The Conservative Case for QE2, Or, Why I Still Will Not Be an Austrian.

[Esuric]

Aren’t all those quotes given in a context of Mises commenting on fiat money?

See my post above. Again, most of those quotes come from a person who claimed to have heard Mises say this at a FEE lecture in the 60s. I can’t find where some of the other quotes came from.

[nirgrahamUK]

Again, most of those quotes come from a person who claimed to have heard Mises say this at a FEE lecture in the 60s. I can’t find where some of the >>other quotes came from.

You can’t have any serious reason to doubt her apart from any prejudice you might hold against what she attributes to him…

Bettina is a serious scholar with tremendous respect for her mentor and colleague.

[z1235]

Esuric, I edited my previous post to add another question.

Here are a few more… Why are “altered monetary conditions” any more cause for concern (thus in need of fine-tuning by manipulating supply) than, say, altered iPod conditions, altered bread conditions, or altered shoe conditions? Why is it a problem when there’s not enough money to meet everyone’s demand for it, but it is not a problem when there aren’t enough Ferraris to meet everyone’s demand for them? Isn’t this why markets and prices exist in the first place?

If there’s not enough of X, the price of X goes up, thus demand for it goes down to meet supply.

Z.

[Esuric]

You can’t have any serious reason to doubt her apart from any prejudice you might hold against what she attributes to him…

I can because it directly contradicts Mises’ seminal work on money, and because there’s no evidence that Mises ever said it. It’s also extremely misleading to present such quotes as if they came from Mises’ published works. At this point, I’m forced to take her on her word. Either way, whether Mises said it or not is entirely immaterial. It’s simply incorrect to proclaim that if the government pursued a forced deflationary policy, where they reduced the supply of money by 99% tomorrow, that it would not lead to a major economic catastrophe, and I won’t believe that Mises ever held such a position without actual proof.

[nirgrahamUK]

No, it doesn’t contradict Mises, nor does it contradict Rothbard, if you would consult The Block and Barnett article it is spelt out in detail, but Mises and Rothbard were ‘wrong’ about ‘optimality’ of the quantity of money. Now perhaps, they could be more sophisticated if pushed at the margin on the question of a vast project to destroy money ‘would not then more money be better than less, if we get rid of 90% of the money, and then ask you’, but their written text on the topic does not fully represent this view with meat on the bones, but rather does seem to embody the fallacy you and block and barnett and I have noticed, the fallacy that some existing quantity of money, is optimal for the future too. (i.e. contradicting the Blockian/Barnettian theory I agree with that the optimal quantity of money is that brought about by the operation of a free market and that changes in the quantity of money within that framework are not ‘sub-optimal’)

[Esuric]

@z12345

Here are a few more… Why are “altered monetary conditions” any more cause for concern (thus in need of fine-tuning by manipulating supply) than, say, altered iPod conditions, altered bread conditions, or altered shoe conditions? Why is it a problem when there’s not enough money to meet everyone’s demand for it, but it is not a problem when there aren’t enough Ferraris to meet everyone’s demand for them? Isn’t this why markets and prices exist in the first place?

Please, I don’t want to repeat myself. For all of those who are just now joining this conversation, please take the time to read the previous posts. It’s unreasonable to assume that I will answer the very same questions over and over again.

@Esuric

Now let’s consider what actually happens when the demand for money rises. Individuals, as I’ve mentioned, will cut consumption and they will withdraw money from the bank, from their savings. They will also sell off their securities (bonds and stocks) for liquidity. This will lower (a) the total supply of loanable funds and (b) the demand for securities, which forces financial intermediaries to charge higher rates of return in order to increase QD. In other words, the market rate(s) of interest will rise, but the natural rate of interest will remain unaltered (because the only thing that has changed is monetary conditions). I’m assuming that the demand for consumer goods (consumption) and the demand for producer goods (savings) fall in a proportionate manner for the sake of simplicity. It could very well be the case that they change unevenly which would alter the natural rate of interest.

My model, though, assumes an economy consisting of a single phase of production. With such an assumption, an elevated rate of savings would produce a similar type of effect except for the fact that interest rates would fall, saving the profitability of a few marginal producers. But when we lax this assumption, and consider an economy consisting of multiple phases of production, than an elevated savings rate actually increases total profit in the aggregate (the stock of profits, so to speak) and total output.

