George Selgin Asks a Question

I first met George Selgin almost 30 years ago at NYU where I was a visiting assistant professor in 1981, and he was a graduate student. I used to attend the weekly Austrian colloquium headed by Israel Kirzner, which included Mario Rizzo, Gerry O’Driscoll, and Larry White, and a group of very smart graduate students like George, Roger Koppl, Sandy Ikeda, Allanah Orrison, and others that I am not recalling. Ludwig Lachmann was also visiting NYU for part of the year, and meeting him was a wonderful experience, as he was very encouraging about an early draft of my paper “A Reinterpretation of Classical Monetary Theory,” which I was then struggling to get into publishable form. A few years later, while I was writing my book Free Banking and Monetary Reform, I found out (I can’t remember how, but perhaps through Anna Schwartz who was on George’s doctoral committee) that he was also writing a book on free banking based on his doctoral dissertation. His book, The Theory of Free Banking, came out before mine, and he kindly shared his manuscript with me as I was writing my book. Although we agreed on many things, our conceptions of free banking and our interpretations of monetary history and policy were often not in sync.

Despite these differences, I watched with admiration as George developed into a prolific economist with a long and impressive list of publications and accomplishments to his credit. I also admire his willingness to challenge his own beliefs and to revise his views about economic theory and policy when that seems to be called for, for example, recently observing in a post on the Free Banking blog that he no longer describes himself as an Austrian economist, and admires that Austrian bete noire, Milton Friedman, though he has hardly renounced his Hayekian leanings.

In one of his periodic postings (“A Question to Market Monetarists“) on the Free Banking blog, George recently discussed NGDP targeting, and raised a question to supporters of nominal GDP targeting, a challenging question to be sure, but a question not posed in a polemical spirit, but out of genuine curiosity. George begins by noting that his previous work in arguing for the price level to vary inversely with factor productivity bears a family resemblance to proposals for NGDP targeting, the difference being whether, in a benchmark case with no change in factor productivity and no change in factor supplies, the price level would be constant or would rise at some specified rate, presumably to overcome nominal rigidities. In NGDP targeting with an upward price trend (Scott Sumner’s proposal) or in NGDP targeting with a stationary price trend (George’s proposal), any productivity increase would correspond to price increases below the underlying price trend and productivity declines would correspond to price increases above underlying the price trend.

However, despite that resemblance, George is reluctant to endorse the Market Monetarist proposal for rapid monetary expansion to promote recovery. George gives three reasons for his skepticism about increasing the rate of monetary expansion to promote recovery, but my concern in this post is with his third, which is the most interesting from his point of view and the one that prompts the question that he poses. George suggests that given the 4.5-5.0% rate of growth in NGDP in the US since the economy hit bottom in the second quarter of 2009, it is not clear why, according to the Market Monetarists, the economy should not, by now, have returned to roughly its long-run real growth trend. (I note here a slight quibble with George’s 4.5-5.0% estimate of recent NGDP growth.  In my calculations, NGDP has grown at just 4.00% since the second quarter of 2009, and at 3.82% since the second quarter of 2010.)

Here’s how George characterizes the problem.

My third reason stems from pondering the sort of nominal rigidities that would have to be at play to keep an economy in a state of persistent monetary shortage, with consequent unemployment, for several years following a temporary collapse of the level of NGDP, and despite the return of the NGDP growth rate to something like its long-run trend.

Apart from some die-hard New Classical economists, and the odd Rothbardian, everyone appreciates the difficulty of achieving such downward absolute cuts in nominal wage rates as may be called for to restore employment following an absolute decline in NGDP. Most of us (myself included) will also readily agree that, if equilibrium money wage rates have been increasing at an annual rate of, say, 4 percent (as was approximately true of U.S. average earnings around 2006), then an unexpected decline in that growth rate to another still positive rate can also lead to unemployment. But you don’t have to be a die-hard New Classicist or Rothbardian to also suppose that, so long as equilibrium money wage rates are rising, as they presumably are whenever there is a robust rate of NGDP growth, wage demands should eventually “catch down” to reality, with employees reducing their wage demands, and employers offering smaller raises, until full employment is reestablished. The difficulty of achieving a reduction in the rate of wage increases ought, in short, to be considerably less than that of achieving absolute cuts.

