A fight over money

Over the last twelve months or so, the blogosphere saw another round of a long-standing fight over money. Not over getting more money (though that is an element too), but its nature and history.

A story about debt
The aforementioned tussle has been provoked by the publication of David Graeber's intriguing, but seriously flawed, book Debt: The First 5,000 Years. Graeber takes strong issue with much of economics in general and with the barter-then-commodity theory of money in particular. This is a theory of the nature and origins of money which dates back to Adam Smith and was famously stated by Austrian economist Carl Menger in his short 1892 essay On the Origin of Money which took further comments made in his 1871 Principles of Economics. Austrian school economist Bob Murphy has provided a useful summary of Menger's theory, as extended by Ludwig von Mises.

Graeber has done what authors do and engaged in various interviews to promote his book, one of which was posted here. Bob Murphy leapt to the defence of the Smith-Menger-Mises tradition, critiquing what Graeber had to say in the interview without, alas, having actually read the book. Graeber responded in turn, to which Murphy then responded. Graeber has since posted a nice summary of his thesis as a wrap-up to this interaction. (One of the sub-themes of which includes the issue of how blogosphere promotes quickie, congenial attacks by the ideologically hostile, including negative Amazon reviews.) Bob Murphy did get around to reading and reviewing Graeber's book.

Economist and Adam Smith scholar Gavin Kennedy has posted a much lengthier, and more nuanced, set of critiques of Graeber's book than Murphy's original posts. There is even the requisite Marxist critique of Graeber for lacking an underlying economic theory and being a romantic.

Meanwhile, economist Jeff Hummel has also posted a critique of Graeber's book. He does a good job of defending economics and economists from Graeber's wider attack, but does much less well in his critique of Graeber's central thesis. Hummel writes that Graeber:

makes several different historical claims, not all of them compatible:
(1) Credit transactions preceded and dominated spot transactions in early human societies.
(2) Media of account emerged before media of exchange.
(3) Barter was unknown (or at least extremely rare) WITHIN early human societies.
Notice that point (1) is incompatible with either (2) or (3). Early credit transactions must have involved barter (contradicting number 3) or media of exchange (contradicting 2). There is no other logical possibility. Yet because Graeber's peculiar concept of barter excludes a farmer trading a pig for delivery of an ax in two weeks (to use Murphy's example), his claim that barter was non-existent tends to become true by definition. Murphy was not the only one to catch this semantic sleight of hand; it is even exposed by an Amazon commenter on the book.
Graeber's terminological tautology appears to stem from his confusing (a) the limited ability of credit to mitigate the problem of the double coincidence of wants with (b) the substantial ability of multilateral exchange to do so. Multilateral networks are in reality what he is partly describing when he invokes "systems of broad, non-enumerated credits" (more on the "non-enumerated" part below). Consider the standard three-person THEORETICAL trading problem, where A wants only what B is selling, B wants only what C is selling, and C wants only what A is selling. The lack of a double of coincidence of wants can be solved by using one of the goods as a medium of exchange in two bilateral trades OR by conducting a single multilateral trade. Obviously for small groups, where people know and trust each other, the latter is often more likely and convenient. Whether such a multilateral exchange takes place at one moment in time (a spot transaction) or is extended through time (a debt transaction) is of secondary relevance, although the possibility of debt transactions certainly increases the potential scope of multilateral exchange.

This is a damming critique of a thesis which, alas, is not Graeber's. If exchanges of goods and services are intermediated, to what extent are such exchanges then barter? Graeber's central point is that early human societies did not involve spot transactions within them. Instead, people operated within dense webs of connections and that transfers of goods and services occurred within, and as expressions of, those connections. Graeber is taking further patterns described in Marcel Mauss’s classic 1923-4 text The Gift: The Form and Reason for Trade in Archaic Societies. Now, Graeber describes the underlying principle as "communism", which is both provocative and misleading. It certainly wasn't the case, for example, that there was no sense of private property. But seeing connectedness as the central feature leads one to view exchanges very differently than a view which takes methodological individualism to imply the "natural" economy is a series of spot trades.

Social connections
What Graeber is describing is transfers of goods and services that manifested felt obligations; obligations that were informal, personal and involved life-time "games". Including a sense of indebtedness that could be discharged in various ways. So credit exchanges need not involve specific media of exchange; any appropriate good and services would do. Units of account could thus easily predate media of exchange; they were ways of keeping track of obligations in the goods and services economy. (Indeed, various modern economic models treat money precisely like that, as ways of keeping track of prices, debts etc in the "real" or goods and services economy.) Moreover, having such units of account immediately provide some of the transaction cost advantages of money without having actual physical money in any useful sense.

Assumption of debt by guarantor

It is clearly true that foraging societies involved implicit exchanges between hunting males and gathering females; an early use of comparative advantage that improved allocation of resources for the purposes of getting food, distributing risks and raising children. Graeber's point is that this did not involve a series of spot trades ("this chicken for those yams") but roles which connected and obligated--we provide the meat, you provide the fruit, grain and vegetables. Now, there is an exchange going on here, but it is not "barter" in the sense of spot trades. It is only when you have interactions outside these dense webs of connections that spot-trade barter makes sense.

Think of a family-and-friends barbecue.  People do not engage in spot trades. They contribute various things and, over time, people have a sense of who contributes what and whether they are "pulling their weight" in the web of connections which come together in said barbecues. Well, in a foraging society, every meal is a group barbecue embedded in connections. Describing what goes on as "barter" is true in one sense (good and services are being exchanged without money) but very misleading in another.

Medieval tax tallies

Graeber's point is that credit, debt and units of account grow out of connections, not out of spot trades.  Which is highly plausible and accords with much archaeological and anthropological evidence. Even taking things forward several millennia; to describe manorial economies as "reversion to barter" simply because use of coins dropped dramatically shows a gross misunderstanding of how manorial economies work.

So far, so good. That, however, the inadequacy of the spot-trade barter story, or implications from it, somehow invalidates mainstream economics does not follow even though Graeber wants to imply that somehow it does.  And Graeber does not help his case by being very cavalier about historical facts. He is, for example, perfectly correct that historically state debt was mainly about war, since warfare and military expenditure overwhelmingly dominated state expenses. Attempts to tie postwar US debt to military expenditure is, however, nonsense on stilts. Debt is borrowing to spend and is driven by whatever the borrower spends money on and in no modern developed state, not even in the US, is military expenditure (whose share of GDP and government expenditure has been trending downwards across the postwar era) remotely the dominant form of government expenditure.

