That makes me a market monetarist/quasi-monetarist.
What makes me a Keynesian is that I actually think one of the major problems we're facing is that the act of saving and the act of investing are done by separate people, and that while people may want to provide a lot of loanable funds right now, investors don't have work to be done that earns a worthwhile rate of return. To a large extent, this is a vicious cycle. There's nothing to invest in because demand is weak. But demand is weak because there is not enough to invest in. Even if this equilibrates - even if income gets ground down through the paradox of thrift to the point that the loanable funds market clears, there's still no reason to expect that it will clear at a full employment level.
I do know of one consumer of loanable funds that has a lot of worthwhile stuff it can do. This economic agent is not reliant on the profit motive, so its ability to do useful things is not constrained by weak prospective demand. This economic agent knows that a school provides value, that scientific advances provide value, that infrastructure provides value - despite current constraints on other utility-maximizers' ability-to-pay and willingness-to-pay.
The profit-maximizers say "if nobody wants to buy from me then the profit-maximizing choice is to sit on something with a zero rate of return than invest in something with a negative rate of return". Only a non-profit-maximizing agent can say "I don't measure benefit by the excess of revenue over costs, and this money is cheap right now - I have things to do with it".
Now I think I have homework to get back to.