Let’s now consider the effects of saving in an economy consisting of multiple phases of production:

The demand for producer goods will rise relative to the demand for consumer goods. People will place their savings in commercial banks and there will be higher demand for securities, which will reduce the market rate(s) of interest. But because the ratio of exchange between consumer and producer goods has changed in favor of the latter, the natural rate of interest will fall as well. There will be a further division of labor and capital across the entire economy; in other words, labor will be spread more thinly as the structure of production expands, which lowers marginal costs (firms, at the margin, employ less laborers). The price of other inputs will fall at each successive stage, further reducing marginal costs, and finally the interest rate will fall, also reducing marginal costs.

Arbitrage will restore a single rate of profit (interest) amongst the various stages of production, but in the aggregate total profits should rise (as the economy produces more). Additionally, the total supply of producer goods (capital) will increase relative to the total supply of consumer goods (I’m merely saying that the structure of production is expanding) which will increase the marginal productivity of labor and therefore real wages. There is no actual deflation here because the price of producer goods is rising at the expense of consumer goods (but consumer price indices will record general price deflation because they only measure the prices of final goods and services).

This is not the case when there’s an elevated demand for money, even in an economy consisting of multiple phases of production. A higher demand for money, again even in an economy consisting of multiple phases of production, will elevate the market rate of interest above the natural rate, constricting general economic activity. This will yield a condition which resembles inadequate effective demand until prices adjust (which will take time and the adjustments will be uneven).

@Esuric

Either way, if we assume an economy consisting of multiple phase of production (a structure of production), a higher demand for money, which elevates the market rate of interest above the natural rate, would make it so that the prices of final outputs would all faster than the prices of inputs, because the structure of production is either contracting, or not expanding enough to restore profitability (as is the case when there’s a higher rate of savings).

[Esuric]

@nirgrahamUK

No, it doesn’t contradict Mises

Sure it does. How could Mises hold this position while he opposes forced deflationism and defines inflation and deflation the way that he does in the TMC?

[nirgrahamUK]

You can’t tell me that there is no contradiction between Mises’ positions on the basis that if there was to be a contradiction, that would be a contradiction!

[Esuric]

You can’t tell me that there is no contradiction between Mises’ positions on the basis that if there was to be a contradiction, that would be a contradiction!

I’m telling you that such a position directly contradicts his earlier and arguably most influential work, and that there’s no actual evidence that Mises ever held this position or made this argument at some FEE lecture.

[nirgrahamUK]

Tell me if I’m wrong that this is the Bettina Quote of Mises you think is unlikely.

_**

Money is a medium of exchange. And that means, first of all, that its quantity is without any importance for the perfection of its functions.

**_

What do you make of this from Human Action:

_**

However, the services which money renders can be neither improved nor repaired by changing the supply of money. There may appear an excess or a deficiency of money in an individual’s cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.

**_

[Smiling_Dave]

@Esuric

@Mises

If it had not been for this the increase in the exchange-value of money, and so also of the monetary metal, would have given an increased impetus to the production of the metal. Capital and labour would have been diverted from other branches of production to the production of the monetary metal. This would undoubtedly have meant increased returns to certain individual undertakings; but the welfare of the community would have suffered. The increase in the stock of precious metals which serve monetary purposes would not have improved the position of the individual members of the community, would not have increased the satisfaction of their wants; for the monetary function could also have been fulfilled by a smaller stock.

This is one undesirable consequence, but Mises’s explicitly says, “all of the undesirable consequences.”

And he lists them all in that section, and says none of them apply to fiat money.

Also, you continuously conflate price-stabilization mandates with monetary equilibrium theory. The latter does not intend to stabilize prices, and it does not oppose general price deflation.

I was adressing what you were saying, and showing it’s flaws. Call it any name you want.

**

I’ve literally had more fruitful conversations with my 3 year old niece.

**

Danny, I’m keeping quiet because of you.

The major and most profound problem associated with inflation, i.e., an expansion in the supply of money beyond the demand for money, is not that “prices go up,” but rather that some prices go up faster than others, while some prices remain unchanged, or actually fall. This is what causes a misallocation of resources towards ultimately untenable productions and an arbitrary distribution of wealth from those who receive the money later, towards those who receive it earlier.

