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On Ideology, economics and the compatibility of Chartalists and Austrians

Below is a framework that delineates the ideology and economics of two groups of economic thought that are much talked about in the wake of the Credit Crisis: the Chartalists and the Austrians. These two groups are considered outside of the mainstream and this is important because many economists and market pundits in both camps predicted the global credit crisis while almost no mainstream economists did. The questions are why and what separates them from mainstream Keynesians and Monetarists and from each other?

Ideology

Let’s talk about ideology first. Almost exactly a year ago, I wrote that: “my goal… is to separate the policy and the politics from the mechanics of how our fiat money system operates. That way it will be clear what is actually happening in our monetary system right now and what is pure political posturing…

“…policy decisions are largely political, exogenous decisions about which informed decision-makers can disagree. However, if we aren’t at least informed about the mechanics of how modern money works, it is very difficult to have an intelligent debate about deficits, Social Security, fiscal stimulus or anything else for that matter.”

-Out of control US deficit spending

Here’s what I was saying: there are good economic frameworks we can all use to understand the economy. However, two individuals using the same framework can come up with wildly different economic policy prescriptions, depending on one’s political or philosophical predisposition. Much of this has to do with one’s view toward the role of government.

My view is that the most logical way of thinking of government’s role is to differentiate between effective and ineffective policy. I am mostly a pragmatist; so what concerns me is the efficacy of government policy, not its size or scope per se. “Because government must tax to maintain its existence or to ensure its control of the currency and this tax will redistribute monies from some agents to others, what are our priorities as a people as to how that redistribution should take place? Who should we tax, by what means and by how much? And who should receive the benefits of government spending and for what purposes? These are questions actually worthy of debate and are fundamental to democracy.”

-A brief philosophical argument about the role of government, stimulus and recession

Yet, that is not the delineation normally used to frame government’s role in most all economic ideology. Instead, we are presented with arguments about the size and scope of government.

“When thinking about government and its role and size, there are three camps of thought.

  1. Big Government. Supporters of big government believe that government can do good. In this view, an increase in the size of government is not just warranted but necessary in a severe economic downturn in order to fill the void left by the private sector’s fragility. The large scale fiscal stimulus enacted in 2001 at the beginning of President Bush’s first term, in 2008 at the tail end of the Bush Administration, and in 2009 during the Obama Administration are examples of Big Government in action.
  2. Limited Government. People in this camp believe that government must always be held in check – even in times of economic distress. If not, a self-perpetuating bureaucracy develops, with a cadre of individuals dependent on government and wedded to institutions or programs which no longer have great value. In this view, expanding government is like moving to into bigger house; the new space must be filled with stuff, with size justifying the need for possessions rather than the need for space justifying the size.
  3. Small Government. Individuals in this camp see government as a parasite which, while necessary in small measure, always and everywhere raises the specter of despotism and cronyism. In this view, government must be kept as small (and as local) as possible because it feeds on society and on power to usurp property and wealth for its own use and that of its cronies.”

-A few thoughts about the limitations of government

When I look at the economics world, I see four economic thought groups divided by this principal ideological difference. In the mainstream we see the Keynesians and the Monetarists. In the heterodox areas, we see the Chartalists and the Austrians

  • Chartalists and Keynesians are ‘pro-government’ meaning “an increase in the size of government is not just warranted but necessary in a severe economic downturn”.
  • Austrians and Monetarists are ‘anti-government’, meaning they “believe that government must always be held in check – even in times of economic distress” or they see”government as a parasite which, while necessary in small measure, always and everywhere raises the specter of despotism and cronyism”

Economics

If I could simplify the Monetarist and Keynesian view of recessions, this is what I would say:

  • Keynesians: Market-based economies are more efficient and lead to higher growth than command and control economies, but markets do fail. When they do, aggregate demand collapses. We advocate an activist policy response in both fiscal and monetary policy. This will mitigate the severity of downturns by increasing aggregate demand and lead to higher growth as a result.
  • Monetarists: “Inflation is always and everywhere a monetary phenomenon” as Milton Friedman said in 1970. This is a lesson we failed to appreciate during the Great Depression. During recession, lowering the rate of interest will mitigate the severity of downturns by increasing the supply of money and lead to higher growth as a result. Therefore, we advocate an activist policy response only in monetary policy. Government’s fiscal policy must be limited and should not be used to counteract a deflationary threat which is a purely monetary phenomenon.

Paul Samuelson was at the center of creating the neoclassical synthesis that is mainstream economics today. This unites Keynesian and Monetarist thought in a unified but rivalrous body of thought. After the Great Depression, the Keynesians gained sway and their dominance lasted for some 30 years. However, when the U.S. went off the gold standard in 1971 and the world experienced an oil shock in 1973, a painful inflationary period led to the rise of the monetarists, led by Milton Friedman and the Chicago school. See: Freshwater versus saltwater circa 1988. Nevertheless, despite the ideological differences between these groups neither predicted the credit crisis. The Economics discipline failed us at the most crucial moment in the last three quarters of a century in economic history.

Naturally, then there have been many attempts to understand why. In September of 2009, Paul Krugman asked “How Did Economists Get It So Wrong?“in a long piece on this in the New York Times. This past week, Brad DeLong wrote another widely-read piece in reference to comments by Larry Summers, a former Treasury Secretary and the Chief Economic Advisor to President Obama, questioning the same problem. In it, he acknowledged that mainstream economics got it wrong:

Here is the most interesting part of Summers’ long answer: “There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.” That may sound obscure to a non-economist, but it was a devastating indictment…

It is the scale of the catastrophe that astonishes me. But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future. “We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists.

I have drawn a different conclusion from the crisis to Brad DeLong actually: We need fewer equilibrium business-cycle theorists and fewer old-fashioned Keynesians and monetarists. We need more Austrians and Post-Keynesians (Chartalists).

As I wrote in January 2010 on “Why economists failed to anticipate the financial crisis“:

“Paul Krugman is a Keynesian. So, his prescription is fiscal stimulus. Have the government pump money into the economy and it will alleviate some of the pressure for the private sector. There is some merit to this argument on stimulus. Many Freshwater economists say monetary stimulus is what is needed. If the Federal Reserve increases the supply of money, eventually the economy will respond. This is what Ben Bernanke was saying in his famous 2002 Helicopter speech at the National Economists Club.

“Yet, I couldn’t help but notice that Krugman mentioned the word debt only twice in 6,000 words. In fact, it is in the very passage above where Krugman uses the term for the only time in the entire article. And here Krugman refers to government debt; no mention of private sector debt whatsoever…

“The reason economists failed to anticipate the crisis is because they were fixated on avoiding downturns and driving the economy to unsustainable growth rates by using debt to consume today what will be earned in the future. Debt is the central problem.”

What Keynesians and monetarists have in common is a fixation with mitigating the downturn without any sense of the importance of secular forces like debt accumulation. Commenting on former BIS head William White’s comments on this matter, I wrote:

“When aggregate debt levels build up across business cycles, economists focused on managing within business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.

“This short-termism that White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.”

-The origins of the next crisis

And so we should look to other schools of economic thought for answers. The two schools I want to concentrate on are the Austrians and the Post-Keynesians. Both schools predicted the crisis because they understand the importance of debt accumulation as a secular force in depressions.

Austrians

The Austrian School of Economics is one of two principal heterodox schools of thought that foresaw the credit crisis. That makes them worthy of attention.

I like the Austrian framework for how business cycles proceed. Ludwig von Mises, an early 20th century economist, spelled it out in 1936 in the midst of the Great Depression:

  • “The lowering of the rate of interest stimulates economic activity. Projects which would not have been thought “profitable” if the rate of interest had not been influenced by the manipulations of the banks, and which, therefore, would not have been undertaken, are nevertheless found “profitable” and can be initiated. The more active state of business leads to increased demand for production and the wages of labor rise, and the increase in wages leads, in turn, to an increase in prices of consumption goods. If the banks were to refrain from any further extension of credit and limited themselves to what they had already done, the boom would rapidly halt. But the banks do not deflect from their course of action; they continue to expand credit on a larger and larger scale, and prices and wages correspondingly continue to rise.”

In the modern context, it is not that credit has expanded but rather that the rate of interest has allowed credit to expand and projects to be undertaken that are not profitable at a higher rate of interest. Low interest rates change the structure of the economy. For example, low interest rates made housing more affordable in the prior decade, drastically increasing the flow of credit to the housing sector and fuelling a credit bubble.

  • “This upward movement could not, however, continue indefinitely. The material means of production and the labor available have not increased; all that has increased is the quantity of the fiduciary media which can play the same role as money in the circulation of goods. The means of production and labor which have been diverted to the new enterprises have had to be taken away from other enterprises. Society is not sufficiently rich to permit the creation of new enterprises without taking anything away from other enterprises. As long as the expansion of credit is continued this will not be noticed, but this extension cannot be pushed indefinitely. For if an attempt were made to prevent the sudden halt of the upward movement (and the collapse of prices which would result) by creating more and more credit, a continuous and even more rapid increase of prices would result. But the inflation and the boom can continue smoothly only as long as the public thinks that the upward movement of prices will stop in the near future. As soon as public opinion becomes aware that there is no reason to expect an end to the inflation, and that prices will continue to rise, panic sets in.”

In the modern context, it is not consumer price inflation but rather asset price inflation which cannot continue indefinitely. As soon as credit stops flowing to the sector where the asset bubble has formed, prices drop and revulsion steps in. That is what we saw during the tech bust and the housing bust as well.

  • “Some enterprises cut back their scale of operation, others close down or fail. Prices collapse;crisis and depression follow the boom. The crisis and ensuing period of depression are the culmination of the period of unjustified investment brought about by the extension of credit. The projects which owe their existence to the fact that they once appeared “profitable” in the artificial conditions created on the market by the extension of credit and the increase in prices which resulted from it, have ceased to be “profitable.” The capital invested in these enterprises is lost to the extent that it is locked in. The economy must adapt itself to these losses and to the situation that they bring about. In is case the thing to do, first of all, is to curtail consumption and, by economizing, to build up new capital funds in order to make the productive apparatus conform to the actual wants, not to artificial wants which could never be manifested and considered real except as a consequence of the false calculation of “profitability” based on the extension of credit.”

Isn’t this what is happening right now? Again, when Mises refers to prices, you should be thinking about asset prices in the modern context. Mises also says curtailing consumption to build up new capital funds is vital. In the modern context, that is called deleveraging.

But here is the key section that is controversial, the policy prescription:

  • It has often been suggested to “stimulate” economic activity and to “prime the pump” by recourse to a new extension of credit which would allow the depression to be ended and bring about a recovery or at least a return to normal conditions; the advocates of this method forget, however, that even though it might overcome the difficulties of the moment, it will certainly produce a worse situation in a not too distant future.

