Tony Yates on market monetarism

Tony Yates has a fairly extensive discussion of his views on market monetarism.  Before dissecting on the specifics, a few general comments:

1.  It’s hard for an outsider to grasp the nuances of any macro framework.  God knows I’ve been criticized for misstating the views of Austrians, MMTers, Keynesians, and many other groups. Yates does better than most.

2.  The views expressed here are my own, and as Nick Rowe indicated in the comment section to Yates’s post, market monetarism is a set of views that share a family resemblance (as is true of Keynesianism, Austrianism, etc.)  Nick’s comments are well worth reading.

So the following will sound more negative than I actually intended.  Let’s go over Yates’s points one at a time.  He starts by listing 10 tenets of market monetarism (these are not his views on policy, but rather his interpretation of our views):

1.  Monetary policy is never ineffective at stabilising inflation or the real economy, even at the zero bound.

Nope.  Monetary policy may be unable to stabilize the economy when there are real shocks. Monetary policy is pretty good at stabilizing the economy when the instability is due to a combination of sticky nominal wages and fluctuating nominal spending.

2.  Fiscal policy is ineffective [at, see above...] always.

Nope.  Fiscal policy can work in many different ways.  If the central bank is targeting inflation (including indirect taxes) then fiscal policy can boost employment if the government reduces VAT taxes, or employer-side payroll taxes.  Under a fixed exchange rate regime the government can boost output with more spending on goods and services.  The US in 1940-41.  My point was that if the central bank is targeting something like “aggregate demand” (as it should), then it’s silly for fiscal policymakers to attempt to influence “aggregate demand.”  That doesn’t mean that certain government projects might not become more desirable at low real interest rates, for standard classical cost/benefit reasons.

3.  Fiscal policy is effective [at...], but not desirable.

I mostly agree, with the caveat of the final sentence in my previous comment.  I do understand that fiscal and monetary policy are not identical, and hence one can construct models with a role for both.  But I don’t find those models persuasive.  To call fiscal policy a “blunt instrument” would be an understatement.

4.  Those New Keynesian models omit to model money, and so don’t capture why monetary policy is effective.

Yes and no.  I happen to think that omitting money makes it harder to see the importance of monetary policy.  However on purely theoretical grounds any story told with changes in the supply and demand for money can also be told with a description of the future path of interest rates relative to the future path of the Wicksellian equilibrium interest rate.  But I could also create models where the key variable was the difference between the actual price of zinc, and the Wicksellian equilibrium price of zinc (where the latter term is defined as the nominal zinc price consistent with 5% NGDP growth.) How do we know of the price of zinc is above the Wicksellian equilibrium price of zinc?  Simple, if NGDP growth is above target.

5.  If you look at New Keynesian models carefully, they show that monetary policy is effective, even at the ZLB, which demonstrates why it, and not fiscal policy, should be used for stabilisation purposes always.

I think it’s more accurate to say that those models allow for the effectiveness of monetary policy at the zero bound.  You can graft onto the NK models something like Krugman’s “promise to be irresponsible.”  Or Lars Svensson’s “foolproof plan” for escaping a liquidity trap.  Of course it’s also possible to construct NK models with expectations traps that do not allow for effective monetary policy.  I don’t accept the assumptions that underlie those pessimistic versions of the model.

6.  Unlike in NK models, monetary policy isn’t just about OMOs, or even buying long dated government securities.  Expansions of the money supply can be used to buy all sorts of assets.

Yes and no.  I certainly don’t believe that developed countries would need to buy non-government securities to hit a reasonable target, such as 4% or 5% NGDP growth, level targeting.  But my deeper objection is that NKs frame the ineffectiveness issue backwards.  They start by asking what the central bank can do at the zero bound, when they should start by asking why we are at the zero bound.  More specifically, imagine a “do whatever it takes” central bank that keeps buying assets until inflation or NGDP growth expectations are on target.  What then?  This reframes the debate in a way that focuses on the real “zero bound” problem, the zero bound on the availability of eligible assets for the central bank to buy.  When framed this way it becomes apparent that the zero bound on interest rates is not the real issue, as a central bank could theoretically run out of eligible assets even at positive rates.

For example, a few years ago the Australian national debt had fallen close to zero.  Nominal interest rates were positive.  Now let’s suppose that the RBA were only allowed to buy Australian government debt.  That constraint would make monetary policy ineffective.  And it would have nothing to do with the zero bound on interest rates, which were (and are) positive in Australia.

Now consider a country at the zero bound like the US.  Suppose that the Fed committed to unlimited “QE” in order to raise NGDP growth expectations up to the old 5% trend line.  They committed to buy T-securities until there were no more, then agency securities until those were exhausted, then Germany, Japanese, Canadian, British, etc., government bonds until those were exhausted, then AAA corporate bonds until those were exhausted, etc., etc.  Is that monetary policy effective?  It’s effective if the Fed can create expectations of sufficiently fast NGDP growth before running out of eligible assets.  Thus the real zero bound problem is not zero interest rates, but the possibility that the Fed might be legally prevented from buying assets that it needed to buy in order to satisfy the public’s demand for base money when NGDP growth is on target.

NKs tend to assume that since the Fed’s balance sheet has ballooned from 6% of GDP to over 20%, a still higher number would be needed if they had adopted a 5% NGDPLT policy in 2008.  Actually just the opposite is true.  With that 5% NGDPLT policy, we never would have hit the zero bound, and hence our monetary base/GDP ratio would be much lower (as is the case in Australia–which never hit the zero bound.)  NKs are monetary policy pessimists because they see interest rates as the lever of policy, whereas it’s more useful to think of them as the outcome of the policy regime.  Yes, NKs are correct that there is a liquidity effect and that easy money today is likely to lead to lower short-term interest rates today.  But as Woodford points out easy money today is not at policy at all; a policy is a change in the expected future path of monetary policy from today to the end of time.  It’s a policy regime.  And an expansionary policy by that criterion may well raise nominal interest rates.

7.  Societies should adopt nominal GDP targeting.

8.  [And/or] It follows from some combination of 1-6 that societies should adopt some form of nominal GDP targeting.

That’s basically right, although I certainly don’t think NGDP targeting is precisely optimal, just a good, pragmatic, easy to understand target that is superior to IT.  I’d prefer something like a nominal total labor compensation target, especially for countries like Kuwait where NGDP can be distorted by commodity price shocks.

9.  The crisis was caused by inflation targeting.  Following a MM perspective, including a nominal GDP target, would have averted it.

Yes and no, there were many causes.  If the Fed had adopted a “target the forecast” approach in their meeting after Lehman failed, monetary policy would have become dramatically more expansionary and the recession would have been significantly milder.  Ditto for replacing an inflation target with a price level target.  But I believe NGDPLT would have been better yet.

10.  Fiscal policy is ineffective away from the ZLB because it prompts an offsetting monetary policy response.

See my response to points 2 and 3.  Note that Yates ignores the “market” part of market monetarism.

A few general remarks:

1.  I accept the fact that it will never be possible to write down a macro model with microfoundations where NGDP targeting is optimal.  However, I also believe that we don’t know enough about the relative importance of price and wage rigidity, or the relative importance of various types of price rigidity, to construct useful models of that sort.

2. It’s a fair criticism of MM to point out that we don’t have much in the way of either sophisticated theoretical models or empirical studies to support our claims.  Like Keynes (1936) we rely heavily on a combination of basic economic models (AS/AD for me, where AD is a hyperbola), stylized facts that are highly suggestive, criticism of alternative approaches, and logic.  If someone bothered to write down the MM model (at least my version of it), the model would be as simplistic as the Keynesian cross.

3.  The real innovation of MM is that we’ve suggested that mainstream economists are thinking about the issues in the wrong way, and we have done so using many concepts that have come from those very same mainstream economists.  I tend to endlessly bore my readers with quotes from famous respected economists who used to claim that low interest rates don’t mean easy money, or that monetary policy remains highly effective at the zero bound.  In late 2008 these mainstream views were abandoned by the profession (including the famous economists I quote), for all the wrong reasons. For example, many economists simply misread the events in Japan (1993-2012) and become pessimistic about monetary policy.  A great deal of MM is simply reminding the profession that if the BOJ does what it did in fact do in 2013, that policy will be effective.  Ditto for the Swiss policy adopted a couple years earlier.

4.  Speaking for myself, I view MM partly as a sort of Deirdre McCloskey-like critique of modern macro methodology.  Milton Friedman (my hero) was famous for not having a well-defined “model.” Or for thinking in partial equilibrium terms.  His best ideas were not his “monetarist” ideas such as the 4% rule, but rather his critique of Keynesianism (low rates aren’t easy money, permanent income hypothesis, natural rate hypothesis, etc.) In my view MM is most effective as a critique of mainstream macro since 2008, and least effective when promoting NGDP targeting.

HT:  Ben Southwood.


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70 Responses to “Tony Yates on market monetarism”

  1. Gravatar of dannyb2b dannyb2b
    14. July 2014 at 19:06

    Theoretically if the CB was targeting NGDP growth at 5% what would it do differently? Would the MB grow faster so that maybe the MB is at 8 trillion?

    Or maybe would the MB be about the same but would people form different expectations just because the target is different? If so isnt that like saying that if somebody gets shot in the leg you get a different result whether it was or wasnt the target?

  2. Gravatar of dannyb2b dannyb2b
    14. July 2014 at 19:57

    What about the hot potato effect? Does it matter if the people the fed is dealing with have a high demand for MB at the zlb like banks or a lower demand like the average person? Theoretically assuming some have a lower demand than others would it make a difference if MB is expanded to those with the lower demand in generating ngdp growth?

  3. Gravatar of dtoh dtoh
    14. July 2014 at 20:35

    Scott,
    1. How could the Fed run out of assets to buy. I think there is pretty close to infinite supply for 1000 year non recourse, non-amortizing 0% fixed rate loans.