The focus on the relative structure of prices, and the uneven adjustments, is a major Austrian insight that is lost amongst many mainstream economists. Additionally, this uneven adjustment process occurs for deflationary episodes as well:

Just asserting the same stuff you already have. No further evidence. I have already refuted it many times over.

@Mises

The converse of what is true of a depreciation in the value of money holds for an increase in its value. Monetary appreciation, like monetary depreciation, does not occur suddenly and uniformly throughout a whole community, but as a rule starts from single classes and spreads gradually. If this were not the case, and if the increase in the value of money took place almost simultaneously in the whole community, then it would not be accompanied by the special kind of economic consequences that interest us here." (pp. 243, TMC)

Who doesn’t know here that it doesn’t happen uniformly? I’ve mentioned many times that the new money goes to Obama and his friends.

At any rate that quote says nowhere near what you are saying.

Now there are other effects of inflation, which I’ve already mentioned. The most serious of which (if we exclude the influence it exerts over relative prices) is inflationary expectations which elevates yields and may lead to a hyperinflation (when the demand for money collapses). The other effects, namely menu costs and shoe leather costs, are, when compared to the other affects, relatively inconsequential. Now it’s important to keep this in mind because many neoclassical economists, who are unfamiliar with Austrian insights, actually believe that inflation is a minor problem, a mere nuisance (they are aware of hyperinflations but believe that they are highly improbable).

Nothing new here, but for some backtracking. You originally said that YOU and ALL BRILLIANT AUSTRIANS think inflation is a minor problem. Now you attribute this to some neoclassicals. Let me remind you of what you said:

When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up

This is not the problem at all. In fact, general price inflation is essentially irrelevant except for the fact that it may, and eventually will, yield high long-term interest rates.

It’s not the case that inflation “increases prices and that’s bad,” nor is it the case that “deflation lowers price and that’s good.”

You…completely ignore major theoretical breakthroughs made by the Austrian school, breakthroughs which distinguish it from the mainstream and other schools of thought.

The mainstream focuses on a few and relatively unessential effects of inflation, such as inflationary expectations, menu costs, shoe leather costs, and arbitrary redistribution of wealth (from creditors to debtors), while the Austrians tend to focus on the effects that inflation has on the relative structure of prices (Austrians don’t deny that the other effects exist).

Either way, the fact that prices (tend to) adjust upwards (as a result of inflation) is the most insignificant problem. I hope you realize this now.

When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up.

is incorrect from an Austrian point-of-view. Again, if prices merely “adjusted up” then inflation would basically be reduced to merely a nuisance

Next, to claim that deflation is “good” because it “lowers prices” is not only overly simplistic, but entirely ignores monetary theory altogether. It is armchair economics. If this were true, than central banks would be extremely efficient social institutions which could intentionally pursue perpetual deflationary mandates, and make all of society wealthier.

Huge error here. You don’t know what central banks are about. They are not interested in making society wealthier. They are interested in making a small handfull of people wealthier, the recipients of their newly printed money.

Additionally, the 30% deflation rates during the great depression should have acted as a major economic stimulus, promoting general economic activity.

You don’t know what promotes general economic activity. It is non interference from govts in any fashion. The interferences by govt then were so mind boggling they over came any possible thing that might have helped. As it is, the huge deflation then indeed was great for the economy, as it prevented many from starving to death, naked and homeless.

A few other ridiculous accusations that I will now address:

1. I don’t support inflation and I don’t support government control of the monetary system. I support a free banking system free from arbitrary regulations.
2. I’m fully aware of the fact that inflation is solely caused by an expansion in the supply of money.
3. I don’t believe that Ben Bernanke should print more money (he’s already done way too much).

Glad to see you are backtracking to agreement with me.

First of all, all your quotes are from TMC, his earliest work, and he is known to have changed his mind in later works about this very question, whether you have to keep the money supply at some arbitrary high.

Okay so stop saying that “mises never claimed” x.

I took care of that in the other part of the reply, that he was explicitly talking baout a gold standard, and said explicitly that with fiat money there is no such problem.

And your endless appeals to authority reveal how intellectually feeble you are, not only because you fail to see that you’re consistently engaging in an argumentative fallacy,

Once again, Danny, I’m defering to you.

You don’t understand when appeal to authority is a fallacy. Certainly when I lay out logical proofs that I am right and you are wrong, and then add that our man Mises agrees with me, there is nothing wrong with that.

