Uneasy Money

Lars Christensen, Chief Analyst at Danske Bank and a regular and valued commenter on this blog since it started over two months ago, has been following and participating in debates about monetary policy in the blogosphere for the past two or three years.  Drawing on his considerable expertise as a monetary economist, a wealth of hands-on knowledge of financial markets and monetary policy, and his comprehensive knowledge of what the blogosphere is saying about monetary policy, Lars has performed a huge public service in distilling some of the most significant results of those debates in his excellent working paper “Market Monetarism: The Second Monetarist Counterrevolution” posted on Marcus Nunes’s blog. The paper appeared while I was in Japan, so I am tardy in acknowledging Lars’s contribution and in offering some of my own thoughts on various points in his paper.  But better late than never.

In addition to doing a great job of extracting the key analytical and policy contributions from nearly three years of discussions about monetary policy in the blogosphere, Lars performs an equally valuable and impressive service in tracing and explaining the monetary- and macoreconomic-theoretic background of the blogosphere discussion. And besides summarizing the relevant theoretical background for market monetarism, Lars shows how the blogosphere discussion is already advancing traditional scholarship, suggesting that the contributions are likely to increase in significance as the interface between academic and blogosphere discussions widens and becomes increasingly permeable.

Lars’s piece reminds me of two other important survey articles introducing an emergent new literature in the context of both historical antecedents and opposing views: Milton Friedman’s 1956 restatement of the quantity theory and the introductory essay Harry Johnson and Jacob Frenkel wrote to their 1976 volume on the monetary approach to the balance of payments. It is far too early to tell how the story of market monetarism will play itself out, but if story turns out as many of us hope it will, Lars’s paper will likely be viewed as an early milestone.

Much of Lars’s survey focuses on the intellectual leader of market monetarism, Scott Sumner, whose influential blog (www.TheMoneyIllusion.com) was a catalyst in the formation and development of market monetarism and whose tireless blogging and relentless, but witty and good-natured, advocacy was critical in making market monetarism a force to be reckoned with in the blogosphere and, increasingly, in academic discourse. But Lars also gives due credit to other contributors like Nick Rowe (www.worthwhile.typepad.com), David Beckworth (www.macromarketmusings.blogsopt.com), Bill Woolsey (www.monetaryfreedom-billwoolsey.blogspot.com), and Josh Hendrickson (www.everydayeconomist.wordpress.com), while citing Robert Hetzel of the Richmond Federal Reserve Bank as a seminal figure and influence on Sumner and the others. Lars also mentions me and this blog as well as Marcus Nunes and his blog as “part of the bigger Market Monetarist family.”

I am happy to be included in this family, but the question has come up in various off-line exchanges (perhaps even in an earlier draft of Lars’s paper) whether I consider myself to be a Market Monetarist (or a quasi-Monetarist, as Paul Krugman has referred to Scott and company). Lars’s paper actually touches on certain theoretical issues about which I am inclined to disagree with my Market Monetarist colleagues, and I hope to have something to say about those issues in some future posts. I am certainly less a fan of Milton Friedman and old-fashioned Monetarism than they tend to be, so I am not all that eager to adopt a label suggesting that I am a follower Friedman and Monetarism. (I am afraid that may sound a bit too critical of Friedman, who was certainly a great economist, but I regard much of his work on money as seriously flawed and a long step backwards from the achievements of earlier monetary theorists, especially Hawtrey.) The labeling problem is that any view that holds that monetary policy is crucial to macroeconomic stability, even one based on non-Friedmanian sources, can legitimately be identified as Monetarist, however different the underlying theory of how monetary policy operates, or should operate, from Friedman’s.

Of course, this raises the question, debated already in a number of places, what exactly to call the school of monetary thought formerly known as a quasi-Monetarism. Lars has opted for Market Monetarism, and by the force of his reasoning, charm, personality, and good timing, it looks as if he just may carry the day. Scott Sumner actually sent me an email recently (I think I got it while I was in Japan), asking me what I thought about the different alternatives. Because of my (perhaps overly finicky) reservations about Monetarism, but perhaps also because of a temperamental reluctance to identify myself with any particular school of thought, I didn’t register a preference for any of the names. But as I have thought further about the various names I have belatedly decided that I favor neo-monetarism over Market Monetarism, quasi-Monetarism, or other candidates.

I concluded that Market Monetarism is not such a good choice, because, as others have already pointed out, it is not at all clear what adding “market” to “monetarism” is intended to signify. Presumably, Market Monetarists are supposed to be more sensitive to information generated by markets in formulating monetary policy than were traditional Monetarists who favored a mechanical, preset rule for controlling one or more monetary aggregates. Nevertheless, traditional Monetarism was hardly antagonistic toward markets and market-oriented economic policies, so the modifier “market” carries a certain invidious, though unintended, implication about traditional Monetarism. Even worse, the vagueness of the adjective “market” when used in connection with Monetarism calls to mind F. A. Hayek’s pointed remark about what happens when the adjective “social” is combined with any other term.

“Social” became more and more the description of the pre-eminent virtue, the attribute in which the good man excelled and the ideal by which communal action was to be guided. But while this development indefinitely extended the field of application of the term “social,” it did not give it the required new meaning. It even so much deprived it of its original descriptive meaning that American sociologists have found it necessary to coin the new term “societal” in its place. Indeed, it has produced a situation in which “social” can be used to describe almost any action as publicly desirable and has at the same time the effect of depriving any terms with which it is combined of clear meaning. Not only “social justice” but also “social democracy,” or “social market economy” or the “social state of law” . . . are expressions which, though justice, democracy, the market economy or the Rechstaat have by themselves perfectly good meanings, the addition of the adjective “social” makes them capable of meaning almost anything one likes. The word has indeed become one of the chief sources of confusion of political discourse and can probably no longer be reclaimed for a useful purpose.  (Law, Legislation and LIberty, vol. 2, pp. 79-80)

Do we really want the same fate to befall “market”?

So I would opt for neo-monetarism, which is not exactly descriptive except insofar as it suggests that there is some undefined difference between old Monetarism and new monetarism (to be distinguished from New Monetarism), just as the nature of the difference between classical and neo-classical economics is not evident from the labels. But classical and neo-classical economics are, indeed, very different theoretical constructs; one cannot discern the difference just from the name; one has to learn a little about each to see wherein the difference lies. In that sense, market monetarism tends to obscure, and perhaps mislead, rather than to inform, while neo-monetarism neither misleads nor misinforms. Anyway, that, for whatever it’s worth, is my take.