Archive for the 'Hayek' Category

Whither Conservatism?

I’m not sure why – well, maybe I can guess – but I have been thinking about an article (“Hayek and the Conservatives”) I wrote in 1992 for Commentary. I just reread it — probably for the first time this century — and although I can’t say that I agree with everything I wrote over 20 years ago, it somehow still seems relevant, perhaps even more so now than then. So I thought I would share it.

At the time of his death on March 23, 1992, less than two months before his ninety-third birthday, F.A. Hayek was widely if not universally acknowledged as this century’s preeminent intellectual advocate of the free market and one of its leading opponents of socialism. His death, coming so soon after the collapse of Communism in Eastern Europe and the abandonment of Marxism and socialism as intellectual ideals, occasioned understandable comment by his admirers about the vindication that Hayek, after years of vilification at the hands of critics, had received at the hands of history.

Though long in coming, however, Hayek’s vindication did not occur all at once. For his work had exerted a crucial, though basically indirect, influence over the renascent conservative and libertarian movements that had grown up after World War II in the United States and Great Britain. Indeed, the revival of those movements culminated in the rise to power of two politicians, Ronald Reagan in America and Margaret Thatcher in England, who were proud to list Hayek among their intellectual mentors. And his vindication had also been presaged, though in an oddly ambiguous way, when Hayek was named co-winner, with the Swedish socialist economist Gunnar Myrdal, of the 1974 Nobel prize in economics.

Still, most of Hayek’s career was spent in the relative obscurity befitting an expatriate Central European intellectual of reserve, urbanity, erudition—and unfashionable views. Hayek’s economic theories had apparently been superseded, first by those of John Maynard Keynes and then by the increasingly mathematical economic analysis of the postwar period, and his political philosophy was considered either a relic of an obsolete Victorian liberalism or, less charitably, an apology for the worst excesses of capitalist exploitation. Before winning the Nobel prize, Hayek, who never served either officially or unofficially as an adviser to any political figure and never sought a mass audience, only twice transcended the obscurity in which he labored for so long: first in the early 1930’s when, as a young man newly arrived in Great Britain, he was briefly considered the chief intellectual rival of Keynes, and a decade later in the mid-1940’s when, much to Hayek’s own surprise, his book, The Road to Serfdom, became a trans-Atlantic best-seller. . . .

Ironically, Hayek’s death occurred not only after his critique of socialism had just received decisive historical confirmation, but when the conservative movement in the United States, whose free-market and free-trade principles he, perhaps more than anyone else, had shaped, was undergoing a fundamental crisis. To understand the nature of the crisis, one must first understand how Hayek came to play such a crucial role in the development of conservatism.

Before World War II what passed for conservatism in the United States was an amalgam of views and prejudices which lacked sufficient coherence to be summarized by any clear set of principles. The chief characteristics of the Old Right were a fanatical opposition to . . . Roosevelt’s New Deal or indeed to any national measures aimed at improving the lot of the least well-off groups or individuals in the country; opposition to international alliances, coupled with decidedly nativist tendencies and a bias in favor of protectionist trade policies; a primitive bias against banks, speculation, high finance, and Wall Street; and complacent toleration of, or occasionally even active support for, racial and religious discrimination against blacks, Jews, and other minorities. . . .

Even more disastrously, American conservatives, mistrusting the federal government and its tendency to become involved in European conflicts, and viscerally hating Roosevelt, bitterly opposed any U.S. efforts to resist or contain the spread of European fascism. These attitudes gave birth to the America First movement of the 1930’s, whose often implicit and occasionally explicit anti-Semitic overtones can only be understood in the light of the broader set of fears, hatreds, and neuroses that animated the movement.

The onset of World War II, the attack on Pearl Harbor, and the subsequent horrific revelations about the Holocaust perpetrated by the Nazis (with whom the America Firsters had uniformly urged coexistence and for whom some of them had expressed sympathy) left American conservatism discredited both morally and intellectually, just as the Depression and a reflexive opposition to the New Deal had discredited conservatism programmatically.

