News & Analysis
Rise of the Neo-Keynesians?
What Actually Causes Inflation (and who gains from it) ... I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world. Money comes into existence when someone adds it to her portfolio of assets. This occurs either when she borrows money (which creates new cash from reserves) or sells securities to the Federal Reserve (which injects new cash into the system). Neither of these scenarios allows the central bank to increase the supply of money beyond demand, the story told by those in the money growth ==> inflation camp. Instead, inflation happens first. This then means that agents need more cash for transactions, leading them to borrow more or sell government securities to the Fed. Thus, the money growth accompanies inflation, but it does not cause it. – Forbes/John T. Harvey/Pragmatic Economics Blog
Dominant Social Theme: Inflation is caused by wage push and other market-based factors.
Free-Market Analysis: The world is full of clever, insightful and well-educated people, and John T. Harvey, a blogger columnist at Forbes (his column is called Pragmatic Economics), is one of them. Not only is he a good writer, he's even a witty one, which is unusual for an economist. Who is he? Here's a bit of his impressive bio:
I am a Professor of Economics at Texas Christian University, where I have worked since 1987. My areas of specialty are international economics (particularly exchange rates), macroeconomics, history of economics, and contemporary schools of thought. During my time in Fort Worth, I have served as department chair, Executive Director of the International Confederation of Associations for Pluralism in Economics, a member of the board of directors of the Association for Evolutionary Economics, and a member of the editorial boards of the American Review of Political Economy, the Critique of Political Economy, the Encyclopedia of Political Economy, the Journal of Economics Issues, and the Social Science Journal.
As smart and well-informed as he is, it seems to us in a recent series of blog-reports (see excerpt above) that Professor Harvey is building a case for a kind of neo-Keynesianism, so named for John Maynard Keynes, the great socialist economist of the early and mid-20th century. He is not alone.
We have noticed this trend of late. Using the Internet, Lew Rockwell and the Austrians have been so successful at presenting the Misesian money-supply argument for inflation that there is not much of John Maynard Keynes arcane body of thought left standing today (except maybe the odor of his exceptional arrogance).
Even on Google, Misesian cites outnumber Keynesian ones. And 20 years ago, quite literally, no one had ever heard of Ludwig von Mises. When his name was mention in economic textbooks, the biographical vitriol positively oozed. Given what has occurred as a result of what we have taken to calling the Internet Reformation, it was inevitable that the powers-that-be would begin to push back. Neo-Keynesianism must inevitably surge, like a counter reformation.
Boy, did the Anglosphere power elite hate Mises. It wasn't even his grasp of monetary economics or the business cycle (though those were bad enough). No, it was his eloquent presentation of human action that poisoned the well. Once one admits that all government plans are doomed to fail, to one degree or another, because human beings will change their behaviors in unanticipated ways over time. Thus government plans go astray.
Mises, therefore, called into the question the fundamental reason for government, or certainly for big government. He proved it couldn't work, basically, though he was too polite to say so in exactly those words. (That was left to his disciple Murray Rothbard.)
Anyway, this is why government laws always have unintended consequences. Every government action results in a price fix and every price fix distorts the economy. This is also why central banking doesn't operate properly, or at least in the ways that its defenders expect it to.
For Professor Harvey, (as an apparent, putative Neo-Keynesian – our term, not his) central banking is not so bad. It's mostly ineffective ( or so he seems to argue). He has now written a number of articles about it over at Forbes. His basic argument from what we can tell (and this is presented in another article) is that it is not how much money central banks print that causes inflation, it's how much money circulates. This, he reminds us, elsewhere, is monetary velocity.
Of course, it is not REALLY monetary velocity that causes money to circulate. Monetary velocity is actually a byproduct of the DEMAND FOR MONEY. The money has to be available, but people have to want to use it. This is why the Misesian business cycle works the way it does. The abundance of available currency at banks, courtesy of central bankers, may eventually trigger a boom (coming after a bust). This is evidently and obviously why someone like Ben Bernanke is flooding the banking system with currency. He is hoping to spark a boom, or at least the beginnings of one.
Once a boom begins, the economy expands and eventually overexpands, leading to a bust. The process continues until the economy itself is so distorted and wretched that monetary stimulation doesn't work anymore. That's where we are today, by the way. The pundits say otherwise but the system is in no way ready to rebound. We've speculated it is already dead or at least withering.
