Advertisements
Advertisements

The young Keynes was a monetarist

I am continuing my reporting on my survey of monetary thinkers’ book recommendations for students of monetary matters. The next “victim” is Scott Sumner and lets jump right into it. Here is Scott’s book list:

David Hume.  Essays on Economics

Irving Fisher. The Purchasing Power of Money

Keynes.  A Tract on Monetary Reform

Ralph Hawtrey.  The Gold Standard in Theory and Practice

Friedman and Schwartz. A Monetary History of the US

David Glasner.  Free Banking and Monetary Reform

Robert Barro.  Macroeconomics

I had asked for five book recommendations, but Scott gave me seven to choose between, but that doesn’t really matter the important thing is that we inspire people to read these books. Nonetheless Scott told me that if we had to cut it to five we should cut out Hume and Keynes. So my next step is not completely fair – I will focus on Keynes’ “A Tract on Monetary Reform”.

The reason is that Tract is a popular book among many of the monetary thinkers I have surveyed and it is not only Scott who has it on his list. The reason I find it interesting is that Tract is really a monetarist book rather than a Keynesian book. Keynesian here meaning the Keynes is The General Theory – Keynes’ most famous book.

To realise that Tract is very much a monetarist book just take a look at that preface. Here is a photo from my own copy of the book:

Tract

The point Keynes makes here is that in a free market without money the markets will tend to “clear” – supply and demand will match each other. This is basically a Walrasian world. However, once we introduce money there is a possibility that if get a disequilibrium between money supply and money demand this disequilibrium will spill-over into other markets or as Keynes express it:

“But they (other markets) cannot work properly if money, which they assume as a stable measuringrod, is undependable.”

In fact this is very much how Leland Yeager or Clark Warburton would explain macroeconomic disequilibrium – recession, deflation, inflation are results of monetary policy failure. It doesn’t get anymore monetarist than that.

Brad DeLong in an excellent review of Tract from 1996 went so far as to say that it was “the best monetarist economics book ever written”. I wouldn’t go so far as Brad, but I certainly agree that Tract fundamentally is monetarist and that is also is very good book. But it is not the best monetarist book ever written – far from it.

In general I would very much like to recommend Brad’s 1996 review of the Tract. It covers all five chapters of the book and  in my view gives a pretty good description of Keynes’ views from the period prior to he became an “Keynesian”.

Get the monetary framework right and let the market take care of the rest

The overall message in the Tract in my view is that Keynes wants to demonstrate that if you mess up the monetary system you will mess up the entire economy. But if on the other hand ensures a stable and predictable – rule based – monetary system then the free market will tend to work well and the price mechanism will more or less ensure an efficient allocation of economic ressources. This of course has been Scott Sumner’s message all along. The Federal Reserve should conduct monetary policy based on – a predictable rule NGDP level targeting – and then the free market will take care of the rest.

The Federal Reserve and other central banks since 2008 has messed up the monetary system and as a result they have done great economic damage. Keynes has a message to today’s central bankers (also from the preface):

“Nowhere do conservative notions consider themselves more in place than in currency; yet nowhere is the need for innovation more urgent. One is often warned that a scientific treatment of currency questions is impossible because the banking world is intellectually incapable of understanding its own problems. If this is true, the order of Society, which they stand for, will decay. But I do not believe it. What we have lacked is a clear analysis of the real facts, rather than ability to understand an analysis already given. If the new ideas, now developing in many quarters, are sound and right, I do not doubt that sooner or later they will prevail.”

I find Keynes’ words from 1923 extremely suiting for the crisis of central banking today and even more suiting for Scott Sumner’s endless campaign to enlighten central bankers and the general society about the importance of proper “Monetary Reform”. In that sense Scott Sumner follows in the footsteps of the younger Keynes, Gustav Cassel, Leland Yeager and Milton Friedman in advocating radical monetary reform.