Graeber's factual unreliability is particularly unfortunate, as he has some fascinating ideas about various historical phenomena and trends -- I was particularly struck by his discussion of what makes an age medieval. But when Graeber makes silly statements such as:

Again, non-state bureaucracies are a phenomenon that no economic model would even have anticipated existing. It’s off the map of economic theory.

he is promoting nonsense -- modern economics finds such things so not-outside its purview, it has awarded Nobel Prizes for work in precisely that.

Unfortunately, there seems to be at least as great a tendency for anthropologists to make dubious statements about mainstream economics as there is for economists to be cavalier about anthropological evidence. Though some economists can join the former game quite happily. For example, in a survey lecture-cum-article on different approaches to money in historical context, economist Michael Hudson tells us that

Douglass North (1984) sees money as having been developed by enterprising merchants seeking a stable measure of value as well as a convenient means of payment. ...
One of the stated reasons for awarding the Nobel Economics Prize to North was his idea that money was developed not by public institutions, but by individuals to grease the wheels of commerce.

Yet there is no mention of money in North's Nobel citation, nor in his Nobel lecture, nor in the article Hudson cites while North's magnum opus has no citation for 'money' in its index.

But there is a wider polemical tussle underlying much of this.

M- or C-theory?
For the debate over Graeber's book is part of a long-standing debate that goes back to at least Georg Friedrich Knapp's The State Theory of Money (pdf) originally published in 1905. (Knapp seemed to have thought that analysis meant multiplication of definitions; his book produces a continual stream of them to the point that following the analysis becomes quite difficult.) Within the Anglosphere, the credit or chartallist theory of money was famously stated by Alfred Mitchell-Innes in two articles published in 1913 and 1914. This stream of thought led to modern monetary theory (MMT). In the chartallist approach, money is seen fundamentally as a creation of the state. This is what economist Charles Goodhart called in a 1998 paper (pdf) the C-theory, one of the two concepts of money.

The alternative is what Goodhart calls M-theory, which sees money as developing out of the needs of exchange. This is very much the dominant mainstream economics approach.  Optimum Currency Area (OCA) theory, for example, uses it. And while Goodhart is correct in that OCA theory is bad at explaining current boundaries of usage of particular currencies, the Eurozone crisis has proved to be eminently explicable in its terms. OCA may not be a good theory of currency realms (the ambit of particular currencies) but it is an excellent barometer by which to judge whether existing currency realms should amalgamate (or not).

As for the wider ideological game that is also being played out, if money is a natural product of exchange, then any state role in money is much more likely to be at best unnecessary and, at worst, pernicious. If, however, money is a natural product of state action, if the state has a necessary role in money, then such action is much more likely to be beneficent.

Thus, Hudson's lecture-cum-article displays a strikingly benign view of "the public sector". While taxes and soldiers get mentioned, the piece shows no serious sense of the expropriation and violence which is at the heart of the history of rulership and the state; in his comments on contemporary policy, there is little sense of issues about the inefficiency of fiscal stimulus, or its impotence if monetary authority does not give it space; little sense of government monetary dysfunction or issues about expenditure rises. Ibn Khaldun's C14th writings have a far better, mostly due to being far more balanced, sense of rulership.

Graeber is not quite playing the same game (his target is debt and state action supporting the same). Nevertheless, while Graeber's portrayal of slaves-money-debt Axial Age empires is extremely hostile (he extends the Axial Age to 600AD), his treatment of ancient Mesopotamian temple and palace complexes is remarkably benign, as is his depiction of medieval manorialism and village economies. He treats the collapse of the Western Roman Empire as overwhelmingly positive, with little sense of the demographic collapse or the loss of comfort which attended it.

On a much less ideological note, part of the problem is that money provokes two different sorts of questions. One is concern for its swap value -- inflation, deflation, use in money offers, the way demand is expressed in a monetised economy. The sorts of questions mainstream economics is mainly interested in.
The other sort of question is how come money has transaction utility at all, why do currency realms exist, what determines the boundaries of currency realms? Boundaries not only in the sense of which money is used in which exchanges, but also whether or how money is used. Consider that family-and-friends barbecue; it is embedded in networks of much more formalised and impersonal exchanges. Such formalised and impersonal exchanges are typically how you treat strangers and other people with low levels of personal connection with you.  Which is why we get offended if people start treating highly informal and personal interactions in ways which imply that they were as if with strangers.

So, there is a certain amount of talking past one another expressed in Goodhart's "two concepts of money", in M-theory and C-theory. Anthropologist Keith Hart expressed the hope that analysis might cope with both sides of the coin -- its manifestation as state power and its use in exchange. But, as he has since pointed out, there is some resistance to such.

Graeber approvingly cites Hart's original "Heads or Tails" essay in his book, and then manifests precisely the sort of one-sided aversion Hart was appealing to folk to get beyond.  There have been attempts to provide some sort of synthesis (such as this recent paper) (via). But the focus on different questions, and the wish to get answers which support wider concerns, means that this recurring fight over money shows no signs of abating.

(Cross-posted at Skepticlawyer and at Critical Thinking Applied.)

They did it again

One of my basic analytical principles is that things reveal their nature in history (including the history that has not happened yet -- that is, what has happened is not the sum of possibilities). If one wishes to understand current events, then cultivate a sense of history for the past is the cause of the present and the beginning of the future.

So, it was both revealing and depressing to read Jorg Bibow's 2003 paper On the 'Burden' of German Unification (also here) (via). Revealing, because the paper shows how destructive the Bundesbank's monetary rectitude could be; depressing because Bibow's analysis of events during the decade before the publication of his paper provides such a depressingly consistent template for events 6 or so years after the publication of the paper.

The unification of West and East Germany in 1991 was the absorption of East Germany by the Federal Republic. Since the infrastructure, technology, firms and level of marketable skills of the East were at a significantly lower level than that of the West, the costs of unification for the German Federal budget were considerable.

Which led to a significant increase in the Federal budget deficit. This, the Bundesbank disapproved of because of its potential inflationary implications. So, the Bundesbank engaged in restrictive monetary policy and public pressure to get the fiscal deficit back down. Which led to the German Federal Government raising taxes to improve the fiscal balance because of Bundesbank pressure while the Bundesbank's monetary policy led to a lowering in economic activity which acted to decrease government revenues and increase government expenditure (i.e. tended to increase the budget deficit).

This became completely farcical when the Bundesbank contracted monetary policy to counteract the effect on the price level of the tax rises it had pressured to occur. That is, the German Federal Government raised taxes to increase revenue only to have the Bundesbank engage in restrictive monetary policy to counteract the price impact of said tax increases thereby effectively negating any effect of the same on the budget balance. So the budget deficit did not improve significantly, but economic activity was below its previous trend.
It was a complete failure of policy coordination.

