The NKs win when only the RBC model is left standing
Karl Smith starts off a new post as follows:
I define the simplified version of the Sumner Critique as follows: If the Central Bank is targeting Nominal GDP precisely then all other macroeconomic effects become classical in nature.
That’s a good observation, although I’d put it differently:
I define the simplified version of the Sumner Critique as follows: If the Central Bank is targeting expected Nominal GDP then all other macroeconomic effects become approximately classical in nature.
It looks similar to Karl’s formulation, but there are three key differences. First, I prefaced NGDP targeting with “expected.” This is important for several reasons, but in this context it allows us to remove the term ‘precisely.’ (A term that otherwise allows skeptics to easily dismiss the critique.) Obviously one cannot precisely target NGDP, but one can precisely peg the price of NGDP futures markets. If one does that, then the expected fiscal multiplier becomes precisely zero (in nominal terms, supply-side effects are possible.) But actual NGDP can move around a little bit, and hence the world is only approximately classical in nature.
Even so, I’m so convinced that stabilizing expected NGDP (via level targeting) would also roughly stabilize actual NGDP that I have in the past made grand claims about “the end of macro.” (Of course I actually meant the end of certain types of macro, just as Francis Fukuyama actually meant the end of certain types of history.)
Macroeconomics is the study of policy failure. Once an issue goes away the field loses interest. Liquidity traps were dropped from the curriculum in the 1970s, when 13% inflation and 15% interest rates made the “problem” of being stuck in deflation and zero rates seem absurd.
The reason New Keynesians and real business cycle-types got along so well during the 1990s and early 2000s is that the nominal problem seemed solved. NGDP growth was stable enough that NKs thought that the Fed could do the job, and that fiscal stabilization wasn’t needed. And the RBC-types were basically fine with a 2% inflation target, and in any case they were more interested in other issues. With the fight over NGDP off the table, macroeconomists could focus on other topics, mostly classical in nature.
Of course all that came to an end in late 2008. The NKs began to see low NGDP as a huge problem. They also saw that inflation targeting wasn’t enough. The RBC-types continued to believe inflation targeting was all you needed on the demand-side.
In 1984-2007 we came close to solving the key macro problem, NGDP stabilization. We were thrown off course by a number of factors, including an inability to use the interest rate instrument at the zero rate bound. If we can get a better policy instrument (NGDP futures targeting anybody?) then we will go right back to the macro problem being solved. When that happens, it will no longer be necessary to divide textbooks into micro and macro splits. The remaining macro areas (such as long run growth) will be special topics, analogous to international trade.
The irony here is that the NKs (and of course us market monetarists) can only succeed by making our models obsolete—thrown into the dustbin of history—and by allowing the RBC-types to take over what little is left of macro.
PS. Wikipedia year 3012: “Scott Sumner was an economist who for some odd reason was obsessed with the money supply and NGDP. Of course as we all know NGDP fluctuates very little, and those small fluctuations are completely uncorrelated with changes in the money supply. He had his 15 minutes of fame, and then rapidly fell back into obscurity.”
Tags:
18. May 2012 at 08:03
Wikipedia year 2080: “Scott Sumner was an economist who for reversing cause and effect reasons was hoodwinked by the seeming attraction of central bank NGDP targeting. Of course as we all know constant NGDP growth targeting required accelerating money inflation. He had his 15 minutes of fame, and he represented the final nail in the coffin for fiat money standards.”
18. May 2012 at 08:13
Wikipedia 2080 – “Internet Austrians have successfully predicted sixty eight of the last zero hyper-inflations.”
18. May 2012 at 08:23
Macroeconomics is the effort to provide causally non-magical mechanisms which account for problem raising patterns in our experience.
Academic economic is pathological because it has become everything _but_ such an effort — under the filter mechanisms of enforced by the profession, and as a consequence of the professions incestuous conjoining with government jobs, Fed money, Fed publications, the NSF, etc.
Once the possibility of professional advancement & professional status advancement goes away the professors loses interest.
The surest way toward professional status and influence is via formal math constructs which invoke and provide magical pretend causal mechanisms that serve the political interests of various political players in the various branches of the government and the government’s financial institutions.
18. May 2012 at 08:28
Hayek was offering the same solution at an earlier date, super-charged with a far superior institutional set up for implementing the solution.
“In 1984-2007 we came close to solving the key macro problem, NGDP stabilization.”
Why wasn’t and isn’t the profession interested? See my post just above.
Getting the causal mechanism right requires junking core assumptions about the math and the explanatory strategy of the science. And it demands falling out of line with the political and financial interests of the dominant career path institutions upon which individual professional economists depend for their status and professional influence and advancement.
It also requires becoming a better economist, which is just too much damn work.
Easier to crank out more math. And more magic “models”.
18. May 2012 at 08:29
Nice. This is basically restating a finding that enlightened me while reading (and commenting) on of the Nick Rowe’s excellent posts. I have it as an upgraded version of Friedman’s famous quote:
“Recessions are always and everywhere a monetary phenomenon, unless they are a leisure phenomenon”
And Market Monetarism is about ensuring that money has nothing to do with them.
PS[late response to your NGDP tsunami]: And this is why Market Monetarism is on the rise – not only because they are right, but because they have advocates that want an honest debate about all sort of interesting topics, instead of lecturing all around themselves how wrong they are (and they are).
18. May 2012 at 08:30
On the bed sharing of macroeconomists and Fed institutions, google Lawrence White’s peer reviewed articles on the topic.
18. May 2012 at 08:41
‘We have seen the future and it is good’
Why does this post make me think of Nietzsche’s last Men?
18. May 2012 at 08:42
Scott,
There is only *one* thing that separates my basically New Keynesian mental macro model from Market Monetarism: targeting vs direct manipulation of NGDP futures. Without the ability to carry out actual purchases of NGDP futures (or some other positive beta asset) and thereby *guarantee* investors/hedgers/employers a particular level of NGDP, there will be circumstances in which it becomes no more possible for the Fed to advance a sufficient quantity of demand to close the output gap at the ZLB, than it would be possible, under normal circumstances, if the lower bound was 10%.
I can see that you might feel there is a political advantage to advocating a target rather than an instrument since it would be trivial to implement. The problem is that a target is prone to failure and since the Fed knows this (Bernanke even publicly admitted how powerless they are in the face of possible fiscal policy tightening later this year) there is no way they would adopt a tougher target. They are terrified of losing their “credibility.” To be credible (omnipotent) they need a positive beta *instrument*. You’ve already sold a huge cross section of economists on the idea that stable NGDP growth is a worthy goal. Where you are not succeeding, and for good reason, is in convincing a lot of them that it is achievable with the current tools. If you adopt the NGDP futures *instrument* as a key piece of your platform it becomes a slam dunk. I think I would even be convinced to totally drop the short rate as a policy instrument. Why not go for it?
18. May 2012 at 08:57
Matt:
Wikipedia 2080 – “Internet Austrians have successfully predicted sixty eight of the last zero hyper-inflations.”
Austrian economics does not contain anything that would enable one to make empirical predictions concerning human action.
Austrianism is about making logical, i.e. non-hypothetical, statements about the real world.
18. May 2012 at 09:09
The only reason your 3012 Wikipedia entry will be true is due to the “Sumnerian Conspiracy”, a mythical secret society that watches over macroeconomic policy makers. Every time a policy maker thinks he can deviate from an NGDP targeting regime, members of the conspiracy coalesce around the deviant and “re-target” his thinking.
18. May 2012 at 10:00
The irony here is that the NKs (and of course us market monetarists) can only succeed by making our models obsolete
This is a very subtle point that I think many economists do not get: the job of a good macro policy is to replicate the flexible price equilibrium in the face of rigidities. So if the central bank is successful, the economy will look like it has a lot of flexibility, leading some people to incorrectly conclude we do not need macro policy.
circular logic makes peoples head hurt: and its amazing the number of economists who defend expectations theories of inflation but also need hand holding as to how QE works, they need to see the Concrete Steppes. I defer to: “Any sufficiently advanced technology is indistinguishable from magic.”
18. May 2012 at 10:01
Anyone want to explain wtf Karl means by “Central Bank Multiplier?”
18. May 2012 at 10:11
“Central Bank Multiplier?”
more or less i think Karl means the degree to which the CB can steer to the left when the economy is veering right (and vice versa) – countercyclical macro policy. the CB could get it exactly right, be politically constrained, or the transmission mechanism could be weak (depends on your view).
18. May 2012 at 10:15
I don’t know there dwb, it feels nefarious. I get the same spidey sense I got when I first heard MMT.
18. May 2012 at 10:31
your spidey sense is going off because hes considering out loud the possibility that the Fed might not get it 100% correct, offsetting government cuts with monetary policy.
18. May 2012 at 11:06
MF, you said:
“Of course as we all know constant NGDP growth targeting required accelerating money inflation. ”
So you think that under Scott’s system the velocity of money will continue to decline, eventually approaching zero. We’ll eventually start using Greenbacks as wallpaper.
18. May 2012 at 11:10
Almost.
It gets to my point that NGDPLT makes govt. smaller.
The Fed CURRENTLY will offset govt. spending cuts or tax cuts with monetary.
The issue is the Fed WON’T offset spending increases or tax increases.
The current status quo bias is Anti-Govt. Fed policy.
NGDPLT codifies it.
So when I hear Karl wondering what happens if the Fed misses, my response is well they don’t miss now, so if NGDPLT doesn’t shrink govt. we will go back to our current model.
18. May 2012 at 11:42
Greg, You are right, MF needs to read some Hayek.
Matt, Sounds about right.
Thanks JV.
Mike Sax, Didn’t Fukuyama get his ideas from Nietzsche?
K, I don’t follow your comment, I support having the Fed buy and sell unlimited NGDP futures so that the policy goal is always equal to the market price. They will make the market. Are you assuming I don’t support that? Maybe I misunderstood your comment.
Don’t take what Bernanke says now as what he believes–he’s forced to defend the Fed. Read his academic writings. I believe he’s actually saying the hawks at the Fed won’t let him do enough if there is a fiscal cliff. And the real problem isn’t next January, it’s this June (in Europe.)
Kevin Dick, Let’s hope so, I’m recruiting members now.
dwb, I like that last quotation. Remind me who said it.
