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Selgin Follow-Up

In my last post I was pretty critical of an interview by George Selgin in which he argues that (price) deflation is good when productivity is increasing but bad when aggregate demand is decreasing.  In fairness to Selgin, this type of interview is always a very crude attempts at skimming a few key conclusions off of the surface of a much deeper body of reasoning.  I admit I do not fully understand the reasoning behind the claims in this case and I am partly arguing with other people who I have heard make similar claims.  So my method of argument was to sort of try to head off every method of reasoning which I can think of which could possibly lead to them.  Many of these can probably be answered pretty well but I don’t think that all of them can be answered simultaneously in a way that results in the basic idea that comes across in the interview.  However, I have put a bit more thought into it and I want to now take a different approach and instead of imagining a bunch of possible defects in the reasoning, try to put it in the best possible light and say how I think it could be said to be correct (and how I think it is not).

So admitting that I don’t completely understand what Selgin means, here is what I think he could mean that would be basically correct:  If we had a completely different monetary regime, in which people expected the price level to fall when productivity increased and rise when productivity decreased, then when that happened, it would not be bad.  I agree with this and I don’t think it is very far outside of the “mainstream.”  Here is what I mean.

Imagine the Fed instituted a Sumner-style NGDP targeting regime in which the target for NGDP were rather low, let’s say 2%.  In this case, the predictive power of the “entrepreneur” would be set to work predicting things like productivity, and when they predicted output to rise more than 2%, they would predict the price level (most likely) would fall, and the markets would be employed in aggregating these predictions which would be incorporated into debt contracts.  In this case, if the forecast was wrong in one direction or the other, those contracts would end up favoring one side or the other but this would be the normal function of markets.  People would only take on the risk that they were willing to bear.  This would not necessarily cause systemic problems when prices fell.

However, I don’t think this is what most people come away from this type of interview thinking.  If you get the impression that what he is saying is that the price level could fall tomorrow due to increasing productivity without causing any problems, then I think you are drastically mistaken.  This is because under the current monetary regime, market participants are not taking NGDP for granted and using this as the starting point for their calculations, they are taking the inflation rate for granted (at least to some extent) because they expect the Fed to do whatever is necessary to produce a certain level of inflation regardless of changes in productivity.  This means that if the Fed suddenly fails to do this (perhaps they become convinced by Selgin’s argument) then the markets will be in the position of having made a systematic error across the board which is not the result of a defect in reasoning but of a misplaced belief about the behavior of the CB.  In this case, there will be all of the problems that I have been trying to describe in credit markets as the burden of debt becomes unexpectedly great.

Now I suspect that a New Keynesian like Paul Krugman would say that deflation would still be bad because wages/prices (particularly wages) don’t adjust downward efficiently, only upward and this is probably the fundamental disagreement between Selgin and the “mainstream.”  I suspect a market monetarist like Sumner would say that the first regime would be better than what we have but not quite as good as an NGDP targeting regime with a slightly higher target because of the same argument but also that it would be disruptive to move to this regime from where we are now because of the adjustment to the lower target and mainly for that reason, they would advocate a higher target.  (That adjustment would be problematic because of all the debt which was built up in expectations of a higher rate of inflation although I don’t know that market monetarists would cast it in that light.)

So basically, my gripe is with the impression that I think this argument creates.  This may or may not be exactly the impression that Selgin intends to create (and maybe it isn’t even the one that he does create, I may be the only one who sees it that way, but I don’t think so).

 

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Categories: Macro/Monetary Theory
  1. John S
    March 18, 2014 at 12:39 pm

    Your follow-up touches on a lot of the points I wanted to make. I think the productivity norm is actually a great topic, and I’d love to be able to explore it more in depth, but due to recent personal circumstances I’m short on reading time.

    If we had a completely different monetary regime, in which people expected the price level to fall when productivity increased and rise when productivity decreased, then when that happened, it would not be bad.