And finally I should of course note that later in the year Scott’s great work on the Great Depression will be published. I am sure it will become a classic on its own. I have been so privileged to read a draft version of the book and I hope you all buy it when it is published. Scott tells me the title of the book will be  “The Midas Paradox: A New Look at the Great Depression and Economic Instability” 

PS I just have to share Brad Delong’s great comments about the young and the old Keynes:

“The implicit point of view is that if the value of money is dependable then leaving saving to the private investors and investment to business will work well. The magnitude of the Great Depression of the 1930s would destroy Keynes’s faith in the proposition that stable internal prices implied a well-functioning macroeconomy and small business cycles. But from our perspective today–in which the Great Depression is seen as a unique disaster brought on by an unprecedented collapse in financial intermediation and in world trade, rather than as the largest species of the genus of business cycles–it is far from clear that Keynes of 1936 is to be preferred to Keynes of 1924. Besides, Keynes of 1924 writes better: his prose is clearer, less academic, less formal; his argument is more straightforward, linear, easier to follow; his style is as witty.”

PPS It is Sumner in Skyrup…

Tract white wine

Advertisements

Unfocused vacation musings on money – part 2

It is sunny this morning in Skyrup and we are planning a daytrip to Kristianstad. The Danish king Christian IV founded the city of Kristianstad in 1614. We might be in Sweden, but Kristianstad still has its old Danish name and the Danish heritage is visible everywhere – including in the city’s Coat of Arms. Notice the C4 for Christian IV. Notice also the Swedish colours. This is true Skåne – combining Danish and Swedish. I like that.

Low for longer – a promise to fail?

Global stock markets rallied yesterday as both the Bank of England and the ECB gave forward guidance on interest rates promising to keep them “low for longer”. Now you might think I would be happy that both the BoE and the ECB promised to keep monetary policy easy, but I am not. Yes, I am happy that that ECB is not about to hike interest rates and I think that is really what the markets were celebrating yesterday, but I fundamentally think it is a bad idea for central banks to communicate in terms of their operational instruments rather than communicating in they want to achieve and it is particularly a bad idea to communicate in terms of interest rates.

As Milton Friedman tells us interest rates are low when monetary policy has been tight and inflation and growth expectations are low. Hence, when a central bank is telling us to keep rates low it is effectively telling us that growth and inflation will remain low. So in a sense when the BoE and ECB tell us that they will keep rates long for longer the central banks are indirectly telling us that they will fail.

However, why are the markets then rallying? Well, because the real message was not about rates, but about a commitment not to tight monetary policy any time soon.

And finally if anybody watched ECB chief Mario Draghi yesterday – I saw a couple of minutes it is after all vacation time – then they would not think that he is revolutionary modern central banker who is fantastic at communicating. But he nonetheless sent European stock markets strongly up. This tells a lot of how little the markets expect from the ECB. Imagine that he had given real forward guidance. He could end the crisis in the euro zone with the right words and a credible commitment to end the ECB’s deflationary policies.

Regarding the Bank of England I must admit I am nervous about Mark Carney’s ability to convince his colleagues on the MPC to do the right thing. “Low for longer” will not be enough. He needs to become much clearer on what he wants to achieve.

Kelly Evans on letting the market forecast NGDP

I think it would be much easier for Mark Carney to do his job if he listened to these very good comments from Kelly Evans on CNBC TV on how to use markets for forecasting NGDP. She explains the case for letting markets predict NGDP very well and I am of course particularly happy that she mentions one of my recent blog posts on why we should leave it to the market to decide on “tapering”.

It is very good to see this idea is getting a boost. Here are a number of my old posts on prediction markets etc.

