Saturday, March 10, 2012

The Austrians and the Market Monetarists

Few things have confused me more than the seeming shift in opinion among (blogosphere) Austrians in about the summer or fall of 2011 into a strong embrace of market monetarism and NGDP targeting. Only slightly less confusing to me is the hostility of many market monetarists to Keynesians, who I think are far more in tune with them. Some market monetarists seem genuinely unaware that Keynesians are in tune with them, mistaking "liquidity traps make fiscal policy very reasonable" for "liquidity traps mean we should completely forget about monetary policy". Some are aware of this and just really don't like the prospect of reliance on fiscal policy.

As I've said to others in the past - if you Austrians really are OK with market monetarism, then you should stop arguing with us and demand (as long as we still have a Fed - which looks likely for the duration of this depression at least) substantial monetary expansion. Many Austrians seem willing to back market monetarism in theory. I don't know if I've seen any lambast Bernanke for not being aggressive enough. John Papola has brought up NGDP targeting with me a lot over the last several months. I tell him fine - make your next video about how Bernanke should do NGDP targeting and pursue more expansionary policy. So far he doesn't seem interested in that. I daresay 95% of his fans would be shocked if he were to ever do that.

Jonathan tries to parse the Austrian relationship with market monetarism here (that's what motivates this post).

However, not everyone is fooled.


  1. Given, I'm not a monetary economist so my views MUST be taken with skepticism... now...

    I think that NGDP-targeting makes the most sense as a central bank policy with the goal of monetary neutrality. I think this is the right goal. I think that it is consistent with Hayek's view of money and it's function as a "loose joint" in the economic system. It seems like the most effective way of equilibrating the supply of money with the demand for money. Here are my caveats with Market Monetarism.

    1. Central banks injecting money in particular places will have injection effects with relative price changes that are not the product of consumer/producer decisions. This is bad for the sustainability of the structure of production that emerges. But a futures-market based system as Sumner and Lars favor seems aimed at addressing this concern. So, NGDP-targeting is a second-best in a world of central banking.

    2. I don't think targeting NGDP growth should be the ideal. NGDP shouldn't grow at all. The target should be stable, zero-growth NGDP. So, if the demand for money increases, increase the supply to meet it... not to exceed it. Let productivity drive the nominal price level DOWN. Productivity-norm deflation is good. It would reduce excessive risk-taking and prevent the accumulation of loose credit conditions that manifest in malinvestment and bubbles.

    3. I am very skeptical that what we need right now is to re-inflate back to the pre-2008 trend line. I'm open to the argument, but skeptical that it is necessary.

    1. "Productivity-norm deflation is good."

      Even that type of deflation - especially when it is unexpected - induces debt deflationary effects, penalising debtors, destroying business confidence.

      Also, appealing to the 1873-1896 period does not suggest that "productivity-norm deflation is good". That period is filled with complaints in the business press of pessimism and depression of profits. Debt deflation caused a popular movement pushing for monetary expansion.

      Here are some (more or less) decadal rates from Balke and Gordon’s estimates of US real GNP from 1873–1896:

      Average real GNP growth rate, 1873–1880: 5.76%
      Average real GNP growth rate, 1881–1890: 2.96%.
      Average real GNP growth rate, 1891–1896: 2.40%

      Notice how average real GNP growth rates slumped as the deflation progressed.

    2. Who is surprised at businesses using the press to complain about falling profits? Btw, falling profits did not result from deflation (selling a greater quantity of goods at a lesser price), but from the restructuring of the economy and growing competition in different industrial sectors of the economy.

  2. As for Keynesians:

    1. Lars has done a good job of explaining why NGDP targeting is not a "keynesian" policy, even if Keynesians are now embracing it. Keynes embraced numerous classical ideas, including the fact that liquidity changes are important for real activity in the short run. Hayek was focused on this before Keynes wrote the GT. It's not a "keynesian" concept. Animal spirits and the importance of confidence didn't start with Keynes either. All the classicals and neoclassicals understand the importance of confidence.

    2. What IS a distinctly "keynesian" concept is that so-called "fiscal policy" can act like monetary policy. I believe this is wrong. First of all, to the extent that it's government consumption and direction of real resources, it's going to be wasteful. This is my central planning concern. Money given to people to dig ditches is wasting those people's time, and people are the most valuable resource we have. It's a waste of time and money to dump billions into the various boondoggles in the "stimulus" bill. This is NOT the same thing as creating more money to meet demand. It's NOT just another form of the theoretical Friedmanite helicopter drop. And that helicopter drop was a mental construct anyway, but one that explicitly avoids the resource consumption and misallocation that government spending produces.

