Leland Yeager at 90 – happy birthday

Today Leland Yeager is turning 90. Happy birthday!

Leland Yeager is an amazing scholar. My friend Peter Kurrild-Klitgaard put it very well in a comment on Facebook:

Such a good scholar and a very nice man. Who speaks Danish. And 10-20 other languages.”

Yes, Pete is right – Yeager speaks an incredible number of languages – but I of course mostly appreciates Yeager’s contribution to monetary thinking.

Leland_Yeager

I consider Yeager (with Clark Warburton) to have been one of the founding father of what we could call Disequilibrium Monetarism and I think that Yeager has written the best ever monetarist “textbook”. As I have put it earlier:

One could of course think I would pick something by Friedman and I certainly would recommend reading anything he wrote on monetary matters, but in fact my pick for the best monetarist book would probably be Leland Yeager’s “Fluttering Veil”.

In terms of something that is very readable I would clearly choose Friedman’s “Money Mischief”, but that is of course a collection of articles and not a textbook style book. Come to think of it – we miss a textbook style monetarist book.

I actually think that one of the most important things about a monetarist (text)book should be a description of the monetary transmission mechanism. The description of the transmission mechanism is very good in (Keynes’) Tract, but Yeager is even better on this point.

Friedman on the other hand had a bit of a problem explaining the monetary transmission mechanism. I think his problem was that he tried to explain things basically within a IS/LM style framework and that he was so focused on empirical work. One would have expected him to do that in “Milton Friedman’s Monetary Framework: A Debate with His Critics”, but I think he failed to do that. In fact that book is is probably the worst of all of Friedman’s books. It generally comes across as being rather unconvincing.

Yeager not only provides very good insight into understanding the monetary transmission mechanism, but he also in my view provides a key insight to understanding what happened in 2008. This is from The Fluttering Veil: (David Beckworth has earlier used the same quote)

Say’s law, or a crude version of it, rules out general overproduction: an excess supply of some things in relation to the demand for them necessarily constitutes an excess demand for some other things in relation to their supply…

The catch is this: while an excess supply of some things necessarily mean an excess demand for others, those other things may, unhappily, be money. If so, depression in some industries no longer entails boom in others…

[T]the quantity of money people desire to hold does not always just equal the quantity they possess. Equality of the two is an equilibrium condition, not an identity. Only in… monetary equilibrium are they equal. Only then are the total value of goods and labor supplied and demanded equal, so that a deficient demand for some kinds entails and excess demand for others.

Say’s law overlooks monetary disequilibrium. If people on the whole are trying to add more money to their total cash balances than is being added to the total money stock (or are trying to maintain their cash balances when the money stock is shrinking), they are trying to sell more goods and labor than are being bought. If people on the whole are unwilling to add as much money to their total cash balances as is being added to the total money stock (or are trying to reduce their cash balances when the money stock is not shrinking), they are trying to buy more goods and labor than are being offered.

The most striking characteristic of depression is not overproduction of some things and underproduction of others, but rather, a general “buyers’ market,” in which sellers have special trouble finding people willing to pay more for goods and labor. Even a slight depression shows itself in the price and output statistics of a wide range of consumer-goods and investment-goods industries. Clearly some very general imbalance must exist, involving the one thing–money–traded on all markets. In inflation, an opposite kind of monetary imbalance is even more obvious.

This is exactly what happened in 2008 – dollar demand rose sharply, but the Federal Reserve failed to ensure monetary equilibrium by not sufficiently increasing the supply of base money. That caused the Great Recession.

Finally I would also note that Yeager in his article (with Robert Greenfield)  Money and Credit confused: An Appraisal of Economic Doctrine and Federal Reserve Procedure explained the very crucial difference between money and credit. 