BTW, what argumentative fallacy are you indulging in, calling your opponent intellectually feeble?

Second, there are readers here who [I suspect] think that if the great Esuric said it, it must be true, and further, must be the accepted view by the Austrian community at large. By quoting Mises making statements you have said are moronic, I show that your opinion is your personal one, not the generally accepted one.

but because you don’t understand the quotes that you’re providing (Mises is attacking the Monetarists and their price-stabilization mandate in almost all of those quotes).

But what he says refutes you as well.

[Esuric]

This is not the issue at hand. Mises is basically correct when he says that the quantity of money is “without any importance for the perfection of its functions,” because prices adjust. The primary function of money, from which all other functions are derived, is due to the fact that it is the commonly employed medium of exchange. This only breaks down when the demand for money collapses, i.e., during a hyper-inflation. No one denies that price adjustments will restore real cash balances, but it’s this adjustment problem that’s problematic, and which I’ve chosen to investigate (and which Mises clearly explains in the TMC). Again,

@Mises

The converse of what is true of a depreciation in the value of money holds for an increase in its value. Monetary appreciation, like monetary depreciation, does not occur suddenly and uniformly throughout a whole community, but as a rule starts from single classes and spreads gradually. If this were not the case, and if the increase in the value of money took place almost simultaneously in the whole community, then it would not be accompanied by the special kind of economic consequences that interest us here." (pp. 243, TMC)

But this does not mean that “any supply of money is sufficient” at any given time (it is made sufficient, eventually, due to price alterations). This statement clearly denies even the existence of monetary disequilibrium (never mind the adjustment towards monetary equilibrium), and clearly contradicts his definition of inflation and deflation. If you follow Mises’ train of thought here then you will (necessarily) reach my conclusion.

Either way, and I must stress this again, whether he held this position or not is meaningless. Since when were appeals to authority considered legitimate here on the Mises forums? Also, what about the fact that I cannot find half of his quotes?

[Smiling_Dave]

@Esuric

This is not the issue at hand. Mises is basically correct

I guess he’s got to get it right once in a while, hey?

when he says that the quantity of money is “without any importance for the perfection of its functions,” because prices adjust. The primary function of money, from which all other functions are derived, is due to the fact that it is the commonly employed medium of exchange. This only breaks down when the demand for money collapses, i.e., during a hyper-inflation. No one denies that price adjustments will restore real cash balances, but it’s this adjustment problem that’s problematic,

no it’s not. You haven’t shown any problems.

and which I’ve chosen to investigate (and which Mises clearly explains in the TMC). Again,

@Mises

The converse of what is true of a depreciation in the value of money holds for an increase in its value. Monetary appreciation, like monetary depreciation, does not occur suddenly and uniformly throughout a whole community, but as a rule starts from single classes and spreads gradually. If this were not the case, and if the increase in the value of money took place almost simultaneously in the whole community, then it would not be accompanied by the special kind of economic consequences that interest us here." (pp. 243, TMC)

yeah, you keep repeating that one, which proves nothing.

But this does not mean that “any supply of money is sufficient” at any given time

Sure it does.

(it is made sufficient, eventually, due to price alterations). This statement clearly denies even the existence of monetary disequilibrium (never mind the adjustment towards monetary equilibrium),

that’s right, it’s all a big myth that you and some cranks made up

and clearly contradicts his definition of inflation and deflation.

no it doesn’t. And don’t forget he said black on white right there in TMC that all the problems he enumerated [ godl rushes to california, dentists not having enough for their fillings] apply to a gold standard. Don’t forget, TMC was written when there was a gold standard in place. He explicitly says the problems vanish in a fiat system. it’s right there in Chapter 17

[nirgrahamUK]

Oh, I think I am coming to see your interpretation. That ‘given sufficient time’ any quantity of money ‘would be optimal’;

I’m afraid that that interpretation rather ‘confuses’ more than elucidates, and it is more straightforward to adopt a position like

@Block and Barnett

We see, then, that, contrary to Mises and Rothbard, the quantity of money

available in the whole economy is not always sufficient to secure for everybody
all that money does and can do. Rather, the optimum quantity of money,
as with any other good, is that quantity determined in the free market process,
and, contrary to Mises and Rothbard, when the free market process causes
additions to be made to the stock, such additions do confer a social benefit,
in the form of additional voluntary exchanges facilitated.