    2. MM is only ineffective at promoting NGDPLT when you don’t present it effectively.

    Otherwise, nice post.

  4. Gravatar of CMA (@CmaMonetary) CMA (@CmaMonetary)
    14. July 2014 at 21:23

    Would you agree that transfers of MB by fed to people are credible because they are always permanent? Unlike asset purchases because these assets can draw the MB out of the system again whereas the transfer cant be reversed.

  5. Gravatar of Morgan Warstler Morgan Warstler
    14. July 2014 at 22:25

    I asked:

    “Hypo MM this way for me please:

    1. Say we find it is possible to put NGDP on a level target (NGDPLT) of say 5% for the next 30 years.

    2. We do this by some kind of monthly recalibration, increasing or decreasing asset buys / sales that occurs without human decision making. A futures market that predicts 1-3-6 coming months and the machine targets the prediction. And acts based on the predictions.

    3. Assume this means, we can predict with some high % (say 95%) assurance, that NGDP will be within +/- .1% on any given month in next 30 years.

    4. Overtime, the accuracy increases because even in the face of massive shocks, market participants learn the machine is brutal cold and unrelenting in ensuring that by any means necessary it will aim for next months, 3 months, 6 months level target.

    ——

    Ok, are you saying that IF we could do this, it’s not worth it, doesn’t mean get us much?

    Or are you saying this can’t be done?”

    He responded:

    “1) it can’t be done.
    2) strong weight of theoretical evidence is that it wouldn’t be a good idea anyway.
    3) any remotely automated system like this would likely lead to great instability, which is what normally happens when you put a rule into a model for which it wasn’t designed, or in this case a rule that does ok in a model, but it turns out that the model is not a good approximation to the real world.”

    I can’t find any real response in these, they are nice markers to have laid down, but I don’t see much here.

  6. Gravatar of W. Peden W. Peden
    14. July 2014 at 23:46

    dannyb2b,

    Ceteris paribus, a successful 5% NGDP target would produce a lower monetary base than the US’s current regime, because the opportunity cost of holding base money would be higher due to higher interest rates/inflation.

  7. Gravatar of Anders Anders
    15. July 2014 at 00:48

    @SS: ‘To call fiscal policy a “blunt instrument” would be an understatement’

    You don’t think an increase in interest rates is a blunt instrument, when it arbitrarily picks a group of people whose disposable income it will reduce (net floating rate debtors), whilst boosting the income of another arbitrary group (net floating rate creditors)??

  8. Gravatar of W. Peden W. Peden
    15. July 2014 at 01:19

    Anders,

    Even if one accepts your premises, your conclusion doesn’t follow: distributional precision and flexibility in targeting AD are two different things.

  9. Gravatar of Anders Anders
    15. July 2014 at 02:00

    W. Peden

    Do Kantian considerations carry no weight with you? Do you not feel uneasy that monetary policy treats net debtors as a means to the end of lowering aggregate demand?

    Rgds

  10. Gravatar of Daniel Daniel
    15. July 2014 at 02:41

    monetary policy treats net debtors as a means to the end of lowering aggregate demand

    1 .What we want is to stimulate aggregate demand, not lower it.

    2. What causes redistribution is UNEXPECTED inflation. Under a regime of NGDP targeting, nominal growth would be steady.

    3. Get over your fixation with interest rates. That’s not what monetary policy is about.

    4. What would be the alternative ? Not using “monetary policy” ?

    What would that even mean ? Freezing the base ? Fixing an exchange rate ?

  11. Gravatar of Ralph Musgrave Ralph Musgrave
    15. July 2014 at 03:50

    Science awards top marks to simple laws which explain a lot, e.g. E=MC2. Compared to the above article of Scott’s which is of truly Byzantine complexity, MMT is phenomenally simple. It says:

    In a recession, create new base money and spend it, and/or cut taxes.

    That’s 14 words as opposed to Scott’s 1,800.

  12. Gravatar of ssumner ssumner
    15. July 2014 at 04:34

    danny, No, the base would be much smaller as a share of GDP.

    dtoh, As a practical matter you are correct–they don’t run out of assets to buy.

    CMA, No they are not always credible, because they are not always permanent. See my post on helicopter drops vs “helicopter drops.” The money can be clawed back via taxes.

    In any case it would be insane for the Fed to give away money when standard asset buying works fine, if combined with NGDP targeting.

    Morgan, Those responses indicate he hasn’t thought carefully about what you are proposing. He responded like you are proposing something like Friedman’s 4% rule.

    Anders, I don’t favor using interest rates as an instrument of monetary policy. In addition, the purchase of bonds by the Fed could easily reduce bond prices, as it did in the 1960s and 1970s.

    Ralph, I noticed you lied about my beliefs in the comment section over there, claiming I had changed my views on the desirability of fiscal policy, even though you know that was a lie. Shows a lot about your character.

  13. Gravatar of Morgan Warstler Morgan Warstler
    15. July 2014 at 05:38

    Frankly, Scott, I think the guy is world class asshole. He’s not much better than MMTers, for acting defensively dismissive. I don’t think he’s got the mental goods.

    I kept hypo super simple. If he REALLY doesn’t think it can be done, he’d forget the rest, and use his words to say why. If can is off table, nothing else matters.

  14. Gravatar of Anthony McNease Anthony McNease
    15. July 2014 at 06:54

    Scott, you are too kind to Mr. Yates. Yates’ post contains the telltale straw man terms used in low brow internet comments from trolls: never & always. That post is just click bait I think, but kudos to you for a serious refutation. I think his response to Morgan’s question/hypo shows he is uninterested in learning more.

    “That’s 14 words as opposed to Scott’s 1,800.”

    It is comforting to oversimplify complex problems so they can be more easily comprehended, but that doesn’t make the simplification accurate nor useful.

  15. Gravatar of Jeff Jeff
    15. July 2014 at 07:21

    Hi Scott,

    Can you expand a little on your comment that it will never be possible to write down a model with microfoundations in which NGDP targeting is optimal? What makes you say that?

  16. Gravatar of Major-Freedom Major-Freedom
    15. July 2014 at 08:11

    “Monetary policy may be unable to stabilize the economy when there are real shocks. Monetary policy is pretty good at stabilizing the economy when the instability is due to a combination of sticky nominal wages and fluctuating nominal spending.”

    What if real shocks can be, and often are, caused by monetary policy? Such events would fly under your ideological radar, and you would end up interpreting a real shock to be a “nominal” one solely on the basis that spending has changed, even though the spending shoch is an effect of of the same thing that caused the real shock!

    In short, MM is blinded by certain consequences of its own framework.

    For example, suppose an individual worker, in the hoola hoop industry, is laid off because the real relative demand for hoola hoops is not what the producers thought it would be. We can imagine that for some positive period of time that worker’s spending will decline, until their real productive activity is more in line with real relative consumer preferences. If this is all that occurred, MMs would interpret this event not as a real capital structure failure, but as a central bank failure, because total spending has declined. But this is a real capital structure failure! We have postulated that too many resources and labor were allocated to the hoola hoop industry, and not enough to other industries.

    Now, and crucially important, this phenomena can still take place should one or two or 30 million individual workers be laid off. If any given capitalist can make a real capital allocation error in their individual respective market, which will encourage them to reduce their investment spending, which will reduce spending out of wages, is it really so hard to believe that it is possible that most capitalists might might have made errors at around the same time, and be revealed relatively close together as well, but likely sequentially one by one over a relatively short time period of say 6 months or a year?

    One of the things that anti-Austrians have so much trouble in understanding is that they believe the Austrian theory of partial relative over investment and partial relative under investment is an implicit advocacy, or at least an implicit consistency, with the MM ideal of no change, or at least no drop in, aggregate spending. The anti-Austrian idea is that OK, let’s all agree with the Austrians that too many resources and labor went into hoola hoop production. But where do they get the crazy insane belief that this means everyone else should suffer too? If the Austrians are claiming that the hoola hoops were in partial relative over production, then wouldn’t they “get what they want” if a central bank ensured that other productions experience an increased spending, so that the partial relatively under produced goods producers were able to make more investment? Isn’t that solving the problem Austrians are talking about? If they STILL say no, then they must be arguing from political ideology and dogmatism, yadda yadda yadda.

    Here is the problem with the above interpretation. It is falsely identifying the “partial relative under produced goods”. The goods that, according to Austrians, have been under produced are not necessarily observable, previously produced goods in the “non-hoola hoop industries” (assuming hoola hoopa are the only partial relative over produced goods) a portion of the supply of which is in inventory. In othwr words, Austrians are not saying that if hoola hoops are in over supply, that this implies something else that has been produced is in under supply. Yes, if they were saying that, then it would make sense to view raising other goods spending as is implied in NGDPLT to be some sort of workaround solution.

    The goods that are partially underproduced in Austrian theory may very well not even exist. If too many resources and labor were allocated in one existing industry, then it could very well be the case that not enough resources and labor went into the production of goods from firms that do not exist but otherwise would have existed had the partial relative over invest not occurred.

    This should not be too much of an intellectual burden for MMs to handle, because I have noticed them mentioning that price targeting is a bad policy in part because goods don’t remain the same over time. This is another way of saying that we cannot even compare as the same good the concept “computer” or “car”. A computer or car today is not the same computer or car 5 years ago.

    It is the same intuition in Austrian theory. Sure, there might be a relative under production of certain goods like “heavy machinery for use in mining”, but that doesn’t mean all the existing and already produced “heavy machinery for us in mining” are what should be duplicated in greater supply. Entirely new machines could have been consistent with satisfying the criteria of no partial under investment.

    This is why Austrians don’t accept the MM argument that targeting total spending will solve the “partial over and under investment” problem.