    Right, in Less than Zero Selgin presents a counterfactual post-WWII monetary regime just as you describe, where the CB occasionally/regularly allowed the price level to fall to reflect productivity increases[1] instead of fighting any fall in the price level at all costs; presumably, after decades, people would be aware of this. He presents it as an ideal to strive towards; I imagine he’d share your view that an immediate transition would be tumultuous.

    Imagine the Fed instituted a Sumner-style NGDP targeting regime in which the target for NGDP were rather low, let’s say 2%.

    That’s what I was going to say, imagine it as just a very low NGDP target–0-1% NGDPLT, where TFP increases (I believe his postwar estimate was 2% annual growth) are offset by gently falling prices. However, the CB would still counteract declines in velocity (“demand shocks”) by expanding the money supply, a result which (in Selgin’s view), would best approximate a free banking result (as velocity declines, free banks require fewer precautionary reserves as the level of gross clearings declines, thus allowing for increased lending).

    all of the problems that I have been trying to describe in credit markets as the burden of debt becomes unexpectedly great.

    Just curious if you’ve seen this Shiller paper on debt-deflation and indexed-units-of-account (http://cowles.econ.yale.edu/P/cd/d18a/d1817.pdf), which would make it a lot easier to make indexed contracts. Seems like an interesting idea, which actually has been implemented in the real world in the form of Chile’s Unidad de Fomento.

    [1] I proposed the term “proflation” for “productivity driven deflation.” Kind of the opposite of stagflation.

    • John S
      March 18, 2014 at 1:24 pm

      Here’s Sumner’s (overall positive) review of Less Than Zero: http://www.themoneyillusion.com/?p=3059

      Japan as a possible example of a real-world CB implementing the productivity norm: http://jpkoning.blogspot.kr/2012/01/japan-productivity-norm-and-deflation.html

      Finally, in your last post you wrote: If there is such a thing as an aggregate demand shortfall it is a purely monetary phenomenon. This is true whether productivity is rising or falling. So why would it be bad in one case and good in the other?

      I think the things to distinguish between here are 1) productivity driven price declines in general and 2) sudden drops in the overall price level caused by shortages of/excess demand for money (rather than comparing #2 with rising productivity vs. #2 with falling productivity). If the CB allowed the money supply to contract severely enough (say -10% NGDP growth), I’m sure Selgin would say that would be bad even if productivity were growing at a good clip.

      As for why #2 is more undesirable than #1? GMU Austrian Steve Horwitz cites Leland Yeager’s insight that “money has no market of its own,” i.e. in order for excess demand for money to be brought back into equilibrium, all prices in the economy must adjust. For firms, especially those that provide highly inelastic basic goods, this presents a problem of “who goes first?” If all firms adjusted at once, the recession would be over, but many/most firms would rather not bear this cost alone and would prefer to wait until competitors to cut prices first. Since downward price adjustment is difficult, quantities must adjust and this causes negative effects such as increased unemployment.

      See Horwitz, Microfoundations and Macroeconomics: An Austrian Perspective, p. 145

      http://books.google.com/books?id=Q9qFAgAAQBAJ&pg=PA145&lpg=PA145&dq=horwitz+yeager+%22who+goes+first%22&source=bl&ots=82OdlJxU8m&sig=PW_oPvP8IPRgUVcTtbRrUVGNooc&hl=en&sa=X&ei=pkgoU9K5AoXylAWe3IDADA&redir_esc=y#v=onepage&q=horwitz%20yeager%20%22who%20goes%20first%22&f=false

      • John S
        March 18, 2014 at 1:29 pm

        #1 (productivity driven price declines) is instead both industry specific and spread out over the business cycle (productivity improvements occur randomly). So it doesn’t entail the same degree of difficult, simultaneous macroeconomic coordination that #2 does.

      • Free Radical
        March 19, 2014 at 2:01 am

        Lot’s to read there, I will try to check out Less than Zero here at some point. Without checking the Horwitz links, that last paragraph jumps out at me. Sure, all prices must adjust but that doesn’t present a “who goes first” problem. When all prices are “too high” all firms have an individual incentive to lower them regardless of what other firms do. This is essentially what makes them “too high.” The demand at the current prices is sufficiently low that any firm could make more profit by lowering their price and taking demand from the others. This drives all of their prices down. This is supply and demand 101 and that’s the kind of thing I would expect Austrians to get right so maybe he has some kind of complicated argument for why these basic market forces don’t work this way in this case? If not, it seems like a serious flaw in reasoning to me.