Morgan, I wondered about that too.
18. May 2012 at 11:49
Yes – i think NGDPLT makes the fed reaction function to govt spending very transparent, that’s one of the many many reasons i like it. Many many economists get confused by the fiscal multiplier, whether and when it exists, and whether the Fed is missing asymmetrically as you say. NGDPLT makes it really black and white crysal clear for the CBO digitheads.
18. May 2012 at 11:55
Saturos:
So you think that under Scott’s system the velocity of money will continue to decline, eventually approaching zero. We’ll eventually start using Greenbacks as wallpaper.
Yes.
Note that velocity of MZM has been on a secular decline since 1980, and the velocity of M2 has been on a secular decline since 2000. As the economy becomes more and more stressed because of inflation, cash holding becomes more and more necessary as a hedge, a safeguard, an insurance, etc. The current velocities of M2 and MZM are the lowest they have ever been in recorded history.
These historical facts are not the ultimate foundation for my argument, they are merely consistent with what I am arguing.
Morgan:
It gets to my point that NGDPLT makes govt. smaller.
Except it doesn’t, since NGDPLT has consistently required more money printing than has existed in this country, and money printing consistently benefits the state because they are typically among the first receivers of the new money via debt purchases.
18. May 2012 at 11:57
“Any sufficiently advanced technology is indistinguishable from magic.”
Arthur C. Clarke (they all apply to monetary policy in some way):
http://en.wikipedia.org/wiki/Clarke%27s_three_laws
personally, the second is my favorite.
18. May 2012 at 12:06
ssumner:
Greg, You are right, MF needs to read some Hayek.
Sumner needs to read some Hayek:
“The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.” – F. A. Hayek, 1974 Nobel Prize lecture.
Hayek believed targeting NGDP is “very harmful.”
Mike Sax, Didn’t Fukuyama get his ideas from Nietzsche?
Hegel.
18. May 2012 at 12:17
Scott, this criticism is valid only against (most)NK economists, not NK models in general. A microfounded NK model like the one in Henrik Jensen’s AER article will make exactly the same predictions about whether IT or NGDP is preferable.
If what you meant to say is that RBC-economists tend to be wrong all the time, NK-economists most of the time and NGDP-economists rarely, I’d agree. But as far as monetary policy is concerned, I don’t see much difference in the way market monetarists and new keynesians model the economy.
18. May 2012 at 12:19
Scott-correct sir.
18. May 2012 at 12:22
“In 1984-2007 we came close to solving the key macro problem, NGDP stabilization. We were thrown off course by a number of factors, including an inability to use the interest rate instrument at the zero rate bound. If we can get a better policy instrument (NGDP futures targeting anybody?) then we will go right back to the macro problem being solved.”
This reminds me of “The End of History and the Last Man” by Francis Fukuyama. Oddly, the end of the Cold War did not signal the end of antagonistic world history. Similarly, as much as I approve of NGDP level targeting, it will only solve the AD stabilization problem until it doesn’t.
“For over a thousand years, Roman conquerors returning from the wars enjoyed the honor of a triumph – a tumultuous parade. In the procession came trumpeters and musicians and strange animals from the conquered territories, together with carts laden with treasure and captured armaments. The conqueror rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children, robed in white, stood with him in the chariot, or rode the trace horses. A slave stood behind the conqueror, holding a golden crown, and whispering in his ear a warning: that all glory is fleeting.”
– from the film Patton
18. May 2012 at 12:24
Scott,
I see you already brought up Fukuyama.
18. May 2012 at 12:49
Note that the argument is against targeting _full employment_ via yo-yo-ing aggregate demand — you can’t simultaneously target both — and you will get neither if you are yo-yo-ing aggregate demand up and down via after the fact money expansion and contraction attempting to hit a given employment target — Hayek’s standard position.
Hayek’s position is that you will _always_ have a trade cycle, but you will make it worse if you attempted to target full employment by manipulating and yo-yo-ing aggregate demand.
A something like a loose expectational NGDP is _not_ an effort to target a fixed and permanent full employment target.
“the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level.”
18. May 2012 at 12:51
Scott — are you targeting both full employment and an NGDP expectations target?
18. May 2012 at 13:23
Scott: “Are you assuming I don’t support that?”
Yes, I was assuming that! So do a lot of people. That’s what all the talk about MM being akin to magical thinking is about. Lots of us think that you think that the Fed can just manipulate NGDP expectations by nothing more than announcing a target (“clicking its heals three times…”). Why do we think that? Because the only instrument you every talk about is (permanent) expansion of the size of the base at the ZLB which I (and others) consider utterly equivalent to determination of the future path of the short rate. And control over the path of the short rate is *not* adequate to close output gap, so neither is control over the base. The NK model would say that beyond possibly influencing expectations of the path of the short rate, the impact on monetary expansion at the ZLB can depend only on the nature of the assets bought by the CB. My personal opinion is that purchases of treasury bonds, being a negative beta asset in a deeply depressed economy, is counter-productive. Therefore, for QE to be effective, the Fed needs to buy positive beta assets. Stocks might work, but I’m not in favour of the incentive/distributional consequences. NGDP futures would do the trick.
There is no rational reason to think that the CB can bring about a change in a target via an expectations channel unless the CB has at its disposal some instrument that could *in principle* bring about the change in the target even if the market didn’t want to oblige. Without adequate instruments the CB is just a loud think tank. Often you really give the impression that you disagree with this.
Part of the problem, in my opinion, is that you talk about “monetary policy” but you have never (AFAIK) defined what you mean by that term. The Fed can’t legally buy stocks and they couldn’t legally buy NGDP futures even if those existed right now. They can’t legally buy new bridges and hospitals either, but should we assume that those might also be covered under your definition of monetary policy? Your readers should be excused for thinking that if you don’t explicitly say how the powers of the Fed ought to be altered and you don’t explicitly discuss *manipulation* of NGDP futures, then you probably don’t consider that to be “monetary policy” any more than the construction of new bridges and hospitals.
I have only been reading this blog for about two years so maybe I missed something. But posts, such as your recent “What is Market Monetarism” don’t clarify this. Maybe I should read the original posts?
“I believe he’s actually saying the hawks at the Fed won’t let him do enough if there is a fiscal cliff.”
A while ago, when I claimed that we shouldn’t necessarily believe Bernanke when he says he has adequate tools at his disposal, you told me that we should just take him at his word, whatever he says, and that he wasn’t motivated by institutional constraints… Also, If you agree that the Fed *should* be able to buy unlimited quantities of NGDP futures that must mean that without that ability you agree that they may otherwise not be omnipotent to determine the path of NGDP, right? Otherwise, why would they need the power to do that? Do they, or do they not need access to some kind of positive beta instrument?
18. May 2012 at 13:28
[…] 5. The Sumner Critique. I find that this is a fantastic way to simplify thinking. Of course, later complexity can be added back in, but it’s a great place to start from. Sumner comments. […]
18. May 2012 at 13:39
Scott,
A question or two, since i was a toddler back then, (I was born in 1982) Krugman argued that the RBC argument about recessions being a signal extraction problem was falsified by the Volcker experience since everyone knew we were in recession at the time. My question is this, when Volcker raised interest rates, did he say publicly and very specifically where he wanted the inflation growth rate and the price level to go? Or did he say he would ease up when “inflation comes down”) in generalized terms.
My second question is technical. All things being equal which is a better way to tighten to raise interest rates, or to slow the growth of MB, M1, and M2 to absolute zero, (i.e.. to conduct no open market operations AT ALL.) My impression is that the second is more effective, and much more brutal. AM I right?
Major_Freedom
Wikipedia 2080 – “Internet Austrians have successfully predicted sixty eight of the last zero hyper-inflations.”
Austrian economics does not contain anything that would enable one to make empirical predictions concerning human action.
Austrianism is about making logical, i.e. non-hypothetical, statements about the real world.
Great! fabulous, How mindbogglingly convenient! Whats ironic is that you are in effect taking the positivist position which makes the distinction between facts and values, between is and ought, when explaining and prediction are always tied up in the real world. And also, the record of rothbardian Austrianism of even explaining the world is poor, with very scant evidence to support it.
I’ll give you the main example. The most compelling argument in my mind against the inflation “distortion” miscoordination argument is the general nature of the boom and bust. Yes some sectors rose and fell more than others. But all rose to some degree during the boom and all fell to some degree during the bust (with the exception of cash and risk free assets- thats the only supply shortage, thats compelling) How can the main PROBLEM be miscoordination if all escorts rise and fall during the boom and bust even if they don’t fall by the same amount. This suggests that the problem of miscoordination is a side issue , that the entire economy doesn’t need to explode for their to be “economic calculation” Also why is the natural rate of interest COMPLETELY unobservable? Consumption savings data is available in real time always in the economy if record show that Americans are saving 4 percent of their income and consuming 96 percent shouldn’t the present discount rate be twenty four percent and easily available for NPV (You really think entrepreneurs are imbeciles don’t you. Thats why I don’t like Keynesians or Austrians both of them seem to think market participants are stupid albeit for different reasons)
Finally if price deflation is the only route to real economic growth what happens when the one cent lower boundary is reached after years and years deflation? (Don’t laugh its a valid question) You said any amount of money in the economy can clear balances, provided prices are flexible. Well the one cent boundary is a limit to flexibility. Or in the gold standard, lets make the ridiculous assumption that their is one ounce of gold in the entire economy. (lol) Isn’t it a bit ridiculous to go around then talking about nano-nano-nano ounces! Doesn’t it just make more sense to increase the money supply in general?!!
Your move
Eddie
18. May 2012 at 13:46
MF,
Look dude, I agree with your in spirit, but you still need to explain yourself:
“Except it doesn’t, since NGDPLT has consistently required more money printing than has existed in this country, and money printing consistently benefits the state because they are typically among the first receivers of the new money via debt purchases.”
WTF are you talking about? NGDPLT hasn’t existed.
And as with NGDP Futures, they don’t EXIST YET EITHER, but what I like about them is that new money printed or money sucked up and out isn’t just GS or even Treasuries.
The GOAL is that if MF is thinking NGDP it going to come in under the target, and bets as such, MF gets the newly printed money.
