Joan Robinson and Anna Schwartz
I probably picked on Anna Schwartz enough last winter, but since readers keep sending me her new editorial in the NYT, I suppose I should say something. Here is her explanation for why monetary policy was easy last fall:
Let me begin with the former. It is standard practice for a central bank like the Federal Reserve to ease monetary policy to combat a recession, and then to tighten it as recovery gets under way. Mr. Bernanke so far has only had to do the first half, and has conducted a policy of extreme ease. The Fed’s Open Market Committee cut the federal funds rate in October to 1 percent from 1.5 percent, and then in December to a range of zero percent to 0.25 percent.
Extreme ease? If this quotation sounds familiar, it may be because the argument used is essentially identical to an earlier Joan Robinson analysis of the German hyperinflation:
“An increase in the quantity of money no doubt has a tendency to raise prices, for it leads to a reduction in the rate of interest, which stimulates investment and discourages saving, and so leads to an increase in activity. But there is no evidence whatever that events in Germany [in the early 1920s] followed this sequence.”
So money couldn’t have been easy when German prices were soaring, because nominal interest rates weren’t that low. And similarly, money couldn’t have been tight last fall as NGDP was plummeting, because nominal interest rates were low. What puzzles me is that in Anna Schwartz’s description of Fed policy, there is no mention of the decision to pay interest on reserves. (Recall that in their Monetary History, Friedman and Schwartz argued that the Fed’s decision to raise reserve requirements in 1936-37 was a mistake that contributed to the severe recession of late 1937.) Instead she makes the following puzzling assertion:
What drove down the funds rate was the Federal Reserve’s decision to increase its depository bank reserves. Bank reserves have been rising since Sept. 17, as the Fed purchased securities and financed loans. When the Fed committee cut the rate to zero, it was merely ratifying the de facto rate.
If this were true, then why would the stock market have responded so strongly to the December announcement? In fact, rates had not already fallen to zero, as banks were able to earn interest on excess reserves.
After engaging in some circa 1938 Keynesian analysis of monetary policy, she suddenly switches to Austrian-style analysis:
Why is easy monetary policy such a sin? Because in such an environment, loans are cheap and borrowers can finance every project that they dream up. This results in excesses, and also increases the severity of the recession that inevitably follows when the bubble bursts.
I won’t say anymore, as I devoted an earlier post here to showing how Anna Schwartz was now making the sort of Austrian arguments that she and Milton Friedman ridiculed in their Monetary History. And then there is this perplexing passage:
Let’s move on to the sins of omission. After 2007, the Federal Reserve clearly observed that the mortgage loan industry was being transformed into an issuer of securities backed by a pool of mortgages of varying quality. Yet the Fed at no point clearly warned investors that these new instruments were difficult to price. (These securities were backed by everything from top-quality mortgages to subprime ones, and it was difficult to determine what value to assign to different mortgages.)
Partly as a result of the Fed’s silence, investors who loaded up their balance sheets with these securities were ignorant of the great risks of trying to sell assets that are difficult to price. Other new instruments, like derivatives, were not risk-free, although the market became enamored of them.
The Fed is the manager of markets. There is thus every reason to expect that it would see the problems that these new instruments were likely to create for normal transactions, and speak up about them.
I’m confused. Does this mean that all the big Wall Street banks that lost billions on bad mortgage bonds aren’t really at fault because the Fed didn’t warn them that the loans they were buying might not be repaid? Isn’t that regulatory paternalism taken to an extreme?
So what does this short editorial add up to?
1. The old Keynesian argument that low interest rates mean easy money, even if prices and NGDP are falling (as in the early 1930s.)
2. The Austrian argument that low interest rates inevitably blow up bubbles and cause recessions, even if there is no sign of inflation (as in the 1920s.)
3. The view that if investors make mistakes this shows that the government didn’t properly “manage” the markets, and warn them not to make foolish investments.
What would Milton say?
I still love her Monetary History. And I suppose Joan Robinson and Anna Schwartz are still two of the three greatest female economists of all time. The third? Obviously Deirdre McCloskey.
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26. July 2009 at 17:15
Why not Anne Krueger? Tullock discovered rent-seeking first, but Krueger turned international econ against import-substitution industrialization. Quite a feat.