Mises is essentially saying let the chips fall where they may. This is the crucial part that other economic schools of thought reject. I would say this prescription works in a garden variety recession. If you build up debt across business cycles and allow the system to collapse, what would the political consequences be? Would civil unrest lead to failed states and the rise of demagogues and authoritarian leaders? And would the friction from a collapse in demand create trade and currency disputes that led to military confrontation?

Chartalists

Hyman Minsky is the main economist celebrated from the Post-Keynesian school, although Wynne Godley and Abba Lerner often get top billing as well . This school of thought is now being dubbed Modern Monetary Theory or MMT because of its explanation of the fiat currency monetary system that came into being after 1971. At its core, the theory rests on just a few planks:

  • Fiat money has no intrinsic value. It simply represents a liability of government, an IOU. The only promise government makes is to repay the holder of that liability with another IOU of equivalent nominal amount in whatever money form the government decides: it could be coins, bonds, paper currency or electronic credits.
  • Because money is created by government, this means government faces no solvency constraints in its own currency since it could always fulfil its IOU liability by creating more money. Government could default on its fiat currency obligation only as a political decision out of a desire not to manufacture more money.
  • In a fiat currency system, when government is the monopoly issuer of currency, money derives its value from the government’s ability to tax and is entrenched by its use as the money of legal tender. Government is the only entity in society that can coerce any and everyone in its jurisdiction to accept a liability.No transaction between private parties can be coerced under penalty of law. However, taxes are coercive, meaning they are not a voluntary arrangement between two parties. This coercive power means you need government’s money to expunge your tax liability.
  • Wynne Godley promoted the accounting identity which showed that government deficits are exactly equal to non-government sector surpluses. That is to say, in an open economy like the U.S., the private sector balance plus the current account balance is exactly offset by the government sector’s balance. Any movement in one balance necessarily moves the others. Government budget deficits are the result of this ex-post accounting identity, meaning attempts to reduce deficits will actually have unintended consequences due to the accounting identity. An attempt to reduce deficits in the face of the private sector’s desire to net save after a large build up of debt will fail and lower aggregate demand.
  • The U.S. dollar’s role as a reserve currency creates pressure on the capital account, causing a capital account surplus and a current account deficit. Combined with the private sector’s desire to net save, this entrenches federal government deficits.
  • Excess credit builds up across cycles such that there is a secular life cycle of an economy. Depressionary booms and busts are thus endogenous to credit-based capitalist systems. The robustness of the financial system encourages greater risk and creates the build up of credit from hedge borrowers to speculative borrowers to Ponzi borrowers, inducing the fragility that leads to crisis and depression.

The principal policy tool in the MMT framework is government’s role in regulating the flow and accumulation of net financial assets in the private sector.

As Steve Waldman writes:

The government creates private sector assets by issuing money or bonds in exchange for current goods or services, or else for nothing at all via simple transfers. Governments destroy private sector financial assets via taxation. MMT-ers tend to view financial asset swaps, whereunder the government issues money or debt to buy financial assets already held by the private sector (“conventional monetary policy”) as second order and less effective, although they might acknowledge some impact.

The controversial aspect of this comes from Irving Fisher‘s Theory of debt deflation, which suggests that economies are not self-equilibrating. Not arresting the fall in aggregate demand and preventing the collapse in employment leads to a permanent loss of output. MMTers suggest government intervention to support aggregate demand and bring the economy back to full employment.

My thoughts

First of all, I have really done some heavy reductionism in explaining these four groups of economic thought. So I apologize if I oversimplified. But, on the whole I use a Austrian-Chartalist blend. I do not see the two schools of thought as incompatible.

The economics of Austrians is predicated on the inherent instability of the credit mechanism, something very much aligned with Minsky’s view of the instability of stability. The idea is that credit growth becomes divorced from the underlying economics of business ventures (for whatever reason) and this leads to a boom-bust. Where ideology and politics enter is in assessing the phrase “for whatever reason”. Is it the Government (the central bank), is it fractional reserve banking or is it the inherent instability of capitalism because of reflexivity? Ludwig von Miss says it is fractional reserve banking when he writes:

In issuing fiduciary media, by which I mean bank notes without gold backing or current accounts which are not entirely backed by gold reserves, the banks are in a position to expand credit considerably. The creation of these additional fiduciary media permits them to extend credit well beyond the limit set by their own assets and by the funds entrusted to them by their clients. They intervene on the market in this case as “suppliers” of additional credit, created by themselves

That may be true – in a gold standard – but I agree with Minsky that the capitalist system is inherently prone to the build-up of excess credit due to animal spirits – and I believe this is true irrespective of fractional reserve banking. That is why I wrote last week on why markets fail, saying the inherent instability of capitalism came from a reflexivity that cannot be modelled using existing mathematical economic models. The Soros piece which spurred that post identified this very well using Friedrich von Hayek as an example. Soros is astute in saying the flaw with Hayek comes here:

Hayek also recognized that decisions based on an imperfect understanding of reality are bound to have unintended consequences. But Hayek and I drew diametrically opposed inferences from this insight…

Hayek subordinated his methodological arguments to his political bias. That is the source of his inconsistency. In the Economica, he attacked scientism. But after World War II, when the communist threat became more acute, he overcame his methodological qualms and became the apostle of market fundamentalism — with only a mild rebuke for the excessive use of quantitative methods in his Nobel Prize acceptance speech.

In all economic schools there is no monolithic way of thinking. The ‘Austrianism’ of today is not the Austrianism of Mises, but more that of latter day Hayek and Rothbard. For example, nowhere does Mises mention the efficient market hypothesis or rational expectations theory. Why? Because those theorems didn’t exist when he lived. They were added to Austrian school thinking by latter day Libertarians after the Samuelson-led neoclassical synthesis made market fundamentalism the mainstream economic doctrine.

Just as Samuelson united mainstream economics in the neoclassical synthesis, I believe Modern Monetary Theory and Austrian Economics have underpinnings which can be united. First and foremost, it is about the build up of credit, leading to an unstable and crisis-ridden period. The point is that if you strip away the politics and ideology and look at the economics, MMT and Austrian economics are not incompatible.

And because the neoclassical tradition has proved inadequate in addressing this crisis, I believe we should look ever more to these two schools of thoughts for a framework to develop solutions.

Source

The Austrian Theory of the Trade Cycle, Ludwig von Mises, Gottfried Haberler, Murray Rothbard, Friedrich von Hayek

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

45 Comments

  1. Jim Bradley says:

    Edward Harrison – Bottom line, I hope we can agree that the cost of bad government is greater than any other single cost. In that respect, I don’t think giving the government any more power to mismanage the economy makes any sense … especially now when the empirical situation shows clearly how the government has nearly obliterated the economy, and now is seen (by MMT) to be the “savior” of it. I think in the long run, the Austrians are going to be right.

    • Bad government has been very much on display during this credit crisis. The philosophical question that is hard to answer is whether this should be seen as an implicit indicator of government’s innate ‘bad-ness’. I say the answer is no. But clearly we are not getting a huge number of supporting data paoints right now.

  2. Jim Bradley says:

    Edward Harrison – Bottom line, I hope we can agree that the cost of bad government is greater than any other single cost. In that respect, I don’t think giving the government any more power to mismanage the economy makes any sense … especially now when the empirical situation shows clearly how the government has nearly obliterated the economy, and now is seen (by MMT) to be the “savior” of it. I think in the long run, the Austrians are going to be right.

    • Bad government has been very much on display during this credit crisis. The philosophical question that is hard to answer is whether this should be seen as an implicit indicator of government’s innate ‘bad-ness’. I say the answer is no. But clearly we are not getting a huge number of supporting data paoints right now.

  3. Excellent post. In the last several years I have attended a series of Tea Party and similar politically far right events despite myself being a pretty old school liberal who finds chartalist descriptions of the actual existing economy I operate in to be the most convincing. I’ve also read my Hayek and Mises and understand where they were coming from but as the liberal (without assets) that I am can not line up behind the idea that folks like me should pay with unemployment for loose lending standards at a Fed that is wholly occupied by private banking interests.

    It is this last thought where I am in pretty much agreement with much of the lunacy I’ve witnessed at Tea Party Events. If you’re some working stiff who thought if you worked hard and did the right thing, somehow something in our political economy would give a shit, you feel pretty rooked by the last thirty years during which you became more and more productive but whatever monetary gains you might feel owed were pretty much devoured by the hedonic adjuster: you’ve got a kick ass flat screen, but you can’t pay your credit card bills because the Treasuries you got for retirement don’t produce any return any more.

    Chartalists see and promote the obvious near term remedy of trying to support aggregate demand, but Austrians are equally on to the problem that our government as it exists is only capable of stimulating the demand of those who are already hoarding enormous assets. Though they like to think of themselves as investor, those commanders of asset hoards are increasingly political speculators as successive supreme court rulings put clearer and clearer legal underpinnings under the marketplace of legalized bribery that has become of our electoral system.

    Chartalists I think would agree with me that our government is the most corrupt it has ever been, but Austrians I doubt would accept that if you prune it you have to prune it for effectiveness, not efficiency. If we can figure out how to cross that bridge together, there might be some future here other than collapse.

    • John,

      hanks for those thoughts. I agree with the thrust of your comments. The upshot of it is the question about what one does when government is corrupted and captured by private interests. What I would advocate is relying on automatic stabilizers to mitigate the effects of the downturn but allowing bankrupt companies to fail or be nationalised. To the degree we want to support full employment, we could always use private-sector initiated government funded jobs programs as a way to fill in the gaps.

      This is a blend of MMT and Austrian policy prescriptions. I think that’s where the rubber hits the road regardless of models we use to understand the economy. Obviously we are a long way from doing that.

      • Thanks for the response.

        While I agree with your policy prescription, I can’t see how a political system captured by corporate interests would allow it any oxygen. As and architect in New York I have worked for a number of Rulers of the Universe who in a one on one will agree the merits a policy prescription like yours, but instead of acting on that they fund the CoC or Mitt Romney or the Tea Party. These funding priorities guarantee that corporate media will not cover options such as yours. I have some hope for blogs spreading alternative ideas, but then one always grasps for hope!

        Or maybe blogs will deliver. Though I resent Gladwell’s copyright on great catch phrases, what happened in Tunisia certainly confirms the notion of “tipping points”. Maybe enough members of the genus “homo corporatus” read enough blogs that they are beginning to suspect that demand (backed with currency to express itself in a market) is not a product of nature, that money does not grow on trees. I’ve spent the last several months pushing conversations like this on line in the hope that another drop in the bucket will eventually make it spill!

    • Anonymous says:

      yes John I hear you there completely.