—–
We’re always in fairyland until we’re not dude.
For christ’s sake I advocate auctioning 30M unemployed at a starting bid of $1 per hour!
You’re ALLOWED to complain it is still a government policy, but the debate isn’t BE IT RESOLVED: all government is bad.
The debate is… BIR: new idea is better than current idea.
18. May 2012 at 15:15
Edward,
I wouldn’t get too worried about the Miseans’ methodology, since they themselves don’t actively believe in it-
“Of course as we all know constant NGDP growth targeting required accelerating money inflation.”
– Major Freedom
Similarly, Austrians cite praxeological methodology when in a position where they may be judged negatively, and cite Ludwig Von Mises’s alleged prediction of the Great Depression when selling their theoretical product. As you say, “convenient”.
18. May 2012 at 15:47
Morgan:
WTF are you talking about? NGDPLT hasn’t existed.
That’s why I said de facto NGDP targeting. That has in fact existed. Take a look at NGDP charts for the years prior to 2008. It may have well have been deliberate NGDP targeting. And yet government grew, and grew, and grew.
You can’t tell me that if the status quo NDGP persists, that all of a sudden the state will be limited. It wasn’t limited by NGDP with de facto NGDP targeting, and it won’t be limited by NGDP with de jure NGDP targeting either.
The GOAL is that if MF is thinking NGDP it going to come in under the target, and bets as such, MF gets the newly printed money.
I don’t want newly printed money. That will just maintain the problem of money printing in the first place. I want out of the fiat money standard altogether, and choose what money I want to use without getting charged as a domestic terrorist, like those who used the Libery Dollar were charged as domestic terrorists, and their wealth confiscated. I want to use my own money, when I want, and where I want, without state threats. I will settle for nothing less.
We’re always in fairyland until we’re not dude.
You mean we’re always in the real world until we’re not.
For christ’s sake I advocate auctioning 30M unemployed at a starting bid of $1 per hour!
Who cares? The same test can be had by abolishing the minimum wage, and we’ll see if people really do in fact agree to $1 an hour wage. If they don’t, then your “guarantee” turns into a non-guarantee, and the only way to turn it into a guarantee would be to point guns at people at forcing them to do what you want them to do.
You’re ALLOWED to complain it is still a government policy, but the debate isn’t BE IT RESOLVED: all government is bad.
The debate is… BIR: new idea is better than current idea.
That’s your debate, not mine. My debate is different.
I don’t want merely a one step better idea, that will have the same disastrous outcome as the one step worse idea. I want to REMOVE the bad idea completely, understand? Telling me to support NGDP because it’s one step better than what we have now is asking me to sanction it, the same way that you telling me to support 10 rapes a week instead of 20 is still a sanction of rape. I will insist on zero rapes, the same way I insist on zero central banks.
Even if, EVEN IF you “succeed” in getting NGDP targeting to be the de jure policy, I will still lose. I will be no better off merely supporting the winning team as some fan with no integrity. If your team wins, it won’t make a lick of difference to me whether I consider myself a fan or not. There is no incentive for me to support central banking, period.
18. May 2012 at 16:09
Edward:
Great! fabulous, How mindbogglingly convenient! Whats ironic is that you are in effect taking the positivist position which makes the distinction between facts and values, between is and ought, when explaining and prediction are always tied up in the real world. And also, the record of rothbardian Austrianism of even explaining the world is poor, with very scant evidence to support it.
The positivists didn’t invent separating fact from value. It’s not ironic in agreeing with something positivists believe but isn’t even crucial to the positivist epistemology.
I’ll give you the main example. The most compelling argument in my mind against the inflation “distortion” miscoordination argument is the general nature of the boom and bust. Yes some sectors rose and fell more than others. But all rose to some degree during the boom and all fell to some degree during the bust
This isn’t a falsification. Production takes time. If the higher order capital stages go bust, then it’s not like the consumer stages can instantly produce and sell more consumer goods. The resources don’t even exist yet! Computer retailers for example cannot possibly sell more PCs unless there is more capital goods produced that makes more PC production possible. But if those stages go bust, then computer sellers have to wait for those resources to increase in production once again. Of COURSE we would expect to see a general decline in productivity despite the fact that the boom was concentrated in the capital goods stages.
(with the exception of cash and risk free assets- thats the only supply shortage, thats compelling) How can the main PROBLEM be miscoordination if all escorts rise and fall during the boom and bust even if they don’t fall by the same amount.
They DON’T rise and fall by the same amount. Some sectors crash far more than other sectors:
http://i.imgur.com/AOHwQ.png
The main problem is discoordination. We see a general slump because production takes time, and a slump in a higher order stages like construction, means all the other stages have less resources to work with, until the higher order stages are healed.
Also why is the natural rate of interest COMPLETELY unobservable?
The same reason why a jammed radio makes the real signal inaudible.
There is only one set of interest rates that are observable, and those are the ones that exist, and the ones that exist are the ones affected by the Fed. They are the only rates investors have to go by. They can’t see interest rates that don’t exist!
Consumption savings data is available in real time always in the economy if record show that Americans are saving 4 percent of their income and consuming 96 percent shouldn’t the present discount rate be twenty four percent and easily available for NPV (You really think entrepreneurs are imbeciles don’t you.
No, entrepreneurs are not imbeciles. Even looking at the real saving rate of consumers, may get some of the more sophisticated investors to consider prevailing interest rates as lower than what they otherwise would be, but the problem is that the profit motive eliminates prudent investors from competition. Those investors who don’t care, and take advantage of the lower nominal interest rates, can for a time attract capital away from other investors by making more short term profits than they do, which will turn the “wise” investors into suckers. Investors are by the nature of the case compelled to do the wrong things in order to make money and stay competitive.
If an entrepreneur had to choose between losing business to other entrepreneurs because he refuses to pay the higher factor input prices, on the basis that he knows the real savings rate doesn’t justify it, and choosing to enter the market and staying competitive, knowing that the game of musical chairs can stop at any time, then what happens in reality, not in your head, but in the real world market, entrepreneurs and investors go into the market anyway, and try to get out before the music stops.
This is, incidentally, why so many businessmen are so focused on short term results. The only way to compete in an inflationary, distorted market is to try to make the fastest profits possible, and then get out before the next bust comes.
Thats why I don’t like Keynesians or Austrians both of them seem to think market participants are stupid albeit for different reasons)
YOU think market participants are stupid! That’s why you think they cannot help but engage in self-destructive behavior in a free market money standard. You should look in the mirror.
I am not saying investors are stupid. I am saying they cannot help but get caught up in the boom, because if they don’t, they cease being entrpreneurs! Inflation acts like a filtration process for short term oriented investors who either don’t care about Austrian business cycle theory, or don’t know about it. I’ve done surveys, and I can tell you that a minority of businessmen have even heard of Austrian business cycle theory. That’s a major reason why the business cycle continues to exist. It’s not that they are stupid, it’s that they either don’t know it, or they do, but the profit motive is too strong to resist.
Finally if price deflation is the only route to real economic growth what happens when the one cent lower boundary is reached after years and years deflation?
I didn’t say price deflation is the only route to real economic growth. Only that in a healthy capitalist market, where money production is integrated into the division of labor just like every other good, prices end up tending to fall over time. This would have otherwise sent signals to investors on how to price their investments, but inflation distorts that by messing up relative prices and interest rates.
To answer your question, that’s easy. Once the one cent boundary is reached, then NEW denominations can be created. Half cents can be called something. Tenths of one cent can be called something. Exactly like the central bank introduced new denominations, e.g. $1000 dollar bill, $10,000 dollar bill, etc, but in the other direction. Instead of adding zeroes and using new words to describe those values, zeroes can be taken away and new words can be used to describe those values.
It would be just as silly for me to ask what would happen a zillion years from now once we go through all the “illions”. Billion, trillion, quadrillion, centillion, sextillion, septillion, etc, etc. What’s the boundary? There isn’t any, is there? Same thing with going towards zero. We can progressively smaller denominations as we approach zero.
(Don’t laugh its a valid question) You said any amount of money in the economy can clear balances, provided prices are flexible. Well the one cent boundary is a limit to flexibility. Or in the gold standard, lets make the ridiculous assumption that their is one ounce of gold in the entire economy. (lol) Isn’t it a bit ridiculous to go around then talking about nano-nano-nano ounces! Doesn’t it just make more sense to increase the money supply in general?!!
The worst defense of inflation…ever.
18. May 2012 at 16:19
“The RBC-types continued to believe inflation targeting was all you needed on the demand-side.”
Even that, BTW, is totally embarrassing for them. If all people wanted was fixed real rate debt, all they would have to do is to inflation index their contracts. It would be a totally trivial matter. We wouldn’t need any inflation target, just a reliable inflation index. The trouble is that an inflation index is not sufficient because people have profound money illusion and vehemently resist nominal wage declines which totally breaks the RBC model.
18. May 2012 at 17:25
“That’s why I said de facto NGDP targeting. That has in fact existed. Take a look at NGDP charts for the years prior to 2008. It may have well have been deliberate NGDP targeting. And yet government grew, and grew, and grew.”
I know that you’re committed to libertarian principles more than pragmatism, but really, you’re quite wrong here. Remember the Clinton years: during the 1990s, we were facing the prospect of actually _paying off the national debt_. Even more strikingly, consider the abandonment of economic “planning” in the 1980s. The Great Moderation (NGDP-lite) got us rid of a _lot_ of government meddling with the economy, despite it being poorly understood (nobody would have described Alan Greenspan as a NGDP targeter at the time).
18. May 2012 at 17:44
MF, you are wrong. Take 4.5% NGDPLT and run it for the past 12 years.
You get:
1. No Barney Frank / Fannie Freddie homes for bad credit risks.
2. No build up of public employee salaries – even after 9/11?
Be clear, do you get why this is?
18. May 2012 at 17:51
“I want out of the fiat money standard altogether, and choose what money I want to use without getting charged as a domestic terrorist,”
You know, alternative scrip is most likely _not_ illegal, and plenty of examples are known. The “Liberty Dollar” folks got in a lot of trouble because they were held to be _ripping off_ US dollar designs, encouraging folks to mix LD with USD and causing confusion among the general public (for instance: all USD coins must bear the words “LIBERTY” and “IN GOD WE TRUST” by law; the LD medallions obviously included the former, as well as “TRUST IN GOD”). That’s _not_ OK under libertarian principles. Now, one could of course take their defense and argue that this is not what really happened; but the point is, this is what got them in trouble.
