Home > Economics - General > The times they are a-changing

The times they are a-changing

January 4th, 2010

Over at what was the Austrian economists blog, Peter Boettke announces a change of name, saying

As an experiment, over the past six months we have been tracking the use of the term Austrian economics in the news and in the blogosphere. Less systematically, we have also been listening carefully to the use of the term among fellow professional economists and what they think the label means. The results do not fit our intention. Google alert, for example, inevitably points to financial advice or libertarian politics, rarely to the research paradigm of F. A. Hayek, never to the scholarship of Israel Kirzner. Mises is often mentioned, but Mises the ideological symbol, not Mises the analytical economist. The “Austrian” theory of the business cycle is mentioned, but only in relationship to anti-fed politics and hard money advocacy, and never as an ongoing research program among professional economists.

These trends are not recent, but have been constant throughout our respective careers. We have always been among those who attempted to offer resistance to this use of the term. It has become evident to us that our efforts have been futile. Rather than resist the pure ideological identification, we are choosing to devote our efforts elsewhere. The name Austrian economics has been lost as a focal point for a tradition of economic scholarship, and is now a focal point for something else. We have to let it go.

This is pretty much the view I expressed here

although the Austrian School was at the forefront of business cycle theory in the 1920s, it hasn’t developed in any positive way since then. The central idea of the credit cycle is an important one, particularly as it applies to the business cycle in the presence of a largely unregulated financial system. But the Austrians balked at the interventionist implications of their own position, and failed to engage seriously with Keynesian ideas.

The result (like orthodox Marxism) is a research program that was active and progressive a century or so ago but has now become an ossified dogma. Like all such dogmatic orthodoxies, it provides believers with the illusion of a complete explanation but cease to respond in a progressive way to empirical violations of its predictions or to theoretical objections.

Meanwhile, Rafe Champion points to this post suggesting that market liberals (the author prefers “classical liberals”) should abandon the use of the term “capitalism”.

It seems pretty clear that these developments are related to the global financial crisis. The adoption as a badge of pride by Forbes magazine and others of the previously pejorative term “capitalism” was one of the most extreme manifestations of market liberal triumphalism in the 1990s. But, in the wake of the crisis, “capitalism” is a much more problematic term. It works well enough as a generic term covering all advanced economies in which private capital plays a leading role, but one that is, as we have seen, ultimately dependent on government action for sustainability. We can then say that the relatively unregulated, finance-dominated form of capitalism that has held sway for the last 30 years is being supplanted by a different form in which the role of government as ultimate risk manager is more direct and obvious. But this has little rhetorical value for market liberals.

The story with Austrian economics is more complex. On the one hand, the crisis has increased the appeal of Austrian views of the business cycle, relative to other rightwing views like New Classical macro and Real Business Cycle theory. On the other hand, the label has been increasingly associated with gold bugs, critics of fractional reserve banking, neo-Confederates and general fringeness.

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  1. Freelander
    January 4th, 2010 at 22:42 | #1

    Another name they could try is “Archaic economic rhetoric”.

    I suppose this might be too broad, as so many others than Austrians fall under this rubric. As JQ points out, it “…has now become an ossified dogma”. The only contributions Austrians seem to make nowadays are new variations on old rhetoric, sans any new ideas, and the ultimate flourish – the name change.

    I don’t think this rebranding will sell any better; the problem is the product stinks.

  2. gerard
    January 5th, 2010 at 06:47 | #2

    The “Austrian” school should simply change its name to the “Randian” school, or even better the “Teabagger” school, as this is what it has degenerated into.

    That said, the role of the bailout-era Federal Reserve is a legitimate question, and branding all those who raise these questions as “fringe” is doing a great disservice. The reason that this subject provides such great fodder for neo-Confederate gold-bugs has a lot to do with the failure of mainstream economics to properly examine and explain the workings of the modern monetary system (exhibit A being the marginalization of post-Keynesian theories of endogenous money creation). Who should be surprised when a global financial crisis upends the world’s monetary system that people should distrust the zombie orthodoxy and look for something different – the problem is that the most readily available alternative are the gold-bug Paulites. Mainstream economists cannot simply point and laugh and call these people delusional conspiracy theorists – in the wake of the profound failure of the mainstream consensus they ought to be engaging the questions seriously and building credible alternatives.

  3. TerjeP (say Tay-a)
    January 5th, 2010 at 08:23 | #3

    My first encounter with people that called their economic thinking “Austrian” was in the context of a discussion about fractional reserve banking (which they opposed). Due to this disagreement it took me a long while to warm to the Austrians. Those that oppose FRB I generally refer to as Rothbardians. The Rothbardians tend to be wrong on the gold standard also, seemingly believing that gold has something called intrinsic value, which seems much more wolly than even the labour theory of value. I think the bad name that gold standard advocates get is mainly due to wolly headed Rothbardians that unfortunately represent the majority amoungst gold bugs. This is a pity because Adam Smith, Karl Marx and Keynes were all gold standard advocates. And I think a well designed gold standard has a lot to offer even today.