U.S. NGDP was restored to its pre-crisis level over two years ago. Since then both its actual and its forecast growth rate have been hovering relatively steadily around 5 percent, or about two percentage points below the pre-crisis rate.The growth rate of U.S. average hourly (money) earnings has, on the other hand, declined persistently and substantially from its boom-era peak of around 4 percent, to a rate of just 1.5 percent.** At some point, surely, these adjustments should have sufficed to eliminate unemployment in so far as such unemployment might be attributed to a mere lack of spending. How can this be?

There have been a number of responses to George. Among them, Scott Sumner, Bill Woolsey and Lars Christensen. George, himself, offered a response to his own question, in terms of this graph plotting the time path of GDP versus the time path of nominal wages before and since the 2007-09 downturn.

Here’s George’s take on the graph:

Here one can clearly see how, while NGDP plummeted, hourly wages kept right on increasing, albeit at an ever declining rate. Allowing for compounding, this difference sufficed to create a gap between wage and NGDP levels far exceeding its pre-bust counterpart, and large enough to have been only slightly reduced by subsequent, reasonably robust NGDP growth, notwithstanding the slowed growth of wages.

The puzzle is, of course, why wages have kept on rising at all, despite high unemployment. Had they stopped increasing altogether at the onset of the NGDP crunch, wages and total spending might have recovered their old relative positions about two years ago. That, presumably, would have been too much to hope for. But if it is unreasonable to expect wage inflation to stop on a dime, is it not equally perplexing that it should lunge ahead like an ocean liner might, despite having its engines put to a full stop?

However, after some further tinkering, George decided that the appropriate scaling of the graph implied that the relationship between the two time paths was that displayed in the graph below.

As a result of that rescaling, George withdrew, or at least qualified, his earlier comment. So, it’s obviously getting complicated. But Marcus Nunes, a terrific blogger and an ingenious graph maker, properly observes that George’s argument should be unaffected by any rescaling of his graph. The important feature of the time path of nominal GDP is that it dipped sharply and then resumed its growth at a somewhat slower rate than before the dip while the time path of nominal wages has continued along its previous trend, with just a gentle flattening of the gradient, but without any dip as occurred in the NGDP time path.  The relative position of the two curves on the graph should not matter.

By coincidence George’s first post appeared the day before I published my post about W. H. Hutt on Say’s Law and the Keynesian multiplier in which I argued that money-wage adjustments — even very substantial money-wage adjustments — would not necessarily restore full employment. The notion that money-wage adjustments must restore full employment is a mistaken inference from a model in which trading occurs only at equilibrium prices.  But that is not the world that we inhabit. Trading takes place at prices that the parties agree on, whether or not those prices are equilibrium prices. The quantity adjustments envisaged by Keynes and also by Hutt in his brilliant interpretation of Say’s Law, can prevent price-and-wage adjustments, even very large price-and-wage adjustments, from restoring a full-employment equilibrium. Hutt thought otherwise, but made no effective argument to prove his case, relying simply on a presumption that market forces will always put everything right in the end. But he was clearly mistaken on that point, as no less an authority that F. A. Hayek, in his 1937 article, “Economics and Knowledge,” clearly understood. For sufficiently large shocks, there is no guarantee that wage-and-price adjustments on their own will restore full employment.

In a comment on Scott’s blog, I made the following observation.

[T]he point [George] raises about the behavior of wages is one that I have also been wondering about. I mentioned it in passing in a recent post on W. H. Hutt and Say’s Law and the Keynesian multiplier. I suggested the possibility that we have settled into something like a pessimistic expectations equilibrium with anemic growth and widespread unemployment that is only very slowly, if at all, trending downwards. To get out of such a pessimistic expectations equilibrium you would need either a drastic downward revision of expected wages or a drastic increase in inflationary expectations sufficient to cause a self-sustaining expansion in output and employment. Just because the level of wages currently seems about right relative to a full employment equilibrium doesn’t mean that level of wages needed to trigger an expansion would not need to be substantially lower than the current level in the transitional period to an optimistic-expectations equilibrium. This is only speculation on my part, but I think it is potentially consistent with the story about inflationary expectations causing the stock market to rise in the current economic climate.

George later replied on Scott’s blog as follows:

David Glasner suggests “the possibility that we have settled into something like a pessimistic expectations equilibrium with anemic growth and widespread unemployment…To get out of such a pessimistic expectations equilibrium you would need either a drastic downward revision of expected wages or a drastic increase in inflationary expectations.”