      • Free Radical
        March 19, 2014 at 2:21 am

        I sort of regret that first Selgin post, even though I still believe in the point I was driving at I wrote it kind of hastily (I was originally going to write about something else but got distracted by that interview) and it wasn’t very carefully organized. My point about an aggregate demand shortfall being purely monetary is essentially that either one of the two scenarios you describe is a monetary phenomenon. In the first one, policy is to contractionary for a situation with static output and in the second, it is too contractionary for a situation with increasing output. The thing that makes it contractionary in either case is that it leads to prices which are lower than what people are expecting. Increasing productivity does not counteract this effect. The only way to make the circumstances Selgin describes into reality is to totally rework monetary policy in such a way that peoples’ expectations of the price level depend on their expectations of productivity.

    • Free Radical
      March 19, 2014 at 1:52 am

      So is Selgin functionally just a market monetarist? I wonder if he thinks that an NGDP target of 1% is notably preferable to one of 5% because of “proflation.”

  2. John S
    March 20, 2014 at 12:44 pm

    The demand at the current prices is sufficiently low that any firm could make more profit by lowering their price and taking demand from the others. This drives all of their prices down.

    This was my initial reaction as well, and I was puzzled by any Austrian putting forth the “who goes first” argument. But thinking about it some more, it seems there are some valid reasons to believe that sudden, economy-wide downward price adjustments are difficult.

    1) Producers of goods with relatively inelastic demand may maximize revenue by maintaining current prices instead of cutting prices. People aren’t likely to change the amount of milk and flour they buy, even in a recession.

    2) The desire to restore previous real cash balances suggest that consumers will lower their overall level of spending, but firms can’t know in advance which goods consumers will economize on first. This is a rather Austrian point; we can’t assume consumers will lower spending on all goods uniformly, we can only observe this ex post, after the changes in consumer spending have worked their way through markets.

    3) Competitor prices aren’t the only prices that firms need to think about; there are also the prices of inputs to consider. Workers aren’t going to accept “excess demand for money” as justification for cutting wages. Some inputs, such as raw materials, parts, and capital goods, are likely to be imported from countries that aren’t experiencing deflation; firms in these countries won’t have much incentive to cut prices (unless the importing country is very large). Even if all inputs are sourced domestically, firms have to weigh the likelihood of increasing market share/revenue vs. the risk of selling the same quantity at a lower price and getting squeezed by costs that haven’t fallen in the same proportion.

    4) Price alone isn’t the only factor that affects market share in monopolistically competitive markets. In my local supermarket, the price of Palmolive is about three times that of the cheapest brand; I highly doubt that lowering the price of Brand X by 5-10% will make any significant difference in Brand X sales, at least within the time frame of the recession (nor is a 5% price cut by Palmolive likely to sway consumers of Joy to switch immediately). “Taking demand from others” is a long-term mission; a short-term tactic like a price cut (unless substantial, which would cut into profits) isn’t likely to succeed.

    5) The costs of renegotiating higher prices with retailers once the recession is over may outweigh the temporary/uncertain benefits of cutting prices now. The Great Recession aside, most recessions play out fairly quickly (I think I saw a post-war average of a year somewhere). For the reasons above, many firms may decide that their best bet is to stand pat and indeed hope that “others go first” in helping to restore overall monetary equilibrium.

    These are a few explanations I can think of, and to some degree, I’m just playing Devil’s Advocate here. At any rate, I think these factors would weigh far more heavily in impeding downward price adjustments under conditions of general excess demand for money than they would hinder industry-specific, randomly occurring productivity driven price declines.