    There is lots more to this. This is barely scratching the surface…

  17. Gravatar of Major-Freedom Major-Freedom
    15. July 2014 at 08:42

    “I certainly don’t believe that developed countries would need to buy non-government securities to hit a reasonable target, such as 4% or 5% NGDP growth, level targeting. But my deeper objection is that NKs frame the ineffectiveness issue backwards. They start by asking what the central bank can do at the zero bound, when they should start by asking why we are at the zero bound.”

    MM suffers from this same backwardness. One can say that their objection to MM is that MMs start by asking what the central bank can do when NGDP declines, when they should start by asking why we are observing an NGDP decline.

  18. Gravatar of Major-Freedom Major-Freedom
    15. July 2014 at 09:02

    “I’d prefer something like a nominal total labor compensation target, especially for countries like Kuwait where NGDP can be distorted by commodity price shocks.”

    Wage payment targeting would distort the beneficial outcome of falling wage payments and rising capital goods spending, which operates to raise worker productivity and real wages. It would also distort relative wages, as inflation does not affect all wage rates equally nor at the same time. It would also distort the world economy to the extent that it distorts cross border labor reallocations, to the extent that wages don’t fall locally when they should, or don’t sufficiently rise locally when they should, given international labor market considerations.

    A good, pragmatic, easy to understand solution is a free market in money. Hayek wrote about it in his book “Denationalization of Money” in 1976, and “Denationalization of Money: The Argument Refined” in 1978 (the latter of which he explained his belief that despite the legal freedom of anyone to issue any money they can sell in the market, there would likely be convergence to one or a few monies as good money outcompetes bad money). Socialist cars doesn’t work well. Neither does socialiat money. If an entire country the size and population of the USSR can abandon socialism, then surely a capitalist country can abandon socialist money. All we need are the intellectuals and economists. (“Oh brother” might be an easy thing to think on that one!)

  19. Gravatar of Philippe Philippe
    15. July 2014 at 09:10

    “The goods that are partially underproduced in Austrian theory may very well not even exist.”

    Don’t you think that people are more likely to invest in producing completely new products if they see that there is a lot of demand and spending in the economy?

    If you see start-ups booming and making millions, aren’t you more likely to create your own start-up (with a completely original product)?

    Aren’t you less likely to do any of the above if the economy is mired in recession, spending/ demand are falling, unemployment is rising, and businesses are going bankrupt?

  20. Gravatar of Philippe Philippe
    15. July 2014 at 09:11

    MF,

    “The goods that are partially underproduced in Austrian theory may very well not even exist.”

    Don’t you think that people are more likely to invest in producing completely new products if they see that there is a lot of demand and spending in the economy?

    If you see start-ups booming and making millions, aren’t you more likely to create your own start-up (with a completely original product)?

    Aren’t you less likely to do any of the above if the economy is mired in recession, spending/ demand are falling, unemployment is rising, and businesses are going bankrupt?

  21. Gravatar of Major-Freedom Major-Freedom
    15. July 2014 at 09:19

    Daniel:

    “What causes redistribution is UNEXPECTED inflation.”

    Entirely false. Even if everyone knew exactly what the Fed will do, redistribution is guaranteed for the simple reason that not everyone’s income can physically be raised at the same rate at the same time when the Fed flushes the banks with new money. It doesn’t matter one iota that the banks send treasuries to the Fed in return. Banks sending treasuries to the Fed cannot make everyone’s income rise equally either.

    Once the banks lend or spend the new money, those people they trade with at that time experience an increased income. Only after those people spend more will that next group be able to spend more. All the while those still waiting are going to be competing with the initial recievers for goods. That leads to redistribution. Even if I know exactly what the Fed will do, I must wait for the new money to be spent before my own income is raised by virtue of my buyers having more money. Everyone has to wait for their buyers to spens more money, but not everyone’s buyers experience an increased income at the same time either. No, we as sellers cannot all raise our price too soon, because each of our buyers have to wait for their buyers to experience an increases income as well.

    Money is always and everywhere spent sequentially, over time, person to person. Merely claiming support for targeting a single aggregate statistic of “spending” does not equate to changing each individual’s spending.

  22. Gravatar of Philo Philo
    15. July 2014 at 09:25

    “Thus the real zero bound problem is not zero interest rates, but the possibility that the Fed might be legally prevented from buying assets that it needed to buy in order to satisfy the public’s demand for base money when NGDP growth is on target” (assuming the Fed was also legally prevented from giving money away–no “helicopter drops” allowed).

  23. Gravatar of Major-Freedom Major-Freedom
    15. July 2014 at 09:35

    Philippe:

    “Don’t you think that people are more likely to invest in producing completely new products if they see that there is a lot of demand and spending in the economy?”

    The key question is WHAT new products. What in the sense of how those products “fit” into the complex of all products. Products are not produced in isolation in a diviaion of labor. We all depend on each other to greater or lesser extents. We produce individually for nominal income, but it is our real activity that needs coordination in order to avoid overall coordination problems.

    It is one thing for someone to be encouraged to invest “in general” for whatever reason, be it confidence or spending on previously produced goods. But it is quite another to know which among the myriad of options is to be chosen. Production for production’s sake is not something you can explain by saying “let the market sort it out”, when we don’t even have a market to speak of.

    “If you see start-ups booming and making millions, aren’t you more likely to create your own start-up (with a completely original product)?”

    It matters which start up is chosen and which are not chosen, when it comes to social coordination. Merely resting on one’s laurels with some investment, any investmenf, is precisely the kind of short term thinking that Austrians refer to when they talk about malinvestment. Not every project is equally profitable or has equal demand. Which specific projects that are undertaken is affected by the monetary system that prevents relative price market signals from being observed.

    “Aren’t you less likely to do any of the above if the economy is mired in recession, spending/ demand are falling, unemployment is rising, and businesses are going bankrupt?”

    If you present the choice as the inaccurate “invest or not invest”, without taking into account what is to be invested in, then sure, we can imagine a depression influencing me to choose “no invest”. But if market forces are free to function, then what really matters, the specific types of investment, will be able to be taken by virtue of certain relative prices adjusting thus revealing profitable investment opportunities in the RIGHT projects, markets and industries, instead of just any old profitable project, say in housing 2006-7, or tech projects 1999, etc.

    Is it better to invest in something than nothing at all for a time? This question can only be answered by the individual for him or herself, and that requires a market.

  24. Gravatar of Philippe Philippe
    15. July 2014 at 10:24

    MF,

    no, I’m not talking about ‘investment in general’ for ‘whatever reason’. Businesses make profits by selling specific products which people want to buy. However business success is also affected by general economic conditions.

    If the economy is growing and there is very little unemployment, then launching a new product or starting a new business is more likely to be successful. If you were to launch exactly the same product or start the same company in the middle of recession when unemployment is high, the chances of failure are likely to be higher.

    It’s much easier to invest in new products and to change the capital structure if the economy is not in a recession.

  25. Gravatar of Major-Freedom Major-Freedom
    15. July 2014 at 11:48

    Philippe:

    I am not sure I understand your point. On the one hand, you say it is not about investment or no investment. But then your explanation seems to be one of encouraging investment versus no investment.

    What about the possibility that a free market, even if introducing it results in a temporary correction/adaptation period, i.e. recession/depression, encourages the right investment, instead of just investment versus no investment?

    Also, and this goes more to your argument, if it were the case that aggregate investment is lower than it otherwise would be because general business conditions are bad, then that would only hasten the recovery, because it would put even greater pressure on specific factor input prices to fall by their respective relative extents that result from the new relative consumer demands. Investment does not stop completely during even the greatest depths of depression. Consumer demand does not disappear either.

    Economies heal one investment at a time, one project at a time, and one market at a time. As the real capital structure heals, THAT is what “stability” truly is in a division of labor economy. That is what encourages genuinely coordinated investment, and as a side effect, increasing “aggregate” investment that can last.

    Short term pain, long term gain. Once the long term gain is reached, no more short term pain. Much better IMO than short term gain then short term pain and back again, or long term exruciating pain after continuous short term unsustainable gain.

    Austrians think investors are tricked into investing (in unsustainable projects) by governments goosing the aggregate economy with non-market signals. Governments do not help by papering over real problems caused by past papering over of what was believed to be solely insufficient paper problems.

  26. Gravatar of Jason Jason
    15. July 2014 at 11:56

    Scott,

    You said: “If someone bothered to write down the MM model (at least my version of it), the model would be as simplistic as the Keynesian cross.”

    I had a go and I actually said the same thing :)

    http://informationtransfereconomics.blogspot.com/2013/08/scott-sumners-model-part-2_30.html

    … me from one year ago:

    “The resulting LS-MS model (for labor supply, money supply) is similar to the “Keynesian cross” AD-AS model with the MS curve analogous to the “45 degree” AD=Y equilibrium line which does not shift (you can only move along it, as it represents a fixed relationship between the price level, NGDP and MB …”

  27. Gravatar of Philippe Philippe
    15. July 2014 at 12:11

    “What about the possibility that a free market, even if introducing it results in a temporary correction/adaptation period, i.e. recession/depression, encourages the right investment, instead of just investment versus no investment?”

    You said that it could be the case that products on offer in the economy are not what people actually want, so what’s needed is a change in production: new products need to be created which people want. This means certain product lines or businesses will have to cease and others will have to take their place. However we can’t know what those products will be until they are created and people choose to buy them, which involves the trial and error processes of the market place.

    All of that may be correct, but the question is whether it is easier for this change in production and reallocation of resources to occur within a depressed economy, or within an economy which is not in a recession/ depression.

    I’d say it’s obvious that it’s easier in the latter case. It is easier to invest in new products and to start new businesses in a growing economy than it is in a depressed economy. It’s easier to sell new products if there isn’t much unemployment and people have enough money to buy the products. A recession or depression will actually make it harder to re-organize production and reallocate resources towards new investments.