[z1235]

@Esuric

But this does not mean that “any supply of money is sufficient” at any given time (it is made sufficient, eventually, due to price alterations).

How is this different from any supply of shoes, or bananas at any given time? “Price alterations” is how markets work/clear.

Z.

[Smiling_Dave]

Nigraham,

Just want point out that Block and Barnett say explicitly that Mises agrees that in a fiat money system any amount is fine

[nirgrahamUK]

Indeed!

1. The optimal quantity of fiat money is zero (Hoppe, Hülsmann, and

Block 1998, pp. 1–50). However, in a fiat-money-using society, the optimal
quantity of fiat money is whatever is in existence, and, from an Austrian perspective, that quantity should never be changed, either increased or decreased,
save for its complete elimination in shifting to a commodity money.2

[Smiling_Dave]

1. All the quotes are from Money and Inflation by Mises, and Nigraham [ I think] showed where the whole book is a web page here too, not just a pdf file.

2. For those who cannot find the quotes, read the whole book. You will learn something.

3. So quoting Mises explaining clearly WHY he says what he says is appeal to authority, but some obscure poster asserting his position with no evidence is fine.

4. For those who called me out for conflating govt money printing with counterfeiting, my beloved Uncle Mises comes through once again:

The government increases the quantity of money. All the evils under
which we are suffering in our market conditions everyday are due to the
fact that governments believe that it is permissible and natural toproduce
money to increase the power of the government to spend. In order to
spend more, the governments have to do practically nothing but give an
order to a printing office: “Print a quantity of money and give it to us.”
If private citizens do this, the government doesn’t like it. There aremany
printing offices in the country; most of these printing offices are in the
position to print dollar bills. What prevents the individual citizen from
printing dollarbills, banknotes, is a series of laws whichmake this a crime,
and the government is powerful enough to prevent it by arresting the peo-
ple and imprisoning them, and so on. But if the government itself prints
additional dollars, then it is legal and it increases the quantity of money.
And this is the monetary problem. Apart from the fact that this brings
about a very bad situation for those peoplewhowere not receivers of the
new additional money, because they have not received more money, they
now face higher prices.

YES!

[Smiling_Dave]

Here is an interesting one. It repeats for the umpteenth time what is all over the book, Mises definition of inflation. There was some question before about he defines it, well here we have it.

Also there was some question about my calling money printing and the resulting price rise "evil’, even though I was quoting Mises. Well I guess he backtracked a bit, because here he merely calls it “very bad”.

BTW, in a book devoted to the problems of money printing, still no mention of price distortions and trade cycles and all that other stuff. And we are 2/3 of the way through.

The best proof that inflation, the increase in the quantity of money,
is very bad is the fact that those who are making the inflation are denying
again and again, with the greatest fervor, that they are responsible.

“Infla-
tion?” they ask. “Oh! This is what you are doing because you are asking
higher prices. We don’t know whyprices are going up.There are bad peo-
ple who aremaking the prices go up. But not the government!”

Note that Mises proof of how bad inflation is applies both to printing money and to rising prices.

[Esuric]

@nirgrahamUK

@Block and Barnett

We see, then, that, contrary to Mises and Rothbard, the quantity of money

available in the whole economy is not always sufficient to secure for everybody
all that money does and can do. Rather, the optimum quantity of money,
as with any other good, is that quantity determined in the free market process,
and, contrary to Mises and Rothbard, when the free market process causes
additions to be made to the stock, such additions do confer a social benefit,
in the form of additional voluntary exchanges facilitated.

I wholeheartedly agree with this but it doesn’t explain why the optimal quantity of money is that which is determined in a free market process, and I don’t believe that Mises inherently opposes fiduciary media.

@z1235

How is this different from any supply or shoes, or bananas at any given time? “Price alterations” is how markets work/clear.

Well there are many reasons but the main reason is that the money rate of interest is partially determined by monetary conditions, and changes in the demand for money can, as I’ve mentioned, yield inter-temporal disequilibrium (when the market rate rises above the natural rate), contracting general economic activity. Money is not like other economic goods; it is both a good and class in itself, and alterations in monetary conditions effect all prices.

We shouldn’t prevent the supply of money from reacting to the demand for money anymore than we should prevent the supply of shoes reacting to the demand for shoes.