18. May 2012 at 17:57
nobody would have described Alan Greenspan as a NGDP targeter at the time
i think thats the key point. Greenspans rule was, “it works.” It’s was not until Taylor came along (thats why hes famous) with some regressions and then the minutes were released, not until then could we dissect Greenspan’s method. Plus, it does not look as though Greenspan was “path level” targeting, just watching nominal aggregates (or flexible inflation targeting, which indistinguishable if the Fed is not managing the path). Greenspan was a master of doublespeak and the message never got to the CBO number crunchers.
and thats the key in my mind: have to make it crystal clear: guns or (private sector) butter. btw, that is really only step 1, you also have to have some fiscal pork-haters in DC as well. Me personally (people will disagree) i like fiscal conservatives in the house (where the appropriations bills start) and opposite in the senate – that way nobody’s favorite pork constituency gets fed. historically when one party has both chambers, there is a lot of pork, it just flows to different constituencies as a reward for those campaign donations. keep em fighting each other and out of the wallet.
18. May 2012 at 18:09
W. Peden:
I wouldn’t get too worried about the Miseans’ methodology, since they themselves don’t actively believe in it-
“Of course as we all know constant NGDP growth targeting required accelerating money inflation.”
– Major Freedom
I don’t see how that quote contradicts Misesean methodology.
Similarly, Austrians cite praxeological methodology when in a position where they may be judged negatively, and cite Ludwig Von Mises’s alleged prediction of the Great Depression when selling their theoretical product. As you say, “convenient”.
I don’t do that. And saying a bust is inevitable isn’t an empirical prediction. It is the difference between saying “If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error” and “There is in fact a house being built that requires 50,000 bricks but there is only 40,000.”
18. May 2012 at 18:19
anon:
I know that you’re committed to libertarian principles more than pragmatism, but really, you’re quite wrong here. Remember the Clinton years: during the 1990s, we were facing the prospect of actually _paying off the national debt_. Even more strikingly, consider the abandonment of economic “planning” in the 1980s. The Great Moderation (NGDP-lite) got us rid of a _lot_ of government meddling with the economy, despite it being poorly understood (nobody would have described Alan Greenspan as a NGDP targeter at the time).
The Clinton “surplus” was a myth. They ignored intragovernmental transfer debt.
During the Clinton years, NGDP grew at roughly 5% per year.
Morgan:
MF, you are wrong. Take 4.5% NGDPLT and run it for the past 12 years.
That’s what roughly happened.
You get:
1. No Barney Frank / Fannie Freddie homes for bad credit risks.
2. No build up of public employee salaries – even after 9/11?
This is false. These things happened, and there was de facto 4.5% NGDP for those years.
The data doesn’t lie.
anon:
You know, alternative scrip is most likely _not_ illegal, and plenty of examples are known. The “Liberty Dollar” folks got in a lot of trouble because they were held to be _ripping off_ US dollar designs, encouraging folks to mix LD with USD and causing confusion among the general public (for instance: all USD coins must bear the words “LIBERTY” and “IN GOD WE TRUST” by law; the LD medallions obviously included the former, as well as “TRUST IN GOD”). That’s _not_ OK under libertarian principles. Now, one could of course take their defense and argue that this is not what really happened; but the point is, this is what got them in trouble.
Call it what you want, demonize it all you want, say it’s illegal all you want. You’d only be proving my point. The state does not want monetary competition. That’s what I am calling for. For anyone to be able to produce and use whatever money they want, without being charged as a terrorist.
18. May 2012 at 18:21
Take 4.5% NGDPLT and run it for the past 12 years
why stop there. can i have no multi-trillion middle east wars as well?? no agribusiness subsidies?
18. May 2012 at 18:24
Sorry, the Clinton years graph might print on your PC when you open the link. This chart:
http://i.imgur.com/M93sB.png
is better.
18. May 2012 at 18:26
dwb:
why stop there. can i have no multi-trillion middle east wars as well?? no agribusiness subsidies?
NGDP targeting encourages multi-trillion dollar middle east wars because the Fed inflates by way of buying government debt. When the state can borrow by selling debt to money printers, it makes it easier for the state to finance wars.
If you want to minimize wars, make it so that the only way the state can finance itself is through taxes and borrowing with no central bank monetization. It won’t stop wars, but it will make them harder to finance.
18. May 2012 at 20:58
Major Freedom,
It’s an empirical prediction about human action. In particular, it makes a clear prediction of the path of the velocity of money, which is analytically reducible to individual human actions.
“And saying a bust is inevitable isn’t an empirical prediction. It is the difference between saying “If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error” and “There is in fact a house being built that requires 50,000 bricks but there is only 40,000.””
Nope: both of those propositions are predictions. They’re different, but not because one is an empirical prediction and the other is not an empirical prediction. They are distinct in that the first is a hypothetical and the second is a declarative statement, but they’re both predictions and they’re both testable i.e. either could potentially be wrong.
18. May 2012 at 21:29
K, a level target makes it less likely that the zero bound would be hit, and if hit, less likely to remain at zero for a long time. That’s because the farther away the target gets, the greater the potential gain from betting on recovery. An aggressive Fed could actually raise the level target, immediately producing a large gap between current and target levels.
18. May 2012 at 21:35
In 3012, Wikipedia will be sentient like SkyNet and the article on Scott Sumner will say whatever it wants it to say.
18. May 2012 at 22:41
@Major_Freedom
As far as I understand, all the monetary policy could be done through the NGDP futures market. The FED wouldn’t need to hold any assets at all. It simply acts as a broker with a printing press: destroy the money of those loosing their NGDP bets and create new money for those winning their NGDP bets.
If trading is open to anybody, this seems a very fair (non-redistributive) way of increasing the money supply.
The question whether the central bank should also prop up certain government securities, bail out insolvent banks, etc. then becomes unrelated to its monetary policy.
I also support private currency, but the question still remains how the private market would best handle supply, as soon as you deviate from a 100% commodity standard.
18. May 2012 at 23:12
Creating your own private money to compete with the dollar is perfectly legal. The Fed even has a free publication about it that I linked to before, “Private Money: Everything Old Is New Again”.
There’ve been hundreds of private money systems. Some are operating right now.
My favorite was the Constant, which circulated in New England during the inflationary 1970s. It was based on a bundle of commodities, and its appreciation in value made it so popular that local banks offered savings and checking accounts in it. It closed down when its operator reached retirement age, couldn’t raise the funds to expand backing of it and couldn’t find a successor to operate it.
There was no legal problem at all for anybody. Nothing illegal to it.
What *is* explicitly illegal is calling your own money “dollars”. You know, like it’s illegal to create your own soft drink and market it as “Coke”.
Here is video of von Nothaus doing just that. He offers to pay for purchases with his own money, the vendors ask, “What’s that?”, and he answers “The new dollar coins”. Then he walks away with the goods — leaving the vendors stuck with the cost as their suppliers won’t accept non-dollars, non-money in payment. And he brags about how easy it is.
That’s *fraud*, f-r-a-u-d, and von Nothaus belongs in jail.
Here’s a tip: If you are honestly interested in going into competition the first thing you do is differentiate your product from the others. You give your product a new unique name. You don’t call your new soft drink “Coke”, and you don’t call your new money “dollars”.
If you do call your new soft drink “Coke” and your new money “dollars” then you aren’t trying to compete — you are trying to pass off your product as the other to the deceived unwitting. Which is fraud. And you belong in jail.
How many libertarians endorse fraud and deceit?
19. May 2012 at 07:11
MF,
You aren’t being exact in your thinking.
You need to think about 4.5% NGDPLT as a CAP on growth.
So in 2004, we hit the cap…
And rates HAVE TO go up, and anything Barney Frank tries to do on bad credit risk housing, will raise those rates more, so Barney doesn’t get to do it.
He keeps pushing it in January, rates go up. The more he tries to do it the higher rates go, until he gives up – there are angry screaming private sector main street businesses screaming at him to stop giving credit to bad credit risks.
Fannie and Freddie aren’t allowed to eat up the cap. Neither do public employees salaries. Wars become less likely.
The marginal stuff that pushes us over 4.5% DOESN’T HAPPEN.
Think of it as scuttling bad spending on bad marginal stuff.
Until you really start bouncing your head into the ceiling of 4.5%, you aren’t really answering my point.
19. May 2012 at 07:16
Saturos and Skynet will be VERY POPULAR because it runs the govt. benevolently without any public employees at all.
19. May 2012 at 07:42
Morgan:
You need to think about 4.5% NGDPLT as a CAP on growth.
So in 2004, we hit the cap…
So what? Government still grew. The long run trend was roughly 5% NGDP, and the long run trend was growth in the state. And it’s not letting up even with LESS than 5% NGDP now.
W. Peden
It’s an empirical prediction about human action. In particular, it makes a clear prediction of the path of the velocity of money, which is analytically reducible to individual human actions.
No, it is not an empirical prediction, it is a logical statement. I am not predicting that central banks will target 5% NGDP. I am not predicting any of this will in fact take place. I am only making the statement that IF constant NGDP targeting is instituted, THEN accelerating money growth will take place. The initial IF prevents this statement from being an empirical prediction.
“And saying a bust is inevitable isn’t an empirical prediction. It is the difference between saying “If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error” and “There is in fact a house being built that requires 50,000 bricks but there is only 40,000.””
Nope: both of those propositions are predictions. They’re different, but not because one is an empirical prediction and the other is not an empirical prediction. They are distinct in that the first is a hypothetical and the second is a declarative statement, but they’re both predictions and they’re both testable i.e. either could potentially be wrong.
No, that’s false. The statement “If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error” is impossible to be wrong. Please understand the implication of the word BUILDING a house. That means the house is being built over time, and the master builder thinks he has 50,000 bricks, but in reality there is only 40,000. It is physically impossible for the house to be completed. There is no way in hell this statement can “possibly” be wrong. For I would have to believe that it is possible that a house that requires 50,000 bricks, can in fact be completed with 40,000 bricks. That is absurd. It cannot ever happen. It couldn’t have happened 100,000 years ago and it could never happen a trillion years from now.
