Scylla & Charybdis

Continued from The Divinity School debate.

The devotees of monetarism start from the observation that what they call ‘money’ tends to move in a loose correspondence with a statistical chimera called ‘National Income’ and then proceed to reverse the usual order of the harnessing of cart to horse to suggest that this income is best controlled by manipulating the quantity of ‘money’ ex ante (and here let us spare ourselves an examination of the exact definition of that beast, in keeping with the monetarists’ own proclivity to flit promiscuously between whichever of the likes of M1, M2, M3… M(n) currently best fits the econometric bill).

Leaving aside the vexed question of what exactly comprises ‘national income’ or of whether the near infinite richness of the interactions taking place between tens – if not hundreds – of millions of people can be boiled down into one simple numerical entity, it is not really surprising that, in a horizontally-diverse, vertically-separated, modern economy, the multifarious business of accumulating, transforming, and delivering a wide array of goods and services involves the generation of a commensurate number of claims so that each individual’s part in the creation of this bounty can be duly recorded and ultimately encashed. 

But it is a long way from recognising that a degree of correlation might exist between money and credit on the one hand and material wealth on the other to insisting that the forcing of extra claims upon the system can somehow encourage an increase in genuine business, an augmentation of prosperity, or a sustainable improvement in the common weal.

To believe that wonders can be enacted merely by tinkering with the availability of the medium of exchange which is our economic system’s basic plumbing is a bit like the brewer who thinks that his beer can be made to ferment quicker and taste better if only he can lengthen the span and widen the bore of his pipe-work, or like a would-be author who thinks his magnum opus is more likely to be recognised as a literary masterpiece if he doubles the spacing between the lines of his typescript and so uses twice the number of reams of paper to set it down.

This is not to say that we Austrians deny that such jiggery-pokery can have very real effects on the economy – we are, after all, the ones who are noted for our own, unique, Monetary Theory of the Business Cycle – but we do doubt that its effects are either so mechanically predictable or so universally benign as our esteemed Chicagoan colleagues suppose.

Furthermore, we are all too aware that the monotonic and comprehensive inflation of values which results from the kind of carpet-bombing,  ‘helicopter drops’ which loom so large in the dark fantasises of our central banking chiefs are not the norm, but that money creation takes place at specific times and specific places and so raises some prices and enhances some demands before it effects others, thus causing all manner of largely incalculable disruptions to the all-important relative price relations which are the means by which we can determine how scarce one good is compared to another. Thus, each of their successive interventions is only likely to introduce further strains into what the earlier ones have made an already highly dislocated structure to the point that the malign effect of such distortions seems to require yet further acts of interference with the natural order. 

As for the Keynesians – one almost fails to know where to begin with a hodge-podge of obscurantism which is at best a rehashed version of the old under-consumptionist fallacies, shot through with a dash of equally antediluvian mercantilism, and at worst a cynical excuse for central planning and an assault upon the sphere of private decision making.

Not the least of the sins of dear Maynard was his role as a ‘terrible simplificateur’ in his championing of a school of accounting tautology that too many of us have come to revere as ‘macroeconomics’ – a many-headed monster of a thing which all too often tends to controvert the eminently sound insights of micro-economics once the latter’s transaction count crosses some strange, reverse quantum threshold of weirdness. 

We have heard some of the peculiar effects of this tendency here tonight in being assured, among other things, that the only salvation of a people brought low by borrowing too recklessly is to find another agency – Burckhardt’s arch ‘swindler-in-chief’, the state, if no one else – to take their place at the high table of prodigality.

We have also been told that public debt is an ‘asset’ that we owe to ourselves – a contention which not only flies in the face of logic, but also of much of history – and that we cannot all export our way out of difficulty, when the very marvels of modern society have been exactly so built up by each man, much less each nation, ‘exporting’ as much value as he can to his fellows, thereby earning the right to ‘import’ as much as he would like from them as his due reward.

Above all, we have been enjoined to assume that everything wrong in the outmoded world of laissez-faire is the consequence of someone – usually someone assumed to reprehensibly better-off than the norm – failing either to exhaust the entirety of his income on fripperies – so triggering a nonsensical ‘paradox of thrift’ – or to spend any such surplus of income over outgo on fixed income securities – so delivering us to the legendary Château d’If of the ‘liquidity trap’ instead.

Needless to say, we hold the opposite to be true. We hold that thrift fuels, rather than frustrates, material progress and that the only ‘liquidity trap’ we have to fear is the snare that results from the provision of too excessive a supply of ‘liquidity’ – i.e., of a great superfluity of money and the promise of artificially cheap credit for ‘as long as it takes’ – in the aftermath of the Bust. This utterly wrong-headed approach only attenuates the purgative effect of the crash and so leaves too many men, machines, and minerals locked into too many failed endeavours at what are still too-elevated prices for their redeployment to alternative uses to promise a decent return on the undertaking, this preventing economic rejuvenation.

In the authorities’ Humpty Dumpty compulsion to validate every sunk cost by suppressing interest rates – and thereby suppressing a good deal of the useful risk appetite and channelling too much of it into the narrow field of financial speculation – they only succeed in sapping the survivors of their remaining vitality. On the one hand denying the least afflicted (among whom are to be found, by definition, our potential saviours, the wiser, the more resilient, and the more flexible) the opportunity to rebuild amid the rubble, they thereby hand the reins instead over to an enervating alliance of extractive, public-choice parasites, skulking subsidy-grubbers, feckless leverage jockeys, and special-pleading, sub-marginal zombie companies

Among other enormities, the fact that production must necessarily precede consumption and that it is the first which comprises the creation of wealth and the second which encompasses its destruction, was far beyond the ken of the spoiled Bloomsbury elitist who exhibited a life-long contempt of the aspirations and mores of the bourgeoisie and who hence imagined that policy was at its finest when, like an over-indulgent aunt, it was pliantly accommodating the otherwise ‘ineffective’ demand being volubly expressed by the old dame’s petulant nephew as he stamped his foot in the tantrum he was throwing up against the sweet-shop window.