      I think one of the main things that seem to be the problem blocking MMT’ers and Austrians is what Ed called the “political differences.” Too often in today’s debates (both political and internet-based) we don’t finish the logical thread of discussion that was originally started. For example, an Austrian comment about how fundamentally flawed the government is does NOT relate to an MMT comment about sectoral balances and increasing aggregate demand through government spending. The first is an opinion, the second an economic reality. I think Austrians need to come over to just admit the way sectoral balances work, while MMT’ers may need to go over to the idea of less government. The funny thing that many people seem to fail to realize is that MMT’ers really aren’t pro or anti government at all. Unless you want to just stop spending all together (like crazy Tea Partiers) or something MMT is not about creating a more command economy and squashing free enterprise or anything like that. If anything I find MMT to be more interested in regulated what is out of control right now and freeing up private enterprise through tax cuts and stimulous programs. MMT is as much against the bailouts of business and propping them up as Austrians are. We can spend on the people rather than on business prop-ups. We can also charge less (lower taxes) on the people to accomplish the same goal. I would think Austrians would support lower taxes like that no?

      Finally the real issue is not about these policy programs one way or another…it is about corruption. No economic policy will ever be sufficient to handle such an issue. That is a purely legal and political discussion and issue that can only be fully handled there. We need to realize where the bounds of economic theory and policy end and where legal/political policies begin. Corruption is that boundary line and we all need to realize that and stop expecting or attempting to fit a round peg into a square hole as the case may be.

      Thank you for sharing your experience too btw. I feel ya man.

  4. Excellent post. In the last several years I have attended a series of Tea Party and similar politically far right events despite myself being a pretty old school liberal who finds chartalist descriptions of the actual existing economy I operate in to be the most convincing. I’ve also read my Hayek and Mises and understand where they were coming from but as the liberal (without assets) that I am can not line up behind the idea that folks like me should pay with unemployment for loose lending standards at a Fed that is wholly occupied by private banking interests.

    It is this last thought where I am in pretty much agreement with much of the lunacy I’ve witnessed at Tea Party Events. If you’re some working stiff who thought if you worked hard and did the right thing, somehow something in our political economy would give a shit, you feel pretty rooked by the last thirty years during which you became more and more productive but whatever monetary gains you might feel owed were pretty much devoured by the hedonic adjuster: you’ve got a kick ass flat screen, but you can’t pay your credit card bills because the Treasuries you got for retirement don’t produce any return any more.

    Chartalists see and promote the obvious near term remedy of trying to support aggregate demand, but Austrians are equally on to the problem that our government as it exists is only capable of stimulating the demand of those who are already hoarding enormous assets. Though they like to think of themselves as investor, those commanders of asset hoards are increasingly political speculators as successive supreme court rulings put clearer and clearer legal underpinnings under the marketplace of legalized bribery that has become of our electoral system.

    Chartalists I think would agree with me that our government is the most corrupt it has ever been, but Austrians I doubt would accept that if you prune it you have to prune it for effectiveness, not efficiency. If we can figure out how to cross that bridge together, there might be some future here other than collapse.

    • John,

      hanks for those thoughts. I agree with the thrust of your comments. The upshot of it is the question about what one does when government is corrupted and captured by private interests. What I would advocate is relying on automatic stabilizers to mitigate the effects of the downturn but allowing bankrupt companies to fail or be nationalised. To the degree we want to support full employment, we could always use private-sector initiated government funded jobs programs as a way to fill in the gaps.

      This is a blend of MMT and Austrian policy prescriptions. I think that’s where the rubber hits the road regardless of models we use to understand the economy. Obviously we are a long way from doing that.

      • Thanks for the response.

        While I agree with your policy prescription, I can’t see how a political system captured by corporate interests would allow it any oxygen. As and architect in New York I have worked for a number of Rulers of the Universe who in a one on one will agree the merits a policy prescription like yours, but instead of acting on that they fund the CoC or Mitt Romney or the Tea Party. These funding priorities guarantee that corporate media will not cover options such as yours. I have some hope for blogs spreading alternative ideas, but then one always grasps for hope!

        Or maybe blogs will deliver. Though I resent Gladwell’s copyright on great catch phrases, what happened in Tunisia certainly confirms the notion of “tipping points”. Maybe enough members of the genus “homo corporatus” read enough blogs that they are beginning to suspect that demand (backed with currency to express itself in a market) is not a product of nature, that money does not grow on trees. I’ve spent the last several months pushing conversations like this on line in the hope that another drop in the bucket will eventually make it spill!

    • Anonymous says:

      yes John I hear you there completely.

      I think one of the main things that seem to be the problem blocking MMT’ers and Austrians is what Ed called the “political differences.” Too often in today’s debates (both political and internet-based) we don’t finish the logical thread of discussion that was originally started. For example, an Austrian comment about how fundamentally flawed the government is does NOT relate to an MMT comment about sectoral balances and increasing aggregate demand through government spending. The first is an opinion, the second an economic reality. I think Austrians need to come over to just admit the way sectoral balances work, while MMT’ers may need to go over to the idea of less government. The funny thing that many people seem to fail to realize is that MMT’ers really aren’t pro or anti government at all. Unless you want to just stop spending all together (like crazy Tea Partiers) or something MMT is not about creating a more command economy and squashing free enterprise or anything like that. If anything I find MMT to be more interested in regulated what is out of control right now and freeing up private enterprise through tax cuts and stimulous programs. MMT is as much against the bailouts of business and propping them up as Austrians are. We can spend on the people rather than on business prop-ups. We can also charge less (lower taxes) on the people to accomplish the same goal. I would think Austrians would support lower taxes like that no?

      Finally the real issue is not about these policy programs one way or another…it is about corruption. No economic policy will ever be sufficient to handle such an issue. That is a purely legal and political discussion and issue that can only be fully handled there. We need to realize where the bounds of economic theory and policy end and where legal/political policies begin. Corruption is that boundary line and we all need to realize that and stop expecting or attempting to fit a round peg into a square hole as the case may be.

      Thank you for sharing your experience too btw. I feel ya man.

  5. ralph says:

    As an MMT supporter I’m quite happy with the “Austrian” idea that a big drawback in fractional reserve banking is that it is pro-cyclical. Though I think Austrians go too far in advocating a return to the gold standard.

    On the subject of Chartalists, Keynsians, Austrians and Monetarists being pro or anti big/small government, any supporters of these ideas who express a preference for big or small government make a big mistake. The question as to whether we have a big or small government is a PURELY political question: it’s a question on which every individual person is entitled to their own view.

    In contrast, there are purely technical questions like how do we best escape recessions, maximise employment levels, etc. Any Chartalist, Keynsian, Austrian or Monetarist who cannot make their ideas compatible with big or small government needs to get a grip.

    Everything I’ve written on MMT has (hopefully) been totally impartial on the question as to how big or small government should be.

    • Agree Ralph. First the economics and only then the policy prescription, identifying the politics. It is not big or small government per se which is the problem, it is bad or corrupt government.

    • Randy Wray makes this point all the time too. MMTers must be MUCH more thoughtful in separating policy and economics, ideology and framework. The crucial difference between MMT and Austrian Economics that may not be bridgeable is the Austrians’ insistence on NO government activism. From a policy prescription perspective, how could that be integrated into an MMT approach?

      • Unless you can get the affluent and those hoarding Net Financial Assets to spend to create jobs, which in itself is a highly unlikely event, then it can’t be. So that leaves you with only ‘government activism’ as you phrase it.

  6. ralph says:

    As an MMT supporter I’m quite happy with the “Austrian” idea that a big drawback in fractional reserve banking is that it is pro-cyclical. Though I think Austrians go too far in advocating a return to the gold standard.

    On the subject of Chartalists, Keynsians, Austrians and Monetarists being pro or anti big/small government, any supporters of these ideas who express a preference for big or small government make a big mistake. The question as to whether we have a big or small government is a PURELY political question: it’s a question on which every individual person is entitled to their own view.

    In contrast, there are purely technical questions like how do we best escape recessions, maximise employment levels, etc. Any Chartalist, Keynsian, Austrian or Monetarist who cannot make their ideas compatible with big or small government needs to get a grip.

    Everything I’ve written on MMT has (hopefully) been totally impartial on the question as to how big or small government should be.

  7. ralph says:

    As an MMT supporter I’m quite happy with the “Austrian” idea that a big drawback in fractional reserve banking is that it is pro-cyclical. Though I think Austrians go too far in advocating a return to the gold standard.

    On the subject of Chartalists, Keynsians, Austrians and Monetarists being pro or anti big/small government, any supporters of these ideas who express a preference for big or small government make a big mistake. The question as to whether we have a big or small government is a PURELY political question: it’s a question on which every individual person is entitled to their own view.

    In contrast, there are purely technical questions like how do we best escape recessions, maximise employment levels, etc. Any Chartalist, Keynsian, Austrian or Monetarist who cannot make their ideas compatible with big or small government needs to get a grip.

    Everything I’ve written on MMT has (hopefully) been totally impartial on the question as to how big or small government should be.

    • Agree Ralph. First the economics and only then the policy prescription, identifying the politics. It is not big or small government per se which is the problem, it is bad or corrupt government.

    • Randy Wray makes this point all the time too. MMTers must be MUCH more thoughtful in separating policy and economics, ideology and framework. The crucial difference between MMT and Austrian Economics that may not be bridgeable is the Austrians’ insistence on NO government activism. From a policy prescription perspective, how could that be integrated into an MMT approach?

      • Unless you can get the affluent and those hoarding Net Financial Assets to spend to create jobs, which in itself is a highly unlikely event, then it can’t be. So that leaves you with only ‘government activism’ as you phrase it.

  8. Great post!

    But I don’t think MMT and Austrian Economics is compatible. Putting aside my ideological prejudices I see a major difference in economic thinking concerning whether aggregates matter. For MMTers they do and for contemporary Austrians not. For Peter Boettke there seems to be NO fallacy of composition? Instead these people obsess about alleged microfoundations of macroeconomics. Boettke: “The aggregate economics that became embedded in the mind-set of economists, intellectuals and policy-makers since WWII still derails our professional discourse let alone the very idea of scientific progress in the field.”

    • I think you hit on the crux of it: Austrians think “scientific” means mathematical and that shiny yellow metal has some intrinsic value while MMT thinks “scientific” means grounded in empirical data and that nothing has value except what humans using it project on to it for whatever reason, reasons which stand outside the economic discussion.

      While this divides the ideological and thus political positions, I’m with Ed on this one in thinking that functionally the two systems have enough in common to support in tandem a policy like Ed proposed in his response above. It could be the basis of an interesting coalition supporting people dependent on incomes for spending on both the right and left, a clear majority, and at the same time support corporate interests its demand effects.

      Whether one would ever get the Austrians to forego their politics to embark on such a policy is the political question. If they did there would be a broad coalition between the most rational hard money types and the most rational functionalists.

  9. Great post!

    But I don’t think MMT and Austrian Economics is compatible. Putting aside my ideological prejudices I see a major difference in economic thinking concerning whether aggregates matter. For MMTers they do and for contemporary Austrians not. For Peter Boettke there seems to be NO fallacy of composition? Instead these people obsess about alleged microfoundations of macroeconomics. Boettke: “The aggregate economics that became embedded in the mind-set of economists, intellectuals and policy-makers since WWII still derails our professional discourse let alone the very idea of scientific progress in the field.”

