Bob Murphy: Where Monetarism Goes Wrong
Вставка
- Опубліковано 11 тра 2017
- The great Austrian economist Friedrich Hayek celebrated a birthday earlier this week, while the prominent monetarist (and Fed historian) Allan Meltzer passed away the same day. Joining us to discuss monetarism is our friend Bob Murphy, who lays out the central tenets of the Chicago school and its godfather Milton Friedman. At its heart, Bob explains, monetarism is a cousin of Keynesianism-one advocates fiscal stimulus, the other monetary stimulus. Both go astray when it comes to money, and both fail to see the trees in the macro forest. Bob explains why in this great discussion of the differences between the Austrian and Chicago schools.
Friedman was my gateway drug to Austrian Economics.
Milton Friedman was my favourite drug
I brainwashed myself in my first years of Econ degree to love Milton Friedman's thoughts and oration. Now I'm a centrist by politics and believe him in some things and others in others
Bob looks like a Fed Chairman with the beard
They are both in a race to Krugmanize themselves, and whoever manages to cross the critical "Fed Chairman"-threshold first walks into that monument to futurism building of theirs and blows it from the inside while the _Mission Impossible_ theme plays.
Guess I am 5 years late, but this was a very informative overview!
Uncle BOB is BACK! THANK YOU Jeff and Mises Media. PS: my uncle was Morris Philipson, Chair of the U Chicago Press for 32 years... U Chicago and Hillsdale IMHO are the two best schools in the USA today... I went to Reed 1978-82... my econ text was Samuelson... but I read Hobbes/Locke/Smith/Hume/Berkeley/Rousseau/Bastiat/Hegel/Kant/Bentham/Marx/Mill/Dostoevsky et alia in my Phil classes...
What is Bob's answer to these quotes from Hayek late in his life:
However, in 1975, Hayek admitted that he made a mistake in the 1930s in not opposing the Central Bank's deflationary policy and stated the reason why he had been ambivalent: "At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy.[40] In 1978, he made it clear that he agreed with the point of view of the Monetarists, saying, "I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy", and that he was as opposed to deflation as he was to inflation.[41]
In other words, late in his life, Hayek agreed that the Fed made a mistake in allowing the money supply to collapse (due primarily to the bankruptcy of banks in a fractional reserve system) was a mistake. Why is it so problematic for Austrians to accept this?
If you save a pile of bricks, in insufficient quantity to build a house, but then get yourself inebriated, causing you to misjudge their amount, as to deem it sufficient, and then embark upon building the house, it does not matter all that much how you deal with it, when, _later on,_ the return to sobriety or extinction of unused bricks causes you to notice that it is not possible to finish the project, thus forcing your to dismantle the partially built house in an effort to save some bricks, but nonetheless already having wasted all the labor and time (and the unrecoverable bricks).
It is a consequence of the limited nature of resources (bricks) and your error in judgement (drunkenness) that your project is un-finish-able and you now must undo the partial house (as it would be an even greater waste, and thus wholly irrational, not to do so). It is important to note that you actually dug yourself into that hole during the happy-times when the house was being built, with all the whistling and gung-ho attitude. How you handle the dismantling of the partial building can be subject to some optimization but is of secondary importance-at least when discussing how to _not_ get into this situation in the first place.
When a central bank or government arrogates to itself monopoly and absolute control over the most important industry in the economy-money-it distorts market signals necessary for economic calculation, and causes widespread and systematic malinvestment. Thus, it is during the "roaring" years of the boom phase that society is digging itself into the hole it will have to pay dearly in order to get out of, after the bust, in the contraction phase. All the accrued malinvestment is not sustainable, destroys wealth, and would not have accumulated to such a large extent had it not been propped up by the government-caused market distortions. (Not because companies would not make errors in calculation or prediction, but because those who did would clearly and soon incur losses and lose control of their resources, while those who did not would make gains and expand their operations, in a continual self-correction mechanism, causing the control of resources to go to the hands of those most apt in productively using them-a process which is prevented from operating by the distortion created by inflation and easy money, in a similar manner that the influx of new investor money, while it lasts, in a Ponzi scheme, prevents the hopelessness of the whole enterprise from being apparent.)