One simply cannot, ever, not a trillion years, complete a house that requires 50,000 bricks when one only has 40,000 bricks. The house WILL be unfinished. The master builder WILL observe a lack of capital at some point given the fact that he continues to build the house.
The statement is not a hypothetical. It is a non-hypothetical statement about the real world. Anyone who feels compelled to “test” this statement to see if it’s really true, hasn’t grasped the apodictic meaning of the statement.
Jim Glass
Creating your own private money to compete with the dollar is perfectly legal. The Fed even has a free publication about it that I linked to before, “Private Money: Everything Old Is New Again”.
No, it is not perfectly legal. The video is a farce. What matters is when and where FORCE is used. Despite anything the Fed says, force is in fact used against private issuers of MONEY. And by that I don’t mean barter certificates that only apply in certain cities. I mean money that can be used by anyone, anywhere, for any purpose, and that activity is NOT taxed in US dollars.
There’ve been hundreds of private money systems. Some are operating right now.
No, those are not money systems. Those are barter systems.
What *is* explicitly illegal is calling your own money “dollars”. You know, like it’s illegal to create your own soft drink and market it as “Coke”.
The Liberty Dollars weren’t called US Federal Reserve Notes. They weren’t called dollars. They were called Liberty Dollars. It’s like the difference between Coca Cola, and RC Cola.
And the Feds do not have a rightful claim on the word dollar anyway. The dollar is derived from thaler, which had nothing to do with the US state.
Even if the Liberty Dollars were called something else, and the markers intended for that currency to compete with US Federal Reserve Notes, they still would have been charged, because they were in fact charged for attempting to create a money to compete with US dollars. They weren’t charged for using the word “dollar.”
Here is video of von Nothaus doing just that. He offers to pay for purchases with his own money, the vendors ask, “What’s that?”, and he answers “The new dollar coins”. Then he walks away with the goods “” leaving the vendors stuck with the cost as their suppliers won’t accept non-dollars, non-money in payment. And he brags about how easy it is.
He would still have gotten charged even if the store owners knew what they were. Or, at the very least, the store would have gotten taxed on that transaction in US dollars, despite the transaction not being IN US dollars.
At any rate, the feds did the exact same thing von Nothaus did. They substituted US Fed Notes not backed by gold, in place of US Fed notes backed by gold. Then they used coercion to prevent citizens from even owning gold. Then they used coercion to stop redeeming US dollars in gold and yet forced people to keep paying taxes in that unbacked currency.
That’s *fraud*, f-r-a-u-d, and von Nothaus belongs in jail.
Fraud according to the state, yes. But I want the state to cease enforcing any monetary laws, period.
Here’s a tip: If you are honestly interested in going into competition the first thing you do is differentiate your product from the others. You give your product a new unique name. You don’t call your new soft drink “Coke”, and you don’t call your new money “dollars”.
Then why is RC Cola still in business?
How many libertarians endorse fraud and deceit?
It is only fraud and deceit in the state’s opinion, which you are parroting. My argument is that I want the state to cease charging individual money producers with “fraud”. Let anyone create their own gold coins, and let the market decide whether or not they will accept it. If that lady at that store didn’t pay US taxes, then she would more than likely accept coins from private minters with a good reputation.
All your claims boil down to this:
Competition is legal, except when people actually try to compete.
I want gold transactions to cease being taxed in US dollars. I want gold to be able to be used by people without being taxes in capital gains. If these continue to exist, there is no competition with the US dollar.
You have to look at the fraud behind the US dollar, rather than foaming at the mouth at everyone who actually competes with the US dollar. Note the “Constant” was a barter commodity, not money.
19. May 2012 at 08:17
dwb, That’s right. And thanks for the 3 quotations from Clarke. I agree they all sort of apply to money.
MF, No, Hayek favored NGDP targeting, you are wrong. That quotation (which I agree with) has no bearing on whether he supports it or not.
Orionorbit, There are subtle differences, but I agree that the big differences (for both of us) is with the RBC types.
Mark, Of course it reminds you of the end of history, I mentioned the end of history in the post!
Ah, you saw it on second reading.
Greg, No, just NGDP.
K, You said;
“There is no rational reason to think that the CB can bring about a change in a target via an expectations channel unless the CB has at its disposal some instrument that could *in principle* bring about the change in the target even if the market didn’t want to oblige.”
The problem with you NKs is that you aren’t New Keynesian enough. It’s not just at the zero bound, it’s always true that the only thing that really matters (much) is the expected future path of policy. So if monetary policy is ineffective now, it would have been ineffective in 2006, when rates were 4%. After all, no one believes that the setting of the fed funds rate over the next month has any material effect on the economy, it’s the way fed funds target changes send signals about future policy that matter. That’s NK economics.
Until NKs can provide a plausible explanation for how markets responded to the December 2007 rate cut (when tighter than expected money caused 3 month T-bill yields to fall), I’ll stick to the market monetarist framework. And of course that’s not to mention that if the liquidity trap proponents were correct, then asset markets would not react to rumors of QE2, but they most certainly did. And also recall that the day that QE1 was announced the dollar fell about 4% against the euro. In the NK model that’s expansionary. So the model of expectations traps is inconsistent with what actually happens in the real world.
You guys think money policy only works by affecting interest rates, but by that logic in an economy with no financial markets and no interest rates, if the Fed buried the economy waist deep in currency there’d be no inflation, as interest rates would not have been affected—since they would not exist.
Why are there no cases in all of fiat money history where a central bank tried to inflate but failed?
I agree about RBC types being in denial about nominal shocks.
If you have questions about December 2007, read my ratex post from February 2009.
Edward, He made vague promises. But look, the signal extraction model is not able to explain business cycles–I agree with Krugman. But it’s silly to focus on 1982, you could just as well point to any other recession.
19. May 2012 at 08:33
If you feel that your private money is more valued and liquid, you will find it easy to get worthless US dollars with which to pay your tax obligations, as people will be eager to hold your private money.
But there’s nothing illegal about cell phone cards or e-gold or Disney Dollars or Eve Online PLEX… or any other medium of trade that isn’t actively trying to pass itself off as a dollar.
19. May 2012 at 10:25
Major Freedom,
“No, it is not an empirical prediction, it is a logical statement. I am not predicting that central banks will target 5% NGDP. I am not predicting any of this will in fact take place. I am only making the statement that IF constant NGDP targeting is instituted, THEN accelerating money growth will take place. The initial IF prevents this statement from being an empirical prediction.”
What do you mean by “logical statement”?
To make the statement “If P, then Q” is to predict that, when P, then Q i.e. it is a statement about what will happen if P happens. Since the statement could be false, the statement of its true is a prediction about what would happen under the hypothetical circumstance of P occuring.
There are predictions about what will happen, predictions about what might happen, and predictions about what would happen. You’re making a prediction about how human beings would act (and might act) if NGDP targeting was implement i.e. they would act in such a way that the NGDP growth target would be maintained only with a constantly increasing money stock rather than a constantly increasing rate of velocity.
Like any other economic theorists, members of the Austrian School make use of predictions to sell their theory-
https://www.google.co.uk/search?q=austrian+school+predicted+the+crisis&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a
“The statement “If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error” is impossible to be wrong. Please understand the implication of the word BUILDING a house. That means the house is being built over time, and the master builder thinks he has 50,000 bricks, but in reality there is only 40,000. It is physically impossible for the house to be completed. There is no way in hell this statement can “possibly” be wrong. For I would have to believe that it is possible that a house that requires 50,000 bricks, can in fact be completed with 40,000 bricks. ”
You don’t have to believe that 40,000 bricks can do the job of 50,000 bricks. You simply have to fail to realize that the problem is the lack of bricks. There’s nothing impossible about such a mistake. People misdiagnose the causes of failure all the time.
“One simply cannot, ever, not a trillion years, complete a house that requires 50,000 bricks when one only has 40,000 bricks.”
That’s not at all necessary for the prediction that “If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error” is mistaken.
“The master builder WILL observe a lack of capital at some point given the fact that he continues to build the house.”
This presumes that (1) the master builder correctly diagnoses that the lack of capital is the cause of the problem and (2) the master builder successfully works out which kind of capital is lacking.
Now, you can modify the antecedent somewhat to “If you’re building a house when you have 40,000 bricks and you need 50,000 bricks and you realize the problem”. However, since the consequent is “You’re eventually going to realise the problem”, then the statement isn’t a prediction but it’s also entirely uninformative.
Proposition A, “If P & you realise the problem at time X, then you realise the problem at some point in time” is not a prediction.
Proposition B, “If P, then Q” is a prediction.
Hayek understood all this and realised that the explanation of society required empirically testable (in the sense of having testable assumptions) theories: see “Economics and Knowledge” by Hayek. I have heard it argued that Mises actually agreed and that, like Hayek, he confined his strict a priorism to the particular choices of individuals rather than to broader social explanation.
19. May 2012 at 10:46
Notice, by the way, that the methodological claim “Austrian economics does not contain anything that would enable one to make empirical predictions concerning human action” leaves no space for the use of Austrian economics in thymology, which is inconsistent with how Mises’s methodology leaves open the possibility of qualitative predictions of human action.
One might say that “Ah, but one needs to add contingent assumptions to Austriah economics before one can make such a qualitative prediction”. Sure, but who denies that theory has to be supplemented by initial conditions before it can generate predictions?
19. May 2012 at 11:07
Then why is RC Cola still in business?
Because it calls itself “RC”, not “Coke”.
Is this too difficult for you to understand? Reeallly???
That is differentiating it from Coke, which is what those who genuinely wish to compete want to do.
If the makers of RC instead sold it as “Coke” they would trying to sell their product by passing it off as something it is not — which is fraud.
Not just fraud by the state’s definition, fraud to any sensate human being, including libertarians (who when they pay for Coke don’t want to wind up swilling RC bearing a counterfeit Coke label).
Now you’ve long since shown us all that you are ideological beyond reason, but beyond being sensate?
When did you come up with your own version of libertarianism that embraces fraud as “competition”?