    When discussing inflation with an Austrian beware of polyseme. The use the term in a subtly different way to the mainstream an this seems to be the cause of many needless semantic arguments.

  4. Ernestine Gross
    January 5th, 2010 at 09:04 | #4

    I should fess up on this one. I am amused to see verbal theoreticians running for cover by means of searching for new gurus and new words. One is asked to take seriously the idea that both, socialism and capitalism are loaded words that have been misused but the ‘fall of socialism’ required an observable system change while the ‘fall of capitalism’ requires a new word.

  5. James
    January 5th, 2010 at 10:20 | #5

    TerjeP (say Tay-a) :Adam Smith, Karl Marx and Keynes were all gold standard advocates.

    What on earth are you smoking?

    Smith was vehemently opposed to the Mercantilists who measured national wealth in gold and silver; a principle theme of The Wealth of Nations was that the true measure of wealth is productive ability and living standards, not gold stocks. Marx analysed the gold standard because it was the form of money at the time, but his preferred form of money under socialism was a form of labour-bank certificate (see Critique of the Gotha Program). As for Keynes! “In truth, the gold standard is already a barbarous relic” Monetary Reform (1924); “Never in history was there a method devised of such efficacy for setting each country’s advantage at variance with its neighbours’ as the international gold (or, formerly, silver) standard.” General Theory of Employment, Interest and Money. Keynes was opposed to recklessly inflating or debasing the currency, but this is a very different position from advocating the gold standard.

  6. TerjeP (say Tay-a)
    January 5th, 2010 at 10:28 | #6

    We’re stuck with the word capitalism. Again polysemy is the problem.

  7. TerjeP (say Tay-a)
    January 5th, 2010 at 10:44 | #7

    James – opposition to mercantilism has nothing to do with monetary policy. The Keynes quote from the 1920s “… the gold standard is already a barbarous relic” was quite accurate at the time. The gold standard had been widely abandoned in Europe during WWI, most significantly in Great Britian. It was not restored in Britian until two years after the Keynes quote and the restoration was botched in any case. Keynes worked hard to re-establish an international monetary system and whilst he didn’t get everything he wanted he was a supporter of the Bretton Woods arrangement.

  8. iain
    January 5th, 2010 at 11:48 | #8

    Terje, what makes you state that Marx advocated for a gold standard?

  9. Alice
    January 5th, 2010 at 15:38 | #9

    I must admit – after the GFC – I would be sympathetic to the idea of enforcing banks to keep more reserves – by raising the fraction that cannot be lent out – as banks like Goldman Sachs have a long and dubious history of inventing their own creative speculative investments, selling them to the public or other banks, diluting the instruments and crashing financial markets. If they couldnt lend so much, they are restrained and must cover losses from their own reserves…rather than tax payer bailouts. How did that help reduce the incentive for risky speculative investments in financial markets?. Goldman is back larger than life.

  10. Rationalist
    January 5th, 2010 at 15:44 | #10

    At least the Austrians advocate cutting my taxes.

  11. Alice
    January 5th, 2010 at 16:50 | #11

    @Rationalist
    Thats all you care about Ratio? You and others like you?

  12. Sea-bass
    January 5th, 2010 at 17:09 | #12

    “But the Austrians balked at the interventionist implications of their own position, and failed to engage seriously with Keynesian ideas.”

    You’ve said that several times now, and it still fails to make any sense. I’ve read quite a lot of literature by “Austrian” economists (although admittedly I have never read Rothbard), and am yet to find any of these interventionist implications. My guess is that you don’t know what you are talking about and that you are basing your criticism on Paul Krugman’s criticism.

    Nonetheless, there do seem to be a lot of self-labelled “Austrians” who reject empiricism, mathematics and embrace goldbug-ism, even when the actual position taken by more well-researched Austrian economists is much more nuanced.

    Then again, there are plenty of self-labelled Keynesians out there who have a very poor understanding of the implications of Keynesian economics (and a woefully poor understanding of economic thought prior to Keynes, as witnessed by the standard textbook definition of Say’s Law/the Law of Markets that students learn). They seem to latch onto it because of the pro-government, left-wing agenda that it seems to recommend, despite Keynes’ own protestations that government spending should NEVER exceed 25% of a nation’s income.

    And as for Marxists, well… Most Marxists I know have never read Das Kapital, let’s put it that way.

  13. Alice
    January 5th, 2010 at 17:18 | #13

    @Sea-bass
    Maybe they latch on to Keynesianism because the theories of free marketism are failing us all so badly Sea Bass? Maybe Keynes was the best thing we had before the world ran away with the stupid idea that markets could cure themselves of their own ills.

