Jonathan, don’t forget that my appeal to “facts” concerning reserve ratios was intended as a response to the claim that under free-market conditions banks would be forced to hold fractional reserves. My point was that, if that is so either (1) there’s never been anything even reasonably approximating a free market in banking or (2) there has, but people were systematically fooled into thinking they were holding 100-percent backed “receipts” even though they weren’t. Neither proposition is supportable.
As for praxeology, I honestly believe that it, and other “methodologies,” while fine as subjects for philosophical discourses concerning what it is that good economists do, are not helpful as self-consciously applied formulas for actually doing economics. I never thought about praxeology when I wrote TFB, or anything since. I thought about making sensible arguemnst supported by available evidence. What’s more, I am absolutely convinced that if I had tried to be self-consciously “praxeological” in doing my work, I’d have felt so cramped that I wouldn’t have been able to finish. (Or worse, I would have written some empirics free stuff like… well, never mind the examples.) Hard-core praxeologists, who insist on doing nothing but, are a dime a dozen; they include persons whose contributions to economic knowledge consist of emphatic blog posts, but nothing else.
Since this thread has been hijacked anyway, I’d like to ask about some point you raised.
You write “Not facts but historical facts. They are relevant to our understanding of history, i.e., economic history. Never to economic theory itself.” I have two quibles with that.
I think historical facts are useful as counterexamples. If a praxeological train of thought leads one to conclude that, say, birds fly north for the winter, and we see that they fly south, it shows us we goofed somewhere.
The stagflation of the Nixon years has been used as a counterexample to aspects of Keynesian thought. [As an aside, amazing what a mess one person can make].
Reading Human Action, I see it is full of historical statements. Rothbard made a list somewhere. One of them is the assumption that some people at times prefer unpaid vacations to working. How can one know that if not from historical fact?
“…19th century bank customers who were consciously willing to play the game of having the cake (interest) and eating it at the same time (the IOU on demand). By the way, if you consider this to be an inappropriate metaphor to describe the service in question, please let me know why you think so.”
I do think it inappropriate,Jakub, for the following reason: people get interest on bank demand liabilities only for as long as they do not exercise the demand option. So If I make a deposit for a week, and then write a check for the amount, I get a week’s worth of interest–nothing more (assuming I even get that much–in fact, banks refer to average balances over a period, but let’s leave such details aside for the sake of argument.). If I leave the money for a day, at best I earn a day’s interest. Whatever the case, I can only keep earning interest until I demand the money back, or spend it (which amounts to the same thing once the check or note clears). So I never get to demand my money and get paid interest on it. I merely get to earn interest while holding to hold a claim including the right to demand my money. The deposit is no different in this respect than any callable loan.
As for runs: of course no-one is happy when they get the bad throw of the dice on a risky asset! I never suggested otherwise–or that customers whose banks fail would merely shrug! But those panics leading to the fed’s establishment were not normal consequences of FRB. They had their roots in very serious government restrictions, including restrictions on branch banking and banknote issuance. I’ve written about this, as have many others. Indeed, central bankers claim that the panic could only be avoided by having a central bank, ignoring these legal restrictions. But that’s no reason to join them in their demostrably false claims. (Canada, by the way, lacked the legal restrictions in question, and had no crises.) On all this, see my Cato J. paper, “Legal Restrictions, Financial Weakening, and the Lender of Last Resort,” or my SSRN’Cato Working paper, “Has the fed Been a Failure?” I also talk about those crises in Theory of Free Banking.
The thing is, I cannot repeat all the stuff I’ve written elsewhere again and again for blogs: its essential that persons inclined to take the 100-percent position go out and read ther stuff that’s available rather than ask us poor defenders of FRB to compose little versions for each new discussion that comes up! Let’s take advantage of those sunk costs everyone!
So you’re defining “deposit” differently than the 100-percenters, which was my point in the other other free banking thread. Each camp is right about why their own position is right but is wrong about why the other camp’s position is wrong. You guys aren’t arguing using the same definitions, which leads you to calling your opponents cult members and Walter Block making fun of you at Mises Circles. How about you guys agree on definitions and then duke it out?
For the record, DD5 doesn’t understand my argument in “Praxeology and Understanding.” Careful readers will see that I assign an important role to historical facts in developing all but a very limited “core” of economic theory. I also think this view consistent with Mises’ stand–read his Theory and History for more. The “Praxeology” DD5 seems to believe in is a version that would make most useful economics impossible: you can only spin out so much about reality without ever leaving your armchair or otherwise consulting history. You certainly cannot say much of any value about the likelihood of 100-percent reserve banking in a free-market environment!
“So you’re defining “deposit” differently than the 100-percenters.” Actually Daniel I’m giving the term the meaning it has taken on in the context of banking since the earliest days of FR banking in England. On this see my SSRN working paper, “Those Dishonest Goldsmiths” and sources cited therein. Also, in case he’s not among them, see H.D. Macleod’s Theory and History of Banking which goes into the very issue in painstaking detail.
I’m not saying that your definition is wrong, instead, I’m saying that is different than the 100-percenter’s definition, which makes the debate between you guys futile. After all, the debate isn’t about who’s got the correct definiton.
