Wednesday, September 19, 2012

Brad DeLong on Austrian economics

I'm worried that a lot of Austrians will be turned off by the initial discussion in this post, which gets into anti-Semitism (inaccurately, in my mind) and Mussolini (more accurate, but not quite relevant to the question at hand). After the initial discussion there's an important attempt to struggle with Mises and some reposting of past discussions, including a couple with me. So please, read through.

I have a few scattered thoughts.


I think it's important to remember that not all Austrians are 100% reservists, and the ones that are taken seriously in the academy aren't. The 100% reservists are basically affiliated with the Murray Rothbard shrine that is the Mises Institute - and not even all of them are 100% reservists. My regular readers probably know this, but outside traffic might not.

That whole can of worms is fascinating in a car-wreck-on-the-highway sort of way and could be safely ignored if it weren't for the fact that we have a powerful politician with a large political movement behind him that seems to have bought into it. That's what Krugman has been mocking. Now, those 100% reservists (a subset of Austrians) have actually addressed money market mutual funds. Joe Salerno has written that "they are clearly excludable from the TMS [true money supply - another Rothbardianism], because they are neither instantly redeemable, par value claims to cash, nor final means of payment in exchange".

OK, so they say Krugman is comparing apples and organges. Fine. Austrians associated with LvMI have been making a huge deal out of this, but whether Krugman's analogy met all the Austrian tests seems a lot less important to me than some of the points that Brad DeLong raises, or the awkward question of how you require 100% reserves as an alleged libertarian.

Ultimately, though, whether fiat money passes a cost benefit test (I think it's obvious that it does), isn't going to sway LvMI Austrians of a more deontological persuasion who simply think it's fraudulent. I don't know what you do with these people. I've tried my hand at the "fraud" argument in the past - perhaps you can search the blog history if you're interested. But these sorts of arguments can be like talking to a brick wall. I have a very tough time wrapping my brain around any sort of deontological ethics, much less that of this gang.


Brad often wonders why I spend time on the Austrians (just like Krugman wonders the same with him). Part of it is an interest in intellectual history. I like Keynes, and Keynes spent quite a bit of time with Hayek, so the Austrians have always held  someinterest for me. There's a bit of path dependence too. I started talking about it. I might as well keep talking about it. Plus I'm more broadly concerned about the impact of libertarianism on this country.

But one person I don't deal a lot with is Mises.

It's not because I think he's "the crazy one" (that's Rothbard, after all). I genuinely don't get what's going on in Mises's head in the way that I feel like I grasp what is going on in Hayek's head. There is a way to (potentially) solve this: read him. I say potentially because of course reading someone that writes inscrutibly doesn't guarantee an understanding. But Mises's books are long and he seems to pontificate a lot, and there is so much else to do and read.

So I stick with Hayek because I understand him, and I actually think he has important ideas. I agree with Friedman that the Austrians have some good insights, but not in monetary theory. It's easy to understand how credit creation causes recessions in Hayek - it's much more transparent than in Mises. You have a sequence of Cantillon and Ricardo effects that cause real changes in the structure of production. In that sense, it's a credit-induced-real-business-cycle-theory. Hayek specifically takes the Bohm-Bawerkian view of capital as goods in process so that the carrying cost of capital has to be considered in capital accumulation decisions. Since production is carried out over an expanse of time, the marginal product of capital itself is a function of the interest rate, and credit expansion and contraction can change (to use Keynes's terms) both the volume and direction of investment.

I find all this quite interesting and quite sensible... as a statement about capital.

I don't think it's sensible as a business cycle theory, and this is one of the things I've been thinking a lot about lately.

But there's a lot of interesting stuff to unpack in Hayek - and that doesn't even get into what Brad DeLong has in the past called "the good Hayek" - the Hayek who talks about decentralized knowledge and the price system.

I don't feel the same way about Mises. I am the first to admit that part of that is my own ignorance (an ignorance I have no plans to remedy any time soon). A lot of Brad's post is about Mises. I can do my best to take a shot at that, but I really don't know Mises.