  14. Alice
    January 5th, 2010 at 17:20 | #14

    @Sea-bass
    And it aint any left wing pro government agenda that causes people to katch back onto Keynesianism. Its because it actually works unlike asking the market to fix itself. My how you people ignore the obvious and then want to create an ideological war. There is no ideological war over the bleeding obvious. Its called people coming to their senses after being bombarded with right wing dogma for 3 decades.

  15. Sea-bass
    January 5th, 2010 at 17:21 | #15

    @TerjeP (say Tay-a)
    I think the definition of inflation that Austrians use (and I will drop the quotation marks) is much more in tune with the proper classical definition of inflation i.e. growth in the money supply, as opposed to a rise in the general price level. I must admit, I still find it extremely frustrating when people talk about the threat of deflation even as the money supply expands exponentially.

    The Austrian definition of savings and the interest rate are also a cause of major misunderstanding.

  16. Alice
    January 5th, 2010 at 17:26 | #16

    Ill point to the media ideological war Sea Bass 1) we have Miranda Devine accusing the movie Avatar of being a left wing conspiracy and today we have Piers Ackerman accusing wikipeadia founder Wales of being a left wing conspiracist.

    By the time you idiots are finished there wont be a right wing conspiracist on the planet.

    Its tedious, boring and a joke because no-one believes this crap anymore. You fools need a new enemy.

  17. Sea-bass
    January 5th, 2010 at 17:35 | #17

    @Alice
    Alice, one does not have to reject government intervention to reject Keynes. Even JS Mill recommended government intervention in the throes of a recession/depression, so as to stimulate idle capital. Even the Austrian economist W Ropke recommended an expansionary policy in times of a downturn. The difference was that the classical economists (and the Austrians agree here) is that wealth springs from the production of goods and services, not from consumption. They did not deny the importance of demand, but they realise that the production of goods enabled greater demand. The problem is that now we have government policies, while not Keynesian prima facie, encouraging needless consumption and discouraging healthy real savings.

    This is not necessarily an argument over whether an unregulated economy is optimal, nor whether government intervention is undesirable. What I am pointing out is that the very foundations upon which Keynesian thought is based are hopelessy flawed. Keynesians fail to understand the classical theory of interest and the difference between savings and hoarding. They believe the economy is just one amorphous blob that the government just has to dump more money into from time to time to keep it going.

  18. Sea-bass
    January 5th, 2010 at 17:38 | #18

    @Alice
    Oddly enough, a blogger at the Austrian website mises.org praised avatar for its anti-imperialist overtones and implicit support for property rights. “Great and libertarian” I think were the words they used to describe the film.

  19. Sea-bass
    January 5th, 2010 at 17:40 | #19

    @Alice
    Oh, and Jimmy Wales is an objectivist and fan of Ayn Rand. Whether that makes him part of left-wing conspiracy is not for me to say.

  20. Alice
    January 5th, 2010 at 18:16 | #20

    @Sea-bass
    Oh for goodness sake – Avatar is a feel good family movie as innocent as Mary Freaking Poppins…what depths do you people plumb in an attempt to keep your own ideological bias going?

    What are you going to do next? jail the director of Avatar? You idiots act like tragic thought police Sea Bass. Who put you in charge if entertainment because Avatar is a hell of a lot more fun than Miranda Devine, Piers Ackerman and you faithful but mindnumbingly obedient footsoldier troops..

    The blogger at the Austrian website was right – so was my 17 year old son who wouldnt know the difference between left and right (thank goodness he hasnt been exposed to the garbage that passes for reasoned political debate in this country) and loved Avatar!

    Jeez – there are some people with serious problems out there and the media pays them to dump their problems on us! Mad

  21. Alice
    January 5th, 2010 at 18:28 | #21

    @Sea-bass
    says”Alice, one does not have to reject government intervention to reject Keynes.”

    I reject neither.

  22. Alice
    January 5th, 2010 at 18:34 | #22

    @Sea-bass
    and this quote of yours Sea Bass is the most hopelessly flawed and simplistic and erroneous interpretation of Keynes I have ever heard…

    ” Keynesians fail to understand the classical theory of interest and the difference between savings and hoarding. They believe the economy is just one amorphous blob that the government just has to dump more money into from time to time to keep it going.”

    Please….spare me the naive view. If you had half the sense …at least apply to economists who have proved beyond doubt they dont have a clue…like Fama.

  23. Sea-bass
    January 5th, 2010 at 18:34 | #23

    @Alice
    Hey, I liked Avatar, did you even read my last post?… I just can’t help it that, being a thoughtful young man, I like to look for a deeper meaning to the film. Didn’t you ever read books in school, where the teacher would ask you to look for a deeper themes? Even Mary “Freaking” Poppins had a deeper meaning to it (parenthood, spending time with one’s children etc), and it taught me a lot about bank runs, even though I was probably about 7-8 when I saw it.