This is why we need an NGDP futures market
Ben maybe you should try “policy futures”?
Yet another argument for prediction markets: “Reputation and Forecast Revisions: Evidence from the FOMC”
Benn & Ben – would prediction markets be of interest to you?
Prediction markets and government budget forecasts
Central banks should set up prediction markets
Markets are telling us where NGDP growth is heading
Scott’s prediction market
Robin Hanson’s brilliant idea for central bank decision-making

A blind policy maker will crash the economy

While we are talking about getting better information about the economy in Europe and in the US policy makers in China apparently seem to think that less information is better. This is from Bloomberg:

China suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers, with an official saying there’s limited time to analyze the large volume of responses.

… The disappearance of data on industries including steel adds to issues hampering analysis of the world’s second-biggest economy, after fake invoices inflated trade numbers this year. Neither the federation’s nor the statistics bureau’s statement on the manufacturing Purchasing Managers’ Index this week gave readings on export orders, imports and finished-goods inventories or an explanation for the omissions.”

A few days ago there were reports that certain words such as “credit crunch” had been banned in the Chinese media.

It is pretty hard to be optimistic about Chinese policy makers’ ability to handle the crisis when they apparently insist on being blind.

Unfocused vacation musings on money – part 1

It is vacation time for the Christensen family. We are in the Christensen vacation home in Skåne (Southern Sweden) and my blogging might reflect that.

There are really a lot of things going on the in world and I would love to write a lot about it all, but there is not enough time. But here are a few observations about recent global events from a monetary perspective.

Egyptian Regime Uncertainty

I am not getting myself into commenting too much on what is going on in Egypt other than I fundamentally is quite upbeat on the Egyptian economy, which I easily could see growth 7-8% y/y in real terms in the next 1-2 decade (with the right reforms!)

Remember the Egyptian population is going from 80 to 90 million within the next decade and the labour will be growing by more than 1% a year in the same period (as far as I remember). With the right reforms that is a major growth boost. So Egypt is a major positive long-term supply side story – short-term it is a major negative supply side story.

What we have in Egypt is of course a spike in what Robert Higgs calls Regime Uncertainty. That is a negative supply shock. The Egyptian central bank should of course allow that to feed through to higher prices – don’t fight a supply shock with monetary policy. There is a lot to say about how Egyptian monetary policy should be different, but monetary policy surely is not Egypt’s biggest problem. If you want to understand Egypt’s problem I think you should read “Why Nations Fail”.

I earlier wrote a post on the implications of recent Turkish political unrest from an AD/AS perspective. I think that post easily could be copy-pasted to understand the economics of the Egyptian crisis.

A Polish deflationary monetary policy blunder

I have followed the Polish economy closely for well over a decade and I love the country. However, recently I have got quite frustrated with particularly the Polish central bank. Yesterday the Polish central bank (NBP) cut its key policy rate by 25bp. No surprise there, but the NBP also (wrongly) said it was the last rate cut in the rate cutting cycle.

Say what? Poland is likely to have deflation before then end of the year and real GDP growth is well-below trend-growth. Not to talk about NGDP growth, which has been slowing significantly. I am not sure the NBP chief Marek Belka realises, but it did not ease money policy yesterday. It tightened monetary policy.

When a central bank tells the markets it will cut interest rates (or expand the money base) less than the markets have been expecting then it is effectively monetary tightening. That was what the NBP did yesterday – pure and simply. Now ask yourself whether that is the right medicine for an economy heading for deflation soon. To me it is a deflationary monetary policy blunder. (I will not even say what I think of the recent FX intervention to prop up the Polish zloty).

A confident Kuroda should not be complacent

This morning Bank of Japan governor Kuroda had press conference on monetary and economic developments in Japan. I didn’t read up on the details – I am on vacation after all – but it seems like Mr. Kuroda was quite confident that what he is doing is working. I agree, but I would also tell Mr. Kuroda that he at best is only half way there. Inflation expectations are still way below his 2% inflation target so his policies are not yet credible enough to declare victory yet. So let me say it again – more work on communication is needed.