The Bundesbank did manage to push the German economy onto a lower economic growth path. What an achievement for monetary rectitude.

Once more, with feeling
Fast forward 10 or so years. The Eurozone has been created, with the European Central Bank (ECB) being basically the Bundesbank on steroids. In the words of political scientist Walter Russel Mead, it has become the world's first sovereign central bank. The point of the Euro, apart from achieving "ever closer union", was a Deutschmark for everyone.

Which meant that, until recently, the Bundesbank was calling the shots within the ECB. Which meant doing, in the name of monetary rectitude, deeply stupid things such as including tax increases in the inflation target, with the result that the ECB is not reaching its inflation target, it is systematically undershooting it. Worse, when Eurozone government raise taxes (!!!!) during a prolonged economic downturn to reduce their fiscal deficits, the ECB engages in restrictive monetary policy to counteract the "inflationary" effect of such tax increases, thereby driving down economic activity, so spending, so income, so government revenues and driving up government expenditure.

In other words, just like the Bundesbank in 1992-7, the ECB completely undermines the efforts of Eurozone Governments to reduce their fiscal deficits. All in the name of "price stability".

And doing so while not even managing competent inflation targeting, as the results show.

But the problem is not merely that the ECB has been negating, or worse than negating, any economic stimulus effect from the budgetary deficits. Nor is it even that it undermines the attempts of Eurozone governments to reduce their budget deficits by its monetary austerity.

It is worse than that; its restrictive monetary policies have made their public debt levels much worse. Which has both stressed the European financial system and further undermined the ability to reduce budget deficits (by increasing the cost of servicing public debts.)

If income crashes, one's debt burden gets worse. This is elementary.

If income increases, one's existing debt burden lessens. Which is the classic way to deal with public debt (apart from some form of default) -- to grow one's way out of problems, as outlined in Evsey Domar's 1944 article. As the economy increases, the existing public debt burden lessens.

But if, in the name of "price stability", the central bank engages in restrictive monetary policies to block any surge in activity that "threatens" the inflation target, then that route is blocked.

It is truly astonishing, how apparently indifferent so many "hard money" advocates are to the level of risk to the financial system they are apparently willing to tolerate to block any danger that inflation might get to the dizzying heights of, say, 4%pa. But, of course, we have also been here before. Adherents of the gold standard in 1928-32 were willing to sacrifice both price stability and the financial system to the sacred doctrine of gold. It is as if money stops being a tool for transactions and becomes some sacred principle to which all else must be sacrificed at whatever cost.


As for regarding increases in the monetary base as an example of "loose" monetary policy presaging some inflationary, or even hyperinflationary breakout, the history of the US monetary base in the interwar period shows what nonsense that is.

More recently, the evidence is that ECB President Mario Draghi has decided that monetary union is not, in fact, a suicide pact. While US Federal Reserve's statement of open-ended asset purchases to get unemployment down is a sign that even the Fed has decided that there is a limit to the economic misery to be imposed in the cause of ostentatious monetary rectitude.

The good news is that the Fed has decided to have something like a clear and open target and has apparently accepted that expectations about spending matter as well as those about price stability.

Monetary turnover ("velocity")

Old-style Monetarism relied on the assumption that monetary turnover (how quickly money moves through transactions, what economists call 'velocity'; a very confusing usage to those of us for whom high school Science took a little too strongly) was basically stable. This turned out not to be true. Which turns the focus on expectations, since they drive behaviour -- including whether people hold onto money or spend it. The more insecure people are in their expectations of income, the more they tend to hoard money rather than spend it, and the more the turnover ("velocity") of money drops.

In extremis, this can lead to a severe fall in monetary turnover, so a crash in transactions.
So, expectations about price stability matter, but so do expectations about income (i.e. spending). (Which is why Australia has not had a recession for 21 years; because Reserve Bank of Australia policy manages both price and spending expectations.) It is good that the Fed (and to a lesser extent the ECB) are beginning to get with the program.

What is less good is that the Fed is targeting a "real" (i.e. non-monetary) variable, unemployment. Central banks have great power over monetary matters (price level, spending, etc). They have much less over non-monetary matters. As several econbloggers have pointed out, using monetary instruments to keep employment up and unemployment down is precisely what lead to the "Great Inflation" of the 1970s.

Prominent econblogger Scott Sumner's comments about the limited understanding of so many central bankers appear to be not less than the truth.

Note for non-economist readers:Nominal GDP = GDP in money terms = NGDP = aggregate demand = Price level (P) times output (y) = Py.

[Cross-posted at Skepticlawyer and at Critical Thinking Applied.]

Can we have an intelligent debate about Islam?

My recent post about "green on blue" killings in Afghanistan provoked the sort of comments that indicate we have, in the modern West, a real problem having an intelligent conversation about Islam. Not the to-and-fro about the geo-strategic issues regarding Afghanistan, but comments about beliefs within Islam and their possible consequences.

The sort of comments which indicate this are the "yes, but in the history of Christianity ..." comments and the "don't be so nasty about Muslims" comments which are pretty standard responses when Islam and Islamic belief is discussed.

Conspicuous about both types of responses is that the reverse is almost never applied. Critiques of Christianity or varieties thereof (such as the role of Christian conservatism in US politics and culture) are almost never confronted with the "but in Islam ..." response. It is as if Christians are Real People, so are expected to take any criticism on the chin, but Muslims are Morally Protected Personages, so one has to bend over backwards to make it clear that one is not singling out Islam and Muslims.

Similarly, criticisms of Christianity, or political manifestations of Christianity (such as the role of Christian conservatism in US politics and culture) are almost never confronted with "but don't be so nasty about Christians" responses. Once again, it is as if Christians are Real People, and so have to wear any negative implications of their belief systems, but Muslims are a Morally Protected Personages, so criticism which might in any way imply anything bad about Muslims is not permissible.

Ideas and consequences
Folks, ideas have consequences. It does not matter if the believers of particular ideas are white, black, brown or brindle; ideas have consequences. It is perfectly legitimate to explore those ideas and their possible (or demonstrable) consequences.

There are, of course, many complexities in this. One of which is not every believer buys into every set of ideas associated with their religion. Even if they do accept particular ideas or doctrines, the extent that they do in practice can vary wildly. Perhaps part of the problem is we are more culturally familiar with Christianity and so are much more aware of the reality of that among Christians.

So, the issue about the doctrine of taqiyya or permitted deception is not whether Muslims are trustworthy as some personal characteristic. The issue is about religiously-sanctioned opting out of some basic norms of social life.