So, now, all the wealth destroying malinvestment thus far accumulated-to a point which defeats our ability to ignore it- _must_ be undone, so that whatever resources can still be salvaged, are recouped.
Because it is an inescapable aspect of reality and the physical nature of this universe that the factors of production (resources) are always scarce, there is no running away from the fact that capital-consuming malinvestment of resources will create a bill that, at some point in the future, _must_ be footed-as physical reality cannot be cheated. And while it is true that varying amounts of fat to be burned in the process might yield different possible lengths of spurious economic "expansion," it can _never_ go on forever: there is only so much steel, concrete, fuel, labor, and so on, in the world-at some point, no matter how strong the distortion in market signals caused by the monetary intervention, we run of actual "bricks" to complete the house and we can't support the roof with "optimism" and "enthusiasm."
At this point, and because of all that, discussion on what type of beverage might suit itself best to prolong your miscounting inebriation while you prepare to embark on your third drinking binge might have some truth to its particular points (tequila is definitely better than vodka) but is of secondary importance-and will never yield the most important admonition of all: that we should not drink.
true austrian economists should oppose fed increasing money supply by fractional reserve banking system in the first place.
So, in your view, if the money supply collapses because of the bankruptcy of many financial institutions, along with the increase in the demand for money that such financial panic would cause, this is a "market" process with which the FED should not have been involved?
If this is what Hayek meant, then why the reference to "a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy"?
100% reserve banking ... there's no need for fed... whoever creates money out of thin air goes to jail because he commits fraud by doing it
Dude, Robert....the beard works for you, keep it.
I'm a monertist, but I think that the two schools are highly valuable. IMO, both are needed to handle the current world.
Love the beard! Bob, is it then really even necessary to teach "macro" as a course. The two courses are basically micro and macro. What should macro then be?
The sad thing is that the whole of economic theory can be taught in a few weeks... Everything else would just be addressing corner cases or showing historical examples. A more direct answer is that "macro" economics is an artificial division and should not be taught as a separate discipline from "micro" economics.
Uruz2012 that's how I taught it. Macro I taught as definitions, AD, AS, GDP (but contrasted against Rothbard's addiction and subtraction), AND theory comparison: Keynes, Friedman, neo-classical, and Austrian (Garrison's short book gives a great graphic comparing Keynes to Hayek). The biggest problem is students think that economics has one answer, math/science like, instead of right or wrong thinking.
The Bearded Wonder. Never stop never shaving.
AND MY AXE!
Sorry Bob, had to say it because of the beard.
Everyone of them is so jealous of Friedman. Every. One.
(っ◔◡◔)っ ❤ Bob Murphy
If only the wise could vote!
Can anyone answer me why we didn't see any inflation after the QEs?
We are seeing asset inflation in the form of rising stock markets and rel estate values. We saw a commodity boom that peaked in 2011/2012. We see bubbles in debt instruments such as bonds, student loans and auto loans. Why we havent seen a 1974 style inflation surge is probably because banks have kept most of their new money on deposit at the Fed earning 0.25%. As interest rates normalize we will see that money hitting Main St and then you probably will see consumer goods inflation.
QE was money creation by buying up assets central banks normally wouldn't buy. It was initiated specifically to prop up the prices of those asset classes, that were in danger to fall without a floor in sight. It helped the financial institutions in two ways: a) they got rid of many of their risky assets and b) the central banks' committment meant that whatever they still held was worth more than it would have been.
So there's a narrow "inflationary" effect on the price of those assets, that comes directly from the newly created demand (and prevents them from falling, more than makes them rise in price). Additionally, it had a traditional expansive monetary policy effect (and not just QE, but the regular open market operations, etc. too). And again, we don't really see it as inflation because we're not looking at a ceteris paribus change. Had it not been for this policy, prices (for goods and assets) across the board would have fallen (and subsequently readjusted) in a deflationary recession.