Brilliant Daniel. You’ve basically eliminated the entire argument between free bankers and rothbardians by pointing out it is an issue of definition, that until resolved, can never conclude the discussion.
It is truly amazing how petty some Austrians scholars (on all sides) are at the highest levels. Thank god for us private sector Austrians, who are much more reasonable, and far too productive to waste such time arguing when definitions don’t match.
I’m not saying that your definition is wrong, instead, I’m saying that is different than the 100-percenter’s definition, which makes the debate between you guys futile. After all, the debate isn’t about who’s got the correct definiton.
Is it an issue of definition? I don’t think it is. These are the arguments, as far as I know (correct me if I missed one):
Fractional reserve banking is unethical, which suggests that the bank is committing fraud. It’s a contract issue (and one which ignores the possibility of a contract that allows for demand deposits to be subject to lending, under conditions expressely agreed to by signing parties — e.g. the contracts you agree to today when you deposit your money into a bank).
Fractional reserve banking is inherently unstable. It’s not an issue of contract or ‘definition’, it’s an issue of pure economic theory.
The differences that I’ve read are not in the ‘definition’, rather in the realm of the subject of stability (where, more often than not, I have just seen full-reservist not really understand the argument they’re trying to tackle [the opponent’s argument, that is] — this doesn’t mean that fractional reservists are correct, btw) and ethics (which I personally think is absurd, but you have to give it credence since there are so many who think it’s a valid case against fractional reserve banking).
It is truly amazing how petty some Austrians scholars (on all sides) are at the highest levels. Thank god for us private sector Austrians, who are much more reasonable, and far too productive to waste such time arguing when definitions don’t match.
Since we’ve already derailed the thread in one direction, there’s no harm in me introducing another tangent. I’ve recently been thinking about entrepreneurship. There’s not much to talk about, but I’ve actually started thinking about entrepreneurship as an alternative to the road (the academic one) I’ve chosen to take so far (with not much success). I just need to start thinking of ideas that I can actually put into motion.
I don’t think the different definitions make the debate “futile”: the real debate is about whether or not it is legally legitimate and economically desirable for banks to lend sums handed over to them by customers in exchange for contractsd offering so-called “demand deposits.” There are ways to settle this, that aren’t merely semantics. The trouble is that the 100-percenters think that by insisting on what the term bank “deposit” ought to mean (but in fact hasn’t ever actually meant), they also succeed in making a substantial argument on the real matter at hand.
Who at the Mises Institute do you “disagree” the most in general with? Is the Mises Institute a “cult” because of the FRB issue or are their other issues (price formation, capital theory, gov’t intervention e.g) that you disagree on them with and they “fail” to engage you in/don’t do “real economics”? I ask you this because it seems from the get go that your opinion of the Institute/some of the “Mises/Rothbard” scholars is overwhelmingly negative, and I wonder if it is solely because of the FRB issue or other reasons.
This is the type of crap that’s becoming increasingly prominent here on the forums, and it’s why posting here simply isn’t worth it. People take things out of context, attack straw-men, and simply engage in dishonest argumentation.
Professor Selgin never made the argument that FRB is “good” because it existed since at least the 17th century. He claimed that a very specific argument, namely that “FRB always requires explicit privilaige from the state,” and “would surely fade once such priviliages are removed,” is bunk. It is not supported by the evidence.
As far as I’m aware, the freer the monetary system, the lower the reserve ratio’s, and 100 RR’s have only existed in religious theocracies which forcefully banned fractional reserves (which is exactly what Rothbard called for).
Which is what I said. The 100-percenters are using a different definition for “deposit” than you are, thus, they are straw-manning you.
What’s the point of debating about movies when one person has defined movies as movies and the other person has defined movies as books?
Which is what I was implying when I said that the debate was not about the definition of deposits.
I think the debate between the fractional-reservers and the 100-percenters hasn’t gotten anywhere besides name calling and mocking because a definition of deposits has not been agreed to.
Dr Selgin, unfortunately I can’t even access that article using my institution’s Athens login. I seriously think Austrians/fellow travellers outside the MI would do themselves a real favour by going open source.
No. Mises clearly makes the fine distinction between economic theory and economic history in Theory and History, as well as Human Action.
But it is not a discovery of Mises that historical facts are inappropriate in logical deductive reasoning. I am quite surprised that this is even contested here.
It indeed makes most economic theories useless. I’m sorry this is an inconvenient for you and many others.
But this remark is even more odd given that most of modern Misesian economic theory is grounded on praxeology. And much more progress since Mises is also based on praxeology. I hardly consider such theories as useless. In fact, I would say they offer the only useful set of theories out there.
I don’t think so. Definitions are critical to any argument, however, definitions cannot simply be invented and reinvented if they are to be useful. And this is the core of the problem with the free bankers. A definition that is too loosely defined or that contradicts itself is useless. (Like available anytime, pending supply,..etc, etc….)
The argument that the “bank is committing fraud” is not an ethical argument. No more then making the argument that government is coercion and compulsion. An ethical argument would pass judgment on such action. It is true that the person making the argument for fraud can also pass judgment, however, this does not mean that the argument itself is based on such ethical considerations.