    • Free Radical
      March 20, 2014 at 8:35 pm

      1) If this is the case, then they are already at the new equilibrium price and no reduction is necessary…

      2) Of course, consumers will not reduce spending on all goods uniformly (not sure if you were arguing that they would). This is sort of a “Lucas Island” sort of imperfect information argument, it is not a “who goes first” argument. I certainly wouldn’t argue that it might take some amount of time for firms to figure out the optimal price but this is not a defect in incentives.

      3) There are two arguments here. The foreign exchange argument doesn’t make sense. Prices in the foreign country are denominated in foreign currencies, if their currency doesn’t deflate and ours does, then their prices automatically become cheaper in terms of our currency because the exchange rate changes so no change in their price is required. The other argument is essentially Keynes’ “sticky wages” argument which it would be ironic for an Austrian to be making but again, if this is the case, it is a purely psychological defect not a defect in incentives.

      4) This is just a general argument that free market forces don’t accurately represent the forces at work in monopolistically competitive markets. Fair enough, but there are still some forces which determine prices in those markets and I don’t see how they cause a “who goes first” problem. If the optimal prices for those firms fall, then they should still have the individual incentives to lower them regardless of whether their competitors do.

      5) This argument makes sense but is not very persuasive to me. This can only thwart a change in prices for which the benefit is smaller than the costs of renegotiating which seems likely to be small to me. Somewhere prices have to fall, if others continue to hold off lowering while AD shrinks, the benefit to an individual firm renegotiating will get bigger until it becomes optimal for some or all to lower. I can see this being a minor friction but I can’t see it compounding into a major inefficiency.

      • John S
        March 21, 2014 at 2:52 am

        All reasonable points, and I’ll respond shortly. However, I think we could avoid confusion and save time if you could answer a couple of questions so I can have a better idea of where you’re coming from on monetary issues (I’ve been reading through some of your archives, which I’ve enjoyed–you were quite the fire-breather for some time!–but I’m not sure how much your views have changed in the last 2-3 years).

        We both seem to agree that: 1) the present system is undesirable/unsustainable (although not for reasons that Rothbardians cite, e.g. fractional reserve banking and imminent hyperinflation); and 2) some kind of laissez-faire banking and monetary system would be preferable. But what I’m not clear on is what your preferred path is to move from #1 to #2.

        In very broad strokes, could you please tell me:

        1) What, if anything, do you think the Fed and/or federal govt should be doing right now to address the current aftermath of the Great Recession?

        2) What is your preferred roadmap/time frame to get to free banking?

      • Free Radical
        March 22, 2014 at 6:52 pm

        These are good (and kind of complicated) questions. First of all, my views on macro and monetary policy have evolved considerably over the past 2-3 years so some of the old stuff is misleading. My formal training is mostly in micro so I have basically been learning macro in my spare time in the last couple years mainly on the blogs. I kind of came up as a “fire breathing” free market kind of guy, the kind of guy who would have been a hardcore Austrian (Rothbardian) if I hadn’t gone to grad school and figured out that a lot of what they say doesn’t actually make any sense (as you know I’m still figuring out GMU types). For instance, there was a time when I bought into the inflation meme so there may even be some posts about that back there.

        Now I will take your questions in reverse order. I think the ideal system would be completely decentralized with free “money” (credit) where banks (or whomever) are pretty much free to develop whatever institutions of exchange can best facilitate trade. My supposition is that this would result in something similar to a gold standard but I don’t think it has to be centrally mandated. I am not sure if this is what Free Bankers want or not, sometimes it seems like it is but other times I hear people like Selgin talking about “freezing the base” which would be a less radical liberalization. Maybe that is an intermediate step in their plan though, I’m not sure. For the record, I think if you tried to freeze the base, everything would fall apart because I don’t think there is enough money at any given moment to repay all the debt and so the money supply has to be constantly increasing or it causes a recession.

        As far as how to get there, there are sort of two separate questions there: how could you get there in theory and how could you get there in a way that people would go along with. I don’t have a good answer to the second one but I will try to briefly answer the first.