    You are also confusing right-wing conservatives with libertarians. I don’t know what Miranda Devine has to do with the Austrian school of economics – perhaps it is YOU is looking for a connection where none exists?

  24. Alice
    January 5th, 2010 at 18:40 | #24

    @Sea-bass
    Sea Bass – all i know is I open the paper for my daily read and there is Mirnada telling us Avatar is a left wing conspiracy. I open it a day or two later and we have Piers telling us Wikipedia is a left wing conspiracy.

    Is there anyone (any book, any movie, any person, any part of the internet, any public servant, any uni professor, any entertainment artist, any singer, any teacher, any rail station guard, any bus driver????) at all out there that isnt part of a left wing conspiracy in the Australian newspapers?

    Well – you can add me. I like Keynes. I must be a left wing conspiracist as well and hey guess what? I dont give a damn. Something about the other view is just all distorted and not quite right (definitely not right).

  25. Rationalist
    January 5th, 2010 at 19:34 | #25

    @Alice
    Yes.

  26. Ikonoclast
    January 5th, 2010 at 19:40 | #26

    “Every profession is a conspiracy against the public.”

    I’ve seen it cited as a quote from G.B. Shaw. I’ve seen it cited as a quote from Adam Smith. I would wager that a few ancient Greek and ancient Chinese thinkers wrote it in one form or another too. It’s a proposition I accept as broadly true without getting unduly paranoid about it.

    The corollary of “Every profession is a conspiracy against the public” is “Everyone is trying to take advantage of everyone else.” The latter is a proposition I regard as long proved by my observation of human behaviour.

    As a sideline, it’s amusing that trying to define a conspiracy in general gets as complicated as trying to define what the Austrian School is.

    Have a look at;

    http://dictionary.reference.com/browse/conspiracy

  27. nanks
    January 5th, 2010 at 19:48 | #27

    Ikonoclast :
    The corollary of “Every profession is a conspiracy against the public” is “Everyone is trying to take advantage of everyone else.” The latter is a proposition I regard as long proved by my observation of human behaviour.

    what do you mean by ‘advantage’?

  28. Ernestine Gross
    January 5th, 2010 at 19:57 | #28

    “healthy real savings”

    (1) o.k., reducing the consumption of fossil fuel by households and producers constitutes a ‘real saving’ and it is ‘healthy’ because it reduces air pollution and human activity enduced global warming.

    Have I understood you correctly, Sea-bass @17?

    (2) How would a ‘healthy real saving’ as described in (1) fit into your proposition “that the production of goods enabled greater demand”

  29. David Irving (no relation)
    January 5th, 2010 at 21:24 | #29

    Pixie dust economics? Invisible hand-waving, perhaps. Cargo-cult economics. From my point of view, the Austrians seem to be magical thinkers.

  30. Sea-bass
    January 5th, 2010 at 21:31 | #30

    @Ernestine Gross
    No you haven’t. Perhaps the word “healthy” was misleading; as a proponent of the Hayekian theory of the business cycle, the word would denote a certain path of consumption and savings/investment that is compatible with long-term growth.

    I differentiate real savings, as in that portion of one’s income that is not consumed which then facilitates greater investment and technological innovation and hence future consumption, from the standard Keynesian idea of saving. Which seems to be that the money issuing authority can just fire-up the printing press and create as much “savings” as it wants (by the way, this confusion leads to the whole nonsense about a “glut of savings” peddled by certain Federal Reserve Chairmen).

    In other words, central bank funny-money is no substitute for saved capital.

    I don’t know if it’s necessarily the correct pedagogical tool, but I like to visualise the problem as an extension of the basic Ramsey-Solow growth model. You have a certain “saddle path” that represents steady growth, whereas deviating from this path, such as might be caused by central bank credit expansion, can lead to an increase in consumption and a concurrent erosion of the capital stock.

    At any rate, I wasn’t talking about environmental issues – which is not to say that I wouldn’t welcome a reduction in fossil fuel consumption. Perhaps you are implying that greater production is incompatible with the preservation of natural capital? I don’t believe this is necessarily the case either.

  31. Peter T
    January 5th, 2010 at 22:39 | #31

    I have seen in the British Museum a small clay tablet on which is written (in Old Assyrian) a promise to pay the bearer a certain sum in silver. It was used as long-distance currency around 3500 years ago. How is this different from a bearer certificate? And what stopped the issuer from handing out more in value than than the silver immediately to hand? Fractional reserve banking is as old as the ability to make loans in any notional currency (eg pigs, cattle, cowry shells, money…). Arguing over whether we should permit it is like arguing over whether we should use long words.