Carney’s long and variable leads (I would have hoped)

Mark Carney has only been Bank of England governor since Monday, but it is tempting to say that he is already delivering results. The macroeconomic data released this week for the UK economy have all been positive surprises and it looks like a recovery is underway in the British economy. So why am I saying that Carney is already delivering results? Well because monetary policy is working with long and variable leads as Scott Sumner likes to tell us. There is a wide expectation in the markets that Carney will “try to do something” to ease UK monetary policy and that in itself is monetary easing (this is the reverse of the Polish story above).

However, my story is unfortunately a lot less rosy. The fact is that the market is not totally sure that Carney will be able to convince his colleagues on the Monetary Policy Committee to do the right thing (NGDP targeting) and judging from the markets a major change in policy is not priced in. So Carney shouldn’t really take credit for the better than expected UK numbers – at least not a lot of credit. So there is still no excuse for not doing the right thing. Get to work on an NGDP level target right now.

Summertime reading…

I hope to be able to do some reading while on vacation – at least I brought a lot of books (yes, one of them is about Karl Marx). Take a look…

Vacation books

PS It is 4th of July today. The US declaration of independence is surely something to celebrate and here in the small city of Skyrup in Skåne our neighbour always fly the Stars and Stripes on July 4th so we won’t forget. I like that.

The Market Monetarist is now on Facebook

You will now find The Market Monetarist on Facebook. Join up here.

For some time there has been an NGDP targeting group on Facebook as well. You will find that group here.

The books on money that David Laidler would like you to read

As I wrote in my post on Milton Friedman’s “Money Mischief” yesterday I have asked a number of “monetary thinkers” to make a list of around five (or so) books on monetary matters they would recommend for students of economics. I had initially just thought I would make a list of books based on the survey, but it turns out that there is a lot more material than I really had thought about. So I will instead do a number of posts on the book recommendations.

When I started to study economics in the early 1990s at the University of Copenhagen I already had a keen interest in monetarist thinking as I read Milton Friedman’s Free to Choose when I was 16 years or so. Some of my fellow students probably would have said that I had a obsessive interest in money supply numbers (I still have…)

Other than studying money supply numbers I early on found the library at the economics department at the University of Copenhagen. I read everything I could find by and about Milton Friedman and then went on to read other monetarists – such as Karl Brunner and Allan Meltzer. It was also at that time I first read articles by Scott Sumner and Bob Hetzel.

Another book I found at the library was David Laidler’s “Monetarist Perspectives”. I think what made the biggest impression initially by reading Monetarist Perspectives was actually that David termed Robert Lucas’ New Classical business cycle theory a Neo-Austrian business cycle theory (Lucas had used a similar term himself). That was one of the inspirations when I later in my Master thesis tried to formalize mathematically by “merging” rational expectations and Austrians Business Cycle theory (I am not sure I was successful…)

It was not everything in Monetarist Perspectives, which impressed me. In fact I was somewhat upset by David’s discussion of “The Case for Gradualism” (Chapther 5). I wanted shock therapy to end inflation. I reread the Chapter last year I must say I had a very hard time seeing what my problem had been back in the early 1990s.

The reason why reread Monetarist Perspectives is that I was able to get my own copy last year. I got a used copy. In fact my copy used to belong to University of California but was withdrawn from the library there and now it is on my table while I am writing this.

Monetarist Perspectives

Monetarist Perspectives is not the only book written by David Laidler I own. And it is not even my favourite Laidler book – that is instead “The Golden Age of the Quantity Theory”.

Laidler MVPY Golden Age

David Laidler is hence one of the biggest experts on monetary thinking in the world and it was therefore natural that I asked David for his contribution to my book survey.

And I am very happy that David kindly has provided me with five books that he would recommend to students of monetary thinking.