All your claims boil down to this: Competition is legal, except when people actually try to compete.
Ha! Pepsi can’t call itself “Coke” so it can’t compete. LOL.
Bitcoin, Ithaca Hours, Constants, and plenty more have circulated happily for years under their own names with no legal problem and plenty of purchases being made with them — even with commercial bank accounts being denominated in them.
But when vendors asked von Nothaus what he was paying with, he had to lie and say “the new dollar coins”, defrauding them of the real dollars they needed to pay their suppliers for what they gave him.
Why did he lie? Because if he’d said “They are the new von Nothaus Quatloos, I made them myself!” they’d have told him to get lost and wouldn’t have sold him anything until he produced dollars. (Which would have been embarrassing in front of that TV camera!) So he *lied* and said they *were* dollars.
Your claim boils down to “But if von Nothaus can’t commit fraud he can’t compete — he couldn’t even have bought that sandwich!”
Yup, that’s true. Too damn bad. Tell him to get a better product.
19. May 2012 at 11:18
The official position of the Democratic Party & its Keynesian economists from the 1940s and the Full Employment Act, and the 1970s with Humphrey-Hawkins, was full employment targeting, to be “hit” by manipulating aggregate demand using both fiscal & monetary measures & thru “full employment” employment laws.
A _full employment_ TARGET. That was Keynesian economics & the official Democratic Party plank, for a period of half a century.
19. May 2012 at 12:15
Greg Ransom,
Put that way, one realises that things could be worse.
19. May 2012 at 15:59
I understand the frustration with a concept of a multiplier. However I think Karl is on to something. The way I see a CBM is the over or under shooting the CB does relative to market expectations. This “expectations gap” produces the multiplier. I posted an analogy with a stadium in his comments but i think it sucks. It’s got to be some kind of game theoretic mechanism, b/c the way I see it the fed is constantly playing a game against markets.
19. May 2012 at 21:30
Scott,
“So if monetary policy is ineffective now, it would have been ineffective in 2006, when rates were 4%.”
It’s not “ineffective”. It’s *inadequate*. The NK model says that if there’s a lower bound then it is not possible to achieve optimal policy if there are sufficiently negative shocks. That’s true even at 4%, since the mere existence of the lower bound means that the best policy is to run an inefficiently high equilibrium inflation rate thus sacrificing some output.
Once the curve is at zero then the further out the forward curve is zero bound, the more powerless the CB becomes. Imagine that expected inflation is -3% forever and the natural rate is 2% forever. All the CB has to do is hold the short rate at -1%. *Forever*. Unfortunately, the best they can do is to promise a 0% nominal rate forever, which is not enough. So we get a debt deflation collapse and there is nothing any monetary expansion, current or promised, can do about it. It’s all about rates.
As to the Dec 07 meeting, I don’t exactly remember and I’m not in front of my Bloomberg right now. Maybe it was a bearish fed statement? Sometimes a bearish statement causes a rally in bonds and a drop in stocks. I’d want to like at the intraday dynamics right at 2:15, since lots of other things can happen during a trading day. The FOMC is not the only thing that can move the market by 10bps on a Wednesday.
QE2: Buying treasury bonds *may* work a bit sometimes. It depends on the expected risk contribution of treasury bonds to the market portfolio. But any effect had nothing to do with the expansion of reserves. If they had bought T-bills instead there would have been no impact.
“by that logic in an economy with no financial markets and no interest rates, if the Fed buried the economy waist deep in currency there’d be no inflation”
If the fed had the means to increase currency that people didn’t want to hold, then there’d be inflation. But they don’t. All they can do is swap it for instruments yielding the same rate that people were already happy to hold. People are approximately indifferent to bonds and currency as an investment, so the Feds actions make very little difference. People don’t hold the new money to spend it. They hold is as an excellent substitute for the bonds the Fed just bought from them. They are an investment, not money.
“Why are there no cases in all of fiat money history where a central bank tried to inflate but failed?”
At the ZLB??? Obviously not very many. Even hitting the bound is not a big deal. A deep trap only occurs when the forward curve starts to get stuck at zero for a few years out. How many cases of that do we even have? In how many of them *did* a CB manage to escape quickly by creating some inflation? Seems to me we are short on examples in general.
Do you see, BTW, why people might think you don’t support direct intervention in the futures market? You aren’t answering the question of which instruments you think the Fed should have access to and why. You aren’t defining monetary policy in any way that might distinguish the purchase by the Fed of T-bills from the purchase of new bridges and hospitals. I think it’s a fair question: what instruments does the Fed require?
19. May 2012 at 21:30
ssumner:
MF, No, Hayek favored NGDP targeting, you are wrong. That quotation (which I agree with) has no bearing on whether he supports it or not.
No, you are wrong. Hayek did not favor NGDP targeting. That quote I cited is crystal clear. He said that maintaining a particular aggregate expenditure would be “very harmful.” Hayek did not favor NGDP targeting.
W. Peden:
“No, it is not an empirical prediction, it is a logical statement. I am not predicting that central banks will target 5% NGDP. I am not predicting any of this will in fact take place. I am only making the statement that IF constant NGDP targeting is instituted, THEN accelerating money growth will take place. The initial IF prevents this statement from being an empirical prediction.”
What do you mean by “logical statement”?
Good lord.
To make the statement “If P, then Q” is to predict that, when P, then Q i.e. it is a statement about what will happen if P happens.
No, that’s not correct. The statement “If there are only two straight line, then they cannot enclose a space”, is not an empirical prediction. It is a logical statement about the nature of straight lines.
If then statement are not necessarily empirical.
Since the statement could be false, the statement of its true is a prediction about what would happen under the hypothetical circumstance of P occuring.
No, the statement cannot possible be false. There is no way that a house that requires 50,000 bricks could possibly be completed with only 40,000 bricks. This statement cannot be false. It is an apodictic statement.
There are predictions about what will happen, predictions about what might happen, and predictions about what would happen. You’re making a prediction about how human beings would act (and might act) if NGDP targeting was implement i.e. they would act in such a way that the NGDP growth target would be maintained only with a constantly increasing money stock rather than a constantly increasing rate of velocity.
It’s not an empirical statement that is hypothetical. It follows from the deduced law of declining law of marginal utility, among other deduced laws. Just because it is a statement that concerns the future, it doesn’t mean it is empirical. I can say that square circles will not be discovered tomorrow, and yet my statement is not empirical, it is logical.
Logic transcends time. You need to understand that logical statements apply to ANY time, so if a logical statement seems to be directed to the future, it doesn’t mean it ceases to be logical. I could say that the Pythagorean theorem WILL apply to all right triangles forever more, for all right triangles that could ever be observed in the future, and yet I still would not be making an empirical claim subject to “testing.”
Like any other economic theorists, members of the Austrian School make use of predictions to sell their theory-
It’s not a fake marketing gimmick.
“The statement “If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error” is impossible to be wrong. Please understand the implication of the word BUILDING a house. That means the house is being built over time, and the master builder thinks he has 50,000 bricks, but in reality there is only 40,000. It is physically impossible for the house to be completed. There is no way in hell this statement can “possibly” be wrong. For I would have to believe that it is possible that a house that requires 50,000 bricks, can in fact be completed with 40,000 bricks.”
You don’t have to believe that 40,000 bricks can do the job of 50,000 bricks. You simply have to fail to realize that the problem is the lack of bricks. There’s nothing impossible about such a mistake. People misdiagnose the causes of failure all the time.
You’re missing the point. I said GIVEN the fact that the master builder is acting on the belief that he has 50,000 bricks, his plan for the house cannot be completed. And I never said that this mistake is impossible. Good lord man, I am telling you that this is the mistake being made in the example!
“One simply cannot, ever, not a trillion years, complete a house that requires 50,000 bricks when one only has 40,000 bricks.”
That’s not at all necessary for the prediction that “If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error” is mistaken.
I didn’t say it was necessary. I said that this statement is a logical statement, not an empirical statement. A house that requires 50,000 bricks cannot be completed when there are only 40,000 bricks, is a logical statement.
“The master builder WILL observe a lack of capital at some point given the fact that he continues to build the house.”
This presumes that (1) the master builder correctly diagnoses that the lack of capital is the cause of the problem and (2) the master builder successfully works out which kind of capital is lacking.
It is impossible for a master builder to complete a house that requires 50,000 bricks when he has only 40,000. Whether he consciously realizes it or not is actually irrelevant. He will stack the bricks until he runs out, and the house will be incomplete. It will be incomplete whether he realizes it or not. Not that this is necessary, but I think it is not far fetched to say that people will be able to learn that their house has no roof.
Now, you can modify the antecedent somewhat to “If you’re building a house when you have 40,000 bricks and you need 50,000 bricks and you realize the problem”. However, since the consequent is “You’re eventually going to realise the problem”, then the statement isn’t a prediction but it’s also entirely uninformative.
It is not even necessary that the investors consciously realize there is a problem. The problem will become apparent when intended projects cannot be completed in the physical sense.
Proposition A, “If P & you realise the problem at time X, then you realise the problem at some point in time” is not a prediction.
Proposition B, “If P, then Q” is a prediction.
No, If P then Q is not a prediction. For example, the proposition “If A is a right triangle, then the Pythagorean theorem holds for A” is not a prediction subject to testing. It is always true.
Hayek understood all this and realised that the explanation of society required empirically testable (in the sense of having testable assumptions) theories: see “Economics and Knowledge” by Hayek.
Hayek was wrong. He rejected a priorism unjustifiably.
I have heard it argued that Mises actually agreed and that, like Hayek, he confined his strict a priorism to the particular choices of individuals rather than to broader social explanation.
No, Mises certainly did not agree.
Notice, by the way, that the methodological claim “Austrian economics does not contain anything that would enable one to make empirical predictions concerning human action” leaves no space for the use of Austrian economics in thymology, which is inconsistent with how Mises’s methodology leaves open the possibility of qualitative predictions of human action.
False. The presence of non-constancy in human action does not at all preclude us from being able to use thymology. Thymology is historical.
One might say that “Ah, but one needs to add contingent assumptions to Austriah economics before one can make such a qualitative prediction”. Sure, but who denies that theory has to be supplemented by initial conditions before it can generate predictions?