  32. Ernestine Gross
    January 5th, 2010 at 23:37 | #32

    @Sea-bass

    Re #1: Thank you for providing an example of the difficulties created by verbal theoreticians.

    Re #2: Your distinction between your notion of the ‘Hayekian theory’ of ‘real savings’ and your notion of the Keynesian theory of savings is not helpful to make sense out of observable phenomena. People in Australia and elsewhere do not consume a fraction of their income (eg superannuation contributions, voluntary or otherwise), as prescribed or recommended by you, but the outcome is different from that you assert. The reality is that monetary values (income not spent on consumption) do not automatically translate into ‘greater investment’ and ‘technological innovations’. In the first instance, these monetary values are exchanged for financial securities (contracts). There are many different types and most of them are tradeable. You may have noticed that there is now a long history of booms and busts in financial markets. You may have noticed that private financial institutions, rather than central banks, have issued many types of financial securities, many of them have lost ‘value’, that is, their prices, if known at all, have declined substantially. Furthermore, while many people ‘save’ a fraction of their income, they simultaneously borrow currency units. That is, they issue financial securities. This is a brief excerpt of the environment we live in. Your ideas fail to provide an explanation.

    Re #3: “In other words, central bank funny-money is no substitute for saved capital”. This is yet another example of difficulties created by verbal theoreticians. What is ‘capital’? Surely the distinction between financial capital (securities) and long-lived produced physical assets and natural resources is understood by now.

    Re #4: Without having the context, a reference to a ‘growth model’ is not helpful. By that I mean, at times it is helpful to develop a model for the purpose of studying a specific question. The usefulness of the model is then confined to the parameters that specify the boundaries of the inquiry. In isolation, a reference to a ‘growth model’ raises the obvious question: ‘growth of what’? Scientists tell us that the life of planet earth is finite. Hence growth of whatever is bounded (see the Arrow-Debreu model).

    Re #5: Yes, I did have in mind an incompatibility problem. It is not an issue of the ‘preservation of natural capital’ (ie oil reserves) per se but rather a problem of an inappropriate rate of consumption due to market prices providing the wrong signals (in direct contradiction of van Hayek) because the nature of physical externalities (by-products) are such that the price system is incomplete (a type of market failure – a coordination failure). A non-market agent (eg a government) is required to ‘intervene’.

    Our host, Professor Quiggin, has stated on at least one (possibly many) occasion that the useful ideas of the so-called ‘Austrians’ have been integrated into mainstream economics. Furthermore, he suggested that the axiomatic approach to economic theory might be more helpful for this ‘school of thought’. I have no information to the contrary.

  33. iain
    January 6th, 2010 at 00:29 | #33

    @Sea-bass

    “I like to visualise the problem as an extension of the basic Ramsey-Solow growth model”

    That would be the same Solow who noted that “the world can, in effect, get along without natural resources”?

  34. fred
    January 6th, 2010 at 01:04 | #34

    “the world can, in effect, get along without natural resources”?

    I didn’t believe you when you wrote that at #33..
    So I checked.
    You are right.

  35. Ikonoclast
    January 6th, 2010 at 08:02 | #35

    @nanks

    Nanks, you might be slightly arch in your question. You have reasonable cause as “advantage” is a word with extra connotations in the economic and social contexts. The phrases “competitive advantage”, “economic advantage” and “take advantage of a lady” all spring to mind.

    However, I meant the phrase “to take advantage” in its more general idiomatic form especially as in to derive an excessive benefit, profit or gain at the expense of impoverishing or harming others or in some way infringing upon their rights.

    We humans do that sort of thing all the time as we are intrinsically and unavoidably selfish. Only socialisation, law and custom properly developed enable us to moderate our selfishness and live cooperatively.

    When we make a fetish of competition by taking it out of context and making it the be-all and end-all we forget the basal matrix of socialisation, law and custom without which competition would be merely anarchic.

  36. Alice
    January 6th, 2010 at 09:33 | #36

    @Ernestine Gross
    you say “You may have noticed that there is now a long history of booms and busts in financial markets. You may have noticed that private financial institutions, rather than central banks, have issued many types of financial securities, many of them have lost ‘value’, that is, their prices, if known at all, have declined substantially.”

    You are quite right Ernestine. This historical artefact confirms this point you make. And as Goldman started…so they continued…

    Senator Couzens (a liberal Michigan Republican): Did Goldman, Sachs and Company organise the Goldman Sachs Trading Corporation?

    Mr Sachs: Yes, sir.

    Senator Couzens: And it sold its stock to the public?

    Mr Sachs: A portion of it. The firm invested originally in 10% of the entire issue for the sum of $10,000,000.

    Senator Couzens: And the other 90% was sold to the public?

    Mr Sachs: Yes, sir.

    Senator Couzens: At what price?

