Wednesday, November 30, 2011

Reading Murray Rothbard

     I just finished reading Hayek. I found his book "Fatal Conceit: The Errors of Socialism" a lot better than I had assumed I would. Which is funny I thought that it would just be a crude piece of "red baiting" propaganda but it really was very interesting. While on the other hand the book I had read before that was a book of his correspondence with Keynes. In that book I found Hayek very unimpressive, and felt that Keynes, but even more Sraffa demolished him while all he did was quibble over the details of Keynes' use of words like "savings" and "investment."

    Ironically, then, I found Hayek's work when he gave up being an economist and become more of a sort of political philosopher better. This is the opposite of what you usually find. Often when someone moves out of the field they were legitimately trained in you find the results less impressive. Friedman seemed worse when he inserted himself too much in the immediate political debates.

     As Dean Baker has suggested, it's very important that we liberals have a healthy appreciation of monetary policy and its efficacy in policy outcomes. In many ways what was worse even than Reagan's tax cuts was Volcker's change in the Fed mandate where inflation at any price was more important than full employment, even if this required an 11% unemployment rate-not only higher than it had been since the Depression but higher than it ever got in the current crisis either. This is why I have come to regularly read many of the monetary blogs like Scott Sumner and Nick Rowe. Sumner himself yesterday was writing about Hayek. He claimed that he was an early precursor to NGDP targeting. I questioned this a bit, not that I knew it to be wrong but that I didn't know it to be right. His rather cursory answer to this was that I'd have to read George Selgin to know when this happened. It sure wasn't during the early 30s where Hayek was a deflationist.

      For more on this please see

      Now I am actually reading Murray Rothbard's "Case Against the Fed" which was originally published in 1993. He talks about how the renowned maverick congressman from Texas, Henry B. Gonzalez, had suggested some of what Rothbard calls mild reforms:

     It called for full independent audits of the Fed's operations, videotaping the meetings of the Fed's policy making committee, releasing detailed minutes of the meeting within a week rather than allowing the Fed to give a vague summary 6 weeks later and finally to have the12 regional Fed presidents chosen by the President rather than by the commercial banks of the respective reasons. He notes the interesting fact that then incoming President Bill Clinton and his administration shot these down. He questions why Clinton might have fought against the expansion of his own power.

    This is a good question. He quotes Barney Frank who supported the bill at the time who pointed out that if the goal is to open up government then why not the Fed which "violates it more than any other branch of government?" (pg. 6) Interestingly some of these reforms have come into being. The audit the fed proposal went through thanks to the support of Ron Paul, et al. The Fed under Bernanke has now started to give a more timely accounting than the old 6 weeks. In fact many of these have been accepted, the main one that hasn't notably is to have the 12 regional Fed presidents chosen by the President. Frank is still fighting the fight and recently again suggested a move in this direction. Maybe out of office he will have more impact than he is been able to have lately in office. Let's hope so.

     The answer of course is the vaunted ideology of  "Fed Independence." Rothbard rightly sees this as specious. This doctrine comes down to the idea that only the Fed and its independence can save us from the Gorgon of inflation. Rothbard expands on this doctrine. The public and politicians are "eternally subject to the temptation to inflate; but it is important for the Fed to have a cozy relationship with private bankers" as the private bankers are "the world's fiercest inflation hawks." (pg. 9)

    However, Rothbard declares that, "every aspect of this mythology is the very reverse of the truth." Indeed the only thing Rothbard agrees with is "that the overwhelming dominant cause of the virus of chronic price inflation is inflation, or expansion, of the supply of money."

   Of course as the expansion of the supply of money is the dominant cause of the virus of inflation then it turns out that Fed is not the solution but the cause of the entire problem, like the proverbial thief who diverts attention by crying, "stop thief!"

   "What we need is not a totally independent, all-powerful Fed: What we need is no Fed at all."(pg 12)

    It is here where Rothbard and I part company. While I am opposed to the ideology of "Fed independence" I am not in support of eliminating the Fed all together. For me in a way his too radical proposal is not radical enough. I support reforms along the line of Frank and Gonzalez where the Fed should be made politically accountable but eliminating it would actually be a step in the wrong direction.