In a great tribute (published yesterday) to Yeager Bill Woolsey - Market Monetarist and student of Yeager – explains:

Yeager was certainly aware that a banking system might respond to depressed economic conditions by reducing the quantity of money rather than holding it steady.    This points to an additional major emphasis of his work–the distinction between money and credit.   For Yeager, money is the medium of exchange.   The quantity is the amount that exists and the demand is the amount that people would like to hold.   Credit, on the other hand, involves borrowing and lending.   Banks can lend money into existence, expanding the quantity of money even if there is no one who wants to hold the additional balances.   And those wishing to hold additional money balances have no directly reason to show up at a bank seeking to borrow.   The interest rate that clears credit markets does not necessarily keep the quantity of money equal to the demand to hold it.    It is the price level for goods and services, along with the prices of resources, including nominal wages, that must adjust to keep the real quantity  of money equal to the demand to hold it.

One could only hope that the central bankers in Frankfurt would study Yeager (and Woolsey!) to understand this crucial difference between money and credit and then we might get monetary easing – to ensure monetary equilibrium rather than the numerous odd credit policies we have seen in recent years. The problem is not a “broken transmission mechanism”, but monetary disequilibrium. No one explains that better than Leland Yeager.

I could – and should – write a lot more on Leland Yeager (for example on his contribution to international trade and international monetary theory), but I will leave it for that for now.

But you shouldn’t stop reading yet. Kurt Schuler over at freebanking.org has collected a number of excellent tributes to Leland Yeager from a number of his friends, colleagues and former students. Here is the impressive list:

Thomas D. Willett
David Tuerck
Roger Koppl
Warren Coats
Kenneth Elzinga
Jim Dorn
Robert Greenfield
Kurt Schuler

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Money and credit confused…again, again and again

The debate over the latest policy actions from the ECB has once again reminded me about one of the oldest failures in monetary debate – the confusion 0f  money and credit. This has been very visible in the discussion about monetary policy over the past six years both in Europe and the US.

The confusion of money and credit again and again has caused central banks to make the wrong decisions implementing credit policies and mistaking it for monetary easing.

I should really write a blog post on this, but it has already been done. Our friend and Market Monetarist blogger Bill Woolsey did it back in 2009. Bill used to be a student of Leland Yeager who back in 1986 wrote the ultimate paper on this issue with Robert Greenfield - Money and Credit confused: An Appraisal of Economic Doctrine and Federal Reserve Procedure.

I stole this from Bill’s 2009 post Money and Credit Confused. Bill explains the crucial differences between money and credit very well:

Money is the medium of exchange. The quantity of money is the amount of money that exists at a point in time.

The demand for money is the amount of money that people want to hold at a point in time. To hold money is to not spend it.

The supply of credit is the amount of funds people want to lend during a period of time.

The demand for credit is the amount of funds that people want to borrow during a period of time.

An increase in the demand for money is not the same thing as an increase in the demand for credit.

An increase in the demand for credit means that households and firms want to borrow more. While it is possible that they want to borrow money in order to hold it, the more likely scenario is that they borrow in order to increase spending on some good or service, including, perhaps some other financial asset.

An increase in the demand for money could result in an increase in the demand for credit. People might borrow money in order to hold it. However, the more likely scenario is that people demanding more money will reduce expenditure out of current income, purchasing fewer other assets, goods, or services. Of course, they could also sell other assets.

An increase in the supply of credit isn’t the same thing as an increase in the quantity of money. While it is possible that new money is lent into existence, raising the quantity of money over a period of time while augmenting the supply of credit, it is also possible for the supply of credit to rise without an increase in the quantity of money. Purchases of new corporate bonds by households or firms, for example, adds to the supply of credit without adding to the quantity of money.

Because shifts in the share of the total supply of credit associated with money creation are possible, the quantity of money can rise over a period of time when the supply of credit is shrinking.

There are relationships between the supply and demand for money and the supply and demand for credit, both in disequilibrium and equilibrium. But money and credit are not the same thing.

As Bill notes – the first rule of monetary policy is not to confuse money and credit. Unfortunately central bankers do it all the time.

 —-

Update: A friend of mine thinks the ultimate discussion is not Yeager, but this one: Currie, Lauchlin. “Treatment of Credit in Contemporary Monetary Theory.” Journal of Political Economy 41 (February 1933), 58-79.

Leland Yeager wrote the best monetarist (text)book

In my recent post about Keynes’ “A Tract on Monetary Reform” I quoted Brad Delong for saying that Tract is the best monetarist book ever written. I also wrote that I disagreed with Brad on this.