  1. Your post parallels some of my own experiences.

    When I first became properly acquainted with Austrian Economics it was typically personalised in the form of Hayek. While a number of his ideas immediately appealed to me, there were many others that I simply couldn't agree with.

    Slowly, however, I came to realise that some of "Hayek's" ideas that I liked least were, in fact, better attributed to Mises. And, more recently, I've come to appreciate that some of that which I disliked most about Mises is actually Rothbard.

    Now obviously there is substantial overlap here (especially between the latter two) and I still think that Hayek was clearly mistaken on some important issues. (Then again, which major economic thinkers didn't have their blind spots?) However, these distinctions matter and more's the pity that the LvMI portrays a pretty skewed impression of what AE is about nowadays.

  2. PS - It's interesting to see how the relevant MisesWiki entry takes pains to emphasise fractional reserves above low interest rates as the predominant driver in ABCT...

    Someone better get the memo to Steve Horowitz and co. No true Scotsman, er Austrian, would dispute the word of Rothbard!

  3. Uh...okay.

    I understand where people are coming from. Truthfully, I do. There is undoubtedly some austrian work that is ideologically based, and not based on the same professionalism of other economists. In short, some have an axe to grind. Okay.

    But what annoys me is when people like Paul Krugman and Brad Delong ALSO have an axe to grind. Take Paul Krugman. Okay, so he makes mention of the 100% legal reserve thing. I myself do not adhere to it, nor do I think banks will over time build up 100% reserves. But I also don't adhere to the Selgin/White model. I think, mainly due to gold inflows brought on by falling prices, fractional reserve banks will expand credit and can cause austrian business cycles. Take that as you may, but I guess it means I say business cycles can occur in a free market. I will spend the next couple of days fearfully by my mailbox waiting for my LvMI union card revoked.

    But what Paul does is take MMMF, and as both Mark Thornton and Joe Salerno have written, literally without even typing it into google, and thereby does not actually mention the 100% reserve Austrian response. So either he did a slipshod research job, or he was deliberately trying to mislead people into thinking that the 100% don't have a response when in fact they have (since about, oh say, the 80s).

    I won't go into Brad Delong's entire response, since most of it is him pasting old posts of his, but what amazes me is he talks about the usury question, as if it is the hidden motive behind the FRB fraud argument of Rothbard, and that he ascribes Rothbard's fraud argument of FRB to Mises. Firstly, Rothbard discussed the usury question in his history of economic thought almost exhaustively, and I think its safe to say that based off of Rothbard's writings (especially his critical remarks on Adam Smith and usury), he did not build his ideas off of it. More importantly, Mises never adhered to the "people deposit gold in banks" "kniving banksmith jews issue false moneytickets" "theft has been committed".

  4. The common Austrian assumes monetary velocity is constant and therefore controlling supply controls demand and prices, and in the extreme view even prevent business cycles or in the less extreme view result in shorter, more frequent, but shallower cycles. Full reserves are just an attempt to rigidly control money supply. This doesn't control credit which doesn't even require money though, as any business offering net 30 knows. Even if credit were controlled, it would still not control changes in monetary demand, though one could treat them as real business cycles. In the end they want a positive risk free return, as unrealistic as that is, and anything that prevents that is theft.

    1. I have never seen the implicit assumption that V is constant. There is the implicit assumption among some that V is a pseudo-concept or that stickiness doesn't matter, but not that it is constant.

      Regarding "positive risk free returns," Rothbardians don't think banks should be paying interest at all, probably. They think everyone should be charged warehousing fees.

    2. It would have to be constant or nearly so if it were capable of preventing recessions. They wouldn't be concerned with interest as the deflation of falling prices would provide their return without them. This is common or vulgar view of the amateurs though.

    3. They don't believe it is constant. They believe prices would be flexible if the government removed restrictions on the market.