  28. Gravatar of Tom Brown Tom Brown
    15. July 2014 at 12:16

    Scott, does the above make Jason the f1rst person to have “bothered to write down” a version of the MM model? If not, do you have another example you can point me to? Thanks.

  29. Gravatar of Philippe Philippe
    15. July 2014 at 12:39

    MF,

    “A good, pragmatic, easy to understand solution is a free market in money. Hayek wrote about it in his book “Denationalization of Money” in 1976, and “Denationalization of Money: The Argument Refined” in 1978″

    In those texts he also argued that a stable price level was optimal for ‘economic calculation’, which is the exact opposite of everything you have ever said.

    He also said that people should be able to pay their taxes in these privately-issued currencies. However that would turn those currencies into state currencies, rather than purely private currencies, as people would be legally obliged to acquire them to pay taxes. So there’s a basic contradiction there.

    When you talk about ‘free market money’ you are actually talking about a world without government or taxation.

  30. Gravatar of CMA (@CmaMonetary) CMA (@CmaMonetary)
    15. July 2014 at 14:19

    How could all the MB created since the last downturn began be expected to be non permanent? Surely people expect only excess base that would create too much inflation to be removed later and not all of it.

  31. Gravatar of Tom Brown Tom Brown
    15. July 2014 at 14:42

    CMA, it’s not like MB is still increasing after the better part of a deca… er… well, scratch that. The point is, Chuck Norris isn’t the Fed chair! Now does it make sense? :D

  32. Gravatar of Daniel Daniel
    15. July 2014 at 15:08

    Money is always and everywhere spent sequentially, over time, person to person.

    If you actually believed your own bullshit, you’d be sprinting to the nearest ATM.

  33. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 15:12

    Philippe:

    “You said that it could be the case that products on offer in the economy are not what people actually want, so what’s needed is a change in production: new products need to be created which people want. This means certain product lines or businesses will have to cease and others will have to take their place. However we can’t know what those products will be until they are created and people choose to buy them, which involves the trial and error processes of the market place.”

    “All of that may be correct, but the question is whether it is easier for this change in production and reallocation of resources to occur within a depressed economy, or within an economy which is not in a recession/ depression.”

    It is, according to Austrians, neither easier nor more difficult in either booms or busts. Austrians argue that regardless of the existing conditions, a free market going forward is the only way sustainable coordination can take place. If existing conditions are a boom, or if existing conditions are a bust, they argue we cannot know how capital and consumption align unless market prices and interest rates are observable.

    “I’d say it’s obvious that it’s easier in the latter case. It is easier to invest in new products and to start new businesses in a growing economy than it is in a depressed economy. It’s easier to sell new products if there isn’t much unemployment and people have enough money to buy the products. A recession or depression will actually make it harder to re-organize production and reallocate resources towards new investments.”

    Austrians argue that a depression IS a “re-organization of production and allocation of resources (and labor)”.

    Recessions and booms are not a sort of canvas upon which economies are constructed for the worse and for the better, or harder and easier, respectively. They are themselves periods of capital and labor re-allocation.

    The criteria of “easier” and “difficult” are not the same as “investment in line with consumer preferences” and “investment not in line with consumer preferences.” Economic life made easy by tricking investors into investing into “something” is what Austrians argue a short term gain but long term pain activity.

    Should capital earn “easy” profits, or should capital earn profits that are in line with consumption/savings preferences?

    ————————

    “In those texts he also argued that a stable price level was optimal for ‘economic calculation’, which is the exact opposite of everything you have ever said.”

    I don’t see how. I’ve only argued that a free market in money would operate to optimize economic calculation. That I think this would result in the most stability in terms of money value and prices in the long run, but did not explicitly mention it as a “reason” for why I think we should have a free market in money, does not mean that Hayek’s point about stable prices is “the exact opposite” of everything I have ever said. Quite the contrary. Maximally stable prices in the long run is but one of many outcomes, I think, of a free market in money.

    In the short run, a free market in money would likely bring about much more volatile prices. But this is not necessarily a bad thing. Prices should reflect actual individual preferences in a market. If that means capitalists and investors expect a more risky future cash flow, then there is no reason why they can’t offer a lower price for inputs, like capital goods, labor, and financial securities that have claims on the cash flows of productive enterprises.

    Regarding “stable prices” and economic calculation, Hayek argued:

    “…effective capital maintenance and cost control is possible only if accounts are kept in a unit that in some sense remains tolerably stable. So we will provisionally leave the present subject with the conclusion that, in the long run at least, the effective choice between competitive offers of currencies will be the usual one of competition. The currency that will prevail will be the one preferred by the people who are helped to succeed and who in consequence will be imitated by others.”

    While in this book, Hayek spoke of the benefits of a stable currency, let that not be confused with an “implicit” or “tacit” or “suggestion” for central banking, nor CB price targeting.

    “He also said that people should be able to pay their taxes in these privately-issued currencies. However that would turn those currencies into state currencies, rather than purely private currencies, as people would be legally obliged to acquire them to pay taxes. So there’s a basic contradiction there.”

    Not if the state does not mandate only one currency of which they have a monopoly. If the argument is that you can pay taxes in privately issued currencies, ANY privately issued currencies, then it is definitely not a contradiction, because you would not be legally obligated to acquire any particular currency to pay taxes.

    But it still would be coercive.

    “When you talk about ‘free market money’ you are actually talking about a world without government or taxation.”

    I don’t see how. If I can earn any money I want, but whatever I earn, you will steal 50% of it, then there can still be freedom in the choice of which money to use and accept, but there would just be theft of whatever you choose. I don’t know for sure, but if you will be robbed of whatever money you accept, then that might influence what money you do choose. Maybe you will publicly accept toilet paper, but secretly you will accept gold. If everyone were legally free from the government’s perspective to accept any money they wanted, then I imagine there would arise a large underground, black market of “true” money, while people in the open and on their tax returns claimed to have received “x” as their money payment, where “x” is something worth very little.

  34. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 15:16

    Daniel:

    “If you actually believed your own bullshit, you’d be sprinting to the nearest ATM.”

    You mean the money I earned? From someone else? Who owned that money before I did? Who also earned it? From someone else prior to them? Who also earned it? From someone else? And so on?

    Not sequential huh?

    Hahaha

    “Quick! Go run to the nearest ATM and show Major_Freedom is right! That ought to show him!”

    Hahahah

  35. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 15:20

    Daniel:

    I’ve already explained it to you more than once that taking money from an ATM is not a creation of new money, but merely a transformation of existing money that has already been earned prior in a sequential person to person spending framework. If you tell me to run to the ATM, you’re just describing another step in the sequence. I would be converting existing money amounts ALREADY EARNED into cash. If I then spend it, then the sequence will continue.

    All throughout, inflation has affected each person’s money balances unequally, depending on how “close” one is to the initial step in the sequence.

    And as money flows outward from person to person, real goods goes the other way. Nothing to do with productive output, but simply where in line you are. That portion of total wealth that is transferred in this way due purely to inflation, is in large part what causes massive wealth inequality you see around you.

  36. Gravatar of Philippe Philippe
    15. July 2014 at 15:28

    MF,
    if people own bonds, which they then sell to the fed, that means that they must have previously had money which they saved by buying the bonds.

  37. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 16:06

    Philippe:

    “if people own bonds, which they then sell to the fed, that means that they must have previously had money which they saved by buying the bonds.”

    I look at this in terms of mutuum sums of money, not bailment sums of money. In other words, money as a “fungible” good.

    Yes, the bond seller must have previously had money to buy the bond. But where did that sum of money come from? It must have come from someone else prior.

  38. Gravatar of Gordon Gordon
    15. July 2014 at 16:08

    Scott, I’m wondering if this post would be a good one to add to your list of links which provide an intro to your views. It does a good job of covering the many misconceptions that people have regarding MM. It’s not just Tony Yates who has these misconceptions. Late last year, I saw Russ Roberts express one of these misconceptions as a criticism of MM even though you’ve been a guest on EconTalk a number of times. That’s why I think adding this to your list of top posts would be helpful.

  39. Gravatar of Daniel Daniel
    15. July 2014 at 16:17

    And as money flows outward from person to person, real goods goes the other way.

    The logical implication would be for you to spend your money before other people do.

    Yet you don’t.

    Turns out austro-morons (redundancy is redundant) don’t behave the way their theories would imply they do. Who’d have thought.

  40. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 16:23

    “It seems to me, in other words, like any other attempts to accept wage and price rigidities as inevitable and to adjust monetary policy to them, the attitude from which ‘Keynesian’ economics took its origin, to be one of those steps apparently dictated by practical necessity but bound in the long run to make the whole wage structure more and more rigid and thereby lead to the destruction of the market economy. But the present political necessity ought to be no concern of the economic scientist. His task ought to be, as I will not cease repeating, to make politically possible what today may be politically impossible. To decide what can be done at the moment is the task of the politician, not of the economist, who must continue to point out that to persist in this direction will lead to disaster.

    “I am in complete agreement with Professor Friedman on the inevitability of inflation under the existing political and financial institutions. But I believe that it will lead to the destruction of our civilisation unless we change the political framework. In this sense I will admit that my radical proposal concerning money will probably be practicable only as part of a much more far-reaching change in our political institutions, but an essential part of such a reform which will be recognised as necessary before long. The two distinct reforms which I am proposing in the economic and the political order! are indeed complementary: the sort of monetary system I propose may be possible only under a limited government such as we do not have, and a limitation of government may require that it be deprived of the monopoly of issuing money. Indeed the latter should necessarily follow from the former.” – FA Hayek, Denationalization of Money: The Argument Refined, pgs 83-4

  41. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 16:24

    Daniel:

    “The logical implication would be for you to spend your money before other people do.”

    “Yet you don’t.”

    People spend MY money…before I do?

    OMG! Daniel! You’ve discovered a new element on the periodic table! Timetravelium.