Just as the issue about high-trust and low-trust societies is not about whether individual members of such societies are good or bad people, it is whether social dynamics are such that trust is such a precious commodity that it is applied extremely narrowly. One of the basic reasons for Western success is that Western societies evolved to be high-trust societies (and the more high trust, the generally more successful). One of the issues with large-scale migration is that it does seem to lower the trust level; likely largely because of lower levels of mutual knowledge and fewer common preferences or shared signals.

Discouraging history
As for the "yes, but in the history of Christianity ..."  response, I completely fail to see how it is reassuring. In the history of Christianity, thousands of people were burnt or hanged as witches, millions of people were killed or starved to death in religious strife precisely because people took the reigning doctrines of their religion very seriously. The obvious spectacle of Muslims willing to kill in large numbers in the name of their religion may well invoke aspects of Christian (or, for that matter, Jewish) history, but they are not reassuring aspects. Particularly given the technological possibilities of mass destruction in our era.


[Read the rest at Skepticlawyer.]

Making my inner medievalist smile

Came across this cartoon.


Made me chuckle.

Though it was not the longbow which made English armies so deadly at Crecy, Poitiers, Najera and Agincourt, it was that their command-and-control was considerably superior to their opponents (who outnumbered them in each of the aforementioned battles). An English army with the same weapons mix as in those four battles was decisively defeated by a smaller Scottish army at the Battle of Bannockburn because of lack of effective command-and-control.

Ambiguous victory

The war aim of the victorious North in the the War Between the States was simple -- that the Union not be divided. As Abraham Lincoln put it, the Union position was "We won't go out of the Union, and you shan't". The Northern victory was, indeed, the Union victory. Freeing the slaves was a natural outcome of that victory but was not the basic war aim.

The war aim of the Confederacy was to separate from the Union in order to preserve slavery, its "peculiar institution", an aim embedded directly in the Constitution of the Confederacy. It wished to preserve slavery because about a third of its wealth was tied up in slaves; preserving slavery would also stop freed slaves from becoming voting citizens and block freed slaves from competing for work as skilled or managerial labour. The last two aims united the interest of non-slaveowners with slaveowners.

This is why the "most whites did not own slaves" argument that the Civil War was not about slavery falls flat. No, they did not; but they still stood to lose substantially if the slaves were freed.

In the immediate aftermath of the Union victory, when Union forces occupied the defeated Southern states, voting blacks dominated the political process. But this situation rested on Union forces enforcing equal protection of the law. With the end of the Reconstruction Era, the withdrawal of Union forces and the re-integration of the former Confederate States back into the Union, white power reasserted itself. This was the era of Jim Crow, where the two subsidiary aims in preserving slavery -- to block freed slaves (and their descendants) from having  voting power and competing for work as skilled or managerial labour -- reasserted themselves.

Of the three interests in creating the Confederacy -- preserving slavery, blocking black voting power, stopping blacks competing for skilled or managerial labour -- the first was lost in battle. Violence settled that issue most thoroughly. The second two were lost only temporarily, then re-asserted during Jim Crow era and only finally lost in the civil rights struggles of the 1950 and 1960s. That is when the underlying war aims of the Confederacy were finally defeated. (Not coincidentally, the defeat of the segregationist cause led to the economic resurgence of the South, as resources were no longer wasted in repression and blocking black talent.)

Elected (and re-elected) by the good ole boys (and girls).

The legacy of mass slavery reverberates down the years. Even today, the American South has distinctly lower levels of social capital than other parts of the US.

In the process, in their final defeat, the South came, after 130 years, to forgive the Republican Party for fighting the Civil War to Northern victory; a forgiveness consummated in the 1994 Republican Congressional victory. For a Democratic Administration -- the Kennedy-Johnson Administration -- supported the civil rights cause during its final legal victory. This use of federal power to profoundly undermine local patterns of power and status alienated many Southerners from the Democrats. First in Presidential elections and then in Congressional ones, the South increasingly voted Republican. The 2007 election of Bobbie Jindal as Republican Governor of Louisiana was both a symbol of how partisan alignments had been transformed and of how thoroughly the original Confederate cause was lost.

But also, of course, how long it took to be finally lost.

The surreal glitter of gold

Blogging at Free Banking, Kurt Schuler wants us to have a debate about gold (as in the gold standard).

Let's not.

I will concede that there is, as he states, much superficial dismissal of the utility of a adopting a gold standard. It is also true understanding the dynamics of gold, silver and bimetallist standards are a necessary part of understanding economic history; not merely for the periods when such standards applied but also for understanding what happened after and why. Such understanding requires a certain level of serious reading and thinking about gold, silver and bimetallism standards, if not quite the "necessary dozen books" Schuler specifies as required (though the list he puts up is an excellent one). Brian Selgin has recently made available a very useful paper on the history of the gold standard in the US.

The problem is the pointlessness of engaging in a "debate" when there is almost no chance of getting agreement about what that historical record tells us.

Take Austrian school economist Steve Horwitz's claim that

If we had a commodity-based free banking system, we would not have had the boom and bust of the 2000s in the first place.

Possibly not, though adding in free banking to a discussion of the gold standard rather muddies the issue. For, under the gold standard it certainly was possible to have a dramatic boom and bust; it was called the Great Depression.  Which makes Steve Horwitz's further claim:

that a gold standard ties the Fed’s hands is exactly the reason to favor it, not oppose it. The Fed was primarily, though not solely, responsible for getting us in this mess in the first place precisely because its hands were free to flood the market with artificially cheap credit.

somewhat less than persuasive. At this point it also becomes clear that no genuine debate will happen, for defenders of the gold standard will immediately claim against citing of said Great Depression "but that was not a real gold standard".

Which is true in the sense that the interwar gold standard was a gold exchange standard managed (or rather mismanaged) by central banks rather than the gold specie standard that had prevailed before the Great War.

For I am shiny and powerful

It was, however, certainly a form of gold standard and if such a disaster can happen under any sort of gold standard, so much worse for the gold standard. Particularly given that the quicker economies went off the gold standard, the quicker they recovered (pdf). Even more since the status of central banks would likely mean that only a gold exchange standard would even be considered for re-introduction.

Moreover, the reason the interwar gold standard was not a "pure" gold standard was that such a standard would likely have collapsed much more quickly. It was precisely the massive deflationary risks (of the ugly monetary contraction kind) attendant on going back on the gold standard after the Great War inflations, as Swedish economist Gustav Cassel repeatedly warned of (pdf),  that led to the various measures to reduce monetary demand for gold in the first place.