    4. While flexible prices may be the result of a recession, it is hardly the preventer of recessions. Flexible prices just indicate recessions can't be prevented.

  5. It's funny Daniel that you have to start your post with, "If you get past the stuff about DeLong calling them a bunch of anti-Semites, unfairly, then I think he makes some good points..."

    1. Exactly. But nevermind that stuff.

  6. "Inaccurately"?

    It is there. I note it. I then say that I am going to shift to a doctrinal discussion. And I do so.

    Seems to me that that is better described as "accurately" than "inaccurately". Not noting the elective affinity between the "Austrian" fear of fractional-reserve banking and older fears of rootless cosmopolitans of all stripes would be as inaccurate as pretending that Murray Rothbard did not seek to exploit hatred of Black people.

    That this makes Bob Murphy upset tells us a lot about Bob Murphy...


    Brad DeLong

    1. I was thinking more of the passage from Noah that you quote. I am not convinced the modern discussion is motivated by anti-Semitism (although there are some worrying cases), or the video he links to at all. There is plenty of scope for being a wacko that's paranoid about bankers without being anti-Semitic. All anti-Semites may stay up at night worrying about the Rothschilds, but not all people that stay up at night worrying about the Rothschilds are anti-Semitic.

      Your commentary restricted itself to medieval Christianity and some early twentieth century aristocratic types. That I would certainly endorse.

      Do your observations necessarily carry over?


      But Keynes had a lot of the same anti-Semitic prejudices and sympathies with medieval prohibitions of usury, and certainly that informed his views on interest rates to some extent.

      I get a lot out of Keynes. But I think it's safe to say, though, that medieval anti-Semitism is not a contributing factor to my views on economics.

    2. Brad DeLong wrote:

      That this makes Bob Murphy upset tells us a lot about Bob Murphy...

      Right, it tells you I don't like someone criticizing my views on banking by first implying I hate homosexuals and Jews. You got me.

    3. Which do you hate, homosexuals or Jews?

      You sleep with two dogs:

      1. Murray Rothbard … exploit[ed] hatred of Black people


      2. Mises licked Il Duce's boots

      and you claim not to have fleas?

      BTW, why in the world would anyone pay attention to your thoughts on banking? What experience do you have in a non-banking world?

      You just blather to draw attention to yourself with the shock value of "gold" and whatever made up words you find convenient in an attempt to sound like you now something.

      Hamilton and Morris, real men, with real experience living in a non-bank world, but could see what banking did for England, had the good sense to give us a federal government with banking.

      In the 225 years since, lots of people have copied us and I don't see anyone going back to mercantilism and barter or deposits without deposit insurance.

      As Delong had to remind Daniel, "I have found nothing anywhere in the Austrian corpus about the baneful effects of improvements in gold mining technology, and how they invariably lead to an Austrian boom-bust cycle--how a gold discovery distorts market signals and creates the illusion of artificial wealth just as any other monetary expansion does."

  7. The wonderful thing about the Internet, (especially when quotes are associated with links) is that you can see where everything went wrong. So here, we have Daniel, linking to De Long, linking to Krugman, linking back to De Long, linking to a speech by Ron Paul in 2003. (

    In that speech, Paul Krugman reads a general condemnation of fractional reserve banking and then makes some snarky comments about free-marketeers wanting the government to prohibit the provision of certain financial services. (for what it's worth, that fully applies to Rothbardian opponents of FRB and I don't understand how they don't see it) Now, reading that speech, it was about an act called the Honest Money Act which is aimed at repealing legal tender laws and generally allowing for competitive currency issue. Ron Paul clearly envisions that as a result, private gold and silver-backed currencies would emerge (probably not a bad prediction in the long term) and he spends quite some time slamming fiat money.

    Now, there is a short snippet about FRB and it is this: "However, the primary beneficiaries of legal tender laws are financial institutions, especially banks, which have been improperly granted the special privilege of creating fiat irredeemable electronic money out of thin air through a process commonly called fractional reserve lending. According to the Federal Reserve, since 1950 these private companies (banks) have created almost $8 trillion out of nothing. This has been enormously advantageous to them."