    3. To draw a finer point on it, Brad Delong talks about the demand for "safe assets" instead of the demand for money. This is a slight of hand to conflation the real with the nominal. Treasuries are liquid, yes. But they are debt. They are instruments which direct resources into the hands of the government. Base money is not debt. It doesn't necessarily empower the state to control (and waste) more resources (though it could).

    Friedman was right that we should focus on how much government spends to understand the cost of government. More spending, more waste and cost. So make government as small as possible as a matter of long run policy. And government fiscal policy should at all times be oriented toward the long run. The "short run" does not change the rules and make consumption, waste or destruction suddenly good for the economy. This is where Say's law comes in to prevent such misunderstanding. To the extent that demand is measure of economic health, it should be understood as demand being derived from the supply of value, not borrowing against prior savings to fund current consumption which little hope of increasing productivity.

    Supporting NGDP does not necessitate support for fiscal stimulus. One can support the former and reject the latter.

  3. One of my first posts on increasingmu was arguing for the productivity norm. I was basically converted to the position in September 2009 when reading the Cato Unbound thing starring Sumner. The rally behind market monetarism (agreeing with Papola: this is still second best) has just gotten louder over time for anyone who isn't too myopic about gold or public choice.


  5. Daniel... I actually produced a video which explained that a Hayekian policy would target stability of MV. It's an interview with Larry White. It's had 38,000 views. He explicitly lays out the Hayekian case for maintaining nominal spending through increased supply of money to meet demand.

    Go to the 5 minute mark.

    This was posted in October of 2010. I edited these mini-docs myself.

    One other note, we originally had lyrics in Fight of the Century, that touched on this. We debated keeping them in but pulled them because the subtly and difficulty of monetary policy targets felt like it needed more context than one verse of rhyme. The Line went something like:

    If you have a central bank, it should target neutrality
    not prop up bad businesses and ignore reality...

    But my record of doing work that puts forward nominal stability is pretty clear.

    1. First - I've seen the interview with White - thanks for sharing it here, though.

      Second - No one is proposing "ignoring reality" - I'm not even sure what that line is supposed to be referring to. If you want nominal stability, you agree with Keynesians.

      Third - I would wager a huge majority of your fans would not think you are promoting "maintaining nominal spending through increased supply of money to meet demand". Why do you think that is.

    2. Like I've said before - if you agree, great. But if you agree it's not really the fight of the century is it? I've always thought this "fight of the century"/Paul Krugman is "evil" stuff was overblown personally. But since you keep saying these things, you can understand why I have my doubts about how committed you are to stable nominal spending.

      But I'd like to be proven wrong - I'd love to have John Papola in our corner. Instead I just seem to get a lot of "so and so is corrupt", "so and so is evil", "you guys just don't understand". Charlie Brown can only kick the football so many times.

      I've always been very pro-Hayek. I would think you would be pro-Keynes if you care about nominal stability, but you consistently seem to be anti-Keynes.

  6. "Ignore reality" was an effort to get at bailing out INSOLVENT institutions through monetary policy actions. But since this needs further unpacking, we dropped the lines.

    So, since nominal income stability was a focus of Hayek before Keynes by way of monetary policy... I'd say it's nice to Keynesians in OUR corner, especially since so many were pushing the "pushing on a string" and "the fed is out of bullets" line when we needed easier money MOST. In this way, Keynesians had done more to harm good monetary policy during the crisis than anyone else. They had the floor. They had the halls of power listening. They pushed for fiscal stimulus.

    And yes, it very much still is the Fight of the Century. The fight is NOT over Hayek vs. Keynes on monetary stability. It's on methodology and fiscal policy.

    Sir John R. Hicks thought so too. In 1967, Sir Hick wrote in "The Hayek Story":

    When the definitive history of economic analysis during the nineteen thirties comes to be written, a leading character in the drama (it was quite a drama) will be Professor Hayek. . . . Hayek’s economic writings . . . are almost unknown to the modern student; it is hardly remembered that there was a time when the new theories of Hayek were the principal rival of the new theories of Keynes. Which was right, Keynes or Hayek?


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