26. July 2009 at 17:26
Um, you generously misinterpret Schwartz… She’s not simply arguing that Bernanke was too easy prior to the crisis, but that the Fed policy was too easy DURING and AFTER the crisis as well:
“Before 2008 there were only moderate increases in the Federal Reserve’s aggregate balance sheet numbers, but since then the balance sheet has exploded by trillions of dollars. The increase was spurred by the Fed’s loans to troubled institutions and purchases of securities.
Why is easy monetary policy such a sin? Because in such an environment, loans are cheap and borrowers can finance every project that they dream up.”
That’s right, over the last 6-8 months, we could all finance anything we could dream up…
In other words, she’s taking a position against the credit facilities the Fed initiated (which were probably too little too late, and were restricted to only the highest quality debt/paper). Meanwhile, we have Roubini (who at least predicted a bit of catasrophe – where, precisely, was Schwartz PRIOR to the implosion?) praising Bernanke for exactly those initiatives which (barely) saved the world from an even worse fate than what we have now.
I’m struggling to see how Schwartz is still dwelling on the same planet as the rest of us.
26. July 2009 at 17:38
Bryan, Yes, you are right. I suppose I was trying to be a bit provocative. I actually don’t know enough about the various individuals to have an intelligent opinion. Krueger’s work might well have been more beneficial to society than any of the other three.
Like people who see market inefficiency everywhere, I see two female economists and think the pattern needs commenting on. I’d have been better off keeping the thought to myself.
BTW, I hope to have something up in a few days which relates to a question you asked about the October 2008 crash.
Stasguy, It’s even worse, I didn’t misinterpret her at all, what I failed to do was to point out just how crazy that worry really is. But thank you for doing so. Often my commenters can write better posts than I can.
26. July 2009 at 20:00
Scott. Note well. This is really NOT the Hayekian analysis. For 2 reasons.
1. The problem identified by Hayek is a problem of sytematically distorted investments — MALINVESTMENTS across the time structure of production. Artificially low interest rates make it look like longer production processes will be profitable. This ISN’T “every project that they dream up”. So it ain’t Hayek and it ain’t “Austrian”.
You were never taught to think or see the time period choice between longer production processes that produce greater output / greater value vs. shorter production processes that produce less output / value — economists are effectively blind to this choice situation, and they are penalized within the profession by their peers if they do.
So it’s not an accident that you don’t see that Anna isn’t talking “Austrian” here at all.
2. Hayek doesn’t have a problem with blocking a “secondary depression” or “downward deflationary spiral” with a temporary “easy money” policy when the demand for liquidity massively expands in the midst of a market panic and economic contraction. So Anna isn’t being “Austrian” in this sense either.
Scott writes:
“she suddenly switches to Austrian-style analysis:
‘Why is easy monetary policy such a sin? Because in such an environment, loans are cheap and borrowers can finance every project that they dream up.'”
26. July 2009 at 20:10
Scott, this also isn’t “Austrian”:
“The Austrian argument that low interest rates inevitably blow up bubbles and cause recessions, even if there is no sign of inflation (as in the 1920s.)”
Hayek’s empirical understanding of the facts of the time may have been wrong, but his claim was their was substantial productivity growth in America in the 1920s, and with substantially increased output at substantially decreased cost should have produced benign deflation in America — deflation which was blocked by Fed policy. Now, Hayek could have been wrong about the facts. But your argument with Hayek is about the facts, you aren’t providing an argument against Hayek’s causal mechanism — not in the least. You’re asserting that the facts of the time didn’t provide the conditions necessary for Hayek’s causal mechanism to operate. And this is an arguments against Hayek’s interpretation of the historical facts, not an argument against Hayek’s economic science.
26. July 2009 at 20:15
Here’s another nominee for greatest female economist:
Vera C. Smith
Ask Larry White or George Selgin …
27. July 2009 at 01:38
Greg Ransom,
Who said anything about Hayek? I think Schwartz’s argument is fairly close (though not exact) to the one made by Schumpeter in 1934 in his contribution to “The Economics of the Recovery Program”. It doesn’t mention the time structure of production, but does that really mean it isn’t Austrian?
