Friday, October 14, 2011

Market Monetarist or Austrian? You Decide.

Via Lars Christensen we learn of this new paper by Steven Horwitz and William Luther, two Austrian economist who take seriously monetary disequilibrium.  You might be shocked to learn that they call for nominal GDP targeting rule for the Fed.  Take a look.
The Great Recession and its Aftermath from a Monetary Equilibrium Theory Perspective
Abstract: Modern macroeconomists in the Austrian tradition can be divided into two groups: Rothbardians and monetary equilibrium (ME) theorists. It is from this latter perspective that we consider the events of the last few years. We argue that the primary source of business fluctuation is monetary disequilibrium. Additionally, we claim that unnecessary intervention in the banking sector distorted incentives, nearly resulting in the collapse of the financial system, and that policies enacted to remedy the recession and financial instability have likely made things worse. Finally, we offer our own prescription to reduce the likelihood that such a scenario occurs again by better ensuring monetary equilibrium and eliminating moral hazard.
Update: paper link fixed.


  1. You need to fix the second link.

    Hmmm. Keynesians agreeing, now Austrians agreeing. Getting crowded around here.

  2. I'm not shocked. It's not much different than the Hayek Rule, right?

  3. geez.. Hayek Rule:

  4. never mind

    I'm not bright enough to post links correctly.

  5. Yes, I feel bad for the MMTers and Rothbardians who are left out of this New Keynesian-Market Monetarist-Hayekian love fest.

  6. I'd like Rothbard more if I felt he was better with monetary economics. And the MMT-ers remind me of the 70's inflation for some reason.

    In case anybody is wondering about my babbling about links, after I post I can't see the whole link url on the "post comment" page; it gets cut off. But on the 'front page' I can see the whole link when I read the comments.

  7. Nick,

    If you haven't read my Microfoundations and Macroeconomics: An Austrian Perspective, you might wish to (it's on Kindle now). Originally published in 2000, I argued back then for a monetary equilibrium approach to macro and tried to bring together Austrian work on inflation with the monetary disequilibrium theory of Yeager and others into a common framework. You can also get it in paperback for a reasonable price.

    I was an Austrian talking about this stuff before you guys made it cool. :)

  8. Steven: Yep. In many ways, there's nothing really new in Market Monetarism. I think we are really just pulling together strands that were known, but have been forgotten or ignored by New Keynesian macroeconomics, so that when the crisis hit they all went off the rails.

    Funny you call it "monetary equilibrium", and I call it "monetary disequilibrium", but we seem to mean the same thing. Not that surprising, I expect.

  9. A key theme of Steve Horwitz's paper is moral hazard.

    Has there been any discussion in Market Monetarist circles about how this issue may be relevant to NGDP-targeting ?

    What I mean by this is that if businesses operate in an environment where AD may change unexpectedly they will need a flexible model - they will avoid signing up for long term price contracts, will have agreement with their workers to reduce costs quickly if they need to etc. Businesses that cannot adopt to unexpected changes in AD will not survive.

    Under an NGDP-targetting regime (and indeed under the inflation targeting policy we have had for the past few decades) companies that make bad decisions that render them unable to change their pricing model fast will be bailed out by monetary policy and "marginal" companies that would not otherwise survive even mild demand-shocks will limp on.

    It seems possible to me that some of the companies out there today that are sitting on huge piles of cash may simply have got "fat and lazy" as a result of decades of having the central bank fix AD for them and they will now just sit out the recession knowing that sooner or later that will happen again.

    These are just the unscientific thoughts of a non-economists who has become fascinated by this debate and would welcome others views on this.

  10. Rob, Market Monetarists clearly acknowledge problems with moral hazard. Non-blogging Market Monetarist Robert Hetzel has written about it the following working paper:

    I think the key point from a MM perspective is that monetary policy should not be used to bail out investors, consumers or government or whole countries. Monetary policy should ensure a nominal anchor to avoid monetary disequilibrium. I hope to blog about this subject on my blog soon.

    Nick & Steve - good your find each other - you surely have similar views. And Nick you should read Steve's book;-)

  11. Rob, there is on pile of cash in corporations. It is all in the hands of capital owners, which is the point. The Corporations and the jobs collapse. Capital owners are fine.

    The Austrian school has no means to deal with this. They simply don't. The best thing they have is to starve the peasents while supposedly the hero's, the capital owners reorganize. Sounds like Mao's great leap foward.

  12. Thanks Lars, that is a useful link. I suspect I may be misusing the term "moral hazard" - I don't mean that AD management encourages excessive risk taking in the way that FDIC does for banking.

    I mean that businesses working within an environment where AD will be kept constant by CB policies will make different decisions to businesses which operate in an environment of AD uncertainty. For example: They may be less inclined to focus on keeping customers at times when demand for their product falls as they know that (when this is due to increased demand for money) CB policy will likely bolster that demand back up again. The price to be paid for the absence of business cycles may be that relatively inefficient business will survive and cause long-term consumer utility not to be maximized.

    This seems not to be an issue under free banking where the profit motive will cause banks to increase the money supply by getting the new funds (via loans or other means) to the businesses that will use them optimally, but under a politicized CB regime I am not sure I understand how this part of AD management works out.

  13. Anonymous:

    Austrians have no way to talk about an increase in the demand for money? And what Austrian economist ever described the capitalists as "heroes" or arguing for starving the peasants?

    You need to read some actual Austrian economics my friend, and I don't mean Internet op-eds but books and articles by actual PhDs.

  14. This is great. This blog post will be a big help to all the readers. Thanks for sharing... i love this. I learned new Of knowledge.

  15. Does this mean the Austrians will stop talking in hushed tones about gold?