I see I’ve had my official “Austrian” card revoked, here’s the thing, the identity of exchange posits no causality, it’s merely an analytical and pedagogical tool that can be used by the economist. Clearly, any explanation of price formation should be in terms of the subjective assessments of individual actors regarding marginal units (you know, this is what Garrison, Horwitz et al mean when they say there are macroeconomic questions, but only microeconomic answers, you’re not breaking any new ground here).
Stop the purist crap, I’ve attempted discussion with you previously concerning the merits of fractional reserve banking and after a whole lot of pedantry you just stopped answering. I’m fairly confident with my knowledge of economics and the breadth of my reading within the short time I’ve been studying economics to say that at the moment I do adhere to the teachings of the Austrian school. AFAIK, you’re no authority to tell me otherwise.
By the way, using the identity equation as a tool doesn’t make one a mechical quantity theorist (unless Hutt, Yeager, Horwitz, Selgin, White, Garrison are all "mechanical quantity theorists), so perhaps you’d best stop preaching and carrying on reading.
Because you always pull back on your original positions, always conceding the main point. When it comes to economics, in the general sense, you know a lot; the problem arises when it comes to Austrian economics. It’s no coincidence that whenever you respond, on any topic, it turns into a major debate. You don’t notice the mistakes you make, and how you come off as a Fisherite.
Okay, I’m a “purist,” now show me why I shouldn’t be.
I’ve changed some of my positions over time, but I’d like to see that as the result of having an open mind (try it sometimes, it’s good fun). AFAIK, I’ve never conceded the main point in regards to fractional reserves, which is that full reserve banking is incongruent with Austrian theory and would cause the business cycle under certain circumstances.
If you really wish to think that I’m entirely ignorant about the Austrian school, go ahead, in comparison to most here though such an assertion just isn’t true. Nor will you find many people believe it to be. I’d love to know how I’m a “Fisherite”.
You’re not ignorant of Austrian economics at all; you know when you’re breaking from Austrain thought. Usually, you’ll briefly acknowledge the Austrian position, and then completely disregard it favor of a quasi-monetarist approach. This is especially true when you defend FRB and quantity theory. Defending an “elastic money supply” is, in essence, defending “stabile prices,” but not in the Austrian sense. Banks can either keep the demand for real capital within the limits set by the supply of savings, or keep the price level “steady;” but they can’t do both. Money is not a consumer good or a producer good, expanding the supply of money does not make society wealthier, instead it distorts the intertemporal guiding mechanism, leading to arbitrary vertical and horizontal shifts and misallocations (something you understand very well).
I don’t know how many times I have to say it, I’m not a quantity theorist! I value the identity because of its use in explaining changes in the price level. It doesn’t account for causality, on theory based on individual human action can do that (how am I contradicting Austrian thought here?). As for FRB, unless you’re definining an Austrian as “one who support 100% reserves in banking” (in which case, congratulations! You’ve finally got every Austrian economist to oppose FRB) I don’t see how this matters. If I were to write a defence of FRB I would invoke the capital structure, relative price movements, public choice arguments, the natural rate of interest etc. what part of this is disregarding Austrian thought in favour of monetarism?
Wait, since when do I favour price stability? I advocate a system in which MV (I’m using this purely for explanatory purposes) is kept stable and money is kept as neutral as possible. However, I favour a declining price level over term that results from changes in productivity. IOW, I agree with George Selgin, who is an Austrian economist.
As for the rest of your post, if you really want to get into the FRB debate once more, go for it. But please, do not run away this time.
I don’t see how this is possible. To me, it’s like saying: If I were to write a defense of the LTV I would invoke the capital structure, relative price movements, public choice arguments, the natural rate of interest, ect. What part of this is disregarding Austrian thought?
You can’t use this for “purely explanatory purposes;” I don’t know what “V” means, how it’s calculated, and how it affects general or relative price levels. Simply saying that V=1/k and k=demand for money means absolutely nothing to me.
How do you define neutral money? Austrians would say that money is neutral when, and only when the rate of interest has no effect on general price levels; when it’s purely determined by individual preferences. How can this condition occur when the supply of money arbitrarily increases due to FRB? FRB allows for the creation of fiduciary media which must underbid the market rate, thus adding to circulation and increasing prices. You have yet to show me why this belief is wrong; you just spew the same line over and over again: “Equilibrium is reached when MV is unchanged,” and then claim, “I use the quantity theory merely for demonstrative purposes;” no you don’t, it’s the central premise of your argument.
But, you see, the LTV just isn’t compatible with Austrian economics, since one of its most important aspects is its thorough embrace of subjectivism. On the other hand, there is nothing that makes FRB imcompatible with Austrianism. So I can’t really help but think that’s a false analogy.
In fact, I’d say just the opposite. Free banking theory is far more in line with the rest of Austrian economics than 100% reserve banking is. The fact of the matter is that unless you can prove that it is impossible for fractional reserve banking to be conducted voluntarily you’re going to have to admit that you’re using the law to impose legal restrictions upon banking. The notion that centralized legal norms can increase economic efficiency and that entrepreneurial profit seeking can’t, seems odd.
Yet, Rothbard and most Austrians since use demand curves, which are technically incorrect. Austrians would point out that demand curves can’t be continuous since this implies that units can be broken down infinately. However, this doesn’t mean that they’re useless from an explanatory purpose.