        Essentially you would just have to unwind the central bank. This could be done by declaring a period (probably several years) in which all banks have to close out their accounts at the Fed by paying off any debts using base money. This would mean that they would have to unwind their dollar denominated loans. This would be complicated and I don’t want to get into it too deeply here. But I suspect there is actually a dimension to this that conservatives would like. This is because I think there would not be enough money to repay all of the debts. This means that the Fed could adjust (increase) the quantity of base money out there available to repay those debts to a quantity that would make it as smooth as possible by buying up treasury debt. Once all of the banks’ accounts at the Fed were cleared out, the Fed would likely still be holding a lot of treasury debt that they could just wipe off the books. This would reduce the debt (probably dramatically) at the same time. Of course you would have to stipulate a lot of things like redenominating the existing outstanding debt (or you could do something like buy back all the debt, and say that after a period in which banks will be allowed to clear their accounts at the Fed, the remaining dollars in circulation will be redeemable for gold at whatever rate is possible given the quantity of gold and the quantity of dollars outstanding.) I could say a lot about this but it’s mostly all day dreaming at this point since there is no appetite for such radical changes.

        Now assuming that your first question is assuming that they are working more or less within the current system, I’m pretty much with Sumner. If they adopted an NGDP target, we’d be better off than we are now (which would mean monetary policy would likely be “looser.”) I have some issues with this in the long run but I will leave those for another time.

      • John S
        March 24, 2014 at 11:13 am

        Thanks for the very detailed responses to my rather broad questions on how you would fix the economy now and reform the entire monetary system! It really will aid me in writing comments on your blog in the future.

        I wanted to write a more detailed response, so I started doing some reading on the subject of monetary disequilibrium theory as interpreted by GMU Austrians. Unfortunately (fortunately?), it led me down a very deep rabbit hole, which I’m not even close to reaching the bottom of. Interestingly, there was something of a ruckus on the GMU side over this very issue a few years ago:

        http://www.coordinationproblem.org/2010/10/why-says-law-does-not-preclude-gluts-and-shortages.html

        For now I’ll just say that I still think it’s reasonable for Austrians to believe that the difficulties of abrupt, economy-wide, downward price adjustments can be attenuated by offsetting excess demand for money with an expansion of the money supply (sticky prices aren’t really “Keynesian,” they can be viewed as an empirical reality). This isn’t quite the same thing as New Keynesian “juicing up” the economy with money illusion smoke and mirrors (not sure if you were getting that impression).

        I think it’s worth reiterating that Selgin’s productivity norm never calls for a decrease in NGDP, just for maintaining constant (or very slowly growing) NGDP in an environment where everyone expects this. In a way, Sumner’s plan is the same thing; instead, he wants to maintain the 5% NGDP trend line everyone had come to expect prior to the crisis. Since you endorse Sumner’s proposals, I suspect that ultimately there’s a lot of overlap between your thinking and Selgin’s.

      • Free Radical
        March 24, 2014 at 7:27 pm

        Yeah I think there is a lot of overlap between myself and Sumner and Selgin from what I can gather. It’s those deep Austrian rabbit holes that usually make me pull my head out whenever I look down them rather than diving in. This probably means there is some stuff going on there that I don’t understand so for the record I’m aware of that. But also for the record Kaynesians (not that I am defending them) wouldn’t characterize what they support as “juicing up” the economy with smoke and mirrors either. They describe what you call “juicing up” in much the same way you describe offsetting excess demand for money. They are both just making up for a perceived shortfall in NGDP. You just seem to disagree about the optimal level/growth rate.

        Regarding “sticky prices” I think it can’t be said that their role as the cause of recessions is an empirical fact. The way I see it, the empirical fact is simply recessions which we know shouldn’t occur in a classical economy with perfectly flexible prices and to some extent we observe that prices don’t fall (at least as much as expected) in recessions. But of course, correlation does not imply causality. But since it is basically impossible to explain a recession if all prices are perfectly flexible we have adopted the moniker “sticky prices” to explain whatever it is that is causing the recessions. My point is that the arguments they make in a first year graduate macro class to explain “sticky prices” seem pretty flimsy to me, at least in their potential to cause severe long-lasting recessions. But debt contracts can be considered a “price” and they are naturally long-dated, dollar denominated, and permeate practically every aspect of the economy. So once you start thinking about that particular “sticky price” a lot of things start to look much more realistic, at least in my eyes.

