Unhelpful Labels: Reply to Hummel

     

As Jeff Hummel wonders, in his last post, whether he has interpreted my views correctly, I hope I may be pardoned for getting in a last word for the sake of answering him.

My answer is that, although in general Jeff represents my views correctly (I shall come to some exceptions in a moment), his portrayal suffers from his insistence upon sorting various aspects of those views into “Monetarist,” “Keynesian,” and “Austrian” pigeonholes, together with his tendency to regard any admixture of ideas of the three schools as necessarily problematic.

Jeff claims, for example, that in treating a decline in money’s velocity as a potential cause of depression, I introduce a “Keynesian” element into my analysis.  And although he is quick to say that for him the epithet carries no opprobrium, he finds the “decidedly un-Austrian flavor” of this aspect of my thinking troublesome.

But what is so “Keynesian” about the notion that velocity sometimes declines, and that, other things equal, such a decline implies reduced spending and a temporary decline in profits and production?  As Hummel himself recognizes (and as Leland Yeager has gone to some length to remind people[16] ), this sort of thinking is straight “old-fashioned” Monetarism, and as such predates the General Theory by many decades.  It forms as well, as Jeff also recognizes, part of Hayek’s own understanding.  Finally, as Larry makes clear in his contributions to this forum, it is at least implicit in some of Mises’s arguments.   The Keynes of the General Theory, on the other hand, far from offering a particularly clear and coherent statement of the possibility in question, obscured it by introducing the vague concept of “liquidity preference.” 

And even if it were true that my theory had a “Keynesian” flavor, it wouldn’t follow, as Jeff suggests, that the flavoring amounted to any serious revision of the Austrian theory.  It would merely indicate my own eclecticism, which I have never intended to disguise.   The fact that I believe that a recession or depression can result from a collapse in spending, with no need for a prior boom, doesn’t means that I either reject or desire to radically revise the Austrian cycle theory.  It just means that I (like Hayek) think that there is more than one way in which downturns can happen.   Indeed, I have publicly complained about the obnoxious tendency of both Monetarists and Austrians (to say nothing of Keynesians) to insist upon a “one theory fits all” approach to understanding business cycles.[17]

Later in his remarks Jeff, replying to my suggestion that the cyclical consequences of any particular spending growth rate will be “muted or neutralized” to the extent that the growth is anticipated, labels the suggestion “pure Monetarism,” as if overlooking the fact that, in making it, I referred to Mises’s own (1943) statement of the same view.[18]  

Jeff also wonders whether I am “making a comprehensive claim ... that any growth rate of MV, if constant and fully anticipated, will not generate a self-reversing malinvestment boom.”  Evidently I did not intend to go quite so far, or I would have written “neutralized” instead of “muted or neutralized.”  On the other hand, I did not limit my statement to cases of “constant” spending growth rates, for (as the rational-expectations revolution has taught us) any nonrandom growth pattern might be fully anticipated.  (I know, I know: I have now added a New Classical “flavor” to my arguments.   So sue me.)  As for 1922-29, I can only say that the question Jeff raises concerning that period has me scratching my head, for if MV growth accelerated during the 20s, and the acceleration itself was not anticipated, that is all it would take to cause an Austrian boom-bust cycle of some (perhaps small) magnitude, regardless of what happened to spending afterwards. 

Next Jeff claims that, in saying that central banks are responsible for any undesirable changes in spending growth, and not just those stemming from changes in the size of their own balance sheets, I am granting such banks, and the Fed in particular, “more ability to stabilize the macroeconomy” than is warranted.  Fiddlesticks: I readily concede -- indeed, I’ve long argued, as Jeff knows very well -- that central banks aren’t capable of managing money in such a way as to avoid or at least minimize cycles.  When I say that central banks are to blame for undesirable changes in the flow of spending, I don’t mean that they might do better.  I mean that another arrangement entirely might do better.

Finally, Jeff claims that, to hold the Fed partly responsible for the easy credit conditions that helped to stoke the subprime boom, (1) I must assume that it had “almost total control over interest rates” and (2) I must be relying upon some version of the Taylor rule with its “astonishing assumption that the underlying real interest rate ... remains perfectly constant over long periods.”  Both suggestions are mistaken.  To suggest, first of all, that the Fed was to blame for the very low interest rates that prevailed between 2001 and 2007 is not to claim that it had “almost complete control” over those rates.  It is only to claim that it was able to influence them at the margin, and temporarily.  To deny that central banks can have such an influence would of course be to reject out of hand not only the Austrian cycle theory, but Wicksell’s theory, and every other theory that holds central banks capable of influencing real interest rates to some nontrivial extent.   Certainly neither Greenspan nor any other central banker ever believed central banks to be so powerless.  On the contrary: most central bankers are inclined to exaggerate central banks’ control over interest rates, except (of course) when it comes to defending themselves against accusations of irresponsible bubble-blowing.

Second, one needn’t appeal to the Taylor rule at all to claim that the Fed kept interest rates too low.  There are other ways for gauging where the federal funds rate stood relative to its “natural” or “neutral” value.  My own assessment is in fact based on a comparison of the federal funds rate with a rough natural-rate estimate based on the growth rate of total factor productivity.[19]

Finally, neither my nor Taylor’s assessment takes for grated a “perfectly constant” natural or neutral rate of interest; both merely assume the real natural or neutral rate varies around a constant mean.

[16] 1. Leland B. Yeager, “New Keynesians and Old Monetarists.”  In George Selgin, ed., The Fluttering Veil: Essays on Monetary Disequilibrium (Indianapolis: Liberty Fund, 1997), pp. 281-302.

[17] “Booms, Bubbles, Busts, and Bogus Dichotomies.” Freebanking.org, August 30, 2013. .

[18] Ludwig von Mises, “Elastic expectations and the Austrian Theory of the Trade Cycle,” Economica, August 1943.

[19] George Selgin, David Beckworth, and Berrak Bahadir, “The Productivity Gap: Monetary Policy, the Subprime Boom, and the Post-2001 Productivity Surge.” Unpublished working paper, September 2013.  The paper includes a comparison of its own estimates with those based upon a Taylor rule.