The rub, if you ask me, is that of reconciling “pessimistic expectations” with what appears, on the face of things, to be an overly optimistic positioning of expected wages.

I am not sure why George thinks there is a problem of reconciliation. As Hayek showed in his 1937 article, a sufficient condition for disequilibrium is that expectations be divergent. If expectations diverge, then the plans constructed on those plans cannot be mutually consistent, so that some, perhaps all, plans will not be executed, and some, possibly all, economic agents will regret some prior decisions that they took. Especially after a large shock, I see no reason to be surprised that expectations diverge or even that, as a group, workers are slower to change expectations than employers. I may have been somewhat imprecise in referring to a “pessimistic-expectations” equilibrium, because what I am thinking of is an inconsistency between the pessimism of entrepreneurs about future prices and the expectations of workers about wages, not a situation in which all agents are equally pessimistic. If everyone were equally pessimistic, economic activity might be at a low level, but we wouldn’t necessarily observe any disappointed buyers or sellers. But what qualifies as disappointment might not be so easy to interpret. But we likely would observe a reduction in output. So a true “pessimistic-expectations” equilibrium is a bit tricky to think about. But in practice, there seems nothing inherently surprising about workers’ expectations of future wages not adjusting downward as rapidly as employers’ expectations do. It may also be the case that it is the workers with relatively pessimistic expectations who are dropping out of the labor force, while those with more optimistic expectations continue to search for employment.

I don’t say that the slow recovery poses not difficult issues for advocates of monetary stimulus to address.  The situation today is not exactly the same as it was in 1932, but I don’t agree that it can be taken as axiomatic that a market economy will recover from a large shock on its own.  It certainly may recover, but it may not.  And there is no apodictically true demonstration in the whole corpus of economic or praxeological theory that such a recovery must necessarily occur.

18 Responses to “George Selgin Asks a Question”

  1. 1 Marcus Nunes July 11, 2012 at 9:47 am

    David – George has been kind enough to place comments in my post. I have answered him arguing exactly your point. The economy experienced a very large (monetary) shock. In that case, even if wages are growing more slowly than before and slower than NGDP, the time to arrive at adjustment is too long, therefore not realistic.


  2. 2 George Selgin July 11, 2012 at 11:02 am

    David, I’m very glad to have your remarks concerning the questions I raised–as I am glad generally to see so much discussion–fruitful discussion, I’m incline to think–in the blogosphere generally. I for one have gotten a lot out of it.

    I agree that divergent expectations are at play; and I’m prepared to believe that they’ve kept on diverging for several years (though that is a matter perhaps calling for more careful statistical work than the mere plots we’ve all been toying with). Finally, I should think we agree that economics has yet to supply an entirely satisfactory explanation of how and why expectations are capable of diverging so persistently.

    Finally, I can’t help augmenting your generous account of my education and intellectual heroes by adding that I also consider myself a Hawtrey fan. If only I could have had a nice long chat with him about free banking!


  3. 3 Lars Christensen July 11, 2012 at 2:05 pm

    David and George, thanks to both of you. This is excellent stuff and damn you guys are lucky for that time you spend at NYU. To think of the people participating at that time…I must admit that I am slightly jealous. The rest of us are lucky that you guys now are blogging.


  4. 4 David Pearson July 11, 2012 at 2:33 pm

    Corporate margins are at peak levels. For the trajectory of real wage expectations to fall, margin expectations would have to rise to significantly above historical peaks. Since margins exhibit mean regression, is this a realistic expectation? Are corporate managers likely to have settled into a pessimistic equilibrium coincident with peak margins? How consistent is this with other observations of such an equilibrium (i.e. the GD)?

    The margin story is more nuanced than I give credit to. Arguably, small business margins have not recovered along with large corporate ones, and perhaps the NIPA data does not do a good job of capturing this divergence. However, nuance, IMO, tends to be a signal less of AD problems than of structural causes.