      • John S
        March 24, 2014 at 11:19 am

        I think Beckworth’s terminology (if I understand it correctly) might be helpful.

        Benign deflation = productivity driven price decreases in an environment of previous trend line NGPD growth

        Malign deflation = below trend line NGDP growth

        So both Selgin and you see malign deflation as bad; Selgin is just imagining a conterfactual, constant NGDP trend line. Unfortunately, in a TV interview, no one will understand the term “malign deflation,” so you just have to say deflation, which could give viewers the wrong impression, as you opined.

      • Free Radical
        March 24, 2014 at 7:29 pm

        Yeah I think this is right. I was originally too hard on Selgin (as I basically previously admitted). The important point, I think, is to notice that the important thing is not the rate of deflation but the monetary policy regime, which is what Sumner also pointed out, much more clearly than I did.

      • John S
        March 25, 2014 at 1:30 pm

        Actually, it hasn’t all been Austrian stuff that I’ve been led to by this discussion. Been reading some monetarist stuff, both old (Yeager) and new (Glasner).

        Re: the term/concept of “sticky prices”–I think you’re quite right, it’s something of a “just so” story to explain AD declines, and it’s a rather flimsy foundation to build an entire macroeconomic theory upon. That said, I think there needs to be some way to express the idea that quantities and output often fall before prices and wages do, whether or not we want to refer to that phenomenon as “stickiness.” I liked this passage from Glasner:

        “When aggregate demand drops, would we really expect workers immediately to take wage cuts and businesses immediately to reduce prices, the decline in aggregate demand being entirely reflected in instantaneously falling prices and wages, with no reduction in output and employment? I doubt it. At the moment aggregate demand falls, how many people are even aware of what has just happened? It’s not easy to distinguish between a general decline in demand and a decline limited to just your own product.”

        http://uneasymoney.com/2011/07/14/why-price-stickiness-matters-or-doesnt/

        So the fall in AD is something that creeps up on everyone, and by the time the recession is common knowledge, there’s some unavoidable period of blind groping to find the new equilibrium (but, as you say, this isn’t a defect in incentives). Perhaps something like Sumner’s NGDP futures/prediction market suggestion could speed this adjustment process by giving firms advance warning of imminent NGDP declines.

      • Free Radical
        March 25, 2014 at 8:42 pm

        Just for the record, it’s not that I think sticky prices don’t exist I just think it is hard to blame a decade-long recession on them. Plus, you would think that if that were what we assumed were the whole cause of recessions, we might, at least occasionally, consider removing all of the government-sponsored institutions that cause them (minimum wage, unions, unemployment benefits, welfare, etc.). But I assume you are basically on my side there and it is a diversion from monetary policy.

        Regarding NGDP futures markets, it does seem likely that it would increase the accuracy of individual forecasts of NGDP. Of course, in an NGDP targeting regime, the idea is for those predictions to always be equal to the target and the market just gives them a way to adjust them toward it.

      • John S
        March 25, 2014 at 1:45 pm

        As far as nominal “sticky debt” goes–I think you’re right again, it’s likely a huge factor in recessions. Aside from Post-Keynesians and the “balance sheet recession” people, hardly any bloggers comment much on this. This is where I think Shiller’s ideas (linked above) have a lot to offer:

        1) Separation of MOE and UOA functions of currency via an indexed-unit-of-account (to help the public overcome money illusion)

        2) CPI-linked [or perhaps NGDP-linked] “baskets” for writing long-term debt contracts (to help shield debtors from unexpected NGDP swings)

        3) Replacement of nominal govt debt with NGDP-linked bonds (to give a big push towards indexed-debt products)

        Lars Christensen has looked at some related ideas via “Quasi-Real Indexing”:

        http://marketmonetarist.com/2011/12/03/quasi-real-indexing-indexing-for-market-monetarists/

  3. John S
    March 20, 2014 at 1:12 pm

    So is Selgin functionally just a market monetarist?