Thymology plus praxeology is sufficient and necessary to economics.
Jim Glass:
“Then why is RC Cola still in business?”
Because it calls itself “RC”, not “Coke”.
But it used the word “Cola”, the same way Liberty Dollars used the word “dollar”. Rather than US dollars, it was Liberty dollars. Rather than Coca Cola, it is RC Cola.
If RC Cola isn’t charged, then neither should Liberty Dollars be charged.
Is this too difficult for you to understand? Reeallly???
Weak.
That is differentiating it from Coke, which is what those who genuinely wish to compete want to do.
The same way Liberty Dollars is differentiated from US dollars!
If the makers of RC instead sold it as “Coke” they would trying to sell their product by passing it off as something it is not “” which is fraud.
Liberty Dollars didn’t use “US dollars”. They used Liberty Dollars.
Not just fraud by the state’s definition, fraud to any sensate human being, including libertarians (who when they pay for Coke don’t want to wind up swilling RC bearing a counterfeit Coke label).
No, it’s fraud to the state. What does “sensate human being” mean other than the state?
Now you’ve long since shown us all that you are ideological beyond reason, but beyond being sensate?
You’re also ideological.
I don’t think you even know what ideological means.
When did you come up with your own version of libertarianism that embraces fraud as “competition”?
Liberty Dollars were not fraud. You have made the claim it is fraud without proving it is fraud in the eyes of me. You’re only telling me it’s fraud in the eyes of the state. I don’t care about that, because the state is the body preventing monetary competition, and calling those who compete “frauds”!
It would be like me telling you that potato competition is legal, but I also say anyone who produces and sells potatoes are guilty of fraud in my opinion, and hence their endeavors are null and void.
“All your claims boil down to this: Competition is legal, except when people actually try to compete.”
Ha! Pepsi can’t call itself “Coke” so it can’t compete. LOL.
Liberty Dollars doesn’t call itself US dollars. Your analogy is moot.
Bitcoin, Ithaca Hours, Constants, and plenty more have circulated happily for years under their own names with no legal problem and plenty of purchases being made with them “” even with commercial bank accounts being denominated in them.
All these transactions are taxed in US dollars. They are not actually competing unless they are not taxed in US dollars.
But when vendors asked von Nothaus what he was paying with, he had to lie and say “the new dollar coins”, defrauding them of the real dollars they needed to pay their suppliers for what they gave him.
The feds did the same thing with Federal Reserve notes that were no longer backed by gold. They too said “these are the new dollars”.
Why did he lie? Because if he’d said “They are the new von Nothaus Quatloos, I made them myself!” they’d have told him to get lost and wouldn’t have sold him anything until he produced dollars. (Which would have been embarrassing in front of that TV camera!) So he *lied* and said they *were* dollars.
Why did the state lie? Why did the state use coercion to confiscate gold? Why did the state back dollars with gold, but then ceased their promise to redeem dollars in gold in 1971?
Your claim boils down to “But if von Nothaus can’t commit fraud he can’t compete “” he couldn’t even have bought that sandwich!”
Yup, that’s true. Too damn bad. Tell him to get a better product.
What he was using IS a better product. But he was charged as a terrorist. That is proof the US state does not want competition in money.
20. May 2012 at 03:52
Major Freedom,
If “logical statement” was unambigious and had a very standard use, then eyes-rolling would be justified. However, there is no such unambigious standard use, so the eyes-rolling is unwarranted.
“If then statement are not necessarily empirical.”
Analytic a priori and synthetic a priori if-then statements aren’t empirical. However, the former are tautologous and the latter are very abstract e.g. “Red is more like pink than like green”.
“It follows from the deduced law of declining law of marginal utility, among other deduced laws.”
So you’re saying that it follows from the law of declining law of marginal utility that an increasing money supply is a necessary condition of increasing economic activity?
Why couldn’t money be an inferior good i.e. the demand for money falls as substitutes become affordable?
“I can say that square circles will not be discovered tomorrow, and yet my statement is not empirical, it is logical.”
Sure, maths isn’t empirical. However, unless one is willing to defend the claim that economics is a kind of mathematics, it doesn’t follow that interesting economic statements aren’t empirical.
“I said GIVEN the fact that the master builder is acting on the belief that he has 50,000 bricks, his plan for the house cannot be completed. Whether he consciously realizes it or not is actually irrelevant.”
When exactly did you say that? The original statement under contention was-
“If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error.”
– which is quite different from saying that, if there aren’t the resources to complete a project, then that project won’t be completed.
“If P then Q is not a prediction. For example, the proposition “If A is a right triangle, then the Pythagorean theorem holds for A” is not a prediction subject to testing. It is always true.”
The proposition is incomplete, because the fact that the Pythagorean theorem holds for all right-angled triangles needs to be stated. Now, one can make the proposition into an axiom, but then it is no longer open to argument; I assume that Austrian School economics is not being claimed to be axiomatic, otherwise it is not open to argument.
“It’s not a fake marketing gimmick.”
Of course not.
“No, Mises certainly did not agree.”
That raises a problem, because Hayek said of Mises’s response to his article-
“[He] took my critique silently and even approved the article as if he had not been aware that it was a criticism of his own views. I cannot explain this.”
“False. The presence of non-constancy in human action does not at all preclude us from being able to use thymology. Thymology is historical.”
And, in their role as thymologists, Austrian School economists make empirical predictions about human action.
20. May 2012 at 12:18
The optimist in me wonders whether there will be (the need for) an economics profession in 3012. The pessimist makes me wonder whether infact the planet will be run by apes, with just a heavily bearded Charlton Heston running around causing havoc.
20. May 2012 at 14:53
W. Peden:
If “logical statement” was unambigious and had a very standard use, then eyes-rolling would be justified. However, there is no such unambigious standard use, so the eyes-rolling is unwarranted.
You are clearly taking your own inability to identify and separate logical statements from empirical statements, and trying to blame me for it by calling my statements “ambiguous.”
I don’t know how in the word you can say that the statement “A house that requires 50,000 bricks cannot be completed with only 40,000 bricks” is somehow empirical in nature and has to be tested.
“If then statement are not necessarily empirical.”
Analytic a priori and synthetic a priori if-then statements aren’t empirical. However, the former are tautologous and the latter are very abstract e.g. “Red is more like pink than like green”.
Of course they’re tautologies, but that doesn’t mean they are not useful. For example, the Pythagorean theorem is contained in, and implied by, what we know right triangles to be. It is a tautology because the concept of a right triangle contains the analytic concept of the Pythagorean theorem. However, I do not think it would be correct to dismiss the Pythagorean theorem as a useless tautology that doesn’t expand our knowledge of the world. For it doesn’t immediately come to our minds as a given fact. We have to learn about it.
The same goes for economic statements. Yes, they’re all tautologies, in the sense that they are all contained in, and implied by, human action. They also expand our knowledge. None of them immediately comes to our minds as given facts. We have to learn about them too. I mean, just look how long it took for the tautology called “the law of marginal utility”, which is implied and contained in the concept of human action, to be learned by enough people. Some people literally killed other people because they did not know it and didn’t know how to deal with its implications any other way.
The entire economics edifice is one giant tautology of human action, but I will not say that learning all of the tautologies doesn’t expand my knowledge over the world. They do. In fact they are perhaps some of the most profound and enlightening knowledge I have, and could ever have.
“It follows from the deduced law of declining law of marginal utility, among other deduced laws.”
So you’re saying that it follows from the law of declining law of marginal utility that an increasing money supply is a necessary condition of increasing economic activity?
No. I am not saying that. Where did you get that from what I have said? I said an accelerating money supply growth is a necessary condition of inflation where the inflation inducers seek to achieve constant aggregate money spending growth via credit expansion.
Why couldn’t money be an inferior good i.e. the demand for money falls as substitutes become affordable?
There is no substitute for money. One money can only be abandoned, in favor of another money, or no money at all and thus barter. Money is a singular concept that means the universally accepted medium of exchange. If something other than money is sought, then we’re no longer talking about a monetary order, but something like a flight into real values, or reversion to barter.
“I can say that square circles will not be discovered tomorrow, and yet my statement is not empirical, it is logical.”
Sure, maths isn’t empirical. However, unless one is willing to defend the claim that economics is a kind of mathematics, it doesn’t follow that interesting economic statements aren’t empirical.
Good, because I do defend the claim that economics is a kind of mathematics. It is the logic of action.
“I said GIVEN the fact that the master builder is acting on the belief that he has 50,000 bricks, his plan for the house cannot be completed. Whether he consciously realizes it or not is actually irrelevant.”
When exactly did you say that? The original statement under contention was-
“If you’re building a house that requires 50,000 bricks and you only have 40,000, you’re eventually going to realize your error.”
Well I guess technically you’re right, because there is a difference between something happening, and people being aware of that something happening. Since it is POSSIBLE for that to happen, the statement under contention is indeed empirical, and not logical.
The connection of the statement under contention to the boom bust cycle is that historically, it just so happened that people have ALWAYS realized they made mistakes, so the logical statement of “you can’t complete such a project” and the empirical statement “you’ll realize your error”, have always occurred together. That’s why I was sloppy in my terminology.
“If P then Q is not a prediction. For example, the proposition “If A is a right triangle, then the Pythagorean theorem holds for A” is not a prediction subject to testing. It is always true.”
The proposition is incomplete, because the fact that the Pythagorean theorem holds for all right-angled triangles needs to be stated.
Precisely, but it’s still a logically deduced statement.
Now, one can make the proposition into an axiom, but then it is no longer open to argument; I assume that Austrian School economics is not being claimed to be axiomatic, otherwise it is not open to argument.
The school is not axiomatic. Just the human action proposition is taken as an axiom, because any attempt to refute it, requires and presupposes action. It is therefore an “irrefutable” proposition.
“No, Mises certainly did not agree.”
That raises a problem, because Hayek said of Mises’s response to his article-
“[He] took my critique silently and even approved the article as if he had not been aware that it was a criticism of his own views. I cannot explain this.”
OK, he was silent.
“False. The presence of non-constancy in human action does not at all preclude us from being able to use thymology. Thymology is historical.”
And, in their role as thymologists, Austrian School economists make empirical predictions about human action.