This is David’s list:
W. S. Jevons. Money and the Mechanism of Exchange (1875)
D. H. Robertson, Money (3rd ed, 1928)  (the best edition according to David)
Axel Leijonhufvud, Information and Coordination  (1981)
John Hicks, A Market Theory of Money (1989)
Milton Friedman, Money Mischief (1992)

This is what David has to say about the books on his list:

The common theme here is that the monetary economy performs the allocative and distributive functions usually attributed to the “market” by general equilibrium theory, that it is capable of performing these well, that success in this regard should nevertheless not be taken for granted, and that the way in which issues related to these matters appear evolves over time as monetary institutions evolve in the face of challenges presented by their own successes and failures.

When I went through David’s list and his arguments for choosing these books I actually came to think of another book and that is Robert Clower’s “Money and Markets”. 

The reason I mention Clower is that I think he has been a particular inspiration for particularly Canadian monetarists like Nick Rowe who was very much brought up in a Laidlerian tradition of monetarism. Nick and David are of course both British-Canadian.

Bob Clower

As always David Laidler is a great inspiration and I hope this post and particularly David’s list will inspire my readers to explore some of these great books (including those written by David!)

And finally as Kurt Schuler notes many of the books on money published prior to 1922 are now available for free online. Particularly the Ludwig von Mises Institute has done a great job in making classics available online – including the first book on David’s list Jevon’s “Money and the Mechanism of Exchange “.

Cheers David and start reading all of you!

‘Money Mischief’ – a major inspiration for ‘monetary thinkers’

I am in the process of surveying a number of “monetary thinkers” about their favourite books on monetary matters. I hope to do a number of posts on the survey results.

I had initially planned only to do one post on the survey, but I can see that there is material for a lot more. So I will likely do a number of posts on the topic in the near future. It is vacation time for the Christensen family – so I am a bit focused on reading books.

Among the monetary thinkers in the survey are George Selgin, David Laidler, Kurt Schuler, Josh Hendrickson, Marcus Nunes, Tobias Straumann, Steve Ambler and Douglas Irwin and many more and more will follow.

Milton Friedman’s “Money Mischief” is short, fun and informative

One of my own absolute favourite books on money is Milton Friedman’s “Money Mischief” from 1992. It is a collection of Friedman articles. Most of the articles are about episodes from monetary history. The book is extremely well-written and generally a very easy read.

Money Mischief is being mentioned as an major inspiration by a number of  the monetary thinkers in my survey. Josh Hendrickson calls Money Mischief “a great overview of money for non-economists and economists alike” and Douglas Irwin calls the book “just fun”. Both Josh and Doug have contributed to my survey and in later posts I will return to some of their other book recommendations.

Money Mischief to a large extent is a inspiration for this blog as I always thought that I wanted to write a blog about different monetary episodes in the spirit of Money Mischief to illustrate my views on monetary issues and I had in fact originally thought naming my blog Money Mischief.

Take for example Chapter 9 in Money Mischief“Chile and Israel: Identical Policies, Opposite Outcomes”. In this Chapter Friedman describes how fixed exchange rate policies was a major success in Israel, but a failure in Chile. In the chapter Friedman once again spells out his general opposition to fixed exchanges, but he also acknowledges that fixed exchange rate regimes might work well for certain countries. Friedman mentions Hong Kong’s currency board as an example of a fairly successful fixed exchange rate regime.

In the chapter he also makes a comment that have been a major inspiration to my own thinking about monetary matters. This is the statement (page 241):

“Never underestimate the role of luck in the fate of individuals and nations”.

I have written numerous blog posts inspired by this comment. See for example:

Never underestimate the importance of luck
The luck of the ‘Scandies’
National stereotyping is not an explanation for boom-bust – it is mostly about luck

And this is exactly what my survey of monetary thinkers is about – books that have inspired them and books that they think should be read by students of economics and money.

The survey has also inspired Kurt Schuler to reproduce his extensive reading list on monetary economics. You can see Kurt’s amazing reading list here.

In the near future I will share more survey results.

This is a picture of my own copy of Money Mischief – did you get a copy yet?

Money Mischief

%d bloggers like this: