Thursday, December 6, 2012

Scott Sumner and the Austrians Haggle Over Cantillon Effects

     Bob Murphy had their point of agreement as they both took turns razzing Krugman. However, that's a distant memory now as Sumner argues with Murphy and the rest of the Austrians over whether there are Cantillon effects-does it matter who gets new cash injected into the economy first? Sumner, of course, says no. The Austrians-of course-say yes.

    For the simpler times when Murphy and Sumner were on the same side, bashing Krugman, see here

    I won't jump into that Krugman debate now, except to say that I find it pretty feeble and hardly "devastation." What it amounts to is-yet again, as Sumner has done this countless times in the past-parsing Krugman's seminal 1998 liquidity trap essay. Sumner is consumed with the idea that Krugman somehow egregiously contradicted what he said in something he wrote 14 years ago. I guess if we can establish beyond a reasonable standard that Krugman committed the grievous sin of contradicting himself at some point in his lifetime, that would really be a terrible strike against him.

   Ok, back to Cantillon effects. Bob Murphy's Cantillon argument:

    "on the Cantillon Effects debate. It occurred to Koning that if we’re going to argue over the issue, maybe we should actually see what Cantillon wrote? Very nice, JP."

     "Let me focus on this aspect of Koning’s attempt to reach a peace treaty:
While we don’t have to agree with Cantillon’s ordering of effects, it seems uncontroversial to assume that if expectations only adapt slowly, then there will be some sort of distributional effect during the adjustment period to an unanticipated change in the money supply. There can certainly be debate over the size and consistency of this effect. Austrians, for instance, build a business cycle theory out of it. Others consider the effect to be ephemeral.
On the other hand, if rational expectations are assumed from the start, then the location of gold’s injection point is moot since everyone perfectly anticipates the repercussions and adjusts. In talking about injection points under rational expectations, it seems to me that market monetarists are having a totally different conversation than Austrians, who are interested in injection points under imperfect expectations. Is this just a debate over the nature of expectations? [Bold added.]
     "I have a deal for JP Koning, Scott Sumner, and Nick Rowe (since I think they would agree with him):

     "You guys convince the government to give me a printing press. I’ll store it in my basement with a lot of security to make sure nobody else uses it. I promise I will give all of you a full month to get ready whenever I’m going to create new money. For example: In January, I’m going to print up $1 billion, and I will spend $500 million on gold bullion and the other $500 million on buying into the S&P500."

     "Do whatever you guys need to, to get ready. Blog about my plans, set up a Facebook page, whatever. Get Glenn Beck to warn his listeners to call Goldline in December."

     "Now: Does anybody deny that it matters to me that I’m going to have that $1 billion in January? Are you guys saying you wouldn’t want the printing press, so that you could buy the assets instead? Do you really mean to say these “injection effects” are completely irrelevant, so long as the price of gold and shares of stock can adjust before I enter the market?"

    "The true irony in all of this discussion is that everybody concedes as a matter of course that the government benefits from having the printing press, i.e. from being the first person in line to get the newly created money. But gee Sheldon Richman and you other Austrians, that doesn’t count as an injection effect mattering! That’s what we call “seignoriage.” So I guess the term for what the monetary authority earns, by creating new money, is actually “fiscal policy”?

     Let me first admit that I'm not sure which horse to back. I'm pretty sure that agree with the Austrians-of all people-to the extent that I don't think money is neutral. Sumner does argue that's besides the point:

     "Some of the smarter commenters tried to convince me that money is non-neutral. My entire blog is devoted to the proposition that money is non-neutral–I don’t need convincing. But that has no bearing on the claim that the effect of money policy depends on who “gets” the money first. Non-neutrality in the labor and goods markets comes from sticky wages and prices, and non-neutrality in debt defaults comes from sticky nominal debt."

     Yet if his whole blog is "devoted to the proposition that money is non-neutral" that's only in the short-term, isn't it? I'm pretty certain he wouldn't agree that it's neutral in the long term as both Austrians and Keynesians would argue.

