Saturday, April 25, 2009
The League of Monetary Cranks...
...has been established by Scott Sumner, my favorite new blogger. In his latest post, he points out that the author of the leading monetary textbook, Mishkin, is in fact a "monetary crank" because "[t]he sine qua non of a monetary crank is the bizarre belief that even depressions featuring zero interest rates can be magically cured by printing money."
Exactly. Mishkin--and all other orthodox theorists operating within the aggregate demand paradigm, and that includes most Chicago school guys as well as MIT'ers--are indeed monetary cranks. The WSJ op ed pages, as well as blogs that promise to make the world better through small steps, are chock full of the idea that printing green pieces of paper can help the economy re-coordinate itself after a massive disruption in the physical capital structure. What cranks!
The funny part, of course, is that Sumner is merely trying to show that his own theory--that the Fed caused the crisis by being far too restrictive up until last September--is actually very close to orthodox opinion. So Sumner is really saying, "You're calling me nuts? Look, if I'm nuts, then everybody in the profession is nuts!"
That's right, Dr. Sumner, welcome to the Austrian's world.
Exactly. Mishkin--and all other orthodox theorists operating within the aggregate demand paradigm, and that includes most Chicago school guys as well as MIT'ers--are indeed monetary cranks. The WSJ op ed pages, as well as blogs that promise to make the world better through small steps, are chock full of the idea that printing green pieces of paper can help the economy re-coordinate itself after a massive disruption in the physical capital structure. What cranks!
The funny part, of course, is that Sumner is merely trying to show that his own theory--that the Fed caused the crisis by being far too restrictive up until last September--is actually very close to orthodox opinion. So Sumner is really saying, "You're calling me nuts? Look, if I'm nuts, then everybody in the profession is nuts!"
That's right, Dr. Sumner, welcome to the Austrian's world.
Comments:
Bob, I definitely was making the point you indicated in your final paragraph, but I'd also like to clear up a few misconceptions. Mishkin's theories suggest that tight money caused the crash of 2008, but almost no mainstream economist believes that a tight money policy caused the crash of 2008. So there is a disconnect between theory and application. I think tight money before September 2008, and even tighter money after September 2008 did cause the crash late last year. In my view the very mild recession of late 2007 into mid-2008 is the sort of adjustment required by the Austrian mis-allocation problem. By mid-2008 resources had been shifted out of the over-expanded real estate sector for 2 years, with only a very small impact on total employment. But it was the tight money policy of late 2008 that caused the recession to move into previously healthy areas like manufacturing--particularly East Asia, that did no have a sub-prime bubble. Then the damage was much greater than what would have been required to deal with the original housing problem. And that's because the Fed violated Hayek's maxim of never, ever letting NGDP fall. It's falling fast. So I also plan on getting some big Austrians into my league. Basically I want to get people in the league who would be horrified by the thought of being considered a monetary crank. That includes MIT and Chicago types, but also Austrians. I am now a monetary crank, but only twice a century are they correct (1929-33,2008-09).
I think you're right that Hayek is probably a crank, especially with his later recantation (and the same for that wuss Lionel Robbins) regarding the avoidance of a "secondary depression" in the early 1930s.
Anyway I'm not going to argue. It is just so refreshing to find someone who is familiar with a bunch of schools of thought and can follow the logical implications of an idea. I agree that the orthodox view must consider Bernanke to have been contractionary even in 4th quarter 2008. From that, I conclude, "See? The orthodox theory must be wrong. Reductio ad absurdum." You reach a different conclusion, but I don't want to spoil things. I am still basking in the joy of someone something besides, "The Fed still has plenty of ammunition."
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Anyway I'm not going to argue. It is just so refreshing to find someone who is familiar with a bunch of schools of thought and can follow the logical implications of an idea. I agree that the orthodox view must consider Bernanke to have been contractionary even in 4th quarter 2008. From that, I conclude, "See? The orthodox theory must be wrong. Reductio ad absurdum." You reach a different conclusion, but I don't want to spoil things. I am still basking in the joy of someone something besides, "The Fed still has plenty of ammunition."
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