    Mr Sachs: At 104. That is the old stock…..the stock was slit two for one.

    Senator Couzens: And what is the price of the stock now?

    Mr Sachs: Aprroximately 1 and 3/4.

    Source: Stock Exchange Practices, Hearings, April-June 1932, pp566-67

  37. Alice
    January 6th, 2010 at 09:37 | #37

    slit above should read split….

  38. TerjeP (say Tay-a)
    January 6th, 2010 at 10:33 | #38

    Sea Bass – as I stated earlier disagreements with Austrians over the definition of inflation are somewhat futile semantic arguments. The word suffers from polysemy. It has two different but related meanings. One meaning for inflation is an increase in the quantity of money. Another meaning is a decline in the value of money. Both are valid but obviously people will talk at crossed purposes if they are using different definitions. What further complicates this debate is that the word money also suffers some polysemy. One definition says money is something that is a medium of exchange, a store of value, and a unit of account. The other definition includes credit which whilst requiring a unit of account clearly isn’t a unit of account itself.

    Personally I think a fixed supply of currency is an okay monetary policy only for a closed economy. Once we look at an open economy (ie all of them except the global economy) and add broad money to the mix then I think quantity targets are somewhat unworkable and even if the were workable it would be poor policy. It is much better to work at fixing the value of money via inflation targeting, a fixed exchange rate (fixed to a relatively low inflation currency such as the Euro) or a fixed exchange rate to a commodity basket (which might be just gold but could be broader). Such a fix can be achieved with or without a fiat currency, with or without legal tender laws. I’d prefer it was done without fiat currency or legal tender laws and I’d prefer our currency was fixed to a commodity basket with interest rates free to float. I’d prefer to have no central bank. However in spite of these heterdox views I do agree with the mainstream view that maintaining the value of our unit of account is more essential than maintaining some specific quantity of money. Quantities of money should adjust, sometimes rapidly, to maintain the value of the currency. The notion that we need government intervention (as apposed to benign government acceptance) to achieve this stability of value is of course wrong.

  39. Alice
    January 6th, 2010 at 10:38 | #39

    @TerjeP (say Tay-a)
    Terje on every economic discussion here you think that there is one cure for all… “The notion that we need government intervention (as apposed to benign government acceptance) to achieve this stability of value is of course wrong.”

    There isnt one cure. This is a nonsense (an ALS nonsense).

  40. nanks
    January 6th, 2010 at 10:59 | #40

    @Ikonoclast
    I’d disagree Ikonclast – humans are essentially social and cooperative much the same as other apes. It is our socialisation – in particular the way in which socialisation is underpinned by economic factors – that is the greatest driver of selfishness. Small-band human behaviour tends to be cooperative.

  41. Graeme Bird
    January 6th, 2010 at 11:42 | #41

    “critics of fractional reserve banking”

    You cannot seriously be in favour of bank-cash-pyramiding? You’ve seen what this leads to?

  42. January 6th, 2010 at 12:14 | #42

    It’s all about the monkeysphere, nanks.

  43. Jim Birch
    January 6th, 2010 at 12:44 | #43

    @nanks

    Ever studied ape behaviour? There’s a lot of very nasty stuff going on, individuals higher up the biting order put a fair bit of effort into making life difficult and stressful for those below them. OTOH individuals can’t survive alone and cooperate in many things. The general aim in the biology of social organisms is to be the most successful individual but belong to the most successful group. Like so much of biology, these aims are in conflict. Is a glass half full or half empty?

    Interestingly (and hopefully), cultural differences exist between different ape troops that must be virtually identical genetically (because individuals swap troops.) Some groups show more cooperation, eg, they more grooming and have social exchanges less governed by dominance relationships. These apes have better physiological markers, like stress hormone levels, on average. They still compete but not quite so obsessively.

    As we might expect, human groups appear to be similarly endowed with conflicting impulses towards competition and cooperation. It’s just more confusing with humans because we believe a lot of weird stuff.

  44. nanks
    January 6th, 2010 at 13:21 | #44

    @Jim Birch
    We probably agree more than it seems from my shorthand Jim Birch. I was really just wanting to point out that the idea that people are innately, totally and ruthlessly selfish is not supported. My background is neuroscience rather than, say, ethology of nonhuman primates.

  45. TerjeP (say Tay-a)
    January 6th, 2010 at 13:23 | #45

    Alice – so long as we have a government that levies taxes and buys and sells stuff it will have a major role to play in determining the unit of account that is uses within our borders. I think it is essential that our government takes an active interest in the unit of account that it selects. However it does not need to issue fiat currency or institute legal tender laws in order to have this influence. In fact prior to 1910 our federal government issues no currency at all and most currencies circulating within our economy were state isssued or issued by the private sector. If if they had all been private issued the government would still have determined the unit of account.