   The fact is the monetary system has been much more stable post 1913 with the passage of the Federal Reserve Act. In the Golden Age of the gold standard-1873-1913) we were in recession 20 out of 40 years. With the rise of the Fed we have seen bank runs as a thing of the past and overall much more steady growth and stability. Friedman is simply wrong in trying to claim that the Depression would not have happened if there had been no Fed-note that this is not the same thing as saying that the Fed's failure to act was certainly a contributing factor to the length and depth of the Depression. You can agree with Friedman's critique of the Fed without agreeing that if there had been none at all there would have been no Depression. The argument that "well no crisis before had let us to a full depression" is arguing without proving that correlation and causation are one in the same.

     Rothbard, of course, is an inflation phobe. For him to increase the money supply is an act of counterfeit. It is a redistributionist "tax" where early receivers gain at the expense of later receivers. If tomorrow someone were to successfully pass of a fake $100 bill as the real thing they would essentially become $100 richer. This would be at the expense of someone down the chain, Who exactly? Suppose the counterfeiter had $500 of these fake bills and bought a new lap top at Best Buy. If he effectively passes it off then he essentially has a free computer as sure as if he stole it off the shelf and some how escaped the store without detection.

     In this case though who actually suffers? Best Buy will take this $500 and pay expenses-like more computers, or rent. Does Best Buy get ripped off? If is able to send the bills to someone else, no. If the $500 are used to pay rent, then the fake bills are in the hands of the landlord. But if when he puts his money in the bank, the bank detects it's fraudulent then he ends up being ripped off. Or, maybe it gets by the banks rigorous controls-which means the quality of the bills are pretty good counterfeits. Maybe some unlucky person later gets them out of an ATM and gets caught later with them. In this example the 5 fake bills are like a hot potato. The last one holding the bag loses.

    Rothbard argues this is how it always works with money printing as well-after he's done inveighing against it he aims his sights on fractional reserve banking. So if the Fed increases the money supply the increase is wholly counterfeit and someone will eventually get stuck holding the bag.

    What is clear is that under this scenario those who spend the money now gain at those who save it to spend later as Rothbard says. He says that it a redistribution from those who spend now to those who spend later. If tomorrow everyone got a check for $1000 those who spent it the quickest gain relative to those who save it the longest. If Thrifty Tom saved $900 while Spendthrfit Sam spent $900 then Sam gains $8 at the expense of Tom.

    I'm still early in the book right now he is onto fractional reserve banking. No doubt he is a Free Banking enthusiast too. One of the curious things about Sumner's NGDP idea is that he derived it largely from George Selgin a Free Banking enthusiast. While I agree with what Nick Rowe told me that the etymology is not that important-you don't have to be a Free Banking enthusiast to go for NGDP I find the etymology interesting in any case. Further, we can point out that Selgin is from the Cato Institute, which only adds to the interest.

    I will have more to say about Rothbard and inflation in future posts. For now it seems to me that to the extent that he is an inflation phobe he is part of the problem. What is clear is that to the extent that inflation punishes spenders at the expense of savers it also redistributes from rich to poor, as the poor spend all their money on consumption.  Americans of modest means-and most Americans are of modest means-by definition spend most or all their money on consumption. This means that most Americans stand to gain by inflation according to Rotbhard's own premises. It was no accident that the greatest American populist, William Jennings Bryan, was as convinced an inflationphile as Rothbard and company are such inflationphobes.




  1. >inflation
    >redistributing from rich to poor
    >oh god my sides

    You forget that the rich keep their wealth NOT in cash, but in stocks/land/other non-cash assets. Assets that appreciate in value relative to inflation.

    The poor and middle-class keep their wealth largely in US Dollars, so inflation dilutes their purchasing power, while driving speculation by the 1%.

    The Austro-libertarians are wrong on a lot of things, but not on this.

  2. I;m not at all sure about that. It may be that the effect of inlfation is mixed. If wages and prices both go up it's a wash depending on which goes up faster.