Now, I realize your posts are typically about defending Mises-Hayek “Austrian brand” against all competitors. But that True Believer devotion can be a bit of a drag. I mean, *you* wouldn’t get tired of a friend that always insisted you drink Coca-Cola because anything less wouldn’t be “the real thing(TM)”?
27. July 2009 at 03:46
Greg, I have had many hundreds of supporter of Austrian economics comment on the blog, and her arguments are very similar to many of their arguments. I don’t recall comparing her to Hayek, but her views are certainly similar to those of many Austrian supporters. So I still think it is a fair description. There are within any school of thought a variety of different perspectives.
I certainly accept your point that she hasn’t become a card-carrying Austrian who looks at things in terms of the time structure of production, etc. But I still think that quotation is a relatively Austrian way of looking at things, and is certainly the view she and Friedman were criticizing in their MH, a view most others interpreted as Austrian.
Hayek doesn’t have a problem with blocking secondary deflations, but I sometimes feel like 90% of the Austrians that comment here agree with Schwartz that money is not too tight, and may even be too loose, so they seem to have a problem with blocking secondary deflations.
Greg#2, I actually don’t have a big problem with Hayek’s argument. If we could run the clock backward to 1920 then I agree that a bit tighter money would have been more desirable in the 1920s. But so would a more expansionary policy. Anything would have been better, as the Great Depression was the worst possible outcome, worse even than hyperinflation.
Greg#3, Thanks, I’ll try to learn more about Vera Smith
Dedubya, I agree with Greg that the Mises/Hayek brand is better than the others (that I am aware of), but I agree with you that the term ‘Austrian’ has now migrated far beyond that core group. Sort of like how “Christian” eventually included breakaway churches like the Protestants. Or “libertarian” included both pragmatists and dogmatists.
27. July 2009 at 06:48
When it comes to monetary theory and the trade cycle, Hayek is the one who wrote the book, and Schumpeter is NOT an “Austrian”.
“Austrian” business cycle theory is Hayek. Schumpeterian business cycle theory is Schumpeter. This is the way the language has always been used in in economics. When economists talk of “Austrian” monetary / trade cycle theory, they are talking about Hayek, and they are not talking about Schumpeter.
Dedubya writes:
“Who said anything about Hayek? I think Schwartz’s argument is fairly close (though not exact) to the one made by Schumpeter in 1934 in his contribution to “The Economics of the Recovery Program”. It doesn’t mention the time structure of production, but does that really mean it isn’t Austrian?””
27. July 2009 at 06:50
Well, you’re commenters are wrong, and this in NOT a fair description. And this really isn’t arguable.
Scott:
“Greg, I have had many hundreds of supporter of Austrian economics comment on the blog, and her arguments are very similar to many of their arguments. I don’t recall comparing her to Hayek, but her views are certainly similar to those of many Austrian supporters. So I still think it is a fair description.”
27. July 2009 at 07:03
This is one reason “Austrians” are so hard on Friedman when it comes to monetary theory and the trade cycle — Friedman never engaged the science, i.e. he failed to comprehend and he failed to engage the causal structure laid out by Hayek and other “Austrians”. And this goes back to Friedman’s failure to think in terms of relative prices and the structure of production — something discussed in dozens of articles on this matter. Hayek many times says that his biggest regret perhaps as significant as his failure to spend another year of his life refuting Keynes (again) was his failure to refute Friedman’s bogus picture of how to do economic science. And there is a core overlap here — both Keynes and Friedman premised their economics on a level of aggregation failed to engage the function of relative prices across the changing structure of production. They pioneered a pseudo-science of “testable” / “Newtonian” aggregate relations which made no sense in terms of the microeconomics of coordinated production decisions across time. Read Hayek’s Nobel Prize lecture for an elementary school level discussion of some of the issues in play here.
And again, that loud roar you hear in article after article by Garrison and others is a giant plea for folks to understand that what they “view” as Austrian causal theory turns out to be one big “you don’t get it, you’re avoiding the issue, there is important stuff here, please slow down and actually engage the issue, which you are missing and then misreporting.”