Well OK, but predictions of the form “I predict that given there aren’t enough bricks to complete the house, the house builder will eventually realize he doesn’t have enough bricks.”
21. May 2012 at 04:52
K, You didn’t address my example of 2006 at all. Why does monetary policy have an effect in 2006? After all the current setting of the fed funds rate doesn’t matter, what matters is the future expected path.
You also said:
“If they had bought T-bills instead there would have been no impact.”
Not true, as liquidity traps don’t last forever. Thus buying T-bills could send a signal of a more expansionary future policy. Or it may not. It’s up to the Fed to decide what sort of signals it wants to sent.
Again, NK theory says the current mechanical aspects of policy are NEVER important. The zero bound is nothing special in that regard.
If the Fed raises rates today but is expected to cut them sharply over the next few months, then today’s increase won’t matter. So interest rate control when rates are positive is just as ineffective as trading cash for T-bills in your view, because you deny the ability of the Fed to change future expectations of policy.
You said;
“Obviously not very many.”
Try “zero.”
The only instrument the Fed needs is swapping zero interest cash for T-securities as needed to keep NGDP futures on target. Nothing else is required. If it were, have them either purchase other assets, or raise the NGDP target path, whichever they prefer.
MF, Read it again. He clearly says it’s a mistake to use NGDP to target employment. He’s right. Hayek favored targeting NGDP, even his supporters agree on that point.
21. May 2012 at 18:02
MF, Read it again. He clearly says it’s a mistake to use NGDP to target employment. He’s right. Hayek favored targeting NGDP, even his supporters agree on that point.
You’re missing the crucial part of the passage. You’re not reading it correctly. Hayek is saying it would be “very harmful” to “maintain total money expenditure at an appropriate level.” It is actually irrelevant as to WHY the central bank would end up trying to maintain total money expenditures at an appropriate level. During Hayek’s time, it was for employment reasons. But in actuality, it could be employment, it could be output, it could be price stability, it could be anything. The effects of targeting aggregate spending doesn’t distinguish between employment reasons versus other reasons.
If your interpretation of Hayek’s argument were correct, then we’d have to believe that Hayek believed maintaining aggregate spending at an appropriate level for the sake of employment is very harmful, but maintaining aggregate spending at an appropriate level for the sake of output, or some other variable, is somehow not very harmful, in fact desirable! That makes no sense! It would be like saying murder for the sake of pleasure is very harmful, but murder for the sake of curiosity is not.
It’s the “maintaining of total expenditures at an appropriate level” that is “very harmful.” Not the fact that it is being done for the sake of some variable over another.
The problem with Hayek is that he was a very muddled thinker and often made contradictory statements. Just read young Hayek versus old Hayek if you doubt this.
21. May 2012 at 18:31
The following imaginary conversation is what market monetarists must believe is possible regarding Hayek:
Keynesian: “The central bank should inflate to bring about a maintaining of total expenditures at an appropriate level of 5% growth, for the sake of maximizing employment.”
Hayek: “That would be very harmful.”
Market Monetarist: “How about this, Hayek: The central bank should inflate to bring about a maintaining of total expenditures at an appropriate level of 5% growth, for the sake of X.”
Hayek: “Wonderful! Where have you market monetarists been all my life?! Count me in!”
Hilarious.
21. May 2012 at 19:09
Actually, MF, it’s more like this:
Keynesian: The government and central bank should keep inflating spending to raise effective demand and pursue full employment, saving capitalism from itself.
Hayek: You central planners will take us down the road to serfdom!!!
MM: The central bank should maintain total spending on a 5% growth path, in order to minimize monetary distortions to the real economy.
Hayek: You central planners will take us down the road to serfdom!!!
21. May 2012 at 19:36
Saturos:
I liked mine better. Yours is just nonsense top to bottom.
22. May 2012 at 09:05
MF, I don’t think I’ve ever come across someone as dense as you. Let me explain in plain English what Hayek is saying. He’s saying don’t try to adjust NGDP up and down to target jobs, rather just allow NGDP to grow at a constant rate.
Hayek favored a monetary policy of targeting NGDP. Everyone in the world, even his supporters, agree on that. Why do you insist on being so dense?
And what’s this nonsense about “my interpretation?” Hayek said he favored NGDP targeting. In plain English. Might I suggest you go and read the articles where he said that, instead of uselessly quoting articles where he didn’t endorse NGDP targeting.
22. May 2012 at 12:38
ssumner:
Either English is your second language, or you just so blinded by your own ideology that you are unable to grasp what Hayek said.
No, Hayek did not say “don’t adjust NGDP up and down to target jobs.” He said “don’t maintain NGDP at an appropriate level.” The key words are “maintain” and “level.” That should have been an introductory clue as to Hayek’s actual position. Hayek was criticizing acting on the belief of there being a direct correlation between employment and aggregate spending, and said “don’t maintain aggregate spending” at a particular level because it would be very harmful.
He was attacking the acting upon a constant or constantly growing NGDP level, not a supposedly changing NGDP level in accordance with employment changes.
Hayek’s supporters are irrelevant. I am not interested in third party interpretations as flawed as yours based on quotes taken out of context.
Hayek did NOT favor NGDP targeting. Hayek favored COMPETING CURRENCIES, and one has to be unbelievably dense to believe that this means he somehow favored a monopoly central bank controlled NGDP targeting scheme.
White for example claimed that Hayek favored NGDP targeting in 1935, but he quotes Hayek out of context many times, and fails to understand is that Hayek wasn’t advocating for it, he was only explaining it in a descriptive sense.
For example, White quotes Hayek as saying:
“Whether we think that the ideal would be a more or less constant volume of the monetary circulation, or whether we think that this volume should gradually increase at a fairly constant rate asproductivity increases, the problem of how to prevent the credit structure in any country from running away in either direction remains the same.”
White interprets this as a “strong advocacy” of NGDP targeting. Come again? In the source he quoted, in the very next paragraph, which he left out, Hayek wrote:
“Here my aim has merely been to show that whatever our views about the desirable behavior of the total quantity of money, they can never legitimately be applied to the situation of a single country which is part of an international economic system, and that any attempt to do so is likely in the long run and for the world as a whole to be an additional source of instability. This means of course that a really rational monetary policy could be carried out only by an international monetary authority, or at any rate by the closest cooperation of the national authorities and with the common aim of making the circulation of each country behave as nearly as possible as if it were part of an intelligently regulated international system.
“But I think it also means that so long as an effective international monetary authority remains a utopian dream, any mechanical principle (such as the gold standard) which at least secures some conformity of monetary changes in the national area to what would happen under a truly international monetary system is far preferable to numerous independent and independently regulated national currencies.”
In other words, Hayek would have said that your NGDP targeting plan for the US would be a “source of instability”, because the US is part of the international market. If NGDP in the US fell, Hayek would have SUPPORTED it if it was due to money being taken out of the US and spent elsewhere. The ONLY possible way it would make sense for aggregate spending to be “maintained” by a central bank, to Hayek, would be on a global scale, under a global central bank that targets global NGDP. He would have said your solution for the US to have NGDP targeting, would create worldwide economic instability.
So don’t tell me he favored your policy. He didn’t. And if you had bothered to actually look up what Hayek wrote, instead of relying on your fellow misguided colleagues based on faith, you have known this too.
Unbelievable.
23. May 2012 at 06:11
MR, The gold standard collapsed long ago, under fiat money Hayek favored stable nominal income. I’ve read Hayek and seen him make that argument numerous times.
23. May 2012 at 08:07
ssumner:
MR, The gold standard collapsed long ago, under fiat money Hayek favored stable nominal income.
I favor free market monetary competition, not a gold standard imposed on everyone by the state. Telling me that the gold standard collapsed is irrelevant.
We’re talking about what Hayek advocated, what he preferred. Don’t try to derail this by saying we have fiat money now so deal with it. If I wanted that, I’d talk to an MMTer.
Fiat money collapsed MANY times throughout the ages, and there is no reason to expect this latest round to last forever either. Fiat money comes at goes. Gold has always been the money of choice for thousands of years when people are free to make their own decisions, rather than being forced by the state to use this or that commodity.
Hayek did NOT favor stable income at the national level, which is what you’re advocating. He clearly said targeting aggregate spending at the national level would generate worldwide economic instability. He said a “rational” central banking policy would only be an international central bank, issuing an international fiat currency, and targeting international NGDP. But, BUT, he called such a thing Utopian, and so, in lieu of that, he favored a GOLD STANDARD:
“This means of course that a really rational monetary policy could be carried out only by an international monetary authority, or at any rate by the closest cooperation of the national authorities and with the common aim of making the circulation of each country behave as nearly as possible as if it were part of an intelligently regulated international system.
“But I think it also means that so long as an effective international monetary authority remains a utopian dream, any mechanical principle (such as the gold standard) which at least secures some conformity of monetary changes in the national area to what would happen under a truly international monetary system is far preferable to numerous independent and independently regulated national currencies.”
That bolded part, Hayek is crystal clear that he would have said the Fed should NOT inflate if US NGDP fell while, say, China’s NGDP rose. If money left the US, and nominal spending decreased in the US, and entered other countries and increased spending there, Hayek would have said that the Fed should refrain from inflating, in order to match as closely as possible to an international NGDP targeting regime, so as to avoid international instability.
So all your calls for the US to target NGDP, regardless of whether or not investors take their money out of the US and put it in some other country, Hayek was AGAINST that.
I’ve read Hayek and seen him make that argument numerous times.
I don’t believe you. Prove it.
I am the only one providing actual quotes from Hayek. You’re expecting me to take what you say based on faith, as if your word about what Hayek said is better than Hayek’s own words.
1. August 2013 at 05:47
[…] is the “Sumner critique.” This critique named after Scott Sumner has been worded many different ways, but I would state it like […]
6. January 2015 at 04:08
[…] I want to support NGDPLT: it is probably superior to price level or inflation targeting anyway, because of the incomplete markets issue. But unless there is a solution to this critique that I am missing, I am not sure that NGDP targeting is a sustainable policy for the long term, let alone the end of monetary history. […]
15. April 2017 at 04:32
[…] http://www.themoneyillusion.com/?p=14433 […]