    Please note, here the presence of the word "irredeemable". As George Selgin in his book Theory of Free Banking (and history) tells us, fractional reserve banking is perfectly capable of emerging even with redeemable notes. In other words, the sentence merely indicts FRB in the context of a fiat-money system without telling us anything regarding Paul's views on fractional-reserve banking in general. The fact that the whole speech is an indictment of fiat-money systems should have been a big hint that Paul was leveling yet another charge against that system and not at FRB. I'm confused how Krugman could have missed that. Or perhaps I should just follow his example and scream at the top of my lungs that I found yet another example of his dishonesty and intellectual bankruptcy. ;-)

    Krugman's whole post is based upon a nonsensical reading of the speech and so De Long's comments which are based upon Krugman's conclusions can only be nonsensical themselves. I'm sure they'll re-read the speech, see the mistake they made and post updates to clarify where they went wrong. Right?

  8. "It's easy to understand how credit creation causes recessions in Hayek - it's much more transparent than in Mises."

    Personally I've always found Mises much easier to understand.

    I think Mises has plenty of interesting ideas too. About entrepreneurship, pricing of capital goods, the cantillon effect (both in association with ABCT and separate to it), fractional reserve banking, absolute advantage in international trade and a whole bunch of other stuff.

  9. human errors cause recessions, not credit creation.

    If there were no bad loans their would be no recessions. Thus, is a bank loans a builder money for a subdivision with displays, and the houses don't sell, the conditions for a recession are established.

    In a barter economy the exact same error will happen. If all the labors and suppliers took promissory notes, and the houses didn't sell, you would have the exact same economic result.

    Money is only a Coasean tool. Its value is in making transactions easier. It neither causes nor prevent errors any more than barter causes or prevents errors.

    1. "If there were no bad loans their would be no recessions. Thus, is a bank loans a builder money for a subdivision with displays, and the houses don't sell, the conditions for a recession are established."

      The failure of the houses to sell does not necessarily mean that the loan was bad. Risk free loans are a mirage.

  10. Perhaps one day Daniel you will see that Austrians are not inventing all of this vitriol we claim to experience. Nice talking with you as always, Alexander Hamilton.

    1. You're not inventing it. Did I say you were?

    2. vitriol--Bob Murphy you deserve every slam up the side of the head that you get. You are nothing but an opportunist trying to sell your books that are wholly valueless, with titles like, "The Politically Incorrect Guide to The Great Depression and the New Deal." What is politically incorrect about the New Deal? Nothing. FDR and his administration worked like dogs to save Capitalism from itself. Like all human efforts they made errors and mistakes, but in their basic mission that were successful. As best I can tell you simply write to appeal to fears, doubts, and jealously.

      Daniel is foolish to think that any honest conversation can take place with someone like you. You don't have an honestly arrived at and held thought about economics in your body, starting with your idea that money is dug out of the ground. How do you dig future promises (debts) out of the ground?

      Last night I had a moment to do some further reading on what this morning I will call the Morris problem. When Morris was becoming America's first capitalist in Philadelphia, every time he would send a ship to China full of silver to be bartered for Chinese goods he would cause a recession in Philadelphia. The reason was that banking was forbidden so, when the ship left, there was nothing that could act like money. Morris often issued his own promissory notes which circulated in lieu of any other money. At that moment his life was a real economic experiment proving the absolute imperative for fractional banking, or similar mechanisms, in a modern economy. His insights continued to grow and expand as he managed the finances of the American Revolution.

      I sincerely doubt that Murphy knows anything about Morris (or for that matter Hamilton). I know that the big three in his life did not truly know that the American Revolution was not a political revolution as much as it was an economic revolution against mercantilism and for meritocracy and economic growth and commerce.

      In sum, if you would not have been a Federalist then, you have no business talking about economics, now.


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