Scott writes:
“But I still think that quotation is a relatively Austrian way of looking at things, and is certainly the view she and Friedman were criticizing in their MH, a view most others interpreted as Austrian.”
27. July 2009 at 07:18
Steve Horwitz is the Hayekian out there most loudly defending Hayek on the “secondary deflation” matter. FTC economics and monetary theorist David Glasner has also defended Hayek on this issue.
People differ on this issue in two ways. They differ on their interpretation of the facts on the ground 2008 – 2009.
And there is a difference between different “Austrian” who find the arguments of Horwitz, Glasner, Hayek and early Mises significant, and those who don’t find those arguments significant and who find other arguments more persuasive. Non-degreed, non-tenured blog commenters tend to go with this later position.
Here’s my own view. On the empirics I don’t claim to have any special competence and depend on the investigations of others. On the causal theory, I find the causal story of Horwitz, Hayek, Glasner, and the early Mises more persuasive, but I don’t pretend that this is a simple issue. The story of how injecting massive amounts of money in particular places serves to coordinate the overall continually changing structure of production and consumption is not a simple one.
I’m guessing you would agree.
Scott writes:
“Hayek doesn’t have a problem with blocking secondary deflations, but I sometimes feel like 90% of the Austrians that comment here agree with Schwartz that money is not too tight, and may even be too loose, so they seem to have a problem with blocking secondary deflations.”
27. July 2009 at 07:35
A great “Hayekian” question is “How do we know when we have too much money or too little money, or how do we know when money is growing to fast or, conversely, when money is contracting to fast?” And the deep Hayekian question is, “How does this stuff link up to credit/interest and the time structure of production?”
One of the most interesting things about your blog is how creatively and innocently you take on this Hayekian problem of money. You’ve made people think about this problem from new directions.
27. July 2009 at 09:10
I sympathizes a bit with both sides of this debate. Greg is being a little picky. However, I can see what Greg is saying, he and I probably look at things a bit differently to you.
The remark about the problems of cheap credit that Schwartz makes is a bit of Pop-Austrianism. In fact, most Pop-Austrian articles wouldn’t put it like she does, they would be more specific. Even those written by Rothbardians wouldn’t put things quite like this.
It’s rather like the situation with Chinese food in Europe or European food in Asia. If I go to a Chinese restaurant with one of my Korean friends they complain about how everything is wrong. Similarly, when I go to Asia I find the sandwiches are awful. Ale is generally awful in Ireland because everyone drinks Stout and Lager.
Similarly those familiar with Austrian economics recognise the proper argument, whereas those who are a bit less familiar find it more difficult.
27. July 2009 at 11:53
Also,
Regarding Schumpeter; he is not generally regarding as an economist of the “Austrian School”.
I had a discussion online with David Prychitco about this. Schumpeter’s entrepreneurship theory is different, he used general equilbrium analysis, his business cycle theory is very different from almost everyone elses. Modern Austrian economists consider that there are enough enough differences that he should be considered on his own.
27. July 2009 at 15:15
Scott,
Let me try and steer the conversation back to the main points of your post….
I agree with all the comments you made above, but (and this may be a rather insignificant point) I think your interpretation of what Schwartz mentions as “extreme ease” mixes ‘flows and stocks’: changes in the stance of monetary policy versus the stance as at a certain date.
One could argue that the reduction in interest rates through mid- to end-2008 was an ‘easing’ of m/p, but this in no way suggests that monetary policy is (or was at that time) easy. Or perhaps we could agree that m/p became ‘less contractionary’.
27. July 2009 at 16:08
Scott, I agree with Greg Ransom that there is more to Austrian business cycle theory than overinvestment at a low interest rate. That proposition can equally well be attributed to Wicksell, the British currency school and Henry Thornton and Ricardo before that. It can also be attributed to D. H. Robertson and Ralph Hawtry, among others, so there is nothing distinctively Austrian about Anna Schwartz’s comment. And although Schumpeter grew up in the Austrian school and traces of his upbringing are evident in his later work, he was not part of the Austrian school. His partiality to general equilibrium analysis does not, however, set him apart from Hayek who also explicitly embedded his business cycle analysis in a GE framework despite his growing doubts about the usefulness of GE for the problems he was trying to solve.