  5. 5 Ritwik July 11, 2012 at 3:08 pm


    But why would trading occur at the expectations of workers, rather than employers? Why does the market for wages stabilize

    My question to George/Scott on Scott’s post was – given that the nominal wages seem nearly perfectly stabilized and this is pretty much the first best monetary policy of George/Scott/you (not to mention others, including Mankiw). Let’d not care whether the Fed achieved this through design or by being idiot savants. If real world monetary policy is tracking, more or less, first best monetary policy, why do we have an aggregate demand shortfall?

    George replied by saying that the nominal rigidities in wages keep nominal wages steady anyway, so this self-stabilized trend line of wages may itself be a disequilibrium trend line. Ok, but why should a disequilibrium trend line be consistent with both 5% unemployment and 9% unemployment? W/NGDP is about the same, if not lower, as 2007. That doesn’t seem easily explainable, unless you visualise supply shocks. Moreover, it also raises the question of – in a world where NGDP fluctuates even as wages are stable, is wage targeting still the first-best policy? Or was it a presumption that NGDP could never crash this much in a world of stabilised wages?

    Instead, let’s suppose an entirely different world, where monetary policy – whatever its real effects, acts primarily through asset prices. However, the argument goes beyond Tobin’s q (the empirical evidence for which is weak) or the wealth effects on consumption. Financial flows dominate real flows. Lower interest rates need not translate into greater demand for current spending but simply increased carry trade arbitrages etc. etc. Add to this world a Fischer Black finance-view of capital. In the aggregate, it doesn’t make sense to differentiate between quantities and prices of capital. A change in asset prices is an instantaneous increase or decrease in the stock of capital itself. Capital is not buildings and factories, but simply the PV of expected future cash flows.

    Notice that this conception of capital is entirely consistent with Keynes’s (and the later Hicks’s) conception of all capital as effectively infinitely lived. When firms invest, they do not buy this machine or that building. They buy more of their firm, awkward as that sounds.

    In this world, a change in asset prices is not (just) a demand shock, but a supply shock, as it is a shock to capital itself. Therefore, a crash in asset prices will reduce demand, but will not cause deflation because it also contracts supply. And similar logic for an increase in asset prices. There are real effects too, so you see modest disinflation or increases in inflation in consumer prices and wages. But there will never be a sustained deflation, or a severe inflation. Instead, all adjustment happens via quantities. In output, but even more in employment (because wages are stickier than other prices). The same trend of wage rate is consistent with widely different rates of unemployment. Even a re-valuation of the wage rate may not help much, because it does very little to improve aggregate supply (and the demand effects of increase in corporate profits are countered by the Keynesian effect of workers spending lesser)

    In this world, achieving low unemployment is simply a case of keeping asset markets propped up. Low inflation is achieved by default, combination of stabilize expectations and the absence of *real* supply shocks. Hence, Greenspanism. What you see as stabilized inflation/ NGDP, is simply a fall-out of propping up aggregate supply to offset demand shocks.

    It’s one view. It’s an incomplete view. But it’s consistent with a lot of what we see around us. Another classic example is Switzerland, with 3% unemployment at -0.5% inflation. The SNB peg hasn’t moved consumer price/ wage inflation, but it has inflated asset prices denominated in CHF. Ergo, low unemployment, low inflation. (But also a subsidy to seekers of safe haven assets, and unlikely to create sustainable inflation anytime soon)

    I believe we *should not* prop up asset prices to solve for unemployment, because of Schumpeterian reasons. But it seems like in economies with inherently low real rates and stabilized price expectations, employment and output are better explained via asset prices, not nominal rigidities.


  6. 6 Benjamin Cole July 11, 2012 at 10:45 pm

    But back to basics: Should the Fed engage in sustained QE (preferably of Treasuries) with a public NGDP target?

    At this point, what could it hurt? If it “fails” we will have monetized debt, and lifted a burden from taxpayers present and future. If it only spurs inflation and no growth (hard to imagine, and not what Milton Friedman would predict) we still deleverage somewhat, and possibly help property markets (still the core of our problem).

    The best (and most probable) case is that steady QE spurs first growth (businesses and workers are eager for more business, believe me), and then possibly slightly higher inflation rates. A win!

    Selgin needs to say what he would expect from a program of steady QE and public NGDP targets. (I like Selgin and have exchange e-pleasantries, but really why this obsession with inflation rates?)

    The USA is not inflation-prone. We import labor, capital, goods and services globally. Unions are dead. This is a lot different frpm the 197os. In a sense we are inoculated against inflation. Productivity has been fine, outstanding in manufacturing and agriculture. To top it all off, inflation is not that important. 2 percent 4 percent who cares? Growth is what counts.