More broadly, the problems of 1928-32 were just the most intense example of a much wider problem with metal monetary standards -- the great vulnerability being on a gold, silver or bimetallist standard generates to the actions of other countries. Whether it is France abandoning bimetallism out of fear of (pdf) newly-unified Germany dumping silver onto international markets as it shifted to the gold standard or the UK being pushed into a lower rate of economic growth by expansion of the gold standard in the 1870s or countries in the goldzone being dragged into the (ugly) deflation (pdf) by the Bank of France and (pdf) the US Federal Reserve in 1929-32 or China being forced off the silver standard in the 1930s due to FDR's silver-buying program to placate silver-State US Senators driving up the price of silver, again and again being on metal-standard money has created grave vulnerability to the actions of other countries.

But none of this will count, because either the historical record will be disputed or some ideal version of the gold standard will be paraded which, by virtue of being wildly ahistorical (either in its take on the past or its sense of the present or both), will be immune to the burden of history.
Particularly if you add in free banking. But if one wants to have a debate about free banking, by all means lets -- the periodically truly appalling record of central banks certainly gives plenty of grounds for such a debate. Just don't mix it in with the gold standard as that distracts from attention to the performance of central banks.

The gold standard glitters so strongly in the minds of its adherents because you can always turn it around in such a way that all one gets is the bright shine of hope without any of the tarnish of history. For the gold standard of adherents is typically a thing of faith, not of history. One is then dealing with religious faith parading as economics and such faith is not subject to the refutation of mere worldly facts. So, let's not have yet another round of theological debate parading as economics.

Treachery Fire

The recent murder of 3 diggers by an Afghan wearing the uniform of the Afghan National Army is part of a pattern of murders of NATO and Allied personnel by Afghans who are either members of official Afghan security services or wearing the uniform of same.

In just the past two weeks, at least 9 Americans have been killed in such insider attacks. For the year to date, at least 40 NATO service members, most of them American, have been killed by either active members of the Afghan forces or attackers dressed in their uniforms — already outstripping the toll from all last year.

Obviously, these "insider killings" sew profound mistrust between NATO and Allied troops and Afghan forces.

Field commanders have also been given discretion to increase numbers of so-called "guardian angel" sentries who oversee foreign soldiers in crowded areas such as gyms and food halls, to respond to any rogue shooting incidents.

Not least because it undermines any sense that Afghans can be trusted to act according to the uniform they wear. Said uniform, and any associated oaths, clearly means much less to the treachery killers than that the NATO and Allied forces are "infidels". There is, for them, no overarching moral standard across the gulf between believer and non-believer.

There is also nothing new in the this pattern. The Dutch encountered exactly the same phenomenon during the Aceh War.

There was no shortage of would-be Acehnese martyrs who, for the sake of gaining a victim, were willing to feign friendship with the Dutch, before drawing their knives against them.  The phenomenon of unpredictable killings by the Acehnese came to be known as Atjèh-moord ‘Acehnese murder'.

The gulf between believer and non-believer trumped any explicit or implicit obligation.
It might be objected that the Dutch were colonising imperialists: which is true. Given that Afghanistan has an elected government and the NATO and Allied forces have no intention of staying permanently -- indeed, have an announced timetable of withdrawal -- that is hardly a common factor. Even more given that the Western intervention has seen a dramatic fall in the number of Afghan refugees, dramatic economic growth, expansion in schooling (particularly of girls and women) and elections (which, though imperfect, likely compare favourably to, say, Chicago under the Daley clan).


All of which may be much of the point.  Empowering women, giving folk effective votes that allow laws to be passed by mere humans, daily reminders of infidel success; these are profoundly affronting to a certain Islamic sensibility.

Patterns
Of course, what we are dealing with here is a pattern within Islam. Which does not make it a pattern of Islam. An important distinction that may be lost on grieving families, and comrades.


[Read the rest at Skepticlawyer.]

Venezia at the QVM

While walking near the Queen Victoria Markets (I had spent some time back in Melbourne, working near the Queen Victoria Markets, before it struck me that said Markets were at the junction of Queen and Victoria Streets) I saw this shop display.

Somehow, it seemed vaguely familiar.

Public knitting

Just next to Yarraville Station, an act of public knitting was recently committed.


I found it quite charming.

Why the noise?

I am a single person and--due to an upbringing starved of physical affection or praise interacting with unfortunate adult experiences (the former making the latter both more likely and more likely to be of a traumatic nature)--am likely to remain so. I also like cafes, perhaps more than I should, given my low income. (Yes, I am an employer who is also on a low income; more common than folk might imagine.)

So, when I go to a cafe, I often read and/or write. For a while, that meant taking along my laptop; now it means my iPad. (Which has a rather nifty keyboard connected by Bluetooth; I love the sheer inventiveness of the modern world.) Between Kindle for Mac, iBook and ReaddleDocs, I have lots of books, pdfs and other documents to read on said iPad. (Dropbox is a wonderful thing; as is Baen Books.) I also often take notes during my reading.

Hence, it is more than a little irritating when waiting staff interrupt to ask you if you want something. It is bad enough when you are reading, but if you are typing away, you really don't want to have your train of though interrupted or, worse, derailed. It is not as if I linger; I rarely spend much time after having consumed what I have ordered and, if I do, it will only be when there are clearly spare tables available. If I want something, I will attract attention. If I am typing away, or reading, I do not want to be interrupted by unnecessary interrogation.

That is, however, an occasional irritation. What is more omnipresent is the apparent requirement to have music playing in the background; often quite loud and with an intrusive beat.

Either people are at cafes with friends, and wish to talk. Or, like I usually am, they are on their own and wish to read or write. Either way, music is likely to get in the way if its loud or otherwise intrusive. Yet, that is often precisely what cafes inflict on paying customers.

It is not as if I dislike music. In the car, I listen to Joy FM in part because I (generally) like the music thereon. But silence, or the gentle hum of voices, can be refreshing too.

This was really brought home to me just recently. I have taken to sometimes patronising a new cafe in Yarraville which has a nice range of teas (I don't drink coffee, I find it stops me sleeping). Its name and tone invokes Eastern mindfulness.

So, there I was, with my peppermint green tea, typing away and the proprietor interrupts my typing to ask if I want anything. To which the answer was no. (I always answer politely; perhaps that is a mistake.) She then puts on music--the quiet had been particularly pleasant--a loud, bouncy pop song. This was not mindful nor encouragement to the same.

I realise that the modern world treats loud as a virtue music should aspire to. Having heard plenty of live music which was perfectly fine without any electronic sound enhancement (speakers and amplifiers do not invoke the right atmosphere at a medieval feast), making music loud because you can does not impress me.