    Funnily enough, this is a criticism leveled against Selgin by many Rothbardians! 🙂

    I’d say Selgin feels NGDPLT of any stripe is a superior regime to inflation targeting, but his vision of monetary deregulation seems much broader and deeper than most MMs. Nick Rowe would be perfectly content with an NGDPLT CB; Sumner makes polite nods toward Selgin now and then, but he’s also been quite hostile toward free banking in some comment threads. Glasner, having written his own book on free banking, seems closest in spirit with free bankers, but even he has de-emphasized things like ending FDIC (mentioned in his book) in favor of joining the NGDP chorus.

    Selgin sees a move to NGDP-targeting as a small step on the long path towards free banking. He’s proposed other steps to reforming the system (such as scrapping the primary dealer system: http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2012/7/v32n2-8.pdf ). Ultimately, he sees moral hazard produced by government guarantees–namely TBTF and deposit insurance–as the key problems of the current system, a view that I share. Most MM’s don’t really focus consistently on these long-term issues as Selgin has. He’s done a good job, in my view, of being an idealist and a pragmatist at the same time.

    • John S
      March 20, 2014 at 1:18 pm

      As far as his entire body of work goes, I think it would be grossly unfair to classify Selgin as just a MM with a low NGDP target. He did, after all, pretty much single-handedly unearth the history of private coinage in Britain in Good Money. He’s consistently focused on free banking for his entire career.

      Btw, here’s a great lecture on Good Money, if you’re interested (to add even more intrigue to the Austrian civil war–I believed his research was partially funded by the Mises Institute!) http://www.youtube.com/watch?v=-gn55fTRXZw

      • George Selgin
        April 29, 2014 at 10:14 pm

        Just saw this, fellows. For the record, I received the first Mises Institute research grant–I think it was for $1500–back in 1983 or 84, when the Institute was just hatched (Lew Rockwell handed me the check), and long before the Good Money was written. My disenchantment with Lew and Co. started some years back, when they became so uniformly anti-fractional reserves and MI became a forum for “paleoconservatism.” At some point, desire to protect one’s reputation trumps gratitude for even a big favor granted in the distant past.

      • Free Radical
        April 30, 2014 at 2:49 am

        Yeah, I may not be completely well versed in your productivity norm but I have read you at least enough to have noticed that you are not in the anti-fractional-reserve crowd. That’s what I like about you haha.

    • Free Radical
      March 20, 2014 at 8:41 pm

      I noticed that Sumner was not particularly hostile to Free Banking in his Less than Zero review which I was a little surprised by (overall, I though his assessment was basically what I predicted here which I consider reassuring). He also stated my main point much more clearly than I did.

      “We need to sort out much more fundamental problems with monetary policy before we risk an intentional policy of deflation, despite the fact that many of George and David’s arguments are quite persuasive. If we don’t, we could accidently burn down the house entitled ‘free market economics.'”

  4. J Thomas
    March 25, 2014 at 6:17 pm

    Perhaps something like Sumner’s NGDP futures/prediction market suggestion could speed this adjustment process by giving firms advance warning of imminent NGDP declines.

    It’s possible I misunderstand prediction markets. But the impression I have is that they are basicly trying to solve a system of one equation in two variables, and it can’t work well.

    As long as nobody cares much about the predictions, individuals who know better can make a profit while influencing the odds.

    But once somebody cares more about the predictions than the money spent, they can spend money to influence the odds.

    If the most knowledgeable people are also very well funded, they can make wads of money off people who try to influence the odds for ulterior purposes, and the odds won’t be influenced very much. But if the people who want bad predictions have more money than the people who make good predictions, then the good guys make lots of money (by their standards) while the predictions are bad.

    So prediction markets should work well as long as they don’t matter. But when somebody bases important decisions on them, it’s predictable that they will stop working.

    The awful results I vaguely heard we got from the last presidential election would fit that. Whether it came because lots of Republicans were irrationally hopeful, or whether it was that somebody thought the wrong predictions would help them and found it pretty cheap to get them, I can’t tell. But either way the result was bad predictions.

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