That led Brad to respond to me by asking: “What do you think is a better monetarist book than the Tract?”

I think that is a very fair question, which I tried to answer in the comment section of my post, but I want to repeat the answer here. So here we go (the answer has been slightly edited):

One could of course think I would pick something by Friedman and I certainly would recommend reading anything he wrote on monetary matters, but in fact my pick for the best monetarist book would probably be Leland Yeager’s “Fluttering Veil”.

In terms of something that is very readable I would clearly choose Friedman’s “Money Mischief”, but that is of course a collection of articles and not a textbook style book. Come to think of it – we miss a textbook style monetarist book.

I actually think that one of the most important things about a monetarist (text)book should be a description of the monetary transmission mechanism. The description of the transmission mechanism is very good in Tract, but Yeager is even better on this point.

Friedman on the other hand had a bit of a problem explaining the monetary transmission mechanism. I think his problem was that he tried to explain things basically within a IS/LM style framework and that he was so focused on empirical work. One would have expected him to do that in “Milton Friedman’s Monetary Framework: A Debate with His Critics”, but I think he failed to do that. In fact that book is is probably the worst of all of Friedman’s books. It generally comes across as being rather unconvincing.

Finally I would also mention Clark Warburton’s “Depression, Inflation, and Monetary Policy; Selected Papers, 1945-1953″. Again a collection of articles, but it is very good and explains the monetary transmission mechanism very well. I believe Warburton was a much bigger inspiration for Friedman than he ever fully recognized – even though Warburton is mentioned in the introduction to “Monetary History”.

So there you go. I recommend to anybody who wants to understand monetarist thinking to read Yeager and Warburton. Yeager and Warburton’s books mentioned above will particularly make you understand three topic. 1) The monetary transmission (and why interest rates is not at the core of it), 2) The crucial difference between money and credit and finally 3) Why both inflation and recessions are always and everywhere monetary phenomena.

I will surely return to these books when I continue the reporting on my survey of monetary thinkers’ book recommendations in the coming days and weeks.

PS Leland Yeager’s “Fluttering Veil” is a collection of articles edited by George Selgin. George deserves a lot of credit (if not money!) for putting it together. It is a massively impressive book, which unfortunately have been read by far too few economists and even fewer policy makers.

From the Christensen book collection: Yeager and Warburton:

Yeager Warburton 2

Counterfeiting, nazis and monetary separation

A couple of months ago a friend my sent me an article from the Guardian about how “Nazi Germany flooded Europe with fake British banknotes in an attempt to destroy confidence in the currency. The forgeries were so good that even German spymasters paid their agents in Britain with fake notes..The fake notes were first circulated in neutral Portugal and Spain with the double objective of raising money for the Nazi cause and creating a lack of confidence in the British currency.”

The article made me think about the impact of counterfeiting and whether thinking about the effects of counterfeiting could teach us anything about monetary theory. It should be stressed that my argument will not be a defense of counterfeiting. Counterfeiting is obviously fraudulent and as such immoral.

Thinking about the impact of counterfeiting we need to make two assumptions. First, are the counterfeited notes (and coins for the matter) “good” or not. Second what is the policy objective of the central bank – does the central bank have a nominal target or not.

Lets start out analyzing the case where the quality of the the counterfeited notes is so good that nobody will be able to distinguish them from the real thing and where the central bank has a clear and credible nominal target – for example a inflation target or a NGDP level target. In this case the counterfeiter basically is able to expand the money supply in a similar fashion as the central bank. Hence, effectively the nazi German counterfeiters in this scenario would be able to increase inflation and the level of NGDP in the UK in the same way as the Bank of  England. However, if the BoE had been operating an inflation target then any increase in inflation (above the inflation target) due to an increase in the counterfeit money supply would have lead the BoE to reduce the official money supply. Furthermore, if the inflation target was credible an increase in inflation would be considered to be temporary by market participants and would lead to a drop in money velocity (this is the Chuck Norris effect).