People are too tired to borrow and even if they could find a way to put the money to work, they can't figure out which businesses are solvent and which ones are being propped up by central banking currency flows. Additionally, banks themselves may be reluctant to lend in such an environment. This is how a central banking economy dies.
Professor Harvey is apparently not so sure of any of this. He doesn't even define inflation the monetarists do – as an increase in currency (swelling bank reserves or, perhaps, circulating). He defines inflation as occurring "when the average price of those goods and services has increased." This would seem to be the Keynesian definition of inflation.
The professor then lists the causes of what we would call "price inflation." First, he explains, comes Market Power. He uses OPEC as an example. At times, OPEC has been in a powerful position, one in which it has been able to avoid competition. In such a situation, a producer can drive prices up hard and fast, and OPEC did. Market power.
"Money supply growth did not cause prices to rise," he writes. "OPEC's attempt to grab a larger income share did. No amount of controlling the money supply was going to eliminate the ultimate impact of rising oil prices: the redistribution of income towards those countries and the oil industry."
Demand Pull is another cause of price inflation. When the economy is humming along, bottlenecks may appear for certain goods and services. In a high-productivity environment, suppliers are willing to pay higher prices for the supplies they need. They "demand" the materials and thus are willing to pay higher prices, which then ripple through the economy. In such a situation, "the Fed presumably accommodates" (makes more money available).
An Asset Market Boom is a third way to generate price inflation. Here's the professor's explanation: "When speculative money bids up the price of a commodity future, this creates an incentive for those actually selling the commodity to withhold supply today in favor of the future (when prices will presumably be higher). The rising spot price then convinces the speculator that her bet had been correct, and she increases her position. This may drive futures prices even higher, and so on. Thus, a goods price is driven up by the price of a financial asset."
Supply Shock is the last way to generate price inflation, according to the professor. (This seems to us a lot like Demand Pull, but, hey, what do we know?) Anyway, the idea is that an in-demand item is suddenly withdrawn from the market for any one of a number of reasons. "If a storm rages through the Gulf of Mexico, taking out oil derricks and refineries along the way, this may well raise the price of oil and gas," the professor explains. "As it should, for this creates incentives to build more derricks and refineries and for consumers to find alternate energy sources."
His conclusion: "The bottom line is that there are a number of processes that can create inflation, none of which starts with, 'the money supply increases.'" Someone, he writes, make a conscious decision to raise a price or wage, and they must be able to make this stick. "Because every higher price you pay means someone is getting more income, inflation causes a redistribution of income. Sometimes it does so in a manner that we would endorse and sometimes not. But in any event, it causes a rise in the demand for money that the Fed will almost certainly accommodate– and rightfully so."
The professor, finally, is wistful ... "I'm afraid this more realistic perspective does not offer a nice, simple rule as in the money growth [equals] inflation camp. That said, neither do they since that's not how the world really works! In reality, monetary policy does not cause inflation, and it is not well placed to stop it ... Prices are determined elsewhere in the system."
Again, all of this seems Keynesian to us. Our elves are apt to stick to the Misesian definition of inflation, which has to do with the money supply and the circulation of money. We would also like to see a return to circulating gold and silver (or certificates thereof).
The circulation of money metals circumvents central banking profligacy. When there is too much money in the system, hoarders cease to circulate their gold and silver and mines shut down. This diminishes the amount of money in the system and causes more demand. When there is more demand, the price of money metals rises and hoarders dishoard and mines open back up. This is the way that supply and demand works in the FREE MARKET. There is no other way to circulate money that does not result in a PRICE FIX. And a price fix causes ... etc. etc.
Indeed, it bears repeating a thousand times. There is NO WAY that the wise of men of central banks ever know when enough money has been printed. In the good times they print too much; in the bad times they print too much. There seems to us NO WAY one can mount a rational defense of central banking. That brings us back to the excerpt at the beginning of this article ...
The professor states that money comes into existence only when someone adds it to her portfolio of assets. His point in several articles is that the central bank (the Fed) can print money but cannot inject it into the economy unless it is wanted. Only "demand" can generate this circulation. "Thus, the money growth accompanies inflation, but it does not cause it."
This issue we have with this comes partially from Say's Law – the famous law that explained how supply could stimulate more supply. We would argue that when central banks print more currency than the economy needs at a given time, the availability of the currency itself drives demand. People may come up with all sorts of needs for cheap cash that they would not have otherwise. And in a money-boom environment, banks are eager to lend.