    What I’m saying is that you seem to have misunderstood me. The determination of the unit of account within an economy is very important. The government largely determines the unit of account merely by virtue of existing (ie it is a byproduct of taxation). The government should choose wisely. The government does not need to be the issuer of notes or the enforcer of tender to have this role. This is quite different to saying that the government shouldn’t be involved. It is merely a recognition that government does not need to do a stack of other things to retain this decision.

    I have many length discussions at ALS with those that believe the government can simply leave the unit of account decision to the market. I have long argued that this is wrong. So long as the government exists it can not avoid determining this outcome. However once it has set the unit of account (be it euros, gold grams or goat heads) it should be essentially benign in the management of money.

    When Newton got Britian to adopt gold as the prime unit of account the decision was wise and was not revisited for centuries. And when it was revisited there is little evidence to suggest that the change offered any provement in monetary outcomes.

  46. TerjeP (say Tay-a)
    January 6th, 2010 at 13:25 | #46

    p.s. Scotland and Hong Kong allow the private issue of currency and their governments still determine the unit of account. Scotland also has no legal tender laws.

  47. jquiggin
    January 6th, 2010 at 13:49 | #47

    Actually, Terje, a quick check reveals that coins, but not notes, are legal tender in Scotland. However, the courts require governments to accept notes as payment, so its a fine point. Bit I wasn’t aware that there were still private banknotes there.

    http://www.siliconglen.com/scotfaq/1_7.html

  48. TerjeP (say Tay-a)
    January 6th, 2010 at 14:22 | #48

    I believe that there are also private bank notes in Northern Ireland. And I think it is wrong that we taxed them out of existance in Australia.

  49. TerjeP (say Tay-a)
    January 6th, 2010 at 14:41 | #49

    Alice – you may reference earlier to supporting higher reserve requirement for banks. Mandating such reserves is counter productive. A bank with 15% reserves in a nation with a mandated 10% reserve can readily survive a small run. However once it’s reserves drop to the 10% level it must close it’s doors or break the law. As such mandatory reserves do nothing to ensure the liquidity of deposits. The fact that the USA has mandatory reserves and more bank bail outs than Australia which has no such mandatory reserves should offer a cautionary tale.

  50. Jim Birch
    January 6th, 2010 at 16:02 | #50

    @nanks
    Ha. We’re probably in strong agreement, then. Monkey behaviour is “on the ground” evidence, but from a neuroscience perspective, neither the imperative selfishness or altruism circuits looks at all like turning up, and, the supposed entity who might be selfish or altruistic appears to be a kind of a fantasy anyway.

  51. Alice
    January 6th, 2010 at 17:44 | #51

    @Graeme Bird
    No Graeme – I am not in favour of banks cash pyramiding. Thats half the problem.

    Terje…you should take note of what Graeme is saying. As usual you have honed in on one word “mandating” because that means, to you, government intervention which is, yet again your only objection.

  52. Alice
    January 6th, 2010 at 20:00 | #52

    @Alice
    But Terje – Ill concede you a point here ” The government should choose wisely. The government does not need to be the issuer of notes or the enforcer of tender to have this role.”

    Im not that fond of the central banks interventions in interest rates myself having never been truly convinced of the wisdom of either monetary policy or other central bank interventions such as the strangely one sided and huge bailouts that recently occurred with taxpayer funds. I will however qualify that by also saying I am not averse to the government issuing bonds if it gives people a safer place to save their honest pennies Terje. I think many might actually like it as they once did in history. Low return but safe…perhaps safer than the sharemarkets we have no control over in regard to our super savings.

  53. TerjeP (say Tay-a)
    January 6th, 2010 at 22:31 | #53

    Alice – I’m not overly opposed to government bonds if they fund productive infrastructure or tax cuts (an investment in the size of the future tax base).

  54. Alice
    January 7th, 2010 at 09:47 | #54

    @TerjeP (say Tay-a)
    Id prefer govt bonds to fund productive infrastructure right now Terje rather than (yet more) tax cuts … we are rather short on adequate supplies of the former, and even maintenance of existing infrastructure.

  55. Graeme Bird
    January 7th, 2010 at 13:57 | #55

    The neoclassicals have this reversalist trick. Where they suddenly put on their faux-libertarian hat to justify selling off strategic resources to foreign communists, running a system that armtwists people into the slavery-lite of appalling private debt, and where they justify tolerating behaviour from banks that ought to come under the fraud and racketeering statutes.

    Neoclassicals never seem to see a bigshot insider that they don’t take a shine to. Some of the worst of consequences of all this is happening right now. Where financial idiots and proven failures are in the process of advising the Queensland government to ruin the prospect of expanded rail in that state this century. Apparently the Premier has two finacial firm advisors. One of them a welfare recipient organisation that manifestly failed. Another one of the most mysterious names in financial history. Both these clowns telling her to do exactly the wrong thing. Any responsible advisor would have stopped that privatisation going down the literal train-wreck path it is going.