Thus, when The Road to Serfdom was published in 1945, it filled a gaping moral and intellectual vacuum. For here was a book, written by an Austrian expatriate of impeccable anti-Nazi credentials, fundamentally opposed to the socialist ideas now guiding progressive thought everywhere. Moreover, in a profound and eloquent argument, The Road to Serfdom contended that the path the fascists had followed to absolute power had been prepared for them by the very instruments of central planning and the ideology of an all-powerful state which socialists had created before them. The Nazis, after all, had been National Socialists, and Mussolini had been a leader of the Italian Socialist party before starting the Fascist party. The common characteristic of all such movements was to subordinate the individual to the supposed interests of some abstract collective entity—class, nation, race, or simply society.

In a relatively brief span of time, Hayek’s version of free-market, free-trade liberalism (in the traditional European sense of the word), and political internationalism, which had never before taken root among either American conservatives or liberals, became the bedrock on which the generation of American conservatives who came of age after 1945 built a political movement. Liberated from nativist, protectionist, and isolationist tendencies, this generation could turn its energies to the struggle against Communism and other forms of collectivism, and to the promotion of a free-market economy.

Naturally the transformation of American conservatism was never complete. . . The lingering Old Right influence is today most noticeable in the conspiratorial cast of mind, the obsession with betrayal and disloyalty, the search for alien influences, the siege mentality, the anti-intellectualism, the chauvinism, and the free-floating anger that unfortunately still pervade parts of the conservative movement. It is just these qualities that Patrick J. Buchanan would restore if he should ever succeed in “taking back” the movement from those who, in his words, have hijacked it. . . .

The key distinction for Hayek was not big government versus small government, but between a government of laws in which all coercive action is constrained by general and impartial rules, and a government of men in which coercion may be arbitrarily exercised to achieve whatever ends the government, or even the majority on whose behalf it acts, wishes to accomplish. Though Hayek contemplated with little enthusiasm the absorption by the state of a third or more of national income, the amount and character of government spending were to him very much a secondary issue that directly involved no fundamental principle. . . .

Hayek’s point is that there is no deductive proof from self-evident axioms that will establish the case for liberty. Rather, he argues, liberty is a condition and a value that has evolved with society. If we value liberty, it is because Western civilization has evolved in such a way that liberty has become part of its tradition. That tradition, the provisional outcome of a contingent historical and evolutionary process, cannot be explained in purely rational terms.

This approach to social theory, the product of a thoroughgoing philosophical skepticism, is decidedly incompatible with the religious beliefs to which a large segment of the conservative movement subscribes, and equally unattractive to those, conservative or libertarian, who ground their political beliefs in natural law or in any other set of self-evident truths. This no doubt explains the regrettably limited influence that Hayek’s later work has exerted on American conservatives—particularly unfortunate because his rich contributions to legal and constitutional theory have much to offer both conservatives and liberals struggling to formulate a coherent philosophy of adjudication.

That apart, however, it remains undeniable that the primary goals of American conservatism in the postwar era evolved steadily from an Old Right toward a Hayekian agenda: from isolationism to containing the military expansion of Communism and other aggressive totalitarian movements; from protectionism to reducing the extent of government interference with and disruption of the free-market economy both domestically and internationally; from wholesale opposition to the New Deal to reforming and rationalizing its social-insurance measures along more market-oriented lines, and focusing government efforts on helping the least well-off rather than redistributing income generally.

Given the conflicting pressures under which policies are made, this agenda has been far from perfectly implemented even under conservative administrations. Yet it was only by embracing such an agenda that conservatism attracted not just new intellectual supporters—the neoconservatives—but, at least in presidential elections, a majority of votes. A retreat to the Old Right stance advocated by Patrick J. Buchanan and his supporters would mean not just throwing overboard the neoconservative “parvenus,” it would mean eradicating root and branch the fundamental consensus that enabled American conservatism to grow and to thrive in the postwar era.

What’s Wrong with Monetarism?