It may be unfair to label the professor a neo-Keynesian, but his insistence that inflation is not the product of an abundance of circulating money-stuff but a rise in prices, and his explanation that money growth "accompanies [price] inflation" provides us with reason to think it so.
He is not at alone, of course. It is a positive sub dominant social theme – a rising tide of voices with various levels of erudition (the professor being among the most erudite) explaining that inflation cannot possibly be supply driven. It is, they say, something else. Perhaps a price phenomenon.
Conclusion: Our elves are simpler than this (perhaps because of their pointy heads). When there is too much of something (currency included) its value tends to lessen in our view. Because of the business cycle, the value of a specific currency may actually seem to rise at certain times, but when the cycle itself collapses, the currency abundantly printed by the central bank will be seen to be over-abundant. This is how the dollar has lost 95 percent (or more) of its value in the past century. Inflation, whatever else it may be, is seemingly monetary.
Posted by dlgertz on 01/08/13 01:30 PM
tye problem is that the Fed has been flooding the system for years and still they are not able to create inflation. Its not that I think Misses is wrong, but we ignore alternate opinions at our peril.
Posted by Bischoff on 06/11/11 10:44 AM
"So, what do I do...??? Use the common semantic which is designed to confuse and stifle clear understanding of philosophical principles, or go ahead and try to explain myself with definitions that work in reasoned arguments...???"
DB: Yes, you try to simplify and explain.
So...teach semantic first....??? There is only so much you one can simplify and explain when one party speaks a different language than the other. Today's economic education uses a language and and applies definitions that prevent a synthesis of the subject.
Posted by Wayne on 06/11/11 02:56 AM
Actually, just remove the ability to commit us to secure their schemes, and it solves nicely.
And one must wonder about the creditors. Some one wants to borrow money, and you ask, how are you going to repay this money?
You respond, I'm securing the loan with the blood, toil, and now perhaps the organs of my slaves.
The creditor says, Cool, how much do you want to borrow?
They are all just slave traders/trafficers.
Go Galt Now!
We are the slaves that have revolted!
Posted by Bischoff on 06/10/11 11:58 AM
BISCHOFF: "The difficulty I have in communicating with others lies in the fact that the meaning of words I ascribe to things differs materially from the meaning others hold."
DB: "We have pointed this out to you as well ..."
So, what do I do...??? Use the common semantic which is designed to confuse and stifle clear understanding of philosophical principles, or go ahead and try to explain myself with definitions that work in reasoned arguments...???
Reply from The Daily Bell
Yes, you try to simplify and explain.
Posted by John Danforth on 06/10/11 08:41 AM
The reason the paper money system was instituted as debt was supposedly to slow down the inexorable death by over-printing (by 'backing it' with your servitude). Take away the debt factor, and it consumes itself like a gasoline fire, every single time. As it turns out, once they decide there is no limitation on debt (and there isn't, if they don't need your permission), it accelerates into an implosion anyway.
The underlying evil is unbacked paper money in the first place.
Posted by John Danforth on 06/10/11 08:34 AM
Thanks, I always look forward to your insight.
I didn't think you were wedded to the idea, I knew you were simply presenting it for consideration. My experience with these organizations is that there are almost always people involved who wish the group had more power, the better to run their neighbors' lives with.
As I mentioned, if there were an opt-out mechanism, they would probably be forced to behave better. An inherent drawback to these things is that productive people tend to be very busy. Minding the common elements is overhead, a nuisance task. Those with lots of spare time are most likely to volunteer their time and energy to the task. Whatever the circumstances are that allow them this spare time essentially pre-selects against the productive innovators, making it statistically more likely that you will get the least able on the committee. There are notable exceptions, but the selection process seems inherently skewed.
Nowadays, I mostly just skip the meetings.
Posted by Summer on 06/10/11 05:11 AM
Thanks. I suppose they would. However, countries would not be in debt due to printing... imagine a country with no debt - self-sufficiency - radical thought eh?
Spending money without earning it - the problem with interest.
An inequitable system. Lender exploits borrower, he toils to repay, lender 'earns' via sweat of the poor.