    Meanwhile the ring-leader of the massive financial failures of last year is the designated advisor to our Feds when it comes to the national broadband network. Here we see these people, all of whom ought to be unemployed, if not up on formal criminal charges, advising our politicians to do the wrong thing. They labour party comes up with the pretty sound idea of separating the underground and trans-spatial assets from the operating companies for telecommunications. But they are going to wreck it all by listening to these financial charlatans.

    Now my point is, surely there is room for alliance between the hard right like myself, and some of you leftists, who are likewise appalled by the mess that the financial ignorance of the neoclassical right is dealing out to us. I listen to Professor Keen. And I say to myself: “This fellow. I am with him.”

  56. Ubiquity
    January 7th, 2010 at 14:08 | #56

    JQ you have your “Black hat” on, Boettke has his “Yellow hat” on….
    and you are talking past each other.
    The central principles of libertarianism are non aggression and voluntary action which fit in well with the ideas of the Austrian economists you have mentioned despite some differences amongst them. I know most here can’t stomach the thought of voluntary action, such as those on the “(religious) right (and include the Cato,Reason mob) as well as those on the left. Both the left and right are authoritarian statist. A libertarian is neither, but statist will label them Austrians with “right” thrown in for good measure. Boettke motives are positive for libertarianism and the economics behind it because it tracks away from perjorative “Austrian” label thanks to those on the left and right

  57. TerjeP (say Tay-a)
    January 7th, 2010 at 14:23 | #57

    Alice – if the infastructure is productive then it can be funded using bonds with no implications either way as to whether we also have tax rate reductions.

  58. Graeme Bird
    January 7th, 2010 at 14:38 | #58

    “Alice – if the infastructure is productive then it can be funded using bonds with no implications either way as to whether we also have tax rate reductions.”

    Why Terje why? Why give the banks a cut? Lets pay for it out of the surplus. Then the voter feels the pinch up front and the tendency is to demand more economy in government. You never seem to want to fire anyone Terje. But we have dozens of government departments wherein if we closed their doors and gave everyone massive tax exemption vouchers no-one would die. Yes I suppose we might miss these departments. But this willingness to go into hock is what prevents serious financial triage.

    Reconsider. Our population pyramid is overturning. Our most important ally has been scuttled and bankrupted. We don’t need any moral or financial obligations to foreigners. We can wean of the social security by raising the age limit one day every two. We can have 200% deductions for the businesses who employ the older guys. We can have the infrastructure, the wharves, rail and canals, that would put the Singaporeans to shame. We are Australians and we can look after our mates. But we have to exercise ruthless financial discipline here. If not financial triage. And this means we can have not time for bringing the finance world in to peddle obligations to people wherein it is unwise to be in their debt.

    I would also question your supply-sider view from a technical point of view. In my world it is business spending that fuels things. Not tax cuts to high-flying executives making more than 200, 000 a year. I think we move forward on retained earnings. So I’m quite happy to get rid of any taxes on retained earnings and then bring the tax free threshold straight up from the ground. I think the supply-sider moment has passed.

  59. Graeme Bird
    January 9th, 2010 at 07:28 | #59

    “Im not that fond of the central banks interventions in interest rates myself having never been truly convinced of the wisdom of either monetary policy or other central bank interventions such as the strangely one sided and huge bailouts that recently occurred with taxpayer funds.”

    We have to change our definitions so we don’t wind up calling flagrant bank subsidies “monetary policy.” Alice how would you feel having a low interest loan from the Reserve Bank? Particularly after the stock market had crashed? Would be good wouldn’t it? Why give the banks this massive subsidy? Why not give it to me. I’d refinance my house, my credit cards, buy undervalued shares. I’d promise not to recycle the money into debt-addiction and asset bubbles. So I’d use the funds more wisely than our banks. And naturally within a few decades I’d be a billionaire.

    This is not monetary policy. Funneling resources to the banks is not monetary policy. Or we ought to have the discipline to cease to call such an outrageous violation of any sane notion of social justice “monetary policy.” A lot of the ambiguity and argument between which is more effective in which contexts, between monetary and fiscal policy, comes from us showering the banks with loot and calling it monetary policy.

    If monetary policy means debt reduction through new cash creation (to stimulate demand) that may be bailing out the banks in an indirect way. Monetary policy to stop demand overshooting ought not be about us selling more bonds and retiring the cash? Why obligate ourselves and drum up yet more business for the financial institutions and traders? Monetary policy to dampen demand is simply nudging the reserve asset ratio up.

    Not only is this sort of monetary policy more morally sound. Its far more powerfully effective and predictable as to its results.

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