  42. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 16:31

    Daniel:

    Kidding aside, how in the world can I spend my money before everyone else, given that the money I have is money people have already spent before me, ON me for my goods/services?

    You’re not making any logical sense Daniel. You keep ignoring the fact that any money I spend, will necessarily be in a sequence where I spend AFTER someone else has spent their money to create my income in the first place. It’s already “too late” if you tell me to spend money I already own. You’re just talking about another step in the sequence.

    The “logical implication” you claim is there, isn’t. I am, and you too, live in a sequential money framework. Even if I go right to the ATM right now and withdraw the maximum, and spend it, all this would still be a sequential phenomena. I had to wait before my income was increased such that my bank even has the amount of money in my name to speak of.

    Methinks you haven’t really thought this through. You just want to flame for the sake of flaming. Try to think more first. Then you can be like me and snark away.

  43. Gravatar of Philippe Philippe
    15. July 2014 at 16:44

    mf,

    “It is, according to Austrians, neither easier nor more difficult in either booms or busts.”

    So you think it is just as easy to start a new business or to invest in and sell new products in the middle of a depression as it is in a growing or booming economy? Strange. I guess you don’t care about facts.

    Anyway, what you say is false. Hayek argued later on that there was no good purpose served by allowing an economy to fall into a depression.

    “[austrians] argue we cannot know how capital and consumption align unless market prices and interest rates are observable.”

    You have interpreted that through your anarcho-capitalist framework to mean that whatever happens in your so-called ‘free market’ (i.e. in your imaginary anarcho-capitalist world) is necessarily optimal – whatever it happens to be.

    You have no theory of what the optimal interest rate is, other than “whatever interest rate happens to exist in a [so-called] free market at any given point in time”. And by ‘free market’ you mean a purely imaginary anarcho-capitalist world.

    So all you do is just assert that your imaginary anarcho-capitalist so-called ‘free market’ cannot fail to be optimal in any way, by definition. The interest rate regime which exists in such an imaginary economy is always the best that could possibly exist, by definition, even if that economy happens to be in a massive depression.

    It’s all just circular reasoning. What you actually do is replace actual austrian economics with your circular anarcho-capitalist ideology.

    “The criteria of “easier” and “difficult” are not the same as “investment in line with consumer preferences” and “investment not in line with consumer preferences.”

    No, I already stated that businesses succeed by making things which people want to buy. However, it is more difficult to successfully produce things which consumers want to buy in the middle of a recession or depression. It is more difficult to launch new products or to start new businesses. What you are advocating would actually make it more difficult for investment in line with consumer preferences to take place.

    “Economic life made easy by tricking investors”

    I didn’t say anything about “tricking” anyone. People will invest in businesses they think will be profitable, and people will buy products they want to buy. There is no reason for an economy to fall into a depression for this to occur. All that would do is make it more difficult for people to organize production in a way that meets their preferences.

    “I don’t see how. I’ve only argued that a free market in money would operate to optimize economic calculation.”

    No, you have argued that deflation of any sort is always in line with optimal economic calculation in your so-called ‘free market’ economy, because whatever happens in that economy is always optimal. Hayek explicitly rejects this. In ‘denationalization’ he argues that optimal economic calculation requires a stable price level, and that deflation serves no good purpose. This is the exact opposite of everything you have ever said.

    “Not if the state does not mandate only one currency of which they have a monopoly. If the argument is that you can pay taxes in privately issued currencies, ANY privately issued currencies, then it is definitely not a contradiction”

    So I could pay my taxes with anything I choose? I could print up my own currency on bits of paper and use it to pay my taxes? LOLOLOL. That obviously makes no sense. Of course, the government would have to choose which supposedly ‘private currencies’ could be used to pay taxes, thereby turning them into state currencies backed by legal obligations. It’s as if the government were to decide that you could pay your taxes with Bitcoin but not with Litecoin.

    The rest of your comment is the usual juvenile ranting about ‘theft’ and how everyone really secretly just loves and covets gold so very much, just like you.

  44. Gravatar of Philippe Philippe
    15. July 2014 at 16:48

    mf

    “Yes, the bond seller must have previously had money to buy the bond.”

    So he previously had money, which he decided to save. And now he has decided to spend that money.

  45. Gravatar of Philippe Philippe
    15. July 2014 at 16:57

    “how in the world can I spend my money before everyone else, given that the money I have is money people have already spent before me, ON me for my goods/services?”

    How can people who sell bonds to the Fed spend their money before everyone else, given that the money they used to buy the bonds in the first place, is money people had already spent before them, ON them for their goods /services?

  46. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 17:25

    Philippe:

    “It is, according to Austrians, neither easier nor more difficult in either booms or busts.”

    “So you think it is just as easy to start a new business or to invest in and sell new products in the middle of a depression as it is in a growing or booming economy? Strange. I guess you don’t care about facts.”

    I think you misunderstood what I responded to. I specifically responded to this point you made:

    “…the question is whether it is easier for this change in production and reallocation of resources to occur”

    If you notice, I did not say it is neither easier nor more difficult to start just any old investment. I meant it is neither easier nor more difficult to reallocate resources into a more sustainable configuration. This is different from the question of ease of making investments per se. It is ease and difficulty of making specific investments, coordinated investments.

    Do you see the difference there? It’s somewhat elusive, because of your seeming penchant to think of investment and consumption in aggregations. When you lump all investment into one conception, and you think of the ease of “investment”, and ignore “specific investments”, then it becomes likely you will misunderstand the Austrian argument. You have to think of capital in terms of heterogeneity, inter-temporality, this rather than that, relative allocations, and so on. Not “less investment” and “more investment.”

    “Anyway, what you say is false. Hayek argued later on that there was no good purpose served by allowing an economy to fall into a depression.”

    I’m pretty sure he thought that a free market in money would avoid the kind of depressions he lived through.

    “[austrians] argue we cannot know how capital and consumption align unless market prices and interest rates are observable.”

    “You have interpreted that through your anarcho-capitalist framework to mean that whatever happens in your so-called ‘free market’ (i.e. in your imaginary anarcho-capitalist world) is necessarily optimal – whatever it happens to be.”

    No, I have interpreted it through Austrian theory. Of economic calculation. The political implications are secondary to the economic arguments. The economic arguments are positive ones. They say “This causes that. If you want to avoid that, then don’t do this.”

    These aren’t normative statements. Anarcho-capitalism is a normative framework. It is a series of oughts and ought nots.

    The argument that investors are misled with non-market money is purely positive, not normative. It’s very easy to connect this with normative ideas, because who really wants investors to be misled on purpose?

    “You have no theory of what the optimal interest rate is, other than “whatever interest rate happens to exist in a [so-called] free market at any given point in time”. And by ‘free market’ you mean a purely imaginary anarcho-capitalist world.”

    So…I have a theory of what optimal interest rates are then?

    “So all you do is just assert that your imaginary anarcho-capitalist so-called ‘free market’ cannot fail to be optimal in any way, by definition. The interest rate regime which exists in such an imaginary economy is always the best that could possibly exist, by definition, even if that economy happens to be in a massive depression.”

    I don’t get what you’re saying. You believe that the optimal interest rate is NOT what the free market generates, but what some other mechanism brings about. Well, is that not arguing what optimal interest rates are “by definition”? If not, why is mine then? Have you elaborated on your theory and explained what generates optimal interest rates?

    “It’s all just circular reasoning. What you actually do is replace actual austrian economics with your circular anarcho-capitalist ideology.”

    Philippe, you’ve already said that you believe it’s circular reasoning, and I’ve already showed you many times how it is not. I think you’re going to a dead end with that accusation.

    “The criteria of “easier” and “difficult” are not the same as “investment in line with consumer preferences” and “investment not in line with consumer preferences.””

    “No, I already stated that businesses succeed by making things which people want to buy.”

    Succeeding in earning profits in a non-market money system is not the same thing as making things which people want to buy OVER TIME.

    “However, it is more difficult to successfully produce things which consumers want to buy in the middle of a recession or depression. It is more difficult to launch new products or to start new businesses. What you are advocating would actually make it more difficult for investment in line with consumer preferences to take place.”

    This has already been discussed above.

    “Economic life made easy by tricking investors”

    “I didn’t say anything about “tricking” anyone.”

    I didn’t say you did.

    The tricking part was not an accusation of what you purposefully seek. But it is the effect of what you want to happen.

    “People will invest in businesses they think will be profitable, and people will buy products they want to buy. There is no reason for an economy to fall into a depression for this to occur. All that would do is make it more difficult for people to organize production in a way that meets their preferences.”

    There is a reason. The reason is that the profit signals are not in line with sustainable consumer preferences given savings/consumption patterns.

    “I don’t see how. I’ve only argued that a free market in money would operate to optimize economic calculation.”

    “No, you have argued that deflation of any sort is always in line with optimal economic calculation in your so-called ‘free market’ economy”

    No, I have not argued that. That is just straw man.

    I said market driven deflation is in line with market preferences.

    “because whatever happens in that economy is always optimal.”

    It is optimal for individuals, because only in a market can individuals be free to achieve their goals without their plans for their persons and property being violently suppressed.

    “Hayek explicitly rejects this. In ‘denationalization’ he argues that optimal economic calculation requires a stable price level, and that deflation serves no good purpose. This is the exact opposite of everything you have ever said.”

    How can my advocacy for a free market in money be opposite to Hayek’s free market advocacy in money?

    “Not if the state does not mandate only one currency of which they have a monopoly. If the argument is that you can pay taxes in privately issued currencies, ANY privately issued currencies, then it is definitely not a contradiction”

    “So I could pay my taxes with anything I choose? I could print up my own currency on bits of paper and use it to pay my taxes? LOLOLOL.”

    That is what a free market in money would imply, yes.

    “That obviously makes no sense.”

    Why doesn’t it make sense?

    “Of course, the government would have to choose which supposedly ‘private currencies’ could be used to pay taxes, thereby turning them into state currencies backed by legal obligations.”

    What do you mean they would HAVE to?

    “It’s as if the government were to decide that you could pay your taxes with Bitcoin but not with Litecoin.”

    And?

    “The rest of your comment is the usual juvenile ranting about ‘theft’ and how everyone really secretly just loves and covets gold so very much, just like you.”

    If you’d rather not engage them, your choice.

    “Yes, the bond seller must have previously had money to buy the bond.”

    “So he previously had money, which he decided to save. And now he has decided to spend that money.”

    Yes. That’s a sequence.

    “how in the world can I spend my money before everyone else, given that the money I have is money people have already spent before me, ON me for my goods/services?”

    “How can people who sell bonds to the Fed spend their money before everyone else, given that the money they used to buy the bonds in the first place, is money people had already spent before them, ON them for their goods /services?”

    They do so by the fact that the money they get from the Fed, was not money earned by anyone else prior. That’s where the sequence starts.

  47. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 17:39

    Philippe:

    It cannot be over-emphasized that investments have still been made even in the greatest depths of past depressions.

    It is not like investments stop. Depressions are just periods of time where many more projects are revealed as bad at the same time than during “normal” times.

    It also cannot be over emphasized that depressions are, according to Austrians periods of corrections to malinvestments. They are not exogenous “out there” canvasses upon which investors act. They are times of investors correcting their errors.

  48. Gravatar of Major_Freedom Major_Freedom
    15. July 2014 at 17:50

    The rise of Bitcoins and other “crypto-currencies”, and the central banks of the world depreciating their currencies, is likely not a coincidence.

    Markets are likely arising due to people thinking fiat money is “too loose.”

    Markets are always right, right?

  49. Gravatar of Philippe Philippe
    15. July 2014 at 18:03

    “I meant it is neither easier nor more difficult to reallocate resources into a more sustainable configuration.”

    Tell me exactly, precisely what you mean by sustainable. No vague guff.

    “It is ease and difficulty of making specific investments, coordinated investments.”

    There is no reason why your so-called ‘free market’ (ancapistan) necessarily results in perfect coordination of plans. Such supposed coordination is only theoretically possible under very strict conditions. But you just ignore all of that and employ circular reasoning to argue that even if plans are completely discoordinated, that constitutes coordination because whatever happens in imaginary ancapistan is coordinated by definition, whatever it is, no matter what, just because.

    “I’m pretty sure he thought that a free market in money would avoid the kind of depressions he lived through.”

    He argued that it would do so by stabilizing the price level, which is the exact opposite of what you have said is optimal. If your imaginary ancapistan ‘free market’ resulted in deflation and depression you would say that was optimal. Hayek would not agree with you.

    “No, I have interpreted it through Austrian theory.”

    No, what you spout is your own anarcho-capitalist version of austrian theory, which evacuates all genuine economic theory and replaces it with circular moral arguments.

    “I said market driven deflation is in line with market preferences”

    Hayek argued that ‘market driven deflation’ serves no good purpose and that optimal economic calculation requires a stable price level. So according to Hayek, even if supposed ‘market preferences’ resulted in deflation, that would not be optimal. But according to you, whatever your imaginary ancapistan ‘free market’ does is always optimal, whatever it is, because your definition of optimal is simply whatever happens in ancapistan – depression, poverty, mass unemployment, all optimal if they happen in ancapistan.

    “It is optimal for individuals, because only in a market can individuals be free to achieve their goals without their plans for their persons and property being violently suppressed.”

    There you go, mixing up economic arguments with moral/political philosophy about violence.

    “How can my advocacy for a free market in money be opposite to Hayek’s free market advocacy in money?”

    Because your arguments are completely different. Hayek says stabilizing the price level is optimal. He argues that this is what a supposed ‘free market’ in money would achieve. You don’t care what the outcome of a supposed ‘free market in money’ is because you simply define it as necessarily optimal – regardless of the outcome!

    “Why doesn’t it make sense?”

    That is a seriously stupid question. The government asks me to pay my taxes, and I scribble “100 Quizlars, equal to whatever amount of tax I owe” on a piece of paper and hand it to the tax man. That’s a nonsensical system. It’s like being able to pay your bills by scribbling any old crap on a piece of paper and handing it to anyone.

    As I said, in Hayek’s scheme the government would have to choose which currencies to accept, thereby privileging them and turning them into state currencies backed by the law.

  50. Gravatar of Michael Byrnes Michael Byrnes
    15. July 2014 at 18:05

    Major wrote:

    “Short term pain, long term gain.”

    What’s wrong with this story?

    Due to various and many supply-side problems, an economy finds itself unable to produce the goods and services in sufficient quantity to satisfy the demand for those products at current market rates. Ergo, prices of those products rise, and the limited supply goes to those consumers who are willing to pay those higher prices. Short-term pain, as some are required to surrender more real resources to obtain the products they want while others must do without. However, it’s not all bad. Those who are able to produce the products in demand make a nice profit, and that profit serves as a signal to them and to others to ramp up production. In the long-term, old producers and new entrants will produce the demanded goods in higher quantities, prices will fall, and eventually consumers will be able to get their desired widgets.

  51. Gravatar of Philippe Philippe
    15. July 2014 at 18:08

    “They do so by the fact that the money they get from the Fed, was not money earned by anyone else prior”

    They had money prior, which they used to buy bonds. Then they sold the bonds to the Fed and had money again instead.

    Where did the money that people spent before you, ON you for your goods/services, come from?

  52. Gravatar of Philippe Philippe
    15. July 2014 at 18:21

    “It also cannot be over emphasized that depressions are, according to Austrians periods of corrections to malinvestments”

    No, Hayek rejected that view of depressions and came to see them as wholly destructive and serving no good purpose.

    But you don’t care, because ‘austrian economics’ just means whatever you want it to mean.

    “I am the last to deny – or rather, I am today the last to deny – that, in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate. I probably ought to add a word of explanation: I have to admit that I took a different attitude forty years ago, at the beginning of the Great Depression. At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should have even then understood that this possibility no longer existed. … I would no longer maintain, as I did in the early ‘30s, that for this reason, and for this reason only, a short period of deflation might be desirable. Today I believe that deflation has no recognizable function whatever, and that there is no justification for supporting or permitting a process of deflation.”

    http://www.themoneyillusion.com/?p=5966

  53. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    15. July 2014 at 18:23

    “In any case it would be insane for the Fed to give away money when standard asset buying works fine, if combined with NGDP targeting.”

    Is it possible standard asset buying isnt working that well?

    Maybe the fed cant attain its targets because when the MB gets too high it loses credibility. Isnt too much asset purchases in itself creating less credibility?

    Asset purchases helps the rich by providing preferential lending rates to fed counterparties. Heli drops should be more equitable and effective if performed by fed independantly of treasury.

  54. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    15. July 2014 at 18:50

    If asset purchases are working fine then why did the balance sheet have to expand so dramatically to target lower than 2% inflation (assuming they are targeting lower than 2%).

    If asset purchases are working fine wouldnt the balance sheet expand at a slower than normal rate (maybe 3% per anum) to create lower than 2% inflation?

    Dont asset purchases maintain the same amount of safe assets on the market in times when demand for safe assets goes up such as a recesion? A fed heli drop would increase supply of safe assets.

  55. Gravatar of Major-Freedom Major-Freedom
    15. July 2014 at 21:23

    Philippe:

    “Tell me exactly, precisely what you mean by sustainable. No vague guff.”

    It means the projects started will have sufficient real, complimentary resources to enable their completion. This can occur when investments are backed by real savings.

    “It is ease and difficulty of making specific investments, coordinated investments.”

    “There is no reason why your so-called ‘free market’ (ancapistan) necessarily results in perfect coordination of plans.”

    You’re right. It is definitely not perfect. But it is the best way IF we desire coordination.

    “Such supposed coordination is only theoretically possible under very strict conditions.”

    There is only one. Respect for the homesteading principle, and the corrollary of indidual private property rights.

    “But you just ignore all of that and employ circular reasoning to argue that even if plans are completely discoordinated, that constitutes coordination because whatever happens in imaginary ancapistan is coordinated by definition, whatever it is, no matter what, just because.”

    Why would there be complete discoordination, and how would preventing individuals from coordinating their own interests with other people’s own interests…coordinate their interests?

    “I’m pretty sure he thought that a free market in money would avoid the kind of depressions he lived through.”

    “He argued that it would do so by stabilizing the price level, which is the exact opposite of what you have said is optimal.”

    No, I never said stable prices is not optimal, nor have I argued that a free market in money is necessarily one of non-stable prices. I said that non-market intervention that forces stable prices away from free market prices is not optimal.

    “If your imaginary ancapistan ‘free market’ resulted in deflation and depression you would say that was optimal. Hayek would not agree with you.”

    How would individuals being free to make their own plans with their bodies and property CAUSE a depression?

    Hayek agrees with me that a free market in money is optimal.

    “No, I have interpreted it through Austrian theory.”

    “No, what you spout is your own anarcho-capitalist version of austrian theory, which evacuates all genuine economic theory and replaces it with circular moral arguments.”

    No, I have interpreted it through Austrian theory.

    Yes, I also advocate for a free market in the normative sense. But even so, that doesn’t mean my positive arguments are necessarily wrong.

    You advocate for a violent suppression of the free market. But I don’t then convince myself that saying as much is sufficient to refuting or chellenging or critiquing your positive statements.

    “I said market driven deflation is in line with market preferences”

    “Hayek argued that ‘market driven deflation’ serves no good purpose and that optimal economic calculation requires a stable price level. So according to Hayek, even if supposed ‘market preferences’ resulted in deflation, that would not be optimal.”

    Stable declines in prices is stable prices, just like stable rises in prices is stable prices.