Posted by Wayne on 06/10/11 01:11 AM
If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Suppose you were an idiot. And suppose you were a member of Congress... But then I repeat myself. - Mark Twain
I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. - Winston Churchill
A government which robs Peter to pay Paul can always depend on the support of Paul. - George Bernard Shaw
A liberal is someone who feels a great debt to his fellow man which debt he proposes to pay off with your money. - G. Gordon Liddy
Democracy must be something more than two wolves and a sheep voting on what to have for dinner. - James Bovard, Civil Libertarian (1994)
Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries. - Douglas Casey, Classmate of Bill Clinton at Georgetown University
Giving money and power to government is like giving whiskey and car keys to teenage boys. - P.J. O'Rourke, Civil Libertarian
Government is the great fiction, through which everybody endeavors to live at the expense of everybody else. - Frederic Bastiat, French Economist (1801-1850)
Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. - Ronald Reagan (1986)
I don't make joe-ks. I just watch the government and report the facts. - Will Rogers
If you think health care is expensive now, wait until you see what it costs when it's free! - P.J. O'Rourke
In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other. - Voltaire (1764)
Just because you do not take an interest in politics doesn't mean politics won't take an interest in you! - Pericles (430 B.C.)
No man's life, liberty, or property is safe while the legislature is in session. - Mark Twain (1866)
Talk is cheap... except when Congress does it. - Unknown
The government is like a baby's alimentary canal, with a happy appetite at one end and no responsibility at the other. - Ronald Reagan
The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. - Winston Churchill
The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin. - Mark Twain
The ultimate result of shielding men from the effects of folly is to fill the world with fools. - Herbert Spencer, English Philosopher (1820-1903)
There is no distinctly Native American criminal class... save Congress. - Mark Twain
What this country needs are more unemployed politicians. - Edward Langley, Artist (1928 - 1995)
A government big enough to give you everything you want, is strong enough to take everything you have. - Thomas Jefferson
Posted by bionic mosquito on 06/09/11 10:45 PM
@DB: It has to be voluntary or it becomes a tax. If it IS voluntary, it's a business partnership ... (Nothing wrong with that.) Wonder if clans and tribes held landin common ...
Foldvary would be worth an interview. I believe he writes quite a bit on economic subjects this group would find of interest. I recall Ingo once saying that the two of them were on a panel together regarding monetary systems.
Click to view link
Reply from The Daily Bell
Thanks. We'll take a look ...
Posted by bionic mosquito on 06/09/11 10:08 PM
I will start by saying I am not wedded to this idea.
I first heard of this concept here at this site, following comments made by Bischoff. Of course, like most of us, I choked on the idea that only the state can own land. But as to the rest of the concept, it struck me that it could be structured in a voluntary manner. Since then, I found Foldvary, who seems to be of the same mind.
With that out of the way, I find many features of such a system to offer benefit - certainly relative to our current state, but some also on an absolute basis.
To list a few:
It is the only payment for so-called public goods. As we already pay property tax, this makes things no worse.
It also avoids income tax - the most intrusive devise invented, destroying all aspects of privacy.
It does not destroy the incentive to produce, as the income tax does - and on a graduated basis as well.
"Voluntary, sure. You can always try to sell out and go rent somewhere else."
Yes you can. Try doing that with your income tax. One can leave the jurisdiction and escape the payments. Certainly, there will be a like fee elsewhere, but at least the old payments do not follow the person (allowing for effective competition. Today, one has to (at minimum) leave his home country to avoid home income tax, and for the sad sacks of the US (and North Korea and one or two other such regimes) you cannot escape the income tax wherever you are in the world.
'They wouldn't be so bad if they were structured with an opt-out clause.'
I believe Foldvary allows for this, but I will say I am not a complete student of the concept as of yet.
"Every one of them [HOA} is a microcosm of the evils of big government."
It may not be utopia, but I will take a microcosm over the real thing anytime. I have dealt with HOAs and I have dealt with the state. There is no comparison, at least for me.
Like I said, I am not wedded to this idea. Unfortunately, at least at this forum, I don't believe the concept has received a fair airing as it has always been presented in the manner that a) the state owns all land, and b) the state is inherently involved in the mechanism. These false "requirements" have rightly caused such strong negative reactions. Neither 'requirement' is necessary, in my opinion.
Reply from The Daily Bell
It has to be voluntary or it becomes a tax. If it IS voluntary, it's a business partnership ... (Nothing wrong with that.) Wonder if clans and tribes held landin common ...
Posted by John Danforth on 06/09/11 10:07 PM
Thanks for your kind comments, Wayne.
Posted by Bischoff on 06/09/11 08:57 PM
"Am I to assume we are starting to comprehend each other?"
I don't know. I merely respond to your reasoning.
To understand George, one must understand the philosophical principles of fundamental economics, Anglo-Saxon history in the English Isles and the North American colonies, Anglo-Saxon common law, as well as the U.S. Constitution.