Hence, under a credible inflation targeting regime an increase in the counterfeit money supply would automatically lead to a drop in the official money supply and/or a drop in money-velocity and as a consequence it would not lead to an increase in inflation. The same would go for any other nominal target.

In fact we can imagine a situation where the entire official UK money supply would have been replaced by “nazi notes” and the only thing the BoE was be doing was to provide a credible nominal anchor. This would in fact be complete monetary separation – between the different functions of money. On the one hand the Nazi counterfeiters would be supplying both the medium of exchange and a medium for store of value, while the BoE would be supplying a unit of account.

Therefore the paradoxical result is that as long as the central bank provides a credible nominal target the impact of counterfeiting will be limited in terms of the impact on the economy. There is, however, one crucial impact and that is the revenue from seigniorage from iss uing money would be captured by the counterfeiters rather than by the central bank. From a fiscal perspective this might or might not be important.

Could counterfeiting be useful?

This also leads us to what surely is a controversial conclusion that a central bank, which is faced with a situation where there is strong monetary deflation – for example in the US during the Great Depression – counterfeiting would actually be beneficial as it would increase the “effective” money supply and therefore help curb the deflationary pressures. In that regard it would be noted that this case only is relevant when the nominal target – for example a NGDP level target or lets say a 2% inflation target is not seen to be credible.

Therefore, if the nominal target is not credible and there is deflation we could argue that counterfeiting could be beneficial in terms of hitting the nominal target. Of course in a situation with high inflation and no credible nominal target counterfeiting surely would make the inflationary problems even worse. This would probably have been the case in the UK during WW2 – inflation was high and there was not a credible nominal target and as such had the nazi counterfeiting been “successful” then it surely would have had a serious a negative impact on the British economy in the form of potential hyperinflation.

Monetary separation could be desirable – at least in terms of thinking about money

The discussion above in my view illustrates that it is important in separating the different functions of money when we talk about monetary policy and the example with perfect counterfeiting under a credible nominal target shows that we can imagine a situation where the provision of the unit of accounting is produced by a (monopoly) central bank, but where production the medium of exchange and storage is privatized. This is at the core of what used to be know as New Monetary Economics (NME).

The best known NME style policy proposal is the little understood BFH system proposed by Leland Yeager and Robert Greenfield. What Yeager and Greenfield basically is suggesting is that the only task the central bank should provide is the provision media of accounting, while the other functions should be privatised – or should I say it should be left to “counterfeiters”.

While I am skeptical about the practically workings of the BFH system and certainly is not proposing to legalise counterfeiting one should acknowledge that the starting point for monetary policy most be to provide the medium account – or said in another way under a monopoly central bank the main task of the central bank is to provide a numéraire. NGDP level targeting of course is such numéraire.

A more radical solution could of course be to allow private issuance of money denominated in the official medium of account. This effectively would take away the need for a lender of last resort, but would not be a full Free Banking system as the central bank would still set the numéraire, which occasionally would necessitate that the central bank issued its own money or sucked up privated issued money to ensure the NGDP target (or any other nominal target). This is of course not completely different from what is already happening in the sense the private banks under the present system is able to create money – and one can argue that that is in fact what happened in the US during the Great Moderation.

Clark Warburton: A much overlooked monetarist pioneer

When I started this blog it was my plan to write a lot about Clark Warburton. I must admit I have failed to do this, but I still hope to be able to give Clark Warburton the attention he deserves.

Nearly no economists know of Clark Warburton and everybody knows about Milton Friedman. However, the fact is that a lot of what Milton Friedman said about monetary policy had been said by Clark Warburton 10-20 years earlier. Unfortunately nobody wanted to listen to Warburton.

In the introduction to Milton Friedman’s and Anna Schwartz’s “Monetary History” they wrote:

“We owe especially heavy debt to Clark Warburton. His detailed and valuable comments on several drafts have importantly affected the final version. In addition, time and again, as we came to some conclusion that seemed to us novel and original, we found he had been there before.”

Said in another way – Warburton might has well have written “Monetary History” – and to some extent he did.

In the articles “The Volume of Money and The Price Level Between the World Wars” (1944) and “Monetary Theory, Full Production and the Great Depression” (1945) Warburton basically presented the monetarist explanation of the Great Depression - almost 20 years before Friedman and Schwartz (1963).