Saying that V is 1/ money demand shouldn’t be that difficult to understand.
The central premise is that the loan market supplies time in the form of money, you’ve agreed with this. Well, then, it stands to reason that when the market for money is in equilibrium so is the market for time. Look, if you were willing to do some research on the topic then it might be a bit easier, but I doubt you’re willing to read any of the work done by “free bankers”. Here’s the thing, absent price level adjustments, holding money implies that you’re giving up scarce resources, which the bank can then lend out to entrepreneurs. If the bank extends too many loans, however, it’s reserves will continue to drop and endanger the solvency of the bank. Clearly, no profit seeking enterprise wants and as such will stop extending loans to such a great extent, thus raising reserve ratios and interest rates. Now, I don’t understnad what part of this contradicts Austrianism, clearly, people are asserting their preferences and the bank is having to faciliate this, making a profit in the process. If people desire to save money, they can either deposit their money in the bank, make a direct loan, or hold more cash. In any of these three situations the bank can translate this into more money available to investors.
So, yes, I would agree with your notion of neutrality (although, I’d put it differently), but I think it works in my favour, not yours. Also, consider this, what if people were to reduce the amount they wish to save, pushing the natural rate up. In a 100% reserve environment they’d start spending their money and using present resources, however, as far as the bank is concerned time preference has remained unchanged, and as such so does the market rate of interest. Now, from an Austrian point of view, this would cause the business cycle.
Well, I’ll admit that this analogy went too far, but my point was that FRB isn’t compatible with Austrian economics as well, at least not when it comes to ABCT.
I really don’t care about so-called market restrictions (though cases have been made logically showing the fraudulent nature of FRB and fiduciary media); I’m simply trying to understand the nature of boom-bust as best as I can. I don’t object to a few legal restrictions; I’m not into the whole political/philosophical aspect of Austrian economics.
FRB does more than just cause business cycles; its inherent instability will justify state intervention and institutional central banks, all of which will justify their actions, citing the “failures of free-market capitalism,” something we’ve seen though out history.
Do interest rates not bring the market into equilibrium?
History does not support this claim.
A reduction in the savings rate (the ratio between consumption and savings changes in favor of the former) will lead to a leftward shift in the supply of potential loans, thus increasing the natural and market rate simultaneously. This would keep the rate of interest neutral and would serve as an accurate price mechanism for market actors. But, If the ratio between consumption and savings changes too much in favor of the former there will indeed be a recession (as the structure of production contracts, and more roundabout methods are no longer economically justified). Austrians don’t claim that their theories end recessions (at least Hayek doesn’t), they merely wish to end the arbitrary cyclical nature of the trade cycle. This situation would be quite rare though (still possible), as overall wealth would increase, allowing for simultaneous increases in both consumption and savings without changing the ratio between the two, at least not too drastically.
Of course it is, the crux of the ABCT Is that when the market rate of interest is pushed below the natural rate, a business cycle may follow. Now, of course, the burden of proof is on you to show that FRB will push the market rate below the natural rate, which I don’t believe it does. If you can prove this, then you will be able to argue that fractional reserves may cause business cycles, otherwise you’re out of luck. Even then, the use of the word “incompatible” is out of context.
I’m not into the political and philosophical aspects of “Austrian economics”, you’re misunderstanding my point. The point isn’t a political one, it’s an economic one. What I was attempting to point out was that Austrians generally hold that centralized legal restrictions cause inefficiencies since they interfere with the market process and entrepreneurial discovery.
However, this doesn’t seem to be the case with FRB. Most of the opponents of fractional reserves seems to hold that banking should be conducted in a very passive way on behalf of banks, however, they do not seem to think the same with regards to other industries. As for your point about fractional reserves causing state intervention, I’d like to see some sort of support for such a claim.
Historically, the state has always inteferred with free banking experiences, even when there have been relatively successful examples of fractional reserves such as in Scotland.
Yes, and, what is your point? This is irrelevant to the point I was making (one you earlier granted).
First of all, yes it does. Once again, I’m going to have to ask for some specific source from you to substantiate such a claim. Free banking was relatively successful in countries such as Scotland, Canada and Switzerland. Secondly, since when to Austrians believe that history trumps theory. I wouldn’t bring this up, but since you seem to keen on challenging my “Austrian credentials”, it seems a bit odd.
Yes, a reduction in savings may ocur in such a manner, but it needn’t. It’s entirely possible that people keep supplying the same amount of loanable funds to the banking industry but reduce savings in the form of cash balances. Unless you believe that prices adjust instantly in the upwards direction (they don’t and if you think they do, you’re going to sound rather Walrasian), the usual relative price effects that cause the Austrian theory of the business cycle will be set in play. Fortunately, free banking can accomodate for this, full reserves can’t.
I concede the first 2 points, but again, your final response doesn’t really address my final point at all. And, as usual, you leave me with “FRB is superior because it is.” No actual explanation whatsoever. I’ve asked you repeatedly to explain how FRB would keep the market rate at or near the natural rate,and why it wouldn’t cause disproportionalities. But, like always, no actual explanation. If you would be kind enough to suggest some articles/books which could clarify your point it would be greatly appreciated since I don’t understand it all.