    Inlfation clearly doesn't only hurt cash assets but bonds as well. Due to the inflation of the 70s school loans hurt a lot less than they do now.

    I wouldn't say that inflation is in and of itself a good thing, but it is not the unmitigated evil that the Austrains think it it.

    I would argue that "an inordinate fear of inflation"-paraphrasing Jimmy Carter-is a greater evil than inflation right now.

    Highger inflation right now I think would be a respite.

  3. You misunderstand his (actually Hayek's) point about how inflation benefits the political class at the expense of everyone else. It has nothing to do with savings (although inflation does benefit debtors at the expense of creditors) because if someone saved their money they would spend it (i.e. buy a bond or w/e) at old rates. What happens is, when the money first enters the economy it has no inflationary effect. The people who get it first (the political class) spend it. Then the money enters teh economy, then people realize the money supply is increased, then the prices of good (in money) increases.

    I find it very difficult to believe that inflation transfers wealth from the rich to the poor. First of all, it's important to realize that no one transfers wealth to the poor. A lot of people talk about it, but no one actually does it (save their employers, those heartless ruthless exploiters of man). All the money spent on welfare? Well where I live welfare cheques are usually very little. OTOH the government spends a lot of money on welfare. The bureaucrats get lots of money. Meanwhile the taxes to raise that money crush the economy. The poverty created justifies more taxes and programs. It's a never ending cycle of statism.

    Anyway, you wanna talk about helping out the poor, there is NOTHING like laissez-faire capitalism to do just that. I dare anyone to find examples of societies where the poor have became radically not poor than the USA, Botswana & Hong Kong when those nations were practicing limited government.

  4. HEY!!

    What about interest on bank deposits? It's ONLY unexpected inflation that causes an income transfer (that and tax on nominal rather than real interest).

  5. One very important point. When it comes to CREDIT creation, the "fractional reserve banking" story is NOT even accurate.

    Banks create credit by balance sheet expansion. This is confirmed by many in MMT studies on banking and monetary systems. One cite is Fed chief Alan Holmes in 1969, disputing Milton Friedman's naïve ideas on curtailing the volume of new bank credit creation by reducing Reserve balances on the Fed's computers ... or the reverse, QE, expanding lending by increasing Reserve (cash) balances by purchasing securities held by banks.

    Abba Lerner and others have expanded on this point.

    Banks lending works by creating a Loan Agreement and a Deposit, simultaneously. The source of the banks' Liability (deposit) is the new Asset (debt obligation).

    Banks then seek out Reserves if they are short of the (extremely weak) requirements, TWO WEEKS in arrears. E.g., Lending creates Deposits. Deposits aka reserve balances are not the source of loans.

    There is virtually NO LIMITS on private bank loan creation, other than their own risk standards and willing borrowers ... and whatever Regulations are enforced on capital asset quantity and *quality*, solvency on the Asset side.

    The Fed is the TAIL to the private banking sector's dog. The Fed is supposed to act as regulator, does payment clearing, sets interest rates, but the QUANTITY of money is set by actions of the banks. The Fed is REQUIRED to make up any shortage of total reserves after the fact ... or else checks don't clear and financial markets seize.

    The idea that Govt SPENDING -- rather than lending -- directly causes inflation by "Supply V Demand" and "diluting the currency" has been debunked by Steve Keen. Keen actually debunks the simplistic Supply V Demand Curve completely. It doesn't even hold up in a two-person economic model.

    The idea that Govt SPENDING dilutes the economy was also debunked by it's own AUTHOR. Irving Fisher published the MV=PT formula, which is simple algebra. He stated that this would hold true in a STATIC economy. Where is there a STATIC MARKET economy that does not respond to signals like increased financial Demand by hiring and increasing supply?

    As long as Supply increases relative to Demand, there is no Demand-Pull inflation ... except for inelastic markets.

    Irving Fisher said that model should never be applied to a REAL economy. Yet is IS treated as a real economic insight in mainstream textbooks.

    “MV= PT” is a tautology pretending to be an equation. ~ Steve Keen