    For all that, I can see holes in Murphy's argument-at least how Sumner would answer it. He draws a distinction between micro effects and aggregate effects. So his argument is that while it's true that if the Fed gives away $1 million dollars it makes a big difference if I'm one of the ones who gets some of it or my next door neighbor. However, the argument is that on the aggregate level it makes nor difference.

    "People need to pay attention to the distinction between the micro level and the macro level. Bill Gates does not refrain by buying a Ferrari today because he doesn’t happen to be holding any base money. His nominal demand for goods and services is based on his nominal wealth. If the Fed buys $100 million in bonds from Gates and pays him cash, he doesn’t feel energized to go out and buy goods and services (his nominal wealth is unchanged), rather he puts the money in the bank and then invests it elsewhere. Of course the aggregate NGDP will rise a tiny bit, and for that reason everyone, including Gates, will spend a tiny bit more on goods and services."

    "If the Fed spends $100 trillion on financial assets, then nominal expenditure in the aggregate will soar (mostly due to inflation, but output will rise slightly in the short run.) Monetary policy operates at the aggregate level, it cannot be explained at the individual level, except by using the concept of the supply and demand for base money. The hot potato effect. But here’s the problem. In the short run prices are sticky, and individual people’s nominal purchases of goods and services depends on their nominal wealth. So we have to get from here to there via some sort of “transmission mechanism.” In the apple market we often assume a Walrasian auctioneer. But in macro that assumption assumes away all that is interesting. Hence people flounder, unable to conceive that monetary policy is all about debasing the medium of account by increasing its supply relative to demand. They want some sort of understandable mechanism that they can visualize at the individual level–the Keynesian interest rate, the Austrian Cantillon effect, but there just isn’t any. Or perhaps I should say there are far too many, each of which plays only a tiny role."

     "Imagine trying to explain to a wheat farmer why increased wheat production will lower the price. He’d say “I don’t notice any price drop when I sell more wheat.”

     So his argument is that while we can certainly talk about the differing effects on individuals depending on where the money goes it makes no difference on the macroeconomic level.

     You might be amused to get Morgan Warstler's perspective on this-over at his new blog. Since he lost his bet with Sumner-that Obama would lose-he's a convent to Sumner's NGDP. However on Cantillon effects he disagrees: who gets it first matters. Morgan wants the "people who matter" the "chosen people" to get it: the small business owners (SMB). He took Sumner's NGDP futures idea and claims that he's "fixed it" by making the market off limits to big market makers, instead shopping it to the SMB.

     "When I say the odds slightly favor the SMB owners in the betting, I mean they will be pay whatever odds are necessary to get the majority of SMBs to use this system."

     "If after God’s chosen people have been serviced, the Fed has to buy /sell a few Treasury Bills from Goldman, who cares?"

     "The new money goes to SMB Owners first, and that’s all that matters."

     For a guy who's on the wrong side, he's pretty good gaming things out.    



  1. Mike,

    Not much to say but here's a few quick thoughts...

    In general I think both sides are talking past each other. Sumner seems to be arguing that monetary policy ends when the Fed swaps Treasuries for reserves with the banks. Any further actions by banks, consumers, etc. is fiscal policy. If that's so, then I'd agree it makes no real difference which banks receive reserves and even the nominal effect on the economy would be minimal, at best.

    Accepting that Fed policy has effects beyond swapping assets with banks (e.g. altering expectations), then relative prices will shift in the economy depending on changes in expectations. Here's a good post from Steve Horwitz on why relative price changes have real effects:

    Lastly, I think you suggest that Austrians and Keynesians accept monetary non-neutrality in the long run. To the best of my knowledge that would be incorrect for most within those groups. Post-Keynesians and others within the modern money camps are the minority in taking that postion about the long-run.

  2. Thanks for your coomments Josh, they're as usual very helpful. I got to read Horowitz, looks like he might have gotten to the bottom of it.

    I'm certainly not an expert on the Austrians but I thought they do believe there can be long term real effects-of course for them the effects would always be bad as they don't think a money injection ever serves a good purpose.

    Arguably the Post-Keynesians-are the real Keynesians? LOL
    You think someone like Krugman doesn't believe in long tterm real effects? Maybe your right,perhaps all neoclassicals believe it's only short term.