Being loud may have some ritualised group effect when the music itself is the draw. But where it is supposed to be an additive enrichment of the overall service, then having it be intrusive is not a positive. Background music is supposed to be precisely that.

Trouble is, background music is sufficiently subordinate to issues of convenience, quality and price that it is not likely to affect decisions to patronise a cafe on its own. So, there is little selective pressure to weed out the noise.

Pity.

The misbegotten birth of macro

As folks may have noted, I like graphs; they can be very useful illustrations, particularly of historical trends.  Consider this graph, taken from the 2012 US Federal Budget (via).


What is striking is the long-run stability of economic growth in the US, apart from one episode which stands out fairly dramatically. Very dramatically (pdf) given that:

industrial production fell nearly 50 percent from its prior peak. The unemployment rate reached 24 percent in 1933: About one in four people in the workforce was without a job. By 1933, the price level was more than 25 percent below its 1929 level.

Evan Soltas points to a particularly revealing indicator:

the median firm was operating at a loss: only 40 percent of firms were running a profit by 1933, as compared to roughly 90 percent under normal macroeconomic conditions.

Apart from that stand-out episode, it is a picture of an economy with a strong tendency towards an economic equilibrium around a steady rate of per capita economic growth. Sure, there are also business cycles but (again with an obvious exception) these are relatively mild, compared to the persistence of the underlying growth rate. Even that wildly abnormal episode also sees an acceleration in growth that "overshoots" and then a return to the long-run growth trend.

So, does one base study of macroeconomics--of the economy in aggregate--around the reality of that steady underlying growth or around the wildly abnormal episode? Unfortunately, what became known as macroeconomics was born during that abnormal episode and that origin has marked it ever since.

Long-run growth
For it really was a highly abnormal episode. To further see how abnormal, let's extend the time-frame backwards (using data from here).


Even without inserting a trend line, we can see that there is a strong, persistent, tendency to a steady rate of per capita economic growth, with that one stand-out episode.

What is not nearly as striking as the persistence of growth are the bumps in the road--the business cycle is comparatively minor in its effects on economic growth, except for that same stand-out episode.

The average rate of US per capita economic growth from 1790-2011 has been 1.8% per annum. But US economic growth did shift to a new trend line from about 1878.  The rate of per capita economic growth from 1790-1878 was 1.4%; from 1879-2011, 2.1%.

So, US economic growth can shift from one long-term trend to another, but such a trend can be very persistent. This upward shift in long-term growth around the beginning of the last quarter of the C19th took place in the US but not in the UK, which had a quite different experience. (The UK GDP data available from the above source only goes back to 1830.)

The 1830-1878 US per capita economic growth rate of 1.4%pa was not significantly different from the UK's rate of 1.3%pa over the same period. (Though, in the very long run of history up to that time, both rates were remarkably high, a result of shifting from an economy dominated by the land/labour constraint to one dominated by the capital/labour ratio.) Since the US could add inputs rather more easily than the UK (all that accessible land), the UK's greater rate of technological innovation was apparently significantly compensating for the US's addable inputs advantage.

Around 1878, things shifted. From 1879-1914, the US economic growth rate was 1.6%pa while the UK per capita economic growth rate slowed to 1.0%pa. US technology increasingly outstripped the UK's during this period (though not as much as is sometimes suggested: the British generally remained ahead in military technology).

Given the broadly similar institutional structure, likely the greater scale of the US economy--and greater access to cheap resources--assisted this surge in economic growth once the disruptions of the War Between The States had settled down. But part of the reason for the increase in US economic growth was probably the US's adoption of the gold standard in 1873--particularly after  the end of the Reconstruction Era meant a stable constitutional order--as said adoption eased the transfer of capital (human and financial) from the UK to the US. Since the UK had been on the gold standard since 1717--apart from the 1797-1821 suspension due to the Revolutionary and Napoleonic Wars--merely being on the gold standard was not the advantage, it was having a reliable Transatlantic payment system with the main exporter of capital (the UK).

Conversely, one can argue that the expansion of the gold standard in the 1870s (Germany, France and the US all adopted the gold standard in that decade, as did various other countries) significantly disadvantaged the UK.

From 1830-1873, the UK had a per capita growth rate of 1.5%pa; from 1874-1914 this dropped to 0.9%pa, a significant downward shift. The expansion in the gold standard in the 1870s meant that the output covered by the gold standard expanded significantly more than the stock of monetised gold, with clear deflationary effect (pdf). Highly urbanised, long-unified, at-the-technological-border UK had far less supply-side flexibility than a recently unified Germany reaping the transaction cost advantages of political unification with lots of peasants flocking to its industrialising cities or a US that was massively importing labour from Europe and incorporating a now enclosed frontier, having thoroughly settled its most divisive issue (slavery).

So the UK mostly got (bad) monetary-contraction deflation while the US and Germany achieved far more (good) output-growth deflation; hence the decline in the UK's economic growth rate, which is hard to explain otherwise. (The development of Germany and the US as centres of innovation should have made it easier for the UK to grow, not harder; especially as the gold standard made international payments highly reliable.) Since the Bank of England effectively managed the 1873-1914 gold standard (the appeal of which was precisely a "pound sterling for everyone"), there is considerable irony involved in this UK-centred monetary system operating to the UK's disadvantage.

If this is correct, it is yet another example of the besetting problem of metal-standard money--its profound vulnerability to the actions of other countries. Whether it is France abandoning bimetallism out of fear of (pdf) newly-unified Germany dumping silver onto international markets as it shifted to the gold standard or countries in the goldzone being dragged into the (ugly) deflation by the Bank of France and (pdf) the US Federal Reserve in 1929-32 or China being forced off the silver standard in the 1930s due to FDR's silver-buying program to placate silver-State US Senators driving up the price of silver, again and again being on metal-standard money has created grave vulnerability to the actions of other countries.

About business cycles

Looking at the 1870s to 1914 period, the figures indicate that the US had fairly dramatic business cycles. But, as a technologically innovative society (with the asset price uncertainty [pdf] that such entails) with considerable geographical indeterminacy about which areas would grow with which industries at what rate (generating further asset price uncertainty, especially given the importance of railroad investment and stocks), an intensified business cycle is hardly surprising. This US experience also helps make sense of (pdf) pre-Keynesian business-cycle theory (as does somewhat similar [pdf] British experience in the first part of the C19th). It was easy to build the wrong assets in the wrong places, leading to downturns while the malinvested capital was "liquidated". This clearly had little or nothing to do with central banks (the US did not have one until the creation of the US Federal Reserve in 1913; the UK, which had had a central bank since 1694, seems to have also had rather milder economic cycles during this later period) but a great deal to do with capital and uncertainty.