I have already discussed in other threads some of my reasons for believing that Austrian business cycle theory has limited relevance to understanding business cycles. And in my view, it certainly has almost no relevance at all to the Great Depression, and not much more to the current downturn. But if Anna Schwartz has expressed what I agree are some wrongheaded policy positions, it does not follow that she has become a late convert to Austrian business cycle theory any more than Alan Meltzer, who is also expressing very hardline anti-inflation views, has.
28. July 2009 at 02:13
Scott:
Read Hetzel again. If anything, Schwartz sounds a bit like the real bills approach that Hetzel criticizes. Too much lending leading to too much asset market speculation. White’s discussion of Hayek’s views in the Depression are also relevant here. White distinguishes between Hayek and the real bills doctrine that actually influenced policy.
Rothbard sought to develop the science of libertarianism. It was a branch of social science that would justify private property, freedom of contract, etc. The “economics” element of the science of libertarianism would be “austrian” economics. While I suppose it isn’t necessary for all of this to turn into dogmatism, it has. And so, there are people who teach, and people who believe, that “austrian ecoomics,” is a set of pro-market dogmas. The result is any number of commenters on this and other blogs who can say about any number of things that _the_ austrian view is this or that. It is a consequence of the Rothbardian ideological approach. It was consciously modeled on Leninism–devloping a party line.
The moden Austrians that Ransom is always citing is ignored at best, and subject to abuse at worst, by these folks.
In contradition to the above analysis, I see many commentors who don’t understand the Rothbardian analysis of money and business cycles. Oddly enough, it isn’t difficult to read comments that appear to reflect real bills thinking and have it discribed as _the_ austrian position. Perhaps this is because there is a bottom line. The Rothbardians advocate a 100% reserve gold standard. Any increase in the quantity of money not 100% backed by gold _is_ inflation and leads to malinvestment, the liquidation of which is recession. Perhapsany argument more or less consistent with that bottom line position is acceptable.
As for Schwartz, I think she remains a quantity theorist, but trying to describe a world where central banks remain devoted to interest rate targetting. I think the key issue is the long and variable lags. Base money creation now influences short term interest rates now, but influences nominal income only after a long and variable lag. So, pre-crisis, there were periods when monetary policy was too loose in the sense that after a long and variable lag, it will lead to higher nominal income. For a variety of reasons, it is associated with low interest rates in the short run.
And I think Schwartz believes that is where we are today. Isn’t this what most monetarist are thinking? Base money has risen a huge amount and M2 quite a bit. Nominal income is going to rise too, after a long and variable lag.
Your view is that if nominal income is going to rise, then the market will know it is going to rise, and if the market knows it is going to rise, nominal income will rise now (and really, it shouldn’t have fallen.) So, contrary to Schwartz and the other monetarists, the current level of base money (and M2) is less than the amount that would be demanded with nominal income at an appropriate level, though the reason money demand is high is because “the market” doesn’t believe that the Fed is committed to increasing base money to the proper level. Paradoxically, if the Fed were committed to raising base money enough to getting nominal income back on its past growth path, then the demand for base money would fall, and perhaps even less base money is necessary. Right?
The weakest point of the argument is the claim that the market will know it. However, I also think more explication of how expecting more nominal income in the future raises it today would be helpful.
28. July 2009 at 05:10
Greg, I’m not qualified to get into a lot of the historical debates between Friedman and Hayek. I like both of them. I agree with each in some areas, and disagree with each in others.
Regarding what is really Austrian, let’s come up with an acronym
“PWCTABANRAs” will be “people who call themselves Austrian but are not really Austrians.”
Then Anna Schwartz presented a very PWCTABANRA argument, despite the fact that in her earlier Monetary History she and Friedman had taken an very anti-PWCTABANRA stance.
Alan, No, I certainly don’t agree that monetary policy became less contractionary in late 2008. I define the stance of monetary policy in terms of the expected growth rate of NGDP. That expected growth rate declined in late 2008, meaning that monetary policy became more contractionary in the only sense that matters. The interest rate is a worthless indicator of the stance of monetary policy, it mostly just reflects the current condition of the economy. BTW, if you think this is weird, consider that Anna Schwartz herself claimed that monetary policy got more contractionary in the early 1930s despite falling interest rates and a rapidly rising monetary base. So nothing I am saying should be viewed as out of the mainstream.