This article is the second in a series. Continue to Part 3: Been there, done that, bought the T-shirt.

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3 replies on “Scylla & Charybdis”
  1. says: waramess

    The problem with both Keynesian and Monetarist economics is they are both based on superficiality.

    Money is the stuff that we spend and, increased consumption consumption will lead to increased production. It is all a bit like the “what about the workers” lament and such flippery requires a rather more considered response.

    I like Frank Shostak’s examples of life on a desert island to portray the abject sillyness of these so called alternative economics.

    For those who consider the desert island ideas not sufficiently complex to explain todays society, they would do well to consider, total cost of production equals total cost of labour, just to see how incisive such ideas really are.

    Anybody who still believes that increasing consumption will increase production should work up their own desert island scenario and then move on to something more serious.

  2. On the subject of money supply increases, Corrigan claims “but we do doubt that its effects are. . . mechanically predictable”. Monetarists don’t claim the effects are mechanically predictable. They are well aware that the effect of money supply increases (and indeed just about everything else in the economy) is NOT easily or simply predicted.

    “Furthermore, we are all too aware that the monotonic and comprehensive inflation of values which results from the kind of carpet-bombing, ‘helicopter drops’…” The idea that a money supply increase might be inflationary is hardly rocket science. The average fifteen year old has probably worked that out.

    However, if an economy is nowhere near capacity, then an increase in demand stemming from a money supply increase will not be inflationary, at least initially. And if it subsequently looks like causing inflation, the money supply increase can be reversed, i.e. the money can at least in principle be unprinted as easily as it was originally printed. (I say in principle because there can be political problems in raising taxes, nabbing money off the private sector and unprinting it.)

    “money creation takes place at specific times and specific places and so raises some prices and enhances some demands before it effects others..” Given the incompetence of the authorities, there is plenty of truth in that. However that does not have to be: i.e. if one cuts income tax plus raises all benefits, that would increase the money incomes of pretty much ALL HOUSEHOLDS, there would not be too much distortion.

    “We have also been told that public debt is an ‘asset’ that we owe to ourselves – a contention which not only flies in the face of logic…” What logic exactly? You don’t spell it out. But never mind – I’ll spell it out. Here goes.

    It’s stark staring obvious that public debt and indeed the monetary base are simply bits of paper or book keeping entries. We’ve all worked out that they are not assets in the same sense as a house or office block is an asset. However, the important point is that they are VIEWED AS assets by those holding those “assets”. To illustrate, I feel richer if I have a wad of £20 notes in my pocket than if I don’t all else equal. I’m more likely to go out and buy real goods and services, which keeps someone employed.

    “We hold that thrift fuels, rather than frustrates, material progress..” You’ve completely missed the distinction between the two wholly different TYPES OF THRIFT. Obviously thrift in the sense of accumulating REAL ASSETS (like houses) furthers “material progress”.

    Quite different to that is accumulating money, the effect of which, as Keynes rightly pointed out depresses economic activity. I.e. if I save £50 a week rather than spend the £50, that’s £50 less a week spent on booze, books or whatever. And that means less work for brewers, book publishers, etc.

  3. says: waramess

    Well then, isn’t it surprising that printing 375 billion did almost nothing. Ignoring the fact that some goes into bubbles and some into inflating the import bill; I would not wish to spoil a good economic theory. Lets assume it all reaches the real economy and it is all usd to buy UK goods.
    The increase in the money supply increases demand.
    The increased demand is first to benefit the retailers. They of course will seek to sell as much as possible and re-order from their wholesalers.
    The wholesalers will either be able to satisfy demand from stocks or they will need to refuse the order. More likely, before that happens they will increase prices and that will lead the retailer to follow. Even if the wholesaler does not do so the retailer, unable to obtain more stocks, will do so himself.

    What about the producer? Well, the producer will have his manufacturing facilities already geared up on the basis of last year’s demand plus an expectation of growth. Notwithstanding the increase in demand the producer will first deplete his stock and then he might increase his sales forecast for the following year.
    Already prices are rising and the consequence will be that the cost of the supplier’s raw materials will increase so that new production will result in increased prices.
    That is just one reason why it does not work. There are others.
    Ah yes, spare capacity in the economy.
    Well, the producer will not take on more people unless he has firm orders under his belt and he is not likely to utilise spare factory capacity until the right amount of orders are received. Utilising spare capacity has a cost and the cost would fall on current production
    The entrepreneur knows full well that increasing production can only be done at a cost to the existing production profile and that the immediate effect will be to dilute profitability. For this reason the entrepreneur is exceptionally cautious when faced with sudden increased demand: his job might depend on his decision.

    Bernanke is beginning to understand this lag.

    Reversing QE. Don’t be silly. The Bank of England will never be allowed to compete with the DMO in issuing gilts and in the event of it ever being considered an option it would need to happen long before the DMO could reasonably accommodate competition in this respect.
    As for savings, the Austrians often describe savings as foregone current consumption. This is not really the case. In reality it is where the producer is earning in excess of his desire to consume and, in this way he releases his excess resources for investment by others.
    Hardly a matter of slight concern and hardly a matter so trite as your example of ssaving on the booze bill.

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