    • I think you hit on the crux of it: Austrians think “scientific” means mathematical and that shiny yellow metal has some intrinsic value while MMT thinks “scientific” means grounded in empirical data and that nothing has value except what humans using it project on to it for whatever reason, reasons which stand outside the economic discussion.

      While this divides the ideological and thus political positions, I’m with Ed on this one in thinking that functionally the two systems have enough in common to support in tandem a policy like Ed proposed in his response above. It could be the basis of an interesting coalition supporting people dependent on incomes for spending on both the right and left, a clear majority, and at the same time support corporate interests its demand effects.

      Whether one would ever get the Austrians to forego their politics to embark on such a policy is the political question. If they did there would be a broad coalition between the most rational hard money types and the most rational functionalists.

  10. Will DeBeest says:

    The MMTers seem to be the only school that has *specifically* derived their theories for a fiat currency. The other schools started way back in gold standard days and don’t seem to have changed much despite the changed circumstances. On the whole the MMTers seem more persuasive.

    • That IS a significant point Will. The reality is that the economics profession is very much trapped in a gold standard convertible fixed exchange rate world. MMT is the only main body of thought which is specifically oriented around addressing the possibilities and limitations inherent in fiat currencies.

      What I find compelling is the distinction between users and creators of currency which very much explains the dichotomy between creator government debtors like the US, UK, and Japan and user government debtors like Ireland, Portugal and Greece. Creating currency helps government to escape liquidity crises which are deflationary. At the same time, it also allows the government to proceed without addressing systemic issues. So in a sense, it really gives us too much rope.

      We have to assume government will use the rope to hang the malinvestment out to dry. Instead they hang the economy out to dry, transferring the debts of the private sector onto the public sector without any sense that economic growth will proceed higher after having socialised these debts.

      • Euclidean vs, non-Euclidean monetary economics, I think is the best metaphor.

      • Will DeBeest says:

        The other thing is that ideologically I am much closer to small government, free market, libertarian dogma than I am to socialist nanny state dogma yet I don’t see MMT as being incompatible with small government politics.

        Corrupt government spending at the urging of lobbyists will bring a country down no matter what your economic philosophy. It seems to me that when MMTers are talking about government spending, money printing and so on they aren’t talking about subsidies to campaign contributors, bail outs for wall street and other corporate crony welfare, they are talking about genuine infrastructure spending etc. (unless I’m mistaken).

        The one area where I haven’t got a handle on MMT is taxation, which they seem to regard as primarily existing to smooth out demand (…again, unless I am mistaken). In that framework I would have thought that taxation solely on consumption would be the best option (i.e. remove/replace income taxes — basically abolish the IRS — three cheers!!!) and in the computer age a government really has the power — in theory — to modify taxation on that basis day by day by changing sales tax rates etc. Imagine a world were the rates could be adjusted immediately in an effort to stem demand.

        Also since taxation is not required to fund government spending it shouldn’t be thought of as punitive and the government shouldn’t treat citizens in a punitive manner — so maybe if they understood MMT they would abolish the IRS and make people happy :)

  11. Will DeBeest says:

    The MMTers seem to be the only school that has *specifically* derived their theories for a fiat currency. The other schools started way back in gold standard days and don’t seem to have changed much despite the changed circumstances. On the whole the MMTers seem more persuasive.

    • That IS a significant point Will. The reality is that the economics profession is very much trapped in a gold standard convertible fixed exchange rate world. MMT is the only main body of thought which is specifically oriented around addressing the possibilities and limitations inherent in fiat currencies.

      What I find compelling is the distinction between users and creators of currency which very much explains the dichotomy between creator government debtors like the US, UK, and Japan and user government debtors like Ireland, Portugal and Greece. Creating currency helps government to escape liquidity crises which are deflationary. At the same time, it also allows the government to proceed without addressing systemic issues. So in a sense, it really gives us too much rope.

      We have to assume government will use the rope to hang the malinvestment out to dry. Instead they hang the economy out to dry, transferring the debts of the private sector onto the public sector without any sense that economic growth will proceed higher after having socialised these debts.

      • Euclidean vs, non-Euclidean monetary economics, I think is the best metaphor.

      • Will DeBeest says:

        The other thing is that ideologically I am much closer to small government, free market, libertarian dogma than I am to socialist nanny state dogma yet I don’t see MMT as being incompatible with small government politics.

        Corrupt government spending at the urging of lobbyists will bring a country down no matter what your economic philosophy. It seems to me that when MMTers are talking about government spending, money printing and so on they aren’t talking about subsidies to campaign contributors, bail outs for wall street and other corporate crony welfare, they are talking about genuine infrastructure spending etc. (unless I’m mistaken).

        The one area where I haven’t got a handle on MMT is taxation, which they seem to regard as primarily existing to smooth out demand (…again, unless I am mistaken). In that framework I would have thought that taxation solely on consumption would be the best option (i.e. remove/replace income taxes — basically abolish the IRS — three cheers!!!) and in the computer age a government really has the power — in theory — to modify taxation on that basis day by day by changing sales tax rates etc. Imagine a world were the rates could be adjusted immediately in an effort to stem demand.

        Also since taxation is not required to fund government spending it shouldn’t be thought of as punitive and the government shouldn’t treat citizens in a punitive manner — so maybe if they understood MMT they would abolish the IRS and make people happy :)

  12. Rogue Econ says:

    To bridge the gap, some MMTers also need to be careful about the terms they use in discussion, as some use the term “printing money” when they really mean deficit government spending. We know that when the government deficit spends, it is effectively printing money, but the printing per se is not the point, the spending is, when government steps into the void created by deficient private sector demand or deleveraging.

    But “printing money” is also the term used by the mainstream for quantitative easing, which does not fill the void, but inflates bubbles and depreciates the currency, which the Austrians hate with a passion. And MMTers also need to put more stress on how the private sector is empowered by their prescriptions rather than focusing on its inevitability. Austrians are allergic to anything that reeks of government expansion.

  13. Rogue Econ says:

    To bridge the gap, some MMTers also need to be careful about the terms they use in discussion, as some use the term “printing money” when they really mean deficit government spending. We know that when the government deficit spends, it is effectively printing money, but the printing per se is not the point, the spending is, when government steps into the void created by deficient private sector demand or deleveraging.

    But “printing money” is also the term used by the mainstream for quantitative easing, which does not fill the void, but inflates bubbles and depreciates the currency, which the Austrians hate with a passion. And MMTers also need to put more stress on how the private sector is empowered by their prescriptions rather than focusing on its inevitability. Austrians are allergic to anything that reeks of government expansion.

  14. Virgil0211 says:

    I’m a little bit of an amateur here, so forgive me if I make an error or come off as sounding stupid. In that case, just ignore me, and I’ll probably end up going away eventually. :-P

    First off, I have to say that I’ve really been enjoying your blog thus far. I may not agree with everything you say, but you make your case well and have so far made every post a pleasure to read.

    Now, I can get to my thoughts.

    I’d like to criticize one aspect of the division between the ‘economics’ and the ‘politics’, if I’m interpreting you correctly. It seems to me that the propensity of government entities to become corrupt and the ability of a central government to effectively implement policy decisions has at least as much to do with a possible course of action as said action’s ability to affect an outcome theoretically. I might even argue that the former must be established before the latter. To apply an analogy, it would be a bit like developing a gene therapy treatment before a reliable delivery vector of appropriate size could be developed. I also disagree that it’s primarily a legal/political/philosophical/criminal problem than a problem for economics. The job of economics, I think, should be to study how and why the corruption occurs. After all, such corruption often results from the desire to abuse one’s position of power for personal gain, and such gain is often monetary. Many Austrians I’ve spoken with argue that such corruption is inherent in the government’s power to regulate the industry, a position that reminds me of that Nietzsche quote about staring into the abyss. The government’s actions during this latest credit cycle certainly don’t do anything to falsify that position. Whatever the case, economics should concern itself with the question of government corruption, as it matters to the potential policy prescriptions of almost every school of economic thought.

    I hope I was clear with that. Lack of sleep and approaching finals have left me less astute than usual, so I may have been more confusing than eloquent. If so, I’ll try again after I’ve had a bit of sleep.

    I think that’s about it. My only other point of contention has to do with Reflexivity and such, though that’s mainly a matter of how powerful its effect is within the non-bubble marketplace and its contribution to inherent instability. I may just need a bit more education on the topic itself, if you’ll pardon my naivete, but reflexivity seems like it would be most applicable in situations where real estate rates have been artificially ‘gamed’, so to speak, distorted in the way that would lead to an Austrian-style business cycle. It would probably explain a bit behind why such business cycles are as bad as they are, but I’m not quite convinced that it would lead to a boom-bust cycle on its own, or that it couldn’t be counteracted by some private innovation rather than state intervention. But then again, that may just be my lack of understanding, naivete, or combination of the two speaking.

    Thank you for reading my comment and taking the time to respond, if you do. I look forward to more blog entries like this one.

    • Virgil,

      Welcome to the comment section. We all appreciate hearing what you have to say.

      Here’s my thinking. You do have to get the economics first before the politics and the ideology or you get the tail wagging the dog. Politics and ideology is very subjective. While I fault economics from being overly mathematical and precise where it can’t be, some degree of methodological robustness is always a god thing. And this is a trend in all the social sciences as well – psychology is on field that comes to mind. Putting ideology first turns economics into voodoo economics or astrology.

      That said, politics is a constraint. I agree with you that government corruption and regulatory capture will always be a problem. That is why the financial system and the rules should be robust enough to deal with systemic issues without significant amounts of government intervention. The kind of intervention we saw during the crisis shows that the system is not robust. The easiest fix would be to break up large banks since smaller banks have been and will continue to be seized by the FDIC. But there are other remedies like decreasing leverage that would also be appropriate.

      Finally, on reflexivity, this goes back to ideology surrounding the efficiency of markets. If one believe markets are efficient in the absence of government interference then reflexivity might seem less important. But, on its face that seems naive. There has never been nor do I suspect there ever will be a n economic system without government interference. So, one cannot disprove the theory that reflexivity is a product of government interference. I don’t believe bubbles are a product of interference. I believe they are endogenous to the economy because of human psychology. But it’s irrelevant from a practical perspective. Rather than work from the theoretical, I prefer to look at what we actually experience. And what we have seen is bubbles since the first days of capitalism. So we should assume they are here to stay and incorporate an understanding about how to mitigate their effect int macroprudential market supervision.

      • Virgil0211 says:

        “Welcome to the comment section. We all appreciate hearing what you have to say.”
        Thank you for your kindness. Considering my previous experience with these discussions, primarily on youtube, it’s something I’m not used to seeing. It’s nice to find a place where these topics can be discussed without all the vitriol common in other places.

        “Here’s my thinking. You do have to get the economics first before the politics and the ideology or you get the tail wagging the dog. Politics and ideology is very subjective. While I fault economics from being overly mathematical and precise where it can’t be, some degree of methodological robustness is always a god thing. And this is a trend in all the social sciences as well – psychology is one field that comes to mind. Putting ideology first turns economics into voodoo economics or astrology.”

        I understand that, but I was speaking less about government corruption and effectiveness less from a political standpoint but from a standpoint of science. To use the analogy I had earlier, the government/state’s tendency to become corrupt, what increases/decreases this tendency, and its ability to effectively apply economic policy would be a bit like working to develop the delivery vehicle for a gene therapy treatment, whereas the effects and ability of the economic policy itself to correct the problems it’s intended to correct would be the gene therapy treatment. You need both in order to effectively apply the treatment.
        I guess I’m saying that economics should study the changes in a recommended policy application from point A (economic science and the recommended action) to point B (the discussion of said action in the chambers of congress) to point C (language of the bill intended to apply the remedy) to point D (enforcement of the law/remedy in the actual marketplace). That’s less a matter of political values and more a point of how best to see a given policy move through the law-making process with as few changes as possible. Then, we can have a better idea as to the effectiveness of such policy, and we’ll have fewer boxing matches between Keynes and Hayek, entertaining as they may be.

      • Virgil0211 says:

        “That said, politics is a constraint. I agree with you that government corruption and regulatory capture will always be a problem. That is why the financial system and the rules should be robust enough to deal with systemic issues without significant amounts of government intervention. The kind of intervention we saw during the crisis shows that the system is not robust. The easiest fix would be to break up large banks since smaller banks have been and will continue to be seized by the FDIC. But there are other remedies like decreasing leverage that would also be appropriate.”

        Perhaps there is a way to mix the Austrian (no regulation, as businesses will then have incentive to either establish a corrupt relationship with the regulators, or encourage the appointment of regulators sympathetic to their interests) and the MMT solution. They could codify such powers in a way that would permit their use only in emergency circumstances. This may make it more difficult for private interests to corrupt government positions as, in order to do so, they would have to financially support sympathetic candidates in times where they would have the power to help them as well as when they didn’t. Otherwise, they would have to make attempts to predict when the government would decide to unlock said emergency powers and start interfering with the economy, or start doing so if the government surprised them. Their predictions wouldn’t be perfect, and there’s no guarantee that they’d gain enough influence by the time the emergency powers were locked again. Left with this, they may either choose to leave the system alone and focus their efforts on increasing profits through more legitimate practices, or attempt to encourage the election of candidates who desire to unlock the emergency powers permanently. I’m not sure how one would go about preventing the latter in a systematic fashion, or if such action would be necessary once such safeguards were in place. That also doesn’t address situations where the problems go in reverse, where politicians enact legislation favorable to companies in the hope of obtaining their support/donations.

        I guess I’m just trying to make a meaningful contribution to the conversation. I’m still an amateur, but one learns by doing, right?

        I’m afraid I must confess to being a bit too unfamiliar with the banking system to discuss the above. Why does the FDIC seize smaller banks? Why would breaking up the larger banks counteract this problem? If this has been covered in a previous blog post, or if it’s a stupidly obvious question, I apologize. I’m still in the process of learning.

      • Virgil0211 says:

        “Finally, on reflexivity, this goes back to ideology surrounding the efficiency of markets. If one believe markets are efficient in the absence of government interference then reflexivity might seem less important. But, on its face that seems naive. “

        I was primarily asking in order to gain a greater understanding of reflexivity. I don’t see it as ‘markets are efficient without government interference’, as such a statement is rather subjective. I see it as ‘markets are efficient when ______________, inefficient when ____________.’ The primary difference between government and private entities is the monopoly on force. Whatever associated abilities come as a result, they all come back to that same power. Ergo, solutions to problems within a market system are only required to be enacted via government action when such actions require the government’s monopoly on force or one of the resulting powers they obtain as a result. Otherwise, it’s still theoretically possible for such action to be undertaken voluntarily. This would allow the application of theoretical solutions to situations with or without a government, making them more universal.
        With that in mind, I’m not saying that every potential solution could be applied via a private alternative to government action. Obviously, any action that makes use of fiat money requires the government’s ability to forcefully extract taxes from the population, unless some group collectively agreed to use a kind of fiat currency amongst themselves, which would imply the development of such currency naturally within the marketplace. As far as I know, the only situation that seems even moderately close to that is the island of Yap, and I think their currency was still technically tied to the stones as assets on paper, so I don’t know whether or not that actually qualifies.

        So, in essence, I guess I’m asking ‘what problems does reflexivity cause in the marketplace, and what needs to be corrected in order to fix those problems?’

        I’m sorry if the way I look at the situation seems a bit naïve. I’m still an amateur in this situation, so I might change my mind as I become more knowledgeable. I just didn’t want to give off the impression that I worked from a standpoint of ‘markets are always efficient when left alone’. That’s not how I approach the problem.

        • Government doesn’t have a monopoly of force. There are plenty of examples in the private sector of private armies, private militia used to help private companies. The government has the only legally sanctioned and largest force but it does not have a monopoly. In fact, it is exactly because private sector agents can band together as corporations or other large bodies that their influence leads to government corruption and the favouring of special interests.

          As to reflexivity, read my post on that referenced above for a quick review. The basic gist of it is that people are social animals who do not act in a vacuum nor do they act based solely on rational expectations. That means future price paths are never completely independent of prior prices. A bubble can form simply because prices become elevated enough that future prices become more dependent on prior prices, so-called animal spirits. his is a ‘flaw’ in the market that has nothing to do with government intervention.

          As t government intervention, if you look at the broad sweep of history, clearly there are zero instances across the entire world in which some level of government intervention existed. Lack of government intervention is a theoretical and unattainable goal in the same way Christians’ goal of perfection is unattainable:

          http://en.wikipedia.org/wiki/Christian_perfection

          The question is how to operate in the real world subject to this constraint. How do we operate in a world in which interest rates are centrally planned and in which they fluctuate by diktat according to changes in inflation and employment? Again, I am asking a pragmatic question, not a theoretical one.

          • Virgil0211 says:

            “Government doesn’t have a monopoly of force. There are plenty of examples in the private sector of private armies, private militia used to help private companies. The government has the only legally sanctioned and largest force but it does not have a monopoly. In fact, it is exactly because private sector agents can band together as corporations or other large bodies that their influence leads to government corruption and the favouring of special interests.”

            I was speaking as to the necessity of legal force in implementing various solutions to correct inefficiency and business cycles in the marketplace, not arguing that government is the only market player who engages in the use of force. I apologize.

          • Virgil0211 says:

            “As to reflexivity, read my post on that referenced above for a quick review. The basic gist of it is that people are social animals who do not act in a vacuum nor do they act based solely on rational expectations. That means future price paths are never completely independent of prior prices. A bubble can form simply because prices become elevated enough that future prices become more dependent on prior prices, so-called animal spirits. his is a ‘flaw’ in the market that has nothing to do with government intervention.”

            So, reflexivity is a way for prices to be inflated apart from an incident involving a change in the money supply/credit manipulation/etc? How does one tell when this happens, and could you provide some historical examples?

          • Virgil0211 says:

            “As t government intervention, if you look at the broad sweep of history, clearly there are zero instances across the entire world in which some level of government intervention existed. Lack of government intervention is a theoretical and unattainable goal in the same way Christians’ goal of perfection is unattainable.”

            By that same token, a human ecosystem free of disease, infection, and other such maladies is unattainable. It doesn’t mean that we can’t know anything about it, or that learning about ideal states of health absent disease would help us to better treat disease.

            I guess I’m saying that, though there isn’t an instance of capitalism/civilization without government intervention, government intervention itself doesn’t seem to be a necessity to trade, and thus a marketplace. I guess a good example might be viewing the effects of deflation as just that- deflation, whether it’s caused by a government contracting a fiat currency or a supply shock for a commodity currency. A bailout is still a bailout whether its undertaken by the government or JP Morgan in the late 1800s early 1900s (can’t remember exactly when that banking panic happened). More along those lines.

          • Virgil0211 says:

            “The question is how to operate in the real world subject to this constraint. How do we operate in a world in which interest rates are centrally planned and in which they fluctuate by diktat according to changes in inflation and employment? Again, I am asking a pragmatic question, not a theoretical one.”

            You’ll get no argument from me on the goal, but I don’t think it’s possible to divorce a question entirely from theoretical premises. A pragmatic solution will still draw from other theories, much in the same way a vaccine, however practical, derives support from germ theory.

          • Virgil0211 says:

            “Government doesn’t have a monopoly of force. There are plenty of examples in the private sector of private armies, private militia used to help private companies. The government has the only legally sanctioned and largest force but it does not have a monopoly. In fact, it is exactly because private sector agents can band together as corporations or other large bodies that their influence leads to government corruption and the favouring of special interests.”

            I was trying to make the point of the necessity of force in implementing various solutions to economic problems. I guess the better way to put it would be the ‘monopoly on legally sanctioned and largest force’ and whether or not/how it would be necessary it implement the solutions in question. I apologize. I’m not as effective at communicating my ideas as I’d like to be.

          • Virgil0211 says:

            “As to reflexivity, read my post on that referenced above for a quick review. The basic gist of it is that people are social animals who do not act in a vacuum nor do they act based solely on rational expectations. That means future price paths are never completely independent of prior prices. A bubble can form simply because prices become elevated enough that future prices become more dependent on prior prices, so-called animal spirits. his is a ‘flaw’ in the market that has nothing to do with government intervention.”

            So, reflexivity is a way for prices to be inflated apart from an incident involving a change in the money supply/credit manipulation/etc? How does one tell when this happens, and could you provide some historical examples? (Please disregard if this was already covered in the aforementioned blog post.)

          • Virgil0211 says:

            “As t government intervention, if you look at the broad sweep of history, clearly there are zero instances across the entire world in which some level of government intervention existed. Lack of government intervention is a theoretical and unattainable goal in the same way Christians’ goal of perfection is unattainable.”

            By that same token, a human ecosystem free of disease, infection, and other such maladies is unattainable. It doesn’t mean that we can’t know anything about it, or that learning about ideal states of health absent disease would help us to better treat disease. I don’t mean that necessarily to compare government to a disease, though I have a few friends who would leap at the comparison. I mean that a theoretical model can be hardly present in pragmatic reality and still have a useful pragmatic application.

            I guess I’m saying that, though there isn’t an instance of capitalism/civilization without government intervention, government intervention itself doesn’t seem to be a necessity to trade, and thus a marketplace. I guess a good example might be viewing the effects of deflation as just that- deflation, whether it’s caused by a government contracting a fiat currency or a supply shock for a commodity currency. A bailout is still a bailout whether its undertaken by the government or JP Morgan in the late 1800s early 1900s (can’t remember exactly when that banking panic happened). More along those lines.

          • Virgil0211 says:

            “The question is how to operate in the real world subject to this constraint. How do we operate in a world in which interest rates are centrally planned and in which they fluctuate by diktat according to changes in inflation and employment? Again, I am asking a pragmatic question, not a theoretical one.”

            You’ll get no argument from me on the goal, but I don’t think it’s possible to divorce a question entirely from theoretical premises. A pragmatic solution will still draw from other theories, much in the same way a vaccine, however practical, derives support from germ theory. If one relies too much on the ‘pragmatic’, if I’m interpreting you correctly, they may run the risk of relying upon correlation without determining causation. This would present its own problems in the long run.

            Then again, I’m still in college, and it would seem that we focus primarily on theoreticals, so this may be the result of my naiive mind which has yet to seriously confront pragmatic realities in practice.

      • Virgil0211 says:

        “There has never been nor do I suspect there ever will be a n economic system without government interference. So, one cannot disprove the theory that reflexivity is a product of government interference.”

        Perhaps, but by that same token, there has never been an ecosystem without micro-organisms. We can still determine what viruses/bacteria/conditions cause specific problems and why (and benefits, such as in the case of E. Coli and digestion). Granted, economics is at a bit of a disadvantage when it comes to biology, but I don’t see why one can’t develop a theoretical framework using reflexivity and applying it to various times in various markets to see what conclusions can be drawn. Then again, maybe that’s my naivete talking.

        • Virgil0211 says:

          From my standpoint, it’s more of ‘I can see how reflexivity increases the severity of asset bubbles when the supply of credit is manipulated. How does this apply to market situations where credit isn’t manipulated in such a way, and how strongly?’

      • Virgil0211 says:

        “I don’t believe bubbles are a product of interference. I believe they are endogenous to the economy because of human psychology.”

        I guess where I’m diverging is how prevalent bubbles would be with less government interference, what would cause them in the absence of interference (Again, not assuming they don’t happen, but their cause), what would need to happen to mitigate the problem. Reflexivity seems like it would primarily be a problem in situations where accurate information on the part of buyers was limited, such as in a boom caused by easy credit. This seems like it would be less of a problem in more competitive markets (assuming Andrew Lo’s efficient market hypothesis, and I’ll admit that doing so is a stretch) or in circumstances where information is more accessible. As information technology becomes more prevalent, such problems may be more mitigated simply by virtue of the fact that information is transmitted more easily. Then again, I may be misunderstanding the problem, so forgive me if that is the case.

      • Virgil0211 says:

        “But it’s irrelevant from a practical perspective. Rather than work from the theoretical, I prefer to look at what we actually experience. And what we have seen is bubbles since the first days of capitalism. So we should assume they are here to stay and incorporate an understanding about how to mitigate their effect int macroprudential market supervision.”

        I don’t think assuming bubbles are solely a product of government interference or inherent to the marketplace are effective methods. Both involve assumptions that are difficult to confirm, and would influence the conclusions one draws from the available data, and would technically be irrelevant to the question of what causes business cycles/inefficiency and how to mitigate it. It needs to be less a question of ‘government/private’ and more a question of ‘cause/effect’ and ‘problem/solution’.

        Of course, I’m the amateur here, so I may be doing little more than blathering nonsensically. I apologize if anything I say is taken offensively or seems disrespectful. I assure you, neither is the case, and I am very grateful for the opportunity to discuss this topic with you. Thank you for your time.

      • Virgil0211 says:

        And I apologize for the wall of text. I had trouble posting my comments in much larger bits, and I had alot of questions to ask/things to talk about.

    • Your questions are all good but ultimately the question regarding the role of government is not something that can be addressed using the scientific method. It is subjective and depends on one’s subjective and philosophical predisposition toward government which may or may not be shared by others. What I have been saying here is that you need to separate the subjective piece and identify it as such. That might allow you to work within a framework based on less subjective and less political criteria.

      • Virgil0211 says:

        I’m not necessarily disagreeing with you there. The role of government is, for the most part, subjective and based on one’s value system. However, I would argue that the effectiveness and ability of government IS capable of being addressed by the scientific method, even in a limited respect. The question of how and when government is effective, why it’s effective when it is, why it’s ineffective when it isn’t, the ability of the government to engage in policy decisions based upon an accurate interpretation of economic theory (whatever theory being used to support the decision), the gap between letter of the regulation and enforcement of the regulation, etc. Of course, that may already be what you’re talking about, so I may just be a bit redundant.

        Again, thank you for replying to me. I imagine I sound a bit ‘green’ compared to other commenters you’re used to dealing with, and I am grateful for your time. I’ve learned a great deal of valuable information from these discussions and your blog posts.

  15. Virgil0211 says:

    I’m a little bit of an amateur here, so forgive me if I make an error or come off as sounding stupid. In that case, just ignore me, and I’ll probably end up going away eventually. :-P

    First off, I have to say that I’ve really been enjoying your blog thus far. I may not agree with everything you say, but you make your case well and have so far made every post a pleasure to read.

    Now, I can get to my thoughts.

    I’d like to criticize one aspect of the division between the ‘economics’ and the ‘politics’, if I’m interpreting you correctly. It seems to me that the propensity of government entities to become corrupt and the ability of a central government to effectively implement policy decisions has at least as much to do with a possible course of action as said action’s ability to affect an outcome theoretically. I might even argue that the former must be established before the latter. To apply an analogy, it would be a bit like developing a gene therapy treatment before a reliable delivery vector of appropriate size could be developed. I also disagree that it’s primarily a legal/political/philosophical/criminal problem than a problem for economics. The job of economics, I think, should be to study how and why the corruption occurs. After all, such corruption often results from the desire to abuse one’s position of power for personal gain, and such gain is often monetary. Many Austrians I’ve spoken with argue that such corruption is inherent in the government’s power to regulate the industry, a position that reminds me of that Nietzsche quote about staring into the abyss. The government’s actions during this latest credit cycle certainly don’t do anything to falsify that position. Whatever the case, economics should concern itself with the question of government corruption, as it matters to the potential policy prescriptions of almost every school of economic thought.

    I hope I was clear with that. Lack of sleep and approaching finals have left me less astute than usual, so I may have been more confusing than eloquent. If so, I’ll try again after I’ve had a bit of sleep.

    I think that’s about it. My only other point of contention has to do with Reflexivity and such, though that’s mainly a matter of how powerful its effect is within the non-bubble marketplace and its contribution to inherent instability. I may just need a bit more education on the topic itself, if you’ll pardon my naivete, but reflexivity seems like it would be most applicable in situations where real estate rates have been artificially ‘gamed’, so to speak, distorted in the way that would lead to an Austrian-style business cycle. It would probably explain a bit behind why such business cycles are as bad as they are, but I’m not quite convinced that it would lead to a boom-bust cycle on its own, or that it couldn’t be counteracted by some private innovation rather than state intervention. But then again, that may just be my lack of understanding, naivete, or combination of the two speaking.

    Thank you for reading my comment and taking the time to respond, if you do. I look forward to more blog entries like this one.

    • Virgil,

      Welcome to the comment section. We all appreciate hearing what you have to say.

      Here’s my thinking. You do have to get the economics first before the politics and the ideology or you get the tail wagging the dog. Politics and ideology is very subjective. While I fault economics from being overly mathematical and precise where it can’t be, some degree of methodological robustness is always a god thing. And this is a trend in all the social sciences as well – psychology is on field that comes to mind. Putting ideology first turns economics into voodoo economics or astrology.

      That said, politics is a constraint. I agree with you that government corruption and regulatory capture will always be a problem. That is why the financial system and the rules should be robust enough to deal with systemic issues without significant amounts of government intervention. The kind of intervention we saw during the crisis shows that the system is not robust. The easiest fix would be to break up large banks since smaller banks have been and will continue to be seized by the FDIC. But there are other remedies like decreasing leverage that would also be appropriate.

      Finally, on reflexivity, this goes back to ideology surrounding the efficiency of markets. If one believe markets are efficient in the absence of government interference then reflexivity might seem less important. But, on its face that seems naive. There has never been nor do I suspect there ever will be a n economic system without government interference. So, one cannot disprove the theory that reflexivity is a product of government interference. I don’t believe bubbles are a product of interference. I believe they are endogenous to the economy because of human psychology. But it’s irrelevant from a practical perspective. Rather than work from the theoretical, I prefer to look at what we actually experience. And what we have seen is bubbles since the first days of capitalism. So we should assume they are here to stay and incorporate an understanding about how to mitigate their effect int macroprudential market supervision.

      • Virgil0211 says:

        “Welcome to the comment section. We all appreciate hearing what you have to say.”
        Thank you for your kindness. Considering my previous experience with these discussions, primarily on youtube, it’s something I’m not used to seeing. It’s nice to find a place where these topics can be discussed without all the vitriol common in other places.

        “Here’s my thinking. You do have to get the economics first before the politics and the ideology or you get the tail wagging the dog. Politics and ideology is very subjective. While I fault economics from being overly mathematical and precise where it can’t be, some degree of methodological robustness is always a god thing. And this is a trend in all the social sciences as well – psychology is one field that comes to mind. Putting ideology first turns economics into voodoo economics or astrology.”

        I understand that, but I was speaking less about government corruption and effectiveness less from a political standpoint but from a standpoint of science. To use the analogy I had earlier, the government/state’s tendency to become corrupt, what increases/decreases this tendency, and its ability to effectively apply economic policy would be a bit like working to develop the delivery vehicle for a gene therapy treatment, whereas the effects and ability of the economic policy itself to correct the problems it’s intended to correct would be the gene therapy treatment. You need both in order to effectively apply the treatment.
        I guess I’m saying that economics should study the changes in a recommended policy application from point A (economic science and the recommended action) to point B (the discussion of said action in the chambers of congress) to point C (language of the bill intended to apply the remedy) to point D (enforcement of the law/remedy in the actual marketplace). That’s less a matter of political values and more a point of how best to see a given policy move through the law-making process with as few changes as possible. Then, we can have a better idea as to the effectiveness of such policy, and we’ll have fewer boxing matches between Keynes and Hayek, entertaining as they may be.

      • Virgil0211 says:

        “That said, politics is a constraint. I agree with you that government corruption and regulatory capture will always be a problem. That is why the financial system and the rules should be robust enough to deal with systemic issues without significant amounts of government intervention. The kind of intervention we saw during the crisis shows that the system is not robust. The easiest fix would be to break up large banks since smaller banks have been and will continue to be seized by the FDIC. But there are other remedies like decreasing leverage that would also be appropriate.”

        Perhaps there is a way to mix the Austrian (no regulation, as businesses will then have incentive to either establish a corrupt relationship with the regulators, or encourage the appointment of regulators sympathetic to their interests) and the MMT solution. They could codify such powers in a way that would permit their use only in emergency circumstances. This may make it more difficult for private interests to corrupt government positions as, in order to do so, they would have to financially support sympathetic candidates in times where they would have the power to help them as well as when they didn’t. Otherwise, they would have to make attempts to predict when the government would decide to unlock said emergency powers and start interfering with the economy, or start doing so if the government surprised them. Their predictions wouldn’t be perfect, and there’s no guarantee that they’d gain enough influence by the time the emergency powers were locked again. Left with this, they may either choose to leave the system alone and focus their efforts on increasing profits through more legitimate practices, or attempt to encourage the election of candidates who desire to unlock the emergency powers permanently. I’m not sure how one would go about preventing the latter in a systematic fashion, or if such action would be necessary once such safeguards were in place. That also doesn’t address situations where the problems go in reverse, where politicians enact legislation favorable to companies in the hope of obtaining their support/donations.

        I guess I’m just trying to make a meaningful contribution to the conversation. I’m still an amateur, but one learns by doing, right?

        I’m afraid I must confess to being a bit too unfamiliar with the banking system to discuss the above. Why does the FDIC seize smaller banks? Why would breaking up the larger banks counteract this problem? If this has been covered in a previous blog post, or if it’s a stupidly obvious question, I apologize. I’m still in the process of learning.

      • Virgil0211 says:

        “Finally, on reflexivity, this goes back to ideology surrounding the efficiency of markets. If one believe markets are efficient in the absence of government interference then reflexivity might seem less important. But, on its face that seems naive. “

        I was primarily asking in order to gain a greater understanding of reflexivity. I don’t see it as ‘markets are efficient without government interference’, as such a statement is rather subjective. I see it as ‘markets are efficient when ______________, inefficient when ____________.’ The primary difference between government and private entities is the monopoly on force. Whatever associated abilities come as a result, they all come back to that same power. Ergo, solutions to problems within a market system are only required to be enacted via government action when such actions require the government’s monopoly on force or one of the resulting powers they obtain as a result. Otherwise, it’s still theoretically possible for such action to be undertaken voluntarily. This would allow the application of theoretical solutions to situations with or without a government, making them more universal.
        With that in mind, I’m not saying that every potential solution could be applied via a private alternative to government action. Obviously, any action that makes use of fiat money requires the government’s ability to forcefully extract taxes from the population, unless some group collectively agreed to use a kind of fiat currency amongst themselves, which would imply the development of such currency naturally within the marketplace. As far as I know, the only situation that seems even moderately close to that is the island of Yap, and I think their currency was still technically tied to the stones as assets on paper, so I don’t know whether or not that actually qualifies.

        So, in essence, I guess I’m asking ‘what problems does reflexivity cause in the marketplace, and what needs to be corrected in order to fix those problems?’

        I’m sorry if the way I look at the situation seems a bit naïve. I’m still an amateur in this situation, so I might change my mind as I become more knowledgeable. I just didn’t want to give off the impression that I worked from a standpoint of ‘markets are always efficient when left alone’. That’s not how I approach the problem.

        • Government doesn’t have a monopoly of force. There are plenty of examples in the private sector of private armies, private militia used to help private companies. The government has the only legally sanctioned and largest force but it does not have a monopoly. In fact, it is exactly because private sector agents can band together as corporations or other large bodies that their influence leads to government corruption and the favouring of special interests.

          As to reflexivity, read my post on that referenced above for a quick review. The basic gist of it is that people are social animals who do not act in a vacuum nor do they act based solely on rational expectations. That means future price paths are never completely independent of prior prices. A bubble can form simply because prices become elevated enough that future prices become more dependent on prior prices, so-called animal spirits. his is a ‘flaw’ in the market that has nothing to do with government intervention.

          As t government intervention, if you look at the broad sweep of history, clearly there are zero instances across the entire world in which some level of government intervention existed. Lack of government intervention is a theoretical and unattainable goal in the same way Christians’ goal of perfection is unattainable:

          http://en.wikipedia.org/wiki/Christian_perfection

          The question is how to operate in the real world subject to this constraint. How do we operate in a world in which interest rates are centrally planned and in which they fluctuate by diktat according to changes in inflation and employment? Again, I am asking a pragmatic question, not a theoretical one.

          • Virgil0211 says:

            “Government doesn’t have a monopoly of force. There are plenty of examples in the private sector of private armies, private militia used to help private companies. The government has the only legally sanctioned and largest force but it does not have a monopoly. In fact, it is exactly because private sector agents can band together as corporations or other large bodies that their influence leads to government corruption and the favouring of special interests.”

            I was speaking as to the necessity of legal force in implementing various solutions to correct inefficiency and business cycles in the marketplace, not arguing that government is the only market player who engages in the use of force. I apologize.

          • Virgil0211 says:

            “As to reflexivity, read my post on that referenced above for a quick review. The basic gist of it is that people are social animals who do not act in a vacuum nor do they act based solely on rational expectations. That means future price paths are never completely independent of prior prices. A bubble can form simply because prices become elevated enough that future prices become more dependent on prior prices, so-called animal spirits. his is a ‘flaw’ in the market that has nothing to do with government intervention.”

            So, reflexivity is a way for prices to be inflated apart from an incident involving a change in the money supply/credit manipulation/etc? How does one tell when this happens, and could you provide some historical examples?

          • Virgil0211 says:

            “As t government intervention, if you look at the broad sweep of history, clearly there are zero instances across the entire world in which some level of government intervention existed. Lack of government intervention is a theoretical and unattainable goal in the same way Christians’ goal of perfection is unattainable.”

            By that same token, a human ecosystem free of disease, infection, and other such maladies is unattainable. It doesn’t mean that we can’t know anything about it, or that learning about ideal states of health absent disease would help us to better treat disease.

            I guess I’m saying that, though there isn’t an instance of capitalism/civilization without government intervention, government intervention itself doesn’t seem to be a necessity to trade, and thus a marketplace. I guess a good example might be viewing the effects of deflation as just that- deflation, whether it’s caused by a government contracting a fiat currency or a supply shock for a commodity currency. A bailout is still a bailout whether its undertaken by the government or JP Morgan in the late 1800s early 1900s (can’t remember exactly when that banking panic happened). More along those lines.

          • Virgil0211 says:

            “The question is how to operate in the real world subject to this constraint. How do we operate in a world in which interest rates are centrally planned and in which they fluctuate by diktat according to changes in inflation and employment? Again, I am asking a pragmatic question, not a theoretical one.”

            You’ll get no argument from me on the goal, but I don’t think it’s possible to divorce a question entirely from theoretical premises. A pragmatic solution will still draw from other theories, much in the same way a vaccine, however practical, derives support from germ theory.

          • Virgil0211 says:

            “Government doesn’t have a monopoly of force. There are plenty of examples in the private sector of private armies, private militia used to help private companies. The government has the only legally sanctioned and largest force but it does not have a monopoly. In fact, it is exactly because private sector agents can band together as corporations or other large bodies that their influence leads to government corruption and the favouring of special interests.”

            I was trying to make the point of the necessity of force in implementing various solutions to economic problems. I guess the better way to put it would be the ‘monopoly on legally sanctioned and largest force’ and whether or not/how it would be necessary it implement the solutions in question.

          • Virgil0211 says:

            “As to reflexivity, read my post on that referenced above for a quick review. The basic gist of it is that people are social animals who do not act in a vacuum nor do they act based solely on rational expectations. That means future price paths are never completely independent of prior prices. A bubble can form simply because prices become elevated enough that future prices become more dependent on prior prices, so-called animal spirits. his is a ‘flaw’ in the market that has nothing to do with government intervention.”

            So, reflexivity is a way for prices to be inflated apart from an incident involving a change in the money supply/credit manipulation/etc? How does one tell when this happens, and could you provide some historical examples?

          • Virgil0211 says:

            “As to reflexivity, read my post on that referenced above for a quick review. The basic gist of it is that people are social animals who do not act in a vacuum nor do they act based solely on rational expectations. That means future price paths are never completely independent of prior prices. A bubble can form simply because prices become elevated enough that future prices become more dependent on prior prices, so-called animal spirits. his is a ‘flaw’ in the market that has nothing to do with government intervention.”

            So, reflexivity is a way for prices to be inflated apart from an incident involving a change in the money supply/credit manipulation/etc? How does one tell when this happens, and could you provide some historical examples?

          • Virgil0211 says:

            “As t government intervention, if you look at the broad sweep of history, clearly there are zero instances across the entire world in which some level of government intervention existed. Lack of government intervention is a theoretical and unattainable goal in the same way Christians’ goal of perfection is unattainable.”

            By that same token, a human ecosystem free of disease, infection, and other such maladies is unattainable. It doesn’t mean that we can’t know anything about it, or that learning about ideal states of health absent disease would help us to better treat disease. I don’t mean that necessarily to compare government to a disease, though I have a few friends who would leap at the comparison. I mean that a theoretical model can be hardly present in pragmatic reality and still have a useful pragmatic application.

            I guess I’m saying that, though there isn’t an instance of capitalism/civilization without government intervention, government intervention itself doesn’t seem to be a necessity to trade, and thus a marketplace. I guess a good example might be viewing the effects of deflation as just that- deflation, whether it’s caused by a government contracting a fiat currency or a supply shock for a commodity currency. A bailout is still a bailout whether its undertaken by the government or JP Morgan in the late 1800s early 1900s (can’t remember exactly when that banking panic happened). More along those lines.

          • Virgil0211 says:

            “The question is how to operate in the real world subject to this constraint. How do we operate in a world in which interest rates are centrally planned and in which they fluctuate by diktat according to changes in inflation and employment? Again, I am asking a pragmatic question, not a theoretical one.”

            You’ll get no argument from me on the goal, but I don’t think it’s possible to divorce a question entirely from theoretical premises. A pragmatic solution will still draw from other theories, much in the same way a vaccine, however practical, derives support from germ theory. If one relies too much on the ‘pragmatic’, if I’m interpreting you correctly, they may run the risk of relying upon correlation without determining causation. This would present its own problems in the long run.

            Then again, I’m still in college, and it would seem that we focus primarily on theoreticals, so this may be the result of my naiive mind which has yet to seriously confront pragmatic realities in practice.

      • Virgil0211 says:

        “There has never been nor do I suspect there ever will be a n economic system without government interference. So, one cannot disprove the theory that reflexivity is a product of government interference.”

        Perhaps, but by that same token, there has never been an ecosystem without micro-organisms. We can still determine what viruses/bacteria/conditions cause specific problems and why (and benefits, such as in the case of E. Coli and digestion). Granted, economics is at a bit of a disadvantage when it comes to biology, but I don’t see why one can’t develop a theoretical framework using reflexivity and applying it to various times in various markets to see what conclusions can be drawn. Then again, maybe that’s my naivete talking.