David, Thanks. Just to be clear, I never mentioned Schumpeter’s name, someone else did.
Anna Schwartz is clearly talking about more than overinvestment, she is talking about mal-investment. But I accept your point that lots on non-Austrians may have also thought that way. I still think that in the modern world it is Austrians, sorry, PWCTABANRAs, who talk like that.
I agree that she has certainly not become an Austrian, which is why I find it so odd that she is expressing PWCTABANRA views. I don’t see the comparison with Meltzer. His views are very monetarist–printing more money now will lead to high inflation in the future. Anna Schwartz is certainly not expressing monetarist views in the NYT article. Her views are old school Keynesian, PWCTABANRAian, and she also advocates that the Fed “manage” investment markets. That’s a long way from F&S’s Monetary History, which was my point.
Bill, I think you are far too kind to Schwartz. You said,
“And I think Schwartz believes that is where we are today. Isn’t this what most monetarist are thinking? Base money has risen a huge amount and M2 quite a bit. Nominal income is going to rise too, after a long and variable lag.”
If she had said this, it might be defensible, although of course it still would have been wrong, and still would have conflicted with her argument in the MH, that says a big increase in the monetary base does not indicate that monetary policy is expansionary. She was right then, and would have been wrong now, if that had been what she had said.
But it wasn’t what she said, instead she used precisely the same argument that Joan Robinson used to disprove the idea that easy money created the German hyperinflation. And that is pure 1938 Keynesianism, and it is really bad macroeconomics. Especially during a time when NGDP was falling fast.
I’m not sure about the real bills doctrine. That doctrine calls for a smaller money supply when NGDP falls fast, because the needs of borrowers are less. Obviously we aren’t slavishly following that idea. On the other hand I’ve argued that the behavior of the monetary base in June was consistent with the real bills doctrine. As banks borrowed less through all the various entities the Fed set up last year, the base fell automatically. Are you saying that Schwartz is advocating the real bills doctrine?
On the last question you raise, I believe that expected NGDP growth is basically what Keynes meant by “confidence”. If you are going to build a factory over a year, and it is financed with nominal debt, and your workers work on nominal wage contracts, you’d like to know whether a year from now total nominal expenditure will go up 5% or down 5%. It will make a huge difference as to the profitability of the investment.
The same for residential houses. The price of new home sis correlated with NHDP, because people tend to spend a certain fraction of their income on housing. So as NGDP goes up, so do housing values. I have also argued that expected NGDP growth is the proper variable for the Fisher equation, but I know you don’t buy that argument.
28. July 2009 at 07:46
I don’t have much to add except…
David Glasner and Bill Woolsey are right in what they have written above about Austrian economics.
Regarding the “Real Bills” doctrine. This is a very confusing subject because there are really several slightly different Real Bills doctrines.
28. July 2009 at 08:39
Scott — these are debates aren’t about history, the questions in dispute between Hayek and Friedman are the ground rock problems in your science. I’m surprised you aren’t interest in them.
Scott wrote:
“I’m not qualified to get into a lot of the historical debates between Friedman and Hayek. I like both of them. I agree with each in some areas, and disagree with each in others.
28. July 2009 at 08:46
Scott, here’s a better idea. Following Glasner, let’s call Schwartz’ view what it is, the Roberson / Hawtrey view, rather than what it obviously isn’t, i.e. “Austrian”.
Words matter, and in fact the history of economic thought matters. Economics is way too hard not to use words accurately and set within the massively rich history of economic thought. History of economic thought matters because there are not enough reminders in a math paper to express the vast territory of background understanding which grounds the science. Academic economists ignore this at the peril of the advance of their science — i.e. they are in constant danger of destroying more inherited knowledge than they produce.
Scott writes:
“Regarding what is really Austrian, let’s come up with an acronym
“PWCTABANRAs” will be “people who call themselves Austrian but are not really Austrians.””
29. July 2009 at 03:31
Scott:
I don’t think you understand about the “Austrians.”
The problem is that some self-described “Austrians” have been taught and believe that Austrian economics is a set of dogmas. They are very confortable in stating the “Austrian view” about things.
The reality is that there is a variety of Austrian views.
So, the point isn’t that those posting on your blog who claim to be Austrians really aren’t. They are. Some of them are really _bad_ Austrian “economists,” really justing
being interested laymen. It is like if someone read “Free to Choose” and was pontificating about monetarism.
My point is, however, that there are Austrian economists, some good, some bad, who are of the habit of claiming that some bit of analysis is _the_ Austrian view, when in reality, it is the view of just some Austrian economists.
For our purposes, the key dogma is the 100% reserve gold standard. From that policy view follows the notion that any increase in the quantity of money (not backed 100% by gold) must be bad. That this badness involves malinvestment. That any increase in the demand for money “should” be cleared up by deflation. That nothing can be problematic about such a deflation. That the recession is about a shift in resource allocations.
Now, I have seen some statements by some _bad_ Austrian economists that seem more like real bills liquidationism that Rothbardian macro. In other words, some of the dogmatists don’t even get the theory right. But, what can you expect?
Anyway, different Austrians have different views. Clearly, there must be some common threads. And I think that it is relatively easy to confuse real bills liquidationism with Austrian malinvestment.
29. July 2009 at 04:40
Bill,
I think you are being a bit unfair to Rothbardian libertarians. They certainly tend to be dogmatic, but that’s true of many others groups too.
29. July 2009 at 06:12
Greg, I didn’t say I wasn’t interested. I don’t have time for even 1/10 of the things I’m interested in reading.
Greg, I like Hawtery a lot, as does David, I don’t think he would have agreed with Schwartz.
Bill, I’m not sure Schwartz’s views are as un-Austrian as you assume. George Selgin is clearly one of the best Austrian economists in the world right now. I seem to recall him arguing that the Fed’s low interest rate policy helped create the housing boom. I still think that is an important theme in a lot of Austrian econ, good and bad.
Question for both you and Greg: Is it ever fair to call someone’s policy pronouncements “Austrian.” After all, there are always at least some Austrians that agree and some who disagree. Not all Austrians favor the gold standard, for instance.
What if someone said “the money supply should grow at a fixed rate of 4% a year?” I’d call that “monetarist,” but I think today most monetarists favor more complicated schemes.
29. July 2009 at 07:48
Scott, The idea that the Fed helped create the housing boom with a low interest rate policy is part of the conventional wisdom about the financial crisis. There may or may not be some truth in the conventional wisdom, but that doesn’t mean that Austrian business cycle theory, heaven help us, is now the conventional wisdom. Clever Austrian ideologists are using that fairly simple-minded relationship as a lever with which to market their whole package of Austrian analysis and policy obsessions. So whether the Fed had anything to do with starting or perpetuating the housing bubble is a separate question from whether Austrian business cycle theory has any validity. You should not conflate the two. I am not sure why you are so sensitive about that issue. I don’t see why you, for example, couldn’t agree that the Fed created and fueled the housing bubble on the one hand, and still argue, on the other, that, after the bubble burst in 2007, the Fed caused a crash by tightening excessively in 2008.
29. July 2009 at 08:17
“What would Milton say?”
What Milton would say is clear from his writings on Japan.
29. July 2009 at 09:17
Scott: “I seem to recall him arguing that the Fed’s low interest rate policy helped create the housing boom. I still think that is an important theme in a lot of Austrian econ, good and bad.”
He is talking about low rates in the context of a period of growth though. That is a different matter.
30. July 2009 at 04:20
David, You said,
“I don’t see why you, for example, couldn’t agree that the Fed created and fueled the housing bubble on the one hand, and still argue, on the other, that, after the bubble burst in 2007, the Fed caused a crash by tightening excessively in 2008”
I completely agree, which makes me think I didn’t express myself well. My own view is that the Fed played a small role in the housing bubble, by allowing NGDP to grow a bit too fast. But I agree that my view on that issue is irrelevant to the issue of what happened in 2008.