    There is not a shrewd businessman in the world that would not seize the present opportunity to deleverage and spur economic growth at the same time. This is a golden opportunity being handed to us on a silver platter. Only shrewd businessmen do not run the federal government and the Fed.

    BTW, the Fed never has to unwind its positions in Treasuries. Why should it?


  7. 7 Olivier Braun July 11, 2012 at 11:19 pm

    Dear Dr Glasner,

    I loved that post. I’d write the same comment as Lars Christensen. It is a polite, bonna fide exchange of ideas, and the opponent (well, that isn’t the right word) isn’t castigated as an adept of a moronish cult (of course, you are both free-bankers, but that doesn’t change the point). Thank you. By the way, I always marvel at your erudition and capacity of work, for I understand you share your thoughts with us in your spare time.


  8. 8 Becky Hargrove July 12, 2012 at 8:30 am

    I second Olivier. Exchanges such as this give us all hope. And then as you said, the market may not necessarily recover. Of course, marketing questions as to what we want (from the marketplace) are not presently posed in the right landuage. Plus, when people say what they desire there are no coordinating institutions to assist the process. Capitalism was to a large degree a social expansion of an already existing but limited marketplace. What happened in early capitalism for greater production of physical product, is what needs to happen now for the changing knowledge based services we all would provide for one another and ask of one another. Doing so with local definitions would provide the wide variety of nuance and interpretation that people desire.


  9. 9 Greg Ransom July 12, 2012 at 9:51 am

    In the gov union worker sector here in California the choice unions & the politicians they control has been to continue to increase compensation — and to eliminate younger workers.

    Example, the San Juan Capistrano school district — they’ve fired teachers year after year, but compensation for teacher with seniority continues to go up.

    This pattern is repeated in city and county across the state of California.

    The most massive increase in compensation since the start of the recession in 2007 has been in the government worker sector — and the biggest loss employment has been in the government worker sector.

    Macroeconomists need only disaggregate the slightest bit — and then do the math.

    But this would take macroeconomists out of the comfort zone, the comfort zone which sticks with 3 or 4 variable math constructs which don’t genuinely capture the causal structure of the world we live in.

    (I don’t know how else to make the point in order to cushion is so that it is both on point and “polite” — it’s simply not polite to speak the truth in some situations, eg when a woman asks you how her hideous dress looks. The demand that people be polite is often a demand that people remain silent & not interrupt the game being played.)


  10. 10 Greg Ransom July 12, 2012 at 9:56 am

    The crazy expectations have been in the government sector — go thru the news stories on gov union worker compensation deals in California over the last 8 years or so.

    It was all unsustainable.

    What can’t go on forever doesn’t. Just look at the gov worker layoffs in the gov union sector, and the cities going bankrupt, and the reports coming out on unfunded gov compensation liabilities.

    Why isn’t this at the _center_ of the discussion?

    We also have disability claims skyrocketing, and we have unemployment payments extended to 99 weeks, and minimum wages skyrocketing over the last 5 years.

    If you aren’t looking at the world we live in, how can you guess what is going on?


  11. 11 David Glasner July 12, 2012 at 10:04 am

    Marcus, Unless there is very rapid adjustment to the initial shock, the decline in output and employment can become cumulative, in which case restoration of equilibrium depends on more than just the adjustment of one price or one class of prices (i.e., wages). The system as a whole must adjust, which involves an adjustment of prices and expectations. There is no guarantee that that adjustment will be achieved in any finite period of time.

    George, Yes, there’s lots of work – theoretical and empirical — to keep economists busy for a long time. One good thing about the blogosphere is that it opens up the conversation to more voices than previously and widens the range of possible explanations. Of course, there can be too much of a good thing also, but I don’t think that we are there yet. Glad to hear, but not surprised, that you’re a Hawtrey fan. Hayek spoke admiringly of him on numerous occasions, despite their differences.

    Lars, And we are lucky to have you with us.

    David, So how would explain the reluctance of corporate managers to hire and invest given their healthy profits, fat margins, and large piles of cash?