Scott Sumner has recently tried to argue why the fiscal multiplier is zero if the central bank is targeting any nominal target. For those interested in this discussion should read Warburton’s 1945 article on “The Monetary Theory of Deficit Spending”. Read it and you should pretty fast become convinced that Scott is right – of course Warburton knew that in 1945. My own view that there is no such thing as fiscal policy (and everything is monetary policy) is also clearly inspired by Warburton.

Warburton’s main contribution to American monetary history and theory are collected in the book “Depression, Inflation and Monetary Policy” (including the above mentioned articles). Anyone who wants to understand monetary theory should read this book. The book, along with Leland Yeagers “The Fluttering Veil” are the two most important books in relation to the understanding of the monetarist branch, we could call disequilibrium monetarism (DM). DM is in many ways between the Austrian school and more traditional monetarists like Milton Friedman, Karl Brunner and Allan Meltzer. DM has undoubtedly had a major influence on Free Banking theorist such as George Selgin, but also on modern Austrian economists like Steven Horwitz. As such DM pioneers like Leland Yeager and Clark Warburton are also important from Market Monetarist perspective.

I hope to write more on Warburton in the future. He work surely deserves a lot more attention.

For a good introduction to Warburton’s work see Michael Bordo’s and Anna Schwartz’s article “Clark Warburton: Pioneer Monetarist”

Guest blog: Tyler Cowen is wrong about gold (By Blake Johnson)

In a recent post I commented on Tyler Cowen’s reservations about the gold standard on his excellent blog Marginal Revolution. In my comment I invited to dialogue between Market Monetarists and gold standard proponents and to a general discussion of commodity standards. I am happy that Blake Johnson has answered my call and written a today’s guest blog in which he discusses Tyler’s reservations about the gold standard.

Obviously I do not agree with everything that my guest bloggers write and that is also the case with Blake’s excellent guest blog. However, I think Blake is making some very valid points about the gold standard and commodity standards and I think that it is important that we continue to discuss the validity of different monetary institutions – including commodity based monetary systems – even though I would not “push the button” if I had the option to reintroduce the gold standard (I am indirectly quoting Tyler here).

Blake, thank you very much for contributing to my blog and I look forward to have you back another time.

Lars Christensen

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Guest blog: Tyler Cowen is wrong about gold

By Blake Johnson

I have been reading Marginal Revolution for several years now, and genuinely find it to be one of the more interesting and insightful blogs out there. Tyler Cowen’s prolific blogging covers a massive range of topics, and he is so well read that he has something interesting to say about almost anything.

That is why I was surprised when I saw Tyler’s most recent post on the gold standard. I think Tyler makes some claims based on some puzzling assumptions. I’d like to respond here to Cowen’s criticism of the gold standard, as well as one or two of Lars’ points in his own response to Cowen.

“The most fundamental argument against a gold standard is that when the relative price of gold is go up, that creates deflationary pressures on the general price level, thereby harming output and employment.  There is also the potential for radically high inflation through gold, though today that seems like less a problem than it was in the seventeenth century.”

I am surprised that Cowen would call this the most fundamental argument against the gold standard. First, regular readers of the Market Monetarist are likely very familiar with Selgin’s excellent piece “Less than Zero” which Lars is very fond of. There is plenty of evidence that suggests that there is nothing necessarily harmful about deflation. Cowen’s blanket statement of the harmful effects of deflation neglects the fact that it matters very much why the price level is falling/the real price of gold is going up. The real price of gold could increase for many reasons.

If the deflation is the result of a monetary disequilibrium, i.e. an excess demand for money, then it will indeed have the kind of negative consequences Cowen suggests. However, the purchasing power of gold (PPG) will also increase as the rest of the economy becomes more productive. An ounce of gold will purchase more goods if per unit costs of other goods are falling from technological improvements. This kind of deflation, far from being harmful, is actually the most efficient way for the price system to convey information about the relative scarcity of goods.