In recent decades the conventional mainstream view in macro has been that the Fed should target inflation and ignore asset bubbles. In my view the recent events have moved the mainstream slightly in the Austrian direction, to worry a bit more about asset bubbles than they did before. But I agree they certainly haven’t adopted Austrian views lock stock and barrel.
But this it what I want to emphasize; Schwartz is saying something much more controversial here. It’s one thing for mainstream economists to say “yeah, money should have been a bit tighter in 2005 when the economy was booming.” But you’d find very few economists who think money should be tighter when unemployment is 9.5% and rising fast. Schwartz is one of those very few. I see her as moving further in the Austrian direction (and Greg I mean the crude Austrians here, not the Hayekians) than other mainstream economists have gone. Maybe I’m wrong, but I don’t see many mainstream economists calling for tighter money right now. And those that do tend to refer to the risk of inflation, not more asset bubbles, which is Schwartz’s concern. Remember that F&S said basically something like “how can easy money have been to blame in the 1920s, prices were stable?” And they directly aimed their argument at the group that argued easy money in the 1920s led to asset price inflation, which resulted in the crash. Who were they probably criticizing there? And now we again have stable prices, and this time it is Schwartz who is making the argument F&S criticized.
123, Good point, but I don’t recall what he said about Japan. Can you fill me in?
Current, I agree, but I still see the distinction as being Austrian economics well done (Selgin) and quasi-Austrian economics poorly done (Schwartz.) There are using similar arguments, but Selgin shows a greater command of the complexity of the issues, and hence reaches more sensible conclusions.
30. July 2009 at 08:33
Milton Friedman criticized Japan’s fiscal stimulus. He also criticized BoJ’s low interest rate fallacy. Current situation differs from Japan’s experience, because now velocity has sharply dropped as a result of a run on the financial system, and the remaining mystery is would he have shifted his focus from monetary aggregates to income statistics.
30. July 2009 at 17:32
Norther Trust economist Paul Kasriel provides a Hayekian defense of Bernanke’s post-bust management of the Federal Reserve _against_ Anna Schwartz here:
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0907/document/ec073009.pdf
31. July 2009 at 13:05
123, Within a few hours I will post on what Friedman would have thought about this crisis. With whom do you think I will have him agree?
Greg, Thanks, that is quite close to my view. He even mentions that Friedman wouldn’t agree with the view that the Fed should “manage” markets to protect big investors from themselves. I was almost going to use the “spinning in his grave” phrase, but I thought it might be disrespectful.
But you are right that it is unfair to compare Schwartz to the Hayekian strain of Austrian economics, which I think we both agree is the best.
31. July 2009 at 13:14
Scott, I know that you’ll say that Friedman would have agreed with you 🙂 .
But don’t forget velocity. For example Friedman said that constant money supply growth rule would have worked better than Fed’s injections during 9/11. And right now monetary aggregate stats look OK.
1. August 2009 at 05:58
123, That’s a good point. You can move any response to me over to the Friedman post, if you want. Here I’ll just say that I think Friedman would have recognized the problem with the interest on reserves policy, so I don’t think he would have fixated on the base. But as you say, the aggregates have also risen.
Obviously I don’t know for sure, but I think he would have correctly recognized that 2008 was the closest parallel to 1929 and 1937 that he had seen in decades, and drawn the obvious conclusions. One thing that I forgot to mention is that Friedman used the NGDP concept much more than most other economists. I don’t have time to dig though his old writings, but he clearly thought in terms of NGDP changes, which is also how I think about monetary problems. Very few other macroeconomists approach things that way (Bennett McCallum is one.) So I think he would have been horrified by the sharp drop in NGDP. Remember that NGDP rose strongly after 9/11 (I think it was up about 4% during 2002.)
1. August 2009 at 18:59
The thing is, when it comes to boom and bust “Austrian” macro, Hayek not only invented the thing, he’s the 800 pound gorilla.
Every other “Austrian” boom bust macroeconomist is working in Hayek’s 800-pound shadow.
Scott writes:
“it is unfair to compare Schwartz to the Hayekian strain of Austrian economics, which I think we both agree is the best.”
2. August 2009 at 11:52
Greg, I’ll take your word for it. Where do you see Mises fitting in?