This is essentially a capital-based macroeconomics; the business cycle is analysed in terms of the dynamics of capital. A successor to such macroeconomics is Austrian business cycle theory. (Though real business cycle theory, with its notion of technology or other "real" shocks driving the business cycle, is in part a reprise of liquidationist theory.)

While technological and geographical uncertainty made the dynamics of capital--as processes of entrepreneurial discovery in conditions of uncertainty--a plausible generator of business cycles in the UK and the US during the C19th and early C20th, Austrian business cycle focuses on disconnects between the effect of credit expansion (typically blamed on central banks over-expanding the money supply) and underlying time preferences so that the production process becomes misaligned with consumer demands, leading to malinvestment and consequent economic downturns while such "capital overhang" is liquidated. Economic downturns--busts--are to be analysed as the consequences of the previous booms. (As Austrian economist Roger Garrison puts it in his Time and Money [pdf], Austrian business cycle theory is a theory of unsustainable booms.)

Apart from the Austrian business cycle theory requiring neither central banks nor entrepreneurs learning--they apparently make the same mistakes over and over again*, a quite different claim than the genuine technological and geographical uncertainty which plausibly generated the aforementioned C19th business cycles--unless depressions are specifically excluded, the theory requires, through its claim that downturns are to be explained by previous booms, even wildly abnormal events to be shoe-horned into a "normal" pattern.

Look back at the data presented graphically above. How plausible is it really that the wildly abnormal 1929-32 downturn is to be "explained" by the fairly unremarkable 1921-29 boom? Austrian business cycle theory, if it is treated as the standard pattern of business cycles, is also strangely narrow in its conception of how central banks can screw up. After all, a central bank over-contracting the money supply will also have unfortunate effects. So unfortunate that it can generate a serious economic downturn of almost any level all on its own

Though Austrian theory presents itself as a capital-based theory, it is actually a very specific form of monetary-based business cycle theory.  Bad monetary policy creating unbalanced credit expansion is the actual driver, capital misallocation is just the intermediate outcome.

In its way, the shift from technological and geographical uncertainty to central bank/credit dysfunction is a comforting notion. After all, precious little can be done about technological uncertainty (geographical uncertainty is probably something of a diminishing factor) but central bank/credit dysfunction is much more plausibly amenable to change--such as by abolishing central banks. Such greater comfort is purchased, however, via diminished plausibility and a dramatically narrowed role for uncertainty (which is necessary to generate faith that the business cycle can be entirely or largely abolished through stopping "unnatural"--that is, deviating from the natural rate of interest, the rate of interest which balances saving and investment--monetary and credit expansion). What is particularly sad about all this is that von Mises and Hayek were correct in that Fed was to blame for the wildly abnormal 1930s downturn (along with the Bank of France) but the Austrians clung to their confidence in "untainted" interest rates to calibrate saving and investment, and (by implication) lack of systematic uncertainty issues, so gravely misdiagnosed how the Fed was to blame and what the implications of that were.

The empirical evidence that busts are not correlated with previous booms but booms are correlated with (pdf) previous busts (Milton Friedman's so-called "plucking model") further undermines the analytical utility of the monetary/credit expansion Austrian business cycle theory.  A capital-based theory that incorporated some derivation of Schumpeterian "creative destruction"--that the more intense the bust, the more intense the selection pressures, the more robust the surviving capital allocation is--would much more plausibly deal with this bust-boom pattern than attempts to connect the bust back to the previous boom.

Considering labour

While Austrian business cycle theory developed from the "liquidationist" theory that had a considerable hold on mainstream economic thought prior to the 1930s Depression, the experience of the 1930s saw the rise of a quite different approach to analysing business cycles. This was Keynesian economics, which can quite plausibly (pdf) be viewed as labour-based macroeconomics. Not because it is not interested in capital (fluctuations in investment are central to Keynesian analysis) but because sticky prices, and especially sticky wages, are crucial to its analysis. As Canadian economist Nick Rowe puts it, in Keynesian macroeconomics, quantities adjust quicker than (key) prices.

Just as the pre-war experience of the US and UK gave plausibility to "liquidationist" approaches, so the UK's interwar experience provided plausibility to a labour-centred approach. As we can see above, the 1920-21 downturn was actually more severe in the UK than the 1929-31 downturn. The UK also did not fully recover from the downturn for many years. Not only did per capita GDP not recover to its 1919 level until 1927 but unemployment remained entrenched. While the introduction of unemployment insurance was blamed, this seemed a thin reed to explain why the British economy was persistently failing to employ available labour or recover to its previous rates of growth. John Maynard Keynes's analysis connected sticky wages, to dysfunctional investment levels, to inadequate demand, where prices could not be relied upon to solve the resultant coordination problem (on the contrary, an economy could become "stuck" at a below-capacity equilibrium) leaving a role for fiscal policy to manage aggregate demand.

Because Keynes and Friedrich Hayek, the young doyen of Austrian economics, were both powerful and charismatic intellects, their clash largely defined the new field of macroeconomics, with Keynes and Keynesianism being the clear winner among mainstream Anglosphere economics. But this new field arose out of the struggle to explain a wildly abnormal event, the Great Depression. The choice being between the Austrian approach--which treated the wildly abnormal as the product of a normal boom-and-bust process--and the Keynesian approach--which treated the wildly abnormal as the baseline for economic analysis. The latter error being more forgivable, given the interwar experience of Britain.

Yet, if we return to the long-run perspective, how plausible is that analysis of entrenched dysfunction?

Yes, the interwar period in the UK is clearly a period of sub-optimal economic performance. But it is bracketed by periods of persistent economic growth. From 1947-2010, the UK had a per capita economic growth rate of 2.0%pa, slightly higher than the US over the same period of 1.9%pa. It was nowhere near enough to make up for the US's higher growth rates over the 1878-1947 period, especially as US standards of living had been higher to start with. Still, we are back to an economy with a strong tendency to equilibrium around a persistent growth rate.

Money matters
For there is a third alternative to capital and labour-based macroeconomics; monetary macroeconomics. This was represented in the interwar period by the work of Gustav Cassell, R.G. Hawtrey, Irving Fisher (especially in his The Debt-Deflation Theory of Great Depressions [pdf]) and later, most famously, by Milton Friedman. (The capital-, labour-, monetary- triad is shamelessly taken from Garrison [pdf] via here.)

Cassell and Hawtrey both predicted (pdf) that a return to the gold standard after the Great War would carry with it grave deflationary dangers. This successful, before-the-event warning failed to hold the attention of mainstream economics because, however internationally prominent he was, Cassell was a Swede while Hawtrey was a Treasury official--handicaps in public advocacy and persuasion within the Anglosphere--and Fisher's reputation never recovered from his optimism about asset prices just before the 1929 crash.