To gain this understanding by using words and by engaging in reasoning applying the semantics of today is simply impossible. I have acquired for myself a set of terms and definitions to allow me to reason across all fields. The difficulty I have in communicating with others lies in the fact that the meaning of words I ascribe to things differs materially from the meaning others hold. I try as best as I can to explain my definition, however I cannot change them. My definitions are essential to my reasoning and to views I hold.
With your last few responses, I have had the feeling that you were thinking in the same terms and meanings as I. Maybe it is for that reason that we are starting to comprehend each other.
Reply from The Daily Bell
"The difficulty I have in communicating with others lies in the fact that the meaning of words I ascribe to things differs materially from the meaning others hold."
We have pointed this out to you as well ...
Posted by Wayne on 06/09/11 08:52 PM
Well described. These associations are nothing more than Marxist cells with another name!
Posted by Wayne on 06/09/11 08:51 PM
Well, we have hit the Wall Of Pain.
Click to view link
The VIG is now higher than the cost of what you buy!
And you'll thought those credit terms were so great!
Posted by John Danforth on 06/09/11 08:43 PM
I guess if they printed money without interest, they still would, so they could spend it without working. Wouldn't you, in their shoes?
Posted by John Danforth on 06/09/11 08:41 PM
Homeowners associations and condominium associations are among the worst forms of democracy there is. Every one of them is a microcosm of the evils of big government. They charge a tax, will seize your property eventually if it is not paid, and they are shot through with every sort of lame-brained, do-gooder pecksniffery you can dream up, and a lot more than that.
There is absolutely no way to remove a piece of property from their jurisdiction, either. If a bunch of idiots live there, you are simply screwed.
Voluntary, sure. You can always try to sell out and go rent somewhere else.
They wouldn't be so bad if they were structured with an opt-out clause.
Posted by Wayne on 06/09/11 08:36 PM
"I don't owe the local jurisdiction anything. They charge me rent at the point of a gun and kick me off my property if I don't pay it. If I refuse to leave, they will kill me. That's the way a gang works. Feudalism is not the only alternative to life as a share-cropping serf! Besides, Wiki defines feudalism as: "Feudalism was a set of legal and military customs in medieval Europe that flourished between the ninth and fifteenth centuries, which, broadly defined, was a system for ordering society around relationships derived from the holding of land in exchange for service or labour." That's EXACTLY equivalent to the collectivist non-ownership of property system we have today."
All torpedoes hit.
Posted by John Danforth on 06/09/11 08:33 PM
I don't owe the local jurisdiction anything. They charge me rent at the point of a gun and kick me off my property if I don't pay it. If I refuse to leave, they will kill me. That's the way a gang works. Feudalism is not the only alternative to life as a share-cropping serf! Besides, Wiki defines feudalism as: "Feudalism was a set of legal and military customs in medieval Europe that flourished between the ninth and fifteenth centuries, which, broadly defined, was a system for ordering society around relationships derived from the holding of land in exchange for service or labour." That's EXACTLY equivalent to the collectivist non-ownership of property system we have today.
And fiat debt-money is not the only alternative to real bills, either. Any bearer note which is a receipt for real value, with a promise to convert to some equivalent value and the reputation to back it up would serve the same purpose. It could be redeemable in cigarettes or fuel. Or gold. So, real bills have utility because they can circulate and are redeemable. They are still receipts. If they serve as money substitutes, then they inflate to the extent of goods in the market. Which limits the inflation, which is good. But the assertion that they are the only market mechanism that can allow a gold standard to function as money, that they require a government-granted monopoly granted to privileged banks, I am dubious. I believe other instruments can serve the same function, and furthermore could be carried off without government-granted monopolies.
To answer your previous query, FRN's are debt-notes. You owe a portion of your life to every single one of them in circulation. Plus interest.
Posted by Summer on 06/09/11 08:31 PM
I have a question. If there was no way to make money (via interest) out of printing money (for nothing) would they (Central Banks) gain from and thus have any reason to do so?
Posted by Wayne on 06/09/11 08:10 PM
"What is there to sort out? Every tax is a price fix. Every price fix creates an economic distortion. Every economic distortion transfers wealth from the creator of it to somewhere else. Are you simply look for the tax solution with the most minimal damage? We would submit that is not a feasible search - to be trying to choose between the lesser of evils ...
If one wishes to make a case for taxation - then make it. But to try to choose between methodologies of economic distortion in our humble view is probably besides the point ..."
What part of this do they not understand?