    Ritwik, The way to think of this is to draw an upward-sloping supply curve of labor, that intersects with a downward-sloping demand for labor and determines an equilibrium wage an and an equilibrium level of employment. In a full equilibrium with consistent expectations, you get full employment, which is to say the optimal amount of search and leisure, so that workers do not regret their labor-leisure-search decisions at the end of the period. If workers become relatively too optimistic about their wage opportunities, the labor supply curve shifts upwards and to the left and the intersection with the demand curve corresponds to an increased wage, but less than expected, and with less than full employment, and with disappointed workers unable to find employment at the wages they expected to be employed at. So the expectations of workers and employers are interacting to determine a short-run temporary equilibrium in each period. If the expectations are realized, the temporary equilibrium is also a full equilibrium with full employment. If not, it is a temporary equilibrium with less than full employment if workers expectations were too optimistic and greater than full employment if they were not optimistic enough.

    My response to you about the relative stability of wages now is that it is not clear what workers’ expectations of future wages are. We don’t have a policy of stabilizing wages, so workers may still be expecting wages to increase by 3 or 4 percent a year. To validate that expectation, especially if there have been negative supply shocks, we might need annual price increases of, say, 5 percent.

    Your story about asset prices and employment is very interesting, but it will take me a while to understand it sufficiently to be able to respond to it coherently. Where can I read up on it?

    Benjamin, I agree inflation is the way to go to deleverage. Deleveraging by cutting spending is a recipe for a eurocrisis.

    Olivier, Thanks for your kind remarks. If you want to see a real workaholic in action, I refer you to my friend Scott Sumner.

    Becky, I am happy to do what I can to keep hope alive. I think that there are huge questions about whether we have an appropriate institutional framework for a well-functioning free market economy. Those questions are worth a lot of attention, but first we need to recover from our Little Depression. I think that there are good grounds for expecting the market to recover, but that doesn’t mean that the appropriate policy is to allow everything to take care of itself.


  12. 12 Greg Ransom July 12, 2012 at 10:09 am

    I always wonder if economists now anything about what is going on in the world — during the housing boom economists in the universities didn’t seem to have a clue what was happening in California, Florida & Nevada, etc.

    And I rarely see an academic economist paying attention to what has happened in the government sector in California, Illinois, Wisconsin, New York, etc. — a story which in California reporter Steven Greenhut has been on top of for almost a decade.

    Macroeconomists pay attention to two or three Keynesian variables, and their toy math constructs (what they ‘model’ isn’t clear, it isn’t the real world).

    But almost universally they were oblivious to the disequilibrium of the ’00 — many even insisting that everything was fine.

    And most of them have seemed equally oblivious to the disequilibrium in the government sector at the city, county and state level which has been getting ever worse over the last decade.

    If you only look at toy macro models & three or four Keynesian macro aggregates, it isn’t surprising that economists don’t have lenses to see what is happening in the world right in front of them.


  13. 13 Ritwik July 12, 2012 at 12:23 pm


    I understand how labour markets may be in disequilibrium through inconsistent expectations, but I was responding specifically to

    “The notion that money-wage adjustments must restore full employment is a mistaken inference from a model in which trading occurs only at equilibrium prices. But that is not the world that we inhabit. Trading takes place at prices that the parties agree on, whether or not those prices are equilibrium prices”

    In your example, compare an upwards shift of the labour supply curve with an inward shift in the labour demand curve. This also causes the same level of unemployment, but at a lower wage rate. So which curve is, relatively speaking, in disequilibrium is a function of how wages have behaved over time (taken together, they are obviously in disequilibrium in either case). Given that wages seem stable and that over time even W/NGDP has fallen back to its pre-crisis levels, it looks like workers expectations are more out of whack, relatively speaking, than employer expectations. Why should this be so? Let’s say that workers revised their wage expectations downwards, so that involuntary unemployment is eliminated. Why is the new W/NGDP substantially lower than it was in 2007? Are we saying that the nature of the demand/supply shock, whatever it was, was such that it necessitated a redistribution from wages to corporate profits? That’s a very different theory of the business cycle from simply saying that rigid wages prevent the labor market from clearing.

    My point about the wage targeting proposal was, assume an economy where monetary policy stabilized wages. Would the trend of nominal wages look very different from the trend that we have today? My guess is no, and if not, then what exactly is the failure of monetary policy here?