    Hayek did not believe that falling prices on the basis of productivity gains serves no good purpose. You seem to be conflating productivity based price deflation with monetary deflation.

    Hayek did not ignore prices when he advocated for a free market in money. Neither do I. I too think that prices would be more stable (over the long run) with a free market in money, but that is not why I advocate for it.

    “is not ut according to you, whatever your imaginary ancapistan ‘free market’ does is always optimal, whatever it is, because your definition of optimal is simply whatever happens in ancapistan – depression, poverty, mass unemployment, all optimal if they happen in ancapistan.”

    Why hasn’t actual depression, poverty, and mass unemployment not stopped you from rejecting statism? Is it that whatever happens in statism, is optimal because by definition it is optimal whereas ancapism is worse? Seems like even with 200 million people murdered by governments during the 20th century alone, two of the worst economic calamities in recorded history under government, all of this has not shaken your faith that governments work and we can’t lose faith.

    I am not demanding that ancapism be imposed on you, or anyone else, against their will. The thing about ancapism is that it isn’t a “system” in the sense that one day everyone is in a democracy and the next they are thrusted into statelessness. No, all ancapism is, is a welcoming to the individual. Ancapism is just an ethic that calls for non-ancaps not to join ancaps, but merely to cease and desist imposing non-ancapism on them. To do nothing expect the negative action of respecting their individual property rights. That is it. If you do not want to “secede”, you don’t have to. Just allow individuals who do want to secede, to secede.

    If you can understand how to refrain from imposing US government on the people of other nations, then you should be able to understand how to do so with other “Americans.”

    “It is optimal for individuals, because only in a market can individuals be free to achieve their goals without their plans for their persons and property being violently suppressed.”

    “There you go, mixing up economic arguments with moral/political philosophy about violence.”

    Not at all. It is a positive statement. Whether or not I or you think people ought to do so, is a different question.

    “How can my advocacy for a free market in money be opposite to Hayek’s free market advocacy in money?”

    “Because your arguments are completely different. Hayek says stabilizing the price level is optimal. He argues that this is what a supposed ‘free market’ in money would achieve. You don’t care what the outcome of a supposed ‘free market in money’ is because you simply define it as necessarily optimal – regardless of the outcome!”

    I don’t think we agree on the term “optimal”. I think that is the source of confusion here. I don’t regard work for work’s sake, or production for production’s sake, or output for output’s sake, or investment for investment’s sake, as anything related to “optimality”. I regard each individual shaping their own lives, choosing their own actions, improving their own well being, subject to the constraint of all other individuals shaping their own lives, choosing their own actions, and improving their own well being as not only optimal by definition, but optimal in relation to outcomes such as employment, output, investment, etc, according to the individual’s own values, not just yours.

    You want to impose your values on everyone’s person and property against their will, to make the world look more like your personal ideal, and then you present that as optimal “by definition.” You are not even asking me what I (or any other individual) wants to do with my (or their) own body and property. You do not even consider this. All you have is an idea of what you want the world to look like, and you are willing to have individuals sacrificed in order to achieve it.

    My worldview is fundamentally and totally different than that. I don’t want to force the world to look like anything in my mind. I want onky to be free from coercion, and anyone else who wants it to be free as well, and allow individuals to shape their own lives and be their own governments.

    Just because I am not as arrogant as you to presume to know what lives others should life for themselves, it does not mean that I don’t care about pain, suffering, and all the rest. I am just not stupid enough to have drunk the koolaid to believe that caring for people means I have to support armed thugs and their crooked politician employers in forcing their bodies and property to do what they themselves don’t want to do. I think that to really help people, you have to at least listen to what they want for their own persons and property.

    “Why doesn’t it make sense?”

    “That is a seriously stupid question.”

    Why is it a seriously stupid question?

    “The government asks me to pay my taxes, and I scribble “100 Quizlars, equal to whatever amount of tax I owe” on a piece of paper and hand it to the tax man. That’s a nonsensical system.”

    Why?

    “It’s like being able to pay your bills by scribbling any old crap on a piece of paper and handing it to anyone.”

    Aren’t you ignoring voluntarily entered into contracts for the latter? If I consent to paying a person in gold or silver, or bitcoins, then I would be breaking the contract if I submitted “Quizlars.”

    “As I said, in Hayek’s scheme the government would have to choose which currencies to accept, thereby privileging them and turning them into state currencies backed by the law.”

    Not necessarily. If the market process ended up with only one or two currencies, and the government taxed people in the currency they earned, then that would not imply the currencies are being imposed on people. It would be like you threatening me with violence if I don’t pay you a portion of my income, and I continue to earn an income in the currency of my choosing that you are willing to steal.

    If I happen to choose accepting a currency you don’t want to steal, then that would be your problem, not mine. You will, in a free market, have to find a way to earn what you want from people, or else ask for charity.

    ———————————-

    Michael Byrne:

    “What’s wrong with this story?”

    “Due to various and many supply-side problems, an economy finds itself unable to produce the goods and services in sufficient quantity to satisfy the demand for those products at current market rates. Ergo, prices of those products rise, and the limited supply goes to those consumers who are willing to pay those higher prices. Short-term pain, as some are required to surrender more real resources to obtain the products they want while others must do without. However, it’s not all bad. Those who are able to produce the products in demand make a nice profit, and that profit serves as a signal to them and to others to ramp up production. In the long-term, old producers and new entrants will produce the demanded goods in higher quantities, prices will fall, and eventually consumers will be able to get their desired widgets.”

    What is wrong? Ignoring the cause for the supply side problems for one thing.

    —————————————

    Philippe:

    “They do so by the fact that the money they get from the Fed, was not money earned by anyone else prior”

    “They had money prior, which they used to buy bonds. Then they sold the bonds to the Fed and had money again instead.”

    Where did they get that “money prior”?

    Where is the increase in money supply in your understanding here? Looks like you are ommitting it.

    “Where did the money that people spent before you, ON you for your goods/services, come from?”

    Initially, and again in terms of mutuum and not bailment, most of it originated from the Federal Reserve system. A very small part originated hundreds if not thousands of years ago when money arose on a free market. I can’t stress enogh how important it is to keep in mind the concept of mutuum with the above argument. I am not saying gold is money, but rather a (small) portion of today’s money supply in terms of mutuum was created by way of precious metals discovery. Since so much additional mutuum in the form of fiat money has been added to the supply, the money that exists today “originated” primarily from the Fed system.

    “It also cannot be over emphasized that depressions are, according to Austrians periods of corrections to malinvestments”

    “No, Hayek rejected that view of depressions and came to see them as wholly destructive and serving no good purpose.”

    No, Hayek argued that monetary deflation served no good purpose. But Austrians Mises and Rothbard, they believed that recessions are curative processes.

    “But you don’t care, because ‘austrian economics’ just means whatever you want it to mean.”

    I think you are talking about your own view.

  56. Gravatar of Ralph Musgrave Ralph Musgrave
    15. July 2014 at 21:57

    Scott,

    You claim my suggestion that you’ve changed your mind on fiscal stimulus is a “lie”. Thanks for that. Here’s some evidence from which I think most people will conclude that it’s actually you that’s the liar (if we’re going to use pejorative words). Here’s a selection of your anti-fiscal statements in recent years (I could have dug up far more, but the following will do). They’re in stark contrast to your most recent statement, namely that fiscal stimulus has been beneficial.

    Title of a paper of yours, Sept 2013: “Why has the effect of fiscal stimulus been so meager in recent years? ”

    Statement you made in May 2013: “The fiscal multiplier theory is as dead as John Cleese’s parrot.”

    Dec 2011: “Keynesian economists have never been able to accept my assertion that the fiscal multiplier is roughly zero.”

    Title of blog post Oct 2012: “Fiscal policy has no oomph”.

  57. Gravatar of Major-Freedom Major-Freedom
    15. July 2014 at 23:29

    Anyone else notice the ad banner on the front page?

    “Death of the Dollar 2014″

  58. Gravatar of Major-Freedom Major-Freedom
    16. July 2014 at 00:04

    Somewhat apropos I think for a blog devoted to “I want more and bigger bubbles now” (unintentionally of course) insanity.

    The Dow has risen by “only” 10,000 points since the recent 2009 low of 7000.

    Government debt around the world has risen by “only” 40% since 2009.

    Stock market in a bubble, San Francisco real estate in a bubble, government debt in a bubble, corporate debt in a bubble, farmland in a bubble, derivatives in a bubble, student loans in a bubble, consumer credit in a bubble, etc, etc, etc, etc. It’s the everything bubble.

    But we need more paper, and dammit, the market better shape up this time and start spending more money on final output like they’re supposed to.

  59. Gravatar of Daniel Daniel
    16. July 2014 at 02:25

    If everything is bubble, nothing is.

  60. Gravatar of Nick Nick
    16. July 2014 at 03:42

    If we believe the absolute size of the purchases matters so little, and the guidance so much, why has ngdp collapsed following as the taper has played out? I remember that, at the time, prof sumner argued that the markets’ immediate reaction to the taper (markets soared and the yield curve steepened) showed that stronger FG could cancel out aparantly contractionary moves with regard to asset purchases. So where do we stand on that theory today? Was it all undone by the infamous ‘six months’ comment? Did hawkish chatter from the rest of the committee undo the guidance? Did the guidance need concrete ‘defense’ that the committee did not provide? Or should I just calm down and stick with ‘data is wrong, employment and labor income figures show we never contracted’?

  61. Gravatar of James in London James in London
    16. July 2014 at 04:01

    Ralph Muscgrave, you said:
    “In a recession, create new base money and spend it, and/or cut taxes”
    Sounds easy, but not practical or realistic while central banks are independent of finance ministries. And, of course, this is no recipe for avoiding the recession in the first place.

    And, for what it’s worth, Scott’s views on fiscal policy haven’t changed. They are nuanced, but haven’t changed. Calling him a liar is jusst silly.