Instead, such is the Austrian viewpoint, we "cemented in" a very shaky capital structure. A (real) recession is a painful time of reallignment and marks the beginning of a new sustainable growth path. What central banks did by "managing" and softening the effects of recessions is to increase systematic uncertainty of the future. All the new money is not being used to invest (since firms don't know what to invest in and are across the board sceptical about the future). Instead, it's just sitting in accounts of the Fed, the big banks or other companies and ensures liquidity. This liquidity is demanded because everyone fears that large players (especially banks and other FIs) might be in danger of collapse.
The thing is I understand all the asset inflation but I fear that we won't see any 'real' inflation. The FED will find a way to divide the inflation in more years (+1% 5 years, than 5 % in a single year). This way orthodox austrian theory will be with it's back against the wall once again.
Or, TL:DR: It's not being used to invest and consume more, but rather to give liquidity and therefore security. Firms and banks sense great uncertainty and are skeptical about the prospects of the future. So it's not circulating in the consumer economy. However, it does create "inflation" in so far as that without expansionary monetary policy, we'd surely see a deflationary shock.
Ok then, should we expect big crash in the following years? Seems like that's the natural (austrain) next stage of the cycle, but FED will manage somehow to delay that yet again or maybe more precise would be mask it (as I've said in previous comment) in few years time. Thoughts?
Love the beard, Bob, but you are not "dumbing it down" very well. :)
Will Austrian economics always remain a bauble , jewel or curiosity that remains in a glass case never to be used in a living breathing political economy ?
The implicit assumption in this kind of questioning betrays a fundamental misunderstanding of Austrian theory.
The _most_ important conclusion drawn from the works in the Austria School is that what we observe as economic order-counter-intuitive as it may be-is an _emergent_ phenomenon, that is, although _caused_ by human action, it is not _planned_ nor _engineered_ in any way, and thus cannot be tweaked, optimized, or re-created by any top-level approach (that is, centrally controlled), because of fundamental limitations in our ability to gather and process into knowledge what would be the required information.
_As such,_ it makes no sense whatever to think of a society or country _using_ Austrian economics to bolster/boost/plan/direct their economy-this notion itself is conceptually wrong.
Economic order just happens whenever you have civilization, private property rights, and freedom to trade. This order is not planned and _cannot_ be planned (and also not increased with centralization of power). The _one_ big piece of advice unavoidably drawn from Austrian theory is: "Government, leave people alone to keep and use their private property as they see fit, in voluntary transactions, within the confines of natural law, and the resulting economic growth will be greater than what you will achieve with any plans you might conjure." (Thus, in this very narrow and limited sense, yes, Austrian theory can be _used_ to _run_ an economy: that is, by informing governments that it's best to leave it to the people. But in all other common meanings of _be used,_ that is, be used as a technical method to decide ahead of time _what_ is best to produce and in what quantities, no, it can never be used in this way.)
As a final addendum, it is worthy of note that Austrian economic theory, due to its epistemological nature, that is, by being apodictic, is _not_ a natural science, and does _not_ need any kind of validation or verification against empirical data-and indeed it does not even make any sense to think of it this way: just as it would not make sense to go hunting for right triangles to measure in order to "test" Pythagoras' theorem. On top of that, it also does not need validation in the form of being used to "engineer" or "run" economies (and, to the contrary, it shows this cannot be done). Because of all that, it is _already_ not merely a "curiosity" but a fantastic achievement of human reason, on par with feats as impressive as the discovery of infinitesimal calculus, or the theory of relativity.
As a general rule of thumb it seems like most professional economists don’t really take it very seriously. Even those with Austrian social opinions begrudgingly follow monetary theory and just confabulate why they’re not monetarists. It’s like someone who doesn’t want to believe in Newtonian physics because of Einstein’s brilliance pretending they’re not using traditional mechanics.
Bob with a beard kind of looks like one of the goblins that work at Gringotts in Harry Potter.
Baller beard
Just don't choose TTU for financial services... terrible communists.
Bullshit. Demand for money is not limited. Demand for money is unlimited if there is no interest (and/or no time limit for repayment).
theres a freakin UFO or something moving around out the window behind Bob's left shoulder
lol Bob's got a little shoulder angel
Well, monetarism is only proven to work macroeconomic theory. Austrian school is utopian, Keynesian economics are misproven