    My asset price/ unemployment story in the form that I presented it in is my own, but I am trying to riff off and build upon on a few different, if connected, themes. One is Perry Mehrling’s work on Fischer Black (Understanding Fischer Black), where he speaks about financial and real capital as being indistinguishable in the aggregate. The other is the common recognition that there hasn’t really been a deflation and that inflation rates, though inadequate, defy the absolute crash in aggregate demand. The third is the IMF/BIS international finance theme of a modern economy with financial globalization, where financial flows often dominate real flows, currencies/commodities are traded assets (as shown by, among others, Claudio Borio, Hyun Song Shin) and central bank interventions aimed at getting the money flowing through the economy often show up simply in carry trades and commodity inflation (Dan Alpert also writes about this). The fourth is Tyler Cowen’s refrain of ‘we are not as wealthy as we thought we were’ which I see echoed in someone like Raghu Rajan. If we try to combine these elements, we might postulate something similar to what I did.


  14. 14 Becky Hargrove July 12, 2012 at 5:24 pm

    Today, Ryan Avent finishes “The Institutional Void” with these thoughts:
    “Perhaps we’re destined for further growth in inequality until a crisis generates a wrenching political realignment. But – and I don’t know if this is an encouraging thought or a discouraging thought – the broad prosperity of an earlier age was a product of a particular set of technologies, and our best hope for an egalitarian future may well be a democratising, skill-premium-erasing technological revolution.”


  15. 15 George Selgin July 15, 2012 at 6:30 pm

    Becky and Olivier should understand that I generally do not refer to people whom I disagree with as members of moronic cults. I only do that when the people I disagree with are…members of moronic cults! And I repeat what I’ve said elsewhere about the designation: it doesn’t refer to anyone who merely disagrees with me, no matter what alternative view he or she holds. It’s a designation I reserve for those who treat their positions as “core beliefs,” and value them above all for allowing them to be members in good standing of a club that they cherish.

    I refer to such people as someone who admits having once been one of them, and who consequently knows intimately that of which he speaks.


  16. 16 David Glasner July 17, 2012 at 7:44 pm

    Greg, For someone who has excused Hayek’s bad policy advice in the 1930s on the grounds that he was out of touch with the facts, I think your condemnation of academic economists for not knowing what is going on in California, Florida, and Nevada is overly strident.

    Ritwik, The demand for labor shifts down. Holding workers’ expectations constant implies a reduction in wages, and unemployment unless workers’ expectations shift downward immediately. The unemployment in the first period causes a further reduction in demand for labor, so even if workers’ expectations adjust downward you still get unemployment, unless expectations adjust to their equilibrium level, but there is no market mechanism that ensures expectations are at their equilibrium level. If you start with everyone expecting wages to rise at a 3-4% annual rate, the adjustment to a falling demand for labor will be to reduce the rate of increase in wages, which is what has happened. Unemployment has also fallen so the magnitude of the disequilibrium has been reduced somewhat. I am not sure how one can say whose expectations are the most out of whack. Inconsistent expectations have feedback effects that cause continuing adjustments but don’t necessarily bring the system back to equilibrium.

    The difference between a nominal-wage targeting regime and what we have observed is that there is no common standard in terms of which workers form their wage expectations. Workers are still expecting wages that are too high relative to what they are observing, even though there has been some downward revision in their expectations. Under a nominal-wage standard, monetary policy would have to increase the price level to validate constant nominal wage expectations if unemployment was tending to force down nominal wages. I’ve read Mehrling’s book on Black, but I probably did not fully understand the point about the indistinguishability of real and financial capital. In doing macro, following Earl Thompson, I tend to assume that real capital is what determines the equilibrium and financial capital adjusts. I will have to think more about what you wrote. It would be nice if you could put it together into a self-contained presentation.

    Becky, Well, I am afraid that I don’t find it a particularly encouraging thought.

    George, Thanks for that explanation of the difference.


  17. 17 Tas von Gleichen July 28, 2012 at 6:06 am

    I’m as pessimistic as it comes when we talk about the western world. They basically since the 1970 have been going onto a path that we now see happening. Whether it be 2008, or what it still to come. The lower class and middle class is being punished big time. I don’t see growth happening any time soon. We will be stuck.


  1. 1 Selgin’s challenge to the Market Monetarists « The Market Monetarist Trackback on July 11, 2012 at 2:04 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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