Cowen’s claim likely refers to the deflation that turned what may have been a very mild recession in the late 1920’s into the Great Depression. The question then is whether or not this deflation was a necessary result of the gold standard. Douglas Irwin’s recent paper “Did France cause the Great Depression” suggests that the deflation from 1928-1932 was largely the result of the actions of the US and French central banks, namely that they sterilized gold inflows and allowed their cover ratios to balloon to ludicrous levels. Thus, central bankers were not “playing by the rules” of the gold standard.

Personally, I see this more as an indictment of central bank policy than of the gold standard. Peter Temin has claimed that the asymmetry in the ability of central banks to interfere with the price specie flow mechanism was the fundamental flaw in the inter-war gold standard. Central banks that wanted to inflate were eventually constrained by the process of adverse clearings when they attempted to cause the supply of their particular currency exceed the demand for that currency. However, because they were funded via taxpayer money, they were insulated from the profit motive that generally caused private banks to economize on gold reserves, and refrain from the kind of deflation that would result from allowing your cover ratio to increase as drastically as the US and French central banks did. Indeed, one does not generally hear the claim that private banks will issue too little currency, the fear of those in opposition to private banks issuing currency is often that they will issue currency ad infinitum and destroy the purchasing power of that currency.

I would further point out that if you believe Scott Sumner’s claim that the Fed has failed to supply enough currency, and that there is a monetary disequilibrium at the root of the Great Recession, it seems even more clear that central bankers don’t need the gold standard to help them fail to reach a state of monetary equilibrium. While we obviously haven’t seen anything like the kind of deflation that occurred in the Great Depression, this is partially due to the drastically different inflation expectations between the 1920’s and the 2000’s. The Fed still allowed NGDP to fall well below trend, which I firmly believe has exacerbated the current crisis.

Finally, I would dispute the claim that the gold standard has the potential for “radically high inflation”. First, one has to ask the question, radically high compared to what? If one compares it to the era of fiat currency, the argument seems to fall flat on its face rather quickly. In a study by Rolnick and Weber, they found that the average inflation rate for countries during the gold standard to be somewhere between -0.5% and 1%, while the average inflation rate for fiat standards has been somewhere between 6.5% and 8%. That result is even more striking because Rolnick and Weber found this discrepancy even after throwing out all cases of hyperinflation under fiat standards. Perhaps the most fundamental benefit of a gold run is its property of keeping the long run price level relatively stable.

“Why put your economy at the mercy of these essentially random forces?  I believe the 19th century was a relatively good time to have had a gold standard, but the last twenty years, with their rising commodity prices, would have been an especially bad time.  When it comes to the next twenty years, who knows?”

I think Cowen makes two mistakes here. First, the forces behind a functioning gold standard are not random. They are the forces of supply and demand that seem to work pretty well in basically every other market. Lawrence H. White’s book “The Theory of Monetary Institutions” has an excellent discussion of the response in both the flow market for gold as well as the market for the stock of monetary gold to changes in the PPG. To go over it here in detail would take far too much space.

Second, commodity prices have not been increasing independent of monetary policy; the steady inflation over the last 30 years has had a significant effect on commodity prices. This is rather readily apparent if one looks at a graph of the real price of gold, which is extremely stable and even falling slightly until Nixon closes the Gold Window and ends the Bretton Woods system, at which point it begins fluctuating wildly. Market forces stabilize the purchasing power of the medium of redemption in a commodity standard; this would be true for any commodity standard, it is not something special about gold in particular.

As an aside, in response to Lars question, why gold and not some other commodity or basket of commodities, I would argue that without a low transaction cost medium of redemption the process of adverse clearings that ensures that money supply tends toward equilibrium becomes significantly less efficient. The reason the ANCAP standard, or a multi-commodity standard such as Yeager’s valun standard are not likely to have great success is mainly the problems of redemption (they also have not tracked inflation well since the 1980’s and 1990’s respectively.) I would gladly say that I believe there are many other commodities that a monetary standard could be based upon. C.O. Hardy argued that a clay brick standard would work fairly well if not for the problem of trying to get people to think of bricks as money (and Milton Friedman commented favorably on Hardy’s idea in a 1981 paper.)