The 1963 publication of Friedman and Schwarz's A Monetary History of the United States re-launched the monetary explanation of the Great Depression. Subsequent work by a range of scholars has extended and deepened the monetary causes analysis, so it is now a widely accepted view within mainstream economics. Friedman substantially agreed with Keynes's macroeconomic analysis while profoundly disagreeing with his underlying moral vision; thus, Friedman both completed and opposed Keynes. After all, why was there a contraction at the end of the 1921-29 boom is not a particularly interesting question--one was likely "due". Why was it so abnormally intense? Why did it last so abnormally long? These are the interesting questions.

Monetary macroeconomics has major analytical advantages over capital-based-yet-money-driven Austrian analysis. It is much more broadminded about how central banks can screw up; they can both over-expand the money supply and seriously contract the money supply. Friedman's view was that serious economic downturns always involved significant monetary contraction; something that continues to be true. Note, this is monetary contraction in the sense of money-in-circulation; contractionary monetary policy is perfectly possible with expanding monetary base. As Friedman notes in Monetary Mischief:

Base, or high-powered money, remained remarkably constant at about 10 percent of national income from the middle of the nineteenth century to the Great Depression. It the rose sharply, to a peak of about 25 percent in 1946 (p.255).

Monetary macroeconomics also has no problem coping with wildly abnormal economic downturns--all that takes is wildly abnormal monetary conditions. Money is so much more variable and pervasive than capital and labour, it is a much more plausible explanatory factor for major economic fluctuations across the entire economy.

Both Keynesianism and Monetarism have since been affected by the expectations revolution, particularly the Lucas critique. This led to New Keynesian economics and, more recently, Market Monetarism which, unlike old-style Monetarism, does not take the view that quantities speak for themselves.** New Keynesianism is also motivated by a search for microeconomic foundations for macroeconomics.

A long shadow
The shadow the 1930s cast over the emerging discipline of macroeconomics is nicely captured by Brad DeLong (pdf):

The Great Depression made it impossible--for a while--for almost anyone to believe that the business cycle was a fluctuation around rather than a shortfall below some sustainable level of production and employment (p.250).
With the memory of the Great Depression still fairly fresh, it was extremely difficult to argue that the normal workings of the business cycle led to fluctuations around any sort of equilibrium position (p.255).
The Great Depression had taught everyone the lesson that business cycles were shortfalls below, and not fluctuations around, sustainable levels of production and employment (p.256).

Then came the entrenched inflation of the 1970s and explanations based on some perennial tendency to demand shortfalls lost plausibility. Old-style Keynesianism failed the test of Stagflation. Moreover, if demand could both undershoot (the 1930s) and overshoot (the 1970s), then fluctuation around some equilibrium became much more plausible. Reinforcing that, the normality of persistent economic growth (at least in societies where production of capital is such that the capital/labour ratio is dominant rather than land/labour constraint) re-asserted itself--hence the notion that the economy is Keynesian in the short-run and classical in the long-run.

Now we are back in very abnormal economic conditions--though not nearly as abnormal as the interwar period--and the (macro)economics profession has not exactly covered itself in glory. The Austrians are mostly just re-running their 1930s mistake of trying to shoe-horn the deeply abnormal into a standard recurring pattern. To cling to the analysis of central banks who never learn and entrepreneurs who never learn as explaining current conditions involves being macroeconomists who never learn; there is a certain analytical unity there, I guess. The Austrians do have something going for them; at least they are willing to point the finger at central bankers.  Alas, the obsession about monetary/credit expansion diverts attention from the actual failures of key central banks and, in feeding the obsession about mythical inflationary dangers, does its bit to make things worse. (As was also true in the 1930s; then Austrian economists were determined to keep the golden fetters, now they either want to go back to such or, if not, through their "hard money" advocacy, they do their bit to keep the inflation-targeting fetters.)

After 1928-32, no one should have any illusions about how bureaucratically insular in disastrous ways central bankers can be. In 1928-32, the Fed and the Bank of France did not have some deep dark plan to help one side of politics, to enrich bankers or whatever. They just had disastrous policy beliefs that they followed to the bitter end. We are in a reprise of that. In both periods, key central banks failed to sensibly run the system they were supposed to be running. They were committed to it (or a certain conception of it) way beyond sense; running such amazingly badly due to a disastrously narrow conception of their policy aims (and, likely, because changing policy would admit fault).

And are doing so with the support of a depressingly large proportion of economists. For the Austrians are not alone in attempting to shoe-horn the abnormal into reassuring patterns of normality. Much of the rest of the economics profession is seeking, just like their interwar colleagues did, to cling to what used to work (simple, rather than over-the-business-cycle, inflation targeting in the current case; the gold standard in the previous one). The view that expectations about prices matter, and are a matter for monetary policy, but expectations about spending do not or are not still has a depressing hold on perceptions. (See this paper [pdf] {via}, for example, by a former member of the Bank of England's Monetary Policy Committee.)

The facts have changed but their thinking has not; Keynes would not have approved. (Neither would have Friedman.) Having reverted to the (macro)economics of normality, too many economists flounder in the face of significant abnormality. Macroeconomics, having been created in wildly abnormal times, and with this deep normality-abnormality misdiagnosis embedded in it, still suffers the legacy of its misbegotten birth.

Notes

* Either such information is deemed to be not available to entrepreneurs, or they have no demand for it, or the market cannot supply such demand yet it remains, in some sense, available to the theorist. The Austrian story also gains plausibility by theorising in terms of single unifying interest rate, abstracting away from the information provided by differences between interest rates for different time periods. Deeming central bank monetary expansion to be automatically inflationary (in either a price level or a credit expansion sense) makes the information directly available to the theorist but also, of course, to anyone else. Revealingly, in his Time and Money (pdf), Garrison treats technological change as a seamless change in the pattern of production yet labours mightily to explain why credit expansion will fool entrepreneurs--and will therefore seriously distort production--while the abstract point that this happens is nevertheless available to theorists.

** Expectations adds time to money in a natural way, as money cannot be effectively analysed without some consideration of expectations, since its use is entirely based on expectations.  Such expectations need be rational only in the weak sense that differences between agents' expectations and theory's implications require justification. (Merely making the expectations of agents be the same as the implications of one's theory--i.e. having difference=0--does not eliminate the need for such justification, as any level of difference has to be justified; without such justification, setting the difference at zero just avoids the issue under the pretence of having solved it.)

[Cross-posted at Skepticlawyer or at Critical Thinking Applied.]