        • Virgil0211 says:

          From my standpoint, it’s more of ‘I can see how reflexivity increases the severity of asset bubbles when the supply of credit is manipulated. How does this apply to market situations where credit isn’t manipulated in such a way, and how strongly?’

      • Virgil0211 says:

        “I don’t believe bubbles are a product of interference. I believe they are endogenous to the economy because of human psychology.”

        I guess where I’m diverging is how prevalent bubbles would be with less government interference, what would cause them in the absence of interference (Again, not assuming they don’t happen, but their cause), what would need to happen to mitigate the problem. Reflexivity seems like it would primarily be a problem in situations where accurate information on the part of buyers was limited, such as in a boom caused by easy credit. This seems like it would be less of a problem in more competitive markets (assuming Andrew Lo’s efficient market hypothesis, and I’ll admit that doing so is a stretch) or in circumstances where information is more accessible. As information technology becomes more prevalent, such problems may be more mitigated simply by virtue of the fact that information is transmitted more easily. Then again, I may be misunderstanding the problem, so forgive me if that is the case.

      • Virgil0211 says:

        “But it’s irrelevant from a practical perspective. Rather than work from the theoretical, I prefer to look at what we actually experience. And what we have seen is bubbles since the first days of capitalism. So we should assume they are here to stay and incorporate an understanding about how to mitigate their effect int macroprudential market supervision.”

        I don’t think assuming bubbles are solely a product of government interference or inherent to the marketplace are effective methods. Both involve assumptions that are difficult to confirm, and would influence the conclusions one draws from the available data, and would technically be irrelevant to the question of what causes business cycles/inefficiency and how to mitigate it. It needs to be less a question of ‘government/private’ and more a question of ‘cause/effect’ and ‘problem/solution’.

        Of course, I’m the amateur here, so I may be doing little more than blathering nonsensically. I apologize if anything I say is taken offensively or seems disrespectful. I assure you, neither is the case, and I am very grateful for the opportunity to discuss this topic with you. Thank you for your time.

      • Virgil0211 says:

        And I apologize for the wall of text. I had trouble posting my comments in much larger bits, and I had alot of questions to ask/things to talk about.

    • Your questions are all good but ultimately the question regarding the role of government is not something that can be addressed using the scientific method. It is subjective and depends on one’s subjective and philosophical predisposition toward government which may or may not be shared by others. What I have been saying here is that you need to separate the subjective piece and identify it as such. That might allow you to work within a framework based on less subjective and less political criteria.

      • Virgil0211 says:

        I’m not necessarily disagreeing with you there. The role of government is, for the most part, subjective and based on one’s value system. However, I would argue that the effectiveness and ability of government IS capable of being addressed by the scientific method, even in a limited respect. The question of how and when government is effective, why it’s effective when it is, why it’s ineffective when it isn’t, the ability of the government to engage in policy decisions based upon an accurate interpretation of economic theory (whatever theory being used to support the decision), the gap between letter of the regulation and enforcement of the regulation, etc. Of course, that may already be what you’re talking about, so I may just be a bit redundant.

        Again, thank you for replying to me. I imagine I sound a bit ‘green’ compared to other commenters you’re used to dealing with, and I am grateful for your time. I’ve learned a great deal of valuable information from these discussions and your blog posts.

  16. dvdhldn says:

    Thanks, that was an illuminating read.

    I do however think it’s important to make a distinction between two problems here,

    one, what is the most appropriate policy approach to our *current* predicament – the ending of a debt supercycle.

    and two, which approach would be best at preventing a recurrence.

    I’m not sure my answer to these two questions would be the same.

    • Yes,

      hat was my point when I wrote: “Mises is essentially saying let the chips fall where they may. This is the crucial part that other economic schools of thought reject. I would say this prescription works in a garden variety recession.”

      First and foremost, w want to get out of this mess. But once we have escaped, I think a solution heavily weighted toward the Austrian school version of no intervention is superior. To the degree you want to offset the loss of private sector demand, there are automatic stabilizers to do so, the key word being automatic.

  17. dvdhldn says:

    Thanks, that was an illuminating read.

    I do however think it’s important to make a distinction between two problems here,

    one, what is the most appropriate policy approach to our *current* predicament – the ending of a debt supercycle.

    and two, which approach would be best at preventing a recurrence.

    I’m not sure my answer to these two questions would be the same.

    • Yes,

      hat was my point when I wrote: “Mises is essentially saying let the chips fall where they may. This is the crucial part that other economic schools of thought reject. I would say this prescription works in a garden variety recession.”

      First and foremost, w want to get out of this mess. But once we have escaped, I think a solution heavily weighted toward the Austrian school version of no intervention is superior. To the degree you want to offset the loss of private sector demand, there are automatic stabilizers to do so, the key word being automatic.

  18. Dan Kervick says:

    This is terrific stuff, Edward, and a great foundation for further debate. Well done.

    My own feeling is that it is not enough to rely on functional finance only to restore aggregate demand during pronounced crises, and then go back to letting the private sector handle everything. I am attracted to Minsky’s focus on the permanent and inherent instability in a capitalist economy. The imbalances exist during boom times and bust times, and so the tools for modulating and stabilizing the economy need to be operating all the times – although obviously the relative volume of activity that takes place in the public vs. the private sector, as well as the activation of regulatory stimuli or checks – should ebb and flow along with trends in the private sector.

    I also like the emphasis of Randall Wray and Billl Mitchell on full employment programs as the proper means of fiscally implementing the monetary tools of an MMT regime. My belief is that unemployment exacts a completely unnecessary cost on society, in addition to the suffering that it inflicts on the unemployed, their families and their communities. I believe aggressive full employment programs can be designed so that they do not interfere with private sector innovation and growth, and instead enhance the latter by providing a buffer stock of continually employed and eminently employable and well-trained folks, while at the same time providing a uniform minimum standard of living. This can be done, in my view, by thinking of these programs as a permanent lifetime education program. People who lose their private sector jobs move back into the public employment program to acquire new skills and knowledge, and then flow back into the private sector as the jobs utilizing these skills are created. In other words, if you are not doing something currently in the private sector, your job is to acquire new skills and knowledge, or to impart those skills and that knowledge to others. Our economy is now too dynamic and innovative to treat the public investment in education as something that takes place only in youth, and is then neglected. We need a public program that constantly upgrades our workforce throughout the lifespan, while building a sense of security and reliability.

    We can see full employment programs then as a public investment in human resources, and thus as a natural accompaniment to the other major role for government economic activity: public investment in infrastructure and large-scale capital resources. The proper role of the government in public investment has been recognized going back to Adam Smith.

    The key insight of the MMT/post-Keynesians, as I understand it, is that the economic role of the monopoly producer of a currency cannot be evaluated in the same way as the economic role of other elements of the economy. Most of the deformities of our current debate have to do with treating the government as though it were just one other economic agent, one whose options and constraints can be analyzed in the same way as those a household or a firm, where income and financing play a larger role, and where income is almost always based on production or exchange.

    I do think the MMT folks tend to err in two things: one, in their assertion that the main function of taxation is simply to regulate aggregate demand. I don’t think that is quite right. Taxation does not just affect a broad aggregate. It subtracts money from some specific locations in the economy while the money creation and spending roles of the government inject money into other specific locations. So taxation has an inherent wealth re-distribution effect, and influences the specific direction of productive activity. The other error, in my amateur opinion, is the excessive emphasis on the chartalist view that the government maintains its role as the monopoly currency producer, and sustains the demand for its money, primarily by virtue of its ability to tax, and to determine the means of discharging a tax obligation. It strikes me that this is just one among several legal and institutional tools a sovereign currency-producing government has at its disposal to regulate the monetary dimension of the economy and build demand for its money. The government is, above all, the maker of the laws that regulate the production and distribution of money and money-like financial instruments in an economy.

  19. Dan Kervick says:

    This is terrific stuff, Edward, and a great foundation for further debate. Well done.

    My own feeling is that it is not enough to rely on functional finance only to restore aggregate demand during pronounced crises, and then go back to letting the private sector handle everything. I am attracted to Minsky’s focus on the permanent and inherent instability in a capitalist economy. The imbalances exist during boom times and bust times, and so the tools for modulating and stabilizing the economy need to be operating all the times – although obviously the relative volume of activity that takes place in the public vs. the private sector, as well as the activation of regulatory stimuli or checks – should ebb and flow along with trends in the private sector.

    I also like the emphasis of Randall Wray and Billl Mitchell on full employment programs as the proper means of fiscally implementing the monetary tools of an MMT regime. My belief is that unemployment exacts a completely unnecessary cost on society, in addition to the suffering that it inflicts on the unemployed, their families and their communities. I believe aggressive full employment programs can be designed so that they do not interfere with private sector innovation and growth, and instead enhance the latter by providing a buffer stock of continually employed and eminently employable and well-trained folks, while at the same time providing a uniform minimum standard of living. This can be done, in my view, by thinking of these programs as a permanent lifetime education program. People who lose their private sector jobs move back into the public employment program to acquire new skills and knowledge, and then flow back into the private sector as the jobs utilizing these skills are created. In other words, if you are not doing something currently in the private sector, your job is to acquire new skills and knowledge, or to impart those skills and that knowledge to others. Our economy is not too dynamic and innovative to treat the public investment in education as something that takes place only in youth, and is then neglected. We need a public program that constantly upgrades our workforce throughout the lifespan, while building a sense of security and reliability.

    We can see full employment programs then as a public investment in human resources, and thus as a natural accompaniment to the other major role for government economic activity: public investment in infrastructure and large-scale capital resources. The proper role of the government in public investment has been recognized going back to Adam Smith.

    The key insight of the MMT/post-Keynesians, as I understand it, is that the economic role of the monopoly producer of a currency cannot be evaluated in the same way as the economic role of other elements of the economy. Most of the deformities of our current debate have to do with treating the government as though it were just one other economic agent, one whose options and constraints can be analyzed in the same way as those a household or a firm, where income and financing play a larger role, and where income is almost always based on production or exchange.

    I do think the MMT folks tend to err in two things: one, in their assertion that the main function of taxation is simply to regulate aggregate demand. I don’t think that is quite right. Taxation does not just affect a broad aggregate. It subtracts money from some specific locations in the economy while the money creation and spending roles of the government inject money into other specific locations. So taxation has an inherent wealth re-distribution effect, and influences the specific direction of productive activity. The other error, in my amateur opinion, is the excessive emphasis on the chartalist view that the government maintains its role as the monopoly currency producer, and sustains the demand for its money, primarily by virtue of its ability to tax, and to determine the means of discharging a tax obligation. It strikes me that this is just one among several legal and institutional tools a sovereign currency-producing government has at its disposal to regulate the monetary dimension of the economy and build demand for its money. The government is, above all, the maker of the laws that regulate the production and distribution of money and money-like financial instruments in an economy.