“Whether or not there is “enough gold,” and there always will be at some price, the transition to a gold standard still involves the likelihood of major price level shocks, if only because the transition itself involves a repricing of gold.  A gold standard, by the way, is still compatible with plenty of state intervention.”

This is Cowen’s best point in my opinion. There would indeed be some sizable difficulties in returning from a fiat standard to a gold standard. In particular, it would not be fully effective if only one or two countries returned to a commodity standard, it would need to be part of a broader international movement to have the full positive effects of a commodity standard. Further, the parity at which countries return to the commodity standard would need to be better coordinated than the return to the gold standard in the 1920’s, when some countries returned with the currencies overvalued, and others returned with their currencies undervalued.

My main gripe is that Cowen’s claims seemed to be a broad indictment of the gold standard (or commodity standards) in general, rather than on the difficulties of returning to a gold standard today. They are two separate debates, and in my opinion, there is plenty of reason to believe that theoretically the gold standard is the better choice, particularly for lesser-developed countries. Even for countries such as the US with more advanced countries, the record does not seem so rosy. Central banks not only watched over, but we have reason to believe that their actions (or inaction) have been significant factors in the severity of both the Great Depression and the Great Recession.

© Copyright (2012) Blake Johnson

The Economist comments on Market Monetarism

The Economist has an interesting article on Market Monetarists as well as would the magazine calls “Heterodox economics” – Market Monetarism, Austrianism and “Modern Monetary Theory” (MMT).

I am happy to see this:

“Mr Sumner’s blog not only revealed his market monetarism to the world at large (“I cannot go anywhere in the world of economics…without hearing his name,” says Mr Cowen). It also drew together like-minded economists, many of them at small schools some distance from the centre of the economic universe, who did not realise there were other people thinking the same way they did. They had no institutional home, no critical mass. The blogs provided one. Lars Christensen, an economist at a Danish bank who came up with the name “market monetarism”, says it is the first economic school of thought to be born in the blogosphere, with post, counter-post and comment threads replacing the intramural exchanges of more established venues.” (Please have a look at my paper on Market Monetarism)

There is no doubt that Scott is at the centre of the Market Monetarist movement. To me he is the Milton Friedman of the day – a pragmatic revolutionary. Scott does not always realise this but his influence can not be underestimated. Our friend Bill Woolsey is also mentioned in the article. But I miss mentioning of for example David Beckworth.

One thing I would note about the Economist’s article is that the Austrianism presented in the article actually is quite close to Market Monetarism. Hence, Leland Yeager (who calls himself a monetarist) and one of the founders of the Free Banking school Larry White are quoted on Austrianism. Bob Murphy is not mentioned. Thats a little on unfair to Bob I think. I think that both Yeager’s and White’s is pretty close to MM thinking. In fact Larry White endorses NGDP targeting as do other George Mason Austrians like Steven Horwitz. I have written the GMU Austrians about earlier. See here and here.

And see this one:

“Austrians still struggle, however, to get published in the principal economics journals. Most economists do not share their admiration for the gold standard, which did not prevent severe booms and busts even in its heyday. And their theory of the business cycle has won few mainstream converts. According to Leland Yeager, a fellow-traveller of the Austrian school who once held the Mises chair at Auburn, it is “an embarrassing excrescence” that detracts from the Austrians’ other ideas. While it provides insights into booms and their ending, it fails to explain why things must end quite so badly, or how to escape when they do. Low interest rates no doubt helped to inflate America’s housing bubble. But this malinvestment cannot explain why 21.8m Americans remain unemployed or underemployed five years after the housing boom peaked.”

Market Monetarists of course provide that insight – overly tight monetary policy – and it seems like Leland Yeager agrees.

It would of course have been great if the Economist had endorsed Market Monetarism, but it is great to see that Market Monetarism now is getting broad coverage in the financial media and there is no doubt that especially Scott’s advocacy is beginning to have a real impact – now we can only hope that they read the Economist at the Federal Reserve and the ECB.

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See also the comments on the Economists from Scott Sumner, Marcus NunesDavid BeckworthLuis Arroyo (in Spanish) and Tyler Cowen.

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