    The nuance you seem unable to get is that while a central bank has an inflation target it will offset fiscal policy that threatens that target. You may not like inflation targeting, but it is the dominant theory of monetary policy.

    If we, you, me and Scott Sumner, manage to overthrow inflation targeting then fiscal policy will stand a chance. However, what policy will you overthrow it with? We need to know.

    Fiscal policy isn’t a monetary policy when you aren’t in a recession. What do you propose instead to avoid inflation and recession in the first place?

  62. Gravatar of ssumner ssumner
    16. July 2014 at 04:22

    Jeff, It’s hard to explain, but the term “NGDP” is very unlikely to appear in a micro-founded model, and that makes it hard for NGDP to come out optimal. It’s not impossible I suppose, but a 1 in a million long shot. NGDP includes stuff like “depreciation” which has almost nothing to do with labor market equilibrium. It’s a crude proxy for the actual optimal target.

    Philo, Yes, but if they are not allowed to spend money on certain types of bonds, they certainly wouldn’t be allowed to drop it out of a helicopter!

    Jason, Why do you assume a fixed relationship between P, NGDP, and MB?

    Tom, I sketched out the outlines of such a model a few years back.

    CMA, I have to take some shortcuts in explanation, obviously not every single dollar is temporary, as you say only enough to keep prices on target in the long run. IOR is another complication.

    Helicopter drops are incredibly wasteful and will not happen. There’s no point in even discussing them. The Fed has hit its targets, that’s why it’s tapering. The real problem is they have the wrong target. Ordinary OMOs (combined with the right target) are all the juice they need.

    Gordon, Good point, I’ll do that.

    Ralph, All anyone has to do is go to the comment section of the post you selectively quoted from, and they will see why I accuse you of lying. I specifically told you that I had not changed my views, and that the sentence right after the passage quote quoted showed that. Then you went ahead and selected the exact same misleading quote out of context, even after I told you the correct meaning. You knew that was a lie.

    Nick, I’d stick with the employment data for high frequency changes. GDP is fine for 12 month periods. If output did contract in Q1 (which is obviously possible), the employment data tells us it was a fluke, perhaps due to non-monetary factors such as weather.

    Having said that, I certainly agree that tapering slowed growth–no argument there. But guidance is probably more powerful. The tricky part of this is that tapering is a sort of guidance, so the effects are hard to disentangle.

  63. Gravatar of Philippe Philippe
    16. July 2014 at 04:38

    “Hayek did not believe that falling prices on the basis of productivity gains serves no good purpose. You seem to be conflating productivity based price deflation with monetary deflation.”

    No, Hayek rejected that view in ‘the denationalisation of money’. Obviously you haven’t read it. He abandoned the idea that the price level should fall with productivity increases, and instead advocated zero price inflation/ zero price deflation, i.e. a stable price level, as optimal:

    George Selgin: ‘Hayek versus Keynes on How the Price Level Ought to Behave’ (p.24):



    “…Hayek himself eventually came to support a zero-inflation ideal. During the last decades of his career, and after having said little on the matter of price-level policy for several decades, Hayek began to distance himself from the productivity norm: in The Constitution of Liberty (1960, 337) he recommended stabilization of an index number combining prices of both factors of production and final goods–a measure half-way between a productivity norm and zero inflation. Still later, in Denationalisation of Money (1978, 66-70) Hayek joined advocates of zero inflation, quietly abandoning his earlier arguments against such a policy together with the business-cycle theory connected to those arguments: attempts to stabilize the price level in face of productivity changes may lead to forced savings, but the problem is, after all, “of minor practical significance” (ibid., 83; see also White 1998, 17-20). In summary, Hayek came at last to accept a view of optimal price-level behavior that was practically the same as the one he had found wanting in Keynes almost half a century before.”



    http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.202.1035&rep=rep1&type=pdf

  64. Gravatar of TravisV TravisV
    16. July 2014 at 05:38

    Inflation!!!!

    Producer Price Index up 0.4% over last month and……

    “The Hershey Company announced that it would be raising prices in response to rising costs. “A weighted average price increase of approximately 8 percent across the company’s instant consumable, multi-pack, packaged candy and grocery lines is effective today,” said the company in a Tuesday afternoon press release.”

    http://www.businessinsider.com/hershey-raising-prices-july-15-2014-7

  65. Gravatar of Philippe Philippe
    16. July 2014 at 06:41

    “Such supposed coordination is only theoretically possible under very strict conditions.”

    “There is only one. Respect for the homesteading principle, and the corrollary of indidual private property rights.”

    This assertion isn’t even austrian economics, it’s just anarcho-capitalist ‘libertarian’ ideology.

    This confirms yet again that your arguments are not really economic arguments. They are not even austrian economic arguments, as austrian economics holds that coordination can fail for different reasons, such as inflexible relative prices or wages.

    Your arguments are just repetitive statements of your anarcho-capitalist ‘libertarian’ belief system, dressed up in vaguely economicky-sounding language. Nothing more. You only lie when you pretend otherwise.

  66. Gravatar of Major-Freedom Major-Freedom
    16. July 2014 at 07:35

    Daniel:

    “If everything is bubble, nothing is.”

    What is the logic behind that comment?

    Philippe:

    I did not claim he was against or for productivity based price deflation in Denationalization of Money. I said he did not believe that productivity based deflation did not serve no good purpose.

    He explained two interpretations of “stable” money. In footnote 1 on pg 73, he writes that gradually increasing or gradually decreasing prices when charted logarithmically, would also be consistent with a “stable” money and thus allow for efficient economic calculation and cost accounting.

    Are you honestly saying you have read the book?, because you’re relying on second hand accounts that may or may not be perfectly accurate. Selgin’s is accurate as far as it goes, but it doesn’t include the whole story. I am not going to put too much into it, because quite frankly Hayek was someone whose views drastically changed over the years and he made quite a few muddled arguments.

  67. Gravatar of Major-Freedom Major-Freedom
    16. July 2014 at 07:55

    Philippe:

    “This assertion isn’t even austrian economics, it’s just anarcho-capitalist ‘libertarian’ ideology.”

    No, you’re still conflating positive statements with normative ones. The statement you just respnded to is a positive one, from Austrian theory of individual action, economic calculation, and the effects of intervention. It is saying if A, then B.

    The other statement of we OUGHT to respect individual property rights, that is from anarcho-capitalism.

    “This confirms yet again that…”

    You are having some difficulty parsing positive statements and normative statements.

    “…austrian economics holds that coordination can fail for different reasons, such as inflexible relative prices or wages.”

    No, “inflexibility” is not Austrian theory AT ALL.

    You do realize that not everything Hayek says is Austrian, don’t you? Hayek abandoned praxeology and a priorism of the Austrian school early on in his career.

    “Your arguments are just repetitive statements of your anarcho-capitalist ‘libertarian’ belief system, dressed up in vaguely economicky-sounding language. Nothing more. You only lie when you pretend otherwise.”

    You only WISH that were true. Nope. The argument about malinvestment, that only a system of individual property rights can avoid the kinds of malinvestment Auatrians say are caused, is 100% positive and not at all normative.

    That Auatrians also tend to argue the normative of anarcho-capitalism, is a choice of morality that is separate from the IF-THEN series of arguments about ehat happens when there is intervention into free markets.

    Sorry Philippe, I know you really really want to paint me as a liar, because you are finding it difficult to view your own self as moral, given what I am explaining is the results of YOUR ideology when put into action. You feel that you have to put me down, as a defense mechanism. This is in large part due to you not believing the positige statements of Austrianism. You find it hard because to understand and accept them, would imply that you advocate for destruction, for depressions, for widespread unemployment, unintentionally of course. So you have ideology and morality on your brain. I simply must be secretly pushing something as economics when it is really…ideology and morality, right? Yes, I am pushing for an ideology, a morality. So are you. You want a morality where individuals must be sacrificed and aggressed against, for the sake of making you feel good that certain aggregate statistics the government concerns itself with, are centrally planned and managed. You want a mommy and daddy to look over the children. That is your “secret” ideology you are pushing. And you project that approach onto me.

  68. Gravatar of Chuck E Chuck E
    16. July 2014 at 08:09

    But if the government got out of the regulation of sugar, I bet the price of candy would drop.

  69. Gravatar of Daniel Daniel
    16. July 2014 at 09:29

    Damn, Major_Moron. You’re even dumber than I thought. No small feat that.

  70. Gravatar of Jason Jason
    16. July 2014 at 09:54

    Scott, you asked: “Why do you assume a fixed relationship between P, NGDP, and MB?”

    I probably should have said a fixed relationship between the expected values of P, NGDP and MB (which I do say at the link), per the “market” part of market monetarist. But if the base is expected to increase by some factor in a one time increase, then the price level should be expected to increase by some factor in the long run. That is a fixed relationship. I made a simplification to say those factors have a fixed relationship over the short run and remain consistent with long run neutrality.

    Essentially I assumed the simplest relationship between MB, NGDP and P consistent with long run neutrality of money, the fixed relationship P = P(NGDP(MB), MB) follows from that:

    P = dNGDP/dMB = k NGDP/MB

    This equation has homogeneity of degree zero in the nominal variables [if NGDP -> a*NGDP and MB -> a*MB, then f(a*NGDP, a*MB) =a^0 f(NGDP, MB)], which per Bennett McCallum’s definition of the quantity theory of money is what ensures long run neutrality:

    http://www.federalreserve.gov/Events/conferences/kdme2009/pdfs/McCALLUM%20and%20NELSON-Oct1-1.pdf

    The equation can also be seen as taking Fisher’s “measuring stick” almost literally (this link has a diagram that describes the basis of the above equation)

    http://arxiv.org/pdf/0905.0610v2.pdf

    I’m not saying it is perfect, but the (short run) fixed relationship between expected values seems a reasonable approximation.

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