Tuesday, January 18, 2011

The Austrians Attempt a Beckworth Smackdown

Well, at least Bob Murphy does over at  He attempts to tear apart the case I made for QE2 in the National Review Online. Strangely, his blistering attack never once addresses the key point of my argument: QE2 is an imperfect attempt to address the on-going excess money demand problem.  He commits a host of  mischaracterizations about my article that all stem from his avoidance of  this issue.  My takeaway from the piece is that Bob Murphy does not take seriously monetary disequilibrium.  If Bob Murphy wanted to do a reasonable critique of my piece, then he should have questioned whether there really is an on-going excess money demand problem as I claim. Instead his piece amounts to anti-Keynesian rant where among other things he labels me a "Monetarist-Keynesian." Come on, everyone knows that I along with Scott Sumner, Nick Rowe, Bill Woosley and Josh Hendrickson are known around the economic blogosphere as Quasi-Monetarists!

Fortunately, Jeffrey Tucker of the Mises Institute has agreed to publish my reply where I attempt to explain to the readers the importance of monetary disequilibrium and in particular the excess money demand problem. [Update: my reply has been published here.] In the meantime, interested readers can go check out the replies to Bob Murphy's article  from  Josh Hendrickson and Bill Woolsey. They both do an excellent job explaining the monetary disequilibrium view. 

 P.S. I did get a chuckle out of the picture of me constructed by the folks at  It was very clever.


  1. David
    Am I grossly mistaken or is there really something very wrong with this quote from Plosser´s speach in Chile:
    "For example, if an adverse productivity shock results in a substantial reduction in the outlook for economic growth, then real interest rates tend to fall. As long as inflation is at an acceptable level, the appropriate monetary policy is to reduce the federal funds rate to facilitate the adjustment to lower real interest rates. Failure to do so could result in a misallocation of resources, a steadily declining rate of inflation, and perhaps even deflation.
    Conversely, when the outlook for economic growth is revised upward, real market interest rates will tend to rise. Provided that inflation is at an acceptable level, appropriate policy would be to raise the federal funds rate. Failure to do so would result in a misallocation of resources and, in this case, a rising inflation rate".

  2. Good discussion, and I think you are handling yourself admirably.

    Reading Yeager recently, I can't help but feel the label "quasi-monetarist" is inappropriate. So-called quasi-monetarists are really just old monetarists. I have been struck by some of the old economists Yeager quotes and how closely their views accord with yours or mine. The "Keynesian diversion" really does seem to have been a regression. Unfortunately, it seems to me that modern Austrianism is a similar diversion.

  3. I have seen people refer to Murphy as an Austrian equivalent to Krugman - often more interested in beating the ideological drum than evaluating and analyzing in search of the truth.

  4. David,

    Thank you for engaging w/ Bob Murphy. I sincerely hope the "conversation" will continue. I'm a fan of both you & Bob -- yes, it is possible to respect the thinking of those w/ different views. And the reactions I've read on the Mises and Coordination Problem blogs to your exchange w/ Bob now have me completely re-reading (yet again!) Chapter 17 of Mises' "Human Action." See, I really appreciate the thought provoking exchange of ideas and while I might not ultimately change my thinking, I'm certainly re-thinking why I believe what I believe to be true. I hope some of the disrespectful posts I've read will not dissuade you from future "conversation" w/ Bob and others of the Austro-Rothbardian persuastion. I'm guilty of more than one less than respectful blog post over the years so I know of what I speak. Anyway, thank you!

    ps - And thank you for your posts re: the Federal Reserve's casual role in the 2008 financial crisis - you're spot on (IMHO).


  5. Thanks Suo for the comment. Yes, I got eaten alive at If only they knew that I happened to be a outspoken critic in the mainstream press of the Fed's low interest rates policies in 2002-2004 for a very Austrian reason: the Fed kept the federal funds way below the natural interest rate.

  6. David,
    I wandered over there to see the response. Not very promising, for the most part. It is rather difficult to argue from a monetarist perspective when the majority of the participants cannot accept the fact that our system IS a fiat based, fractional reserve system. The denial leads to theories and arguments based on a system of money that is nothing more than wishful thinking. I think they have read about as much Keynes, as Krugman has been accused of reading of Hayek.

    I am not schooled formally in your discipline, and would like to confirm that excess money demand in fact means the opposite of what seems logical. That is, money is being held excessively?

  7. Nanute,

    Excess money demand is when one's actual money balances is less than one's desired money balances. Let me outsource to Steve Horwitz, an Austrian who does take seriously this issue, for more:

    [I]t's a comparison between desired money balances and actual money balances. Assuming... that the demand to hold money balances is not infinite, i.e., there is a determinant amount of wealth people wish to hold in the form of money, this Yeagerian distinction is sensible.

    If our actual holdings are greater than our desired holdings, we get rid of the excess by spending on goods, services, and financial assets. This, of course, is how excess supplies of money translate into rising prices: the excess supply of money is spent because it is more than people wish to hold in their balances at the current price level.

    When our actual holdings are less than our desired holdings, we will try to acquire additional money balances. The one sure way we have of doing so is to cut back on our spending. (There are other ways, but they are not completely under our control.) The result is downward pressure on prices, which is how deficient supplies of money lead to falling prices (eventually).

  8. David,
    Thanks for the explanation. Does this lead to the "paradox of thrift"? It would seem that under current conditions everyone from consumers to lenders seem to be in a position of one's money balances is less than one's desired money balances. Which begs the question: Why? When money is spent by consumers or "spent" by lenders, is it really a matter of price levels? I am assuming Horowitz is referring to real vs. nominal price levels; no? Currently, inflation levels don't seem to be having much of an negative impact on real values. More importantly, I think, is that preservation of capital is a significant factor for consumers not spending. Most people don't think in terms of their money losing value over time. On the lender/spender side of the equation, it appears to be a matter of a willingness to take the spread on excess deposits, rather than lend to the market. The major financial players are in worse shape than stated, and are using this tactic to repair balance sheets with questionably valued assets. (When is an asset a liability?) Furthermore; the risk premium in the market is not enough to spend the capital. Or, at least that seems to be the perception. How else do you explain the lack of spending on the part of the lenders? Or, am I all wet?

  9. Nanute:

    Great questions. The Paradox of Thrift is (as Bill Woolsey puts it) a vulgar Keynesian version of the excess money demand problem. The two ideas are getting at the same thing, but I have come to the conclusion that framing it as an excess money demand problem is more precise.

    Here is a post where I discuss the paradox of thrift vs. excess money demand problem.

  10. David,
    I thought I'd get a rise with the Keynesian question. lol. I'll read your link AFTER the football. I'm sure I'll be back with more questions for you. And thanks for the response.

  11. I always imagine the Austrian School as a place where stern-looking mustachioed men with dueling scars talk about the the need for rectitude and the gold standard.

    The Austrian School is another quirky sign that something is rotting from within on the American right. Where does all this lunacy on money supply come from? You even have James Taylor, after gushing about the effects of QE in Japan, now saying QE is no good for the USA.

    I keep hoping the R-Party will run somebody I can vote for. A dwindling hope for this go 'round.