UPDATE: (05/06): In an email Richard Lipsey has chided me for seeming to endorse the notion that 1970s stagflation refuted Keynesian economics. Lipsey rightly points out that by introducing inflation expectations into the Phillips Curve or the Aggregate Supply Curve, a standard Keynesian model is perfectly capable of explaining stagflation, so that it is simply wrong to suggest that 1970s stagflation constituted an empirical refutation of Keynesian theory. So my statement in the penultimate paragraph that the k-percent rule

was empirically demolished in the 1980s in a failure even more embarrassing than the stagflation failure of Keynesian economics.

should be amended to read “the supposed stagflation failure of Keynesian economics.”

Brad DeLong recently did a post (“The Disappearance of Monetarism”) referencing an old (apparently unpublished) paper of his following up his 2000 article (“The Triumph of Monetarism”) in the Journal of Economic Perspectives. Paul Krugman added his own gloss on DeLong on Friedman in a post called “Why Monetarism Failed.” In the JEP paper, DeLong argued that the New Keynesian policy consensus of the 1990s was built on the foundation of what DeLong called “classic monetarism,” the analytical core of the doctrine developed by Friedman in the 1950s and 1960s, a core that survived the demise of what he called “political monetarism,” the set of factual assumptions and policy preferences required to justify Friedman’s k-percent rule as the holy grail of monetary policy.

In his follow-up paper, DeLong balanced his enthusiasm for Friedman with a bow toward Keynes, noting the influence of Keynes on both classic and political monetarism, arguing that, unlike earlier adherents of the quantity theory, Friedman believed that a passive monetary policy was not the appropriate policy stance during the Great Depression; Friedman famously held the Fed responsible for the depth and duration of what he called the Great Contraction, because it had allowed the US money supply to drop by a third between 1929 and 1933. This was in sharp contrast to hard-core laissez-faire opponents of Fed policy, who regarded even the mild and largely ineffectual steps taken by the Fed – increasing the monetary base by 15% – as illegitimate interventionism to obstruct the salutary liquidation of bad investments, thereby postponing the necessary reallocation of real resources to more valuable uses. So, according to DeLong, Friedman, no less than Keynes, was battling against the hard-core laissez-faire opponents of any positive action to speed recovery from the Depression. While Keynes believed that in a deep depression only fiscal policy would be effective, Friedman believed that, even in a deep depression, monetary policy would be effective. But both agreed that there was no structural reason why stimulus would necessarily counterproductive; both rejected the idea that only if the increased output generated during the recovery was of a particular composition would recovery be sustainable.

Indeed, that’s why Friedman has always been regarded with suspicion by laissez-faire dogmatists who correctly judged him to be soft in his criticism of Keynesian doctrines, never having disputed the possibility that “artificially” increasing demand – either by government spending or by money creation — in a deep depression could lead to sustainable economic growth. From the point of view of laissez-faire dogmatists that concession to Keynesianism constituted a total sellout of fundamental free-market principles.

Friedman parried such attacks on the purity of his free-market dogmatism with a counterattack against his free-market dogmatist opponents, arguing that the gold standard to which they were attached so fervently was itself inconsistent with free-market principles, because, in virtually all historical instances of the gold standard, the monetary authorities charged with overseeing or administering the gold standard retained discretionary authority allowing them to set interest rates and exercise control over the quantity of money. Because monetary authorities retained substantial discretionary latitude under the gold standard, Friedman argued that a gold standard was institutionally inadequate and incapable of constraining the behavior of the monetary authorities responsible for its operation.

The point of a gold standard, in Friedman’s view, was that it makes it costly to increase the quantity of money. That might once have been true, but advances in banking technology eventually made it easy for banks to increase the quantity of money without any increase in the quantity of gold, making inflation possible even under a gold standard. True, eventually the inflation would have to be reversed to maintain the gold standard, but that simply made alternative periods of boom and bust inevitable. Thus, the gold standard, i.e., a mere obligation to convert banknotes or deposits into gold, was an inadequate constraint on the quantity of money, and an inadequate systemic assurance of stability.

In other words, if the point of a gold standard is to prevent the quantity of money from growing excessively, then, why not just eliminate the middleman, and simply establish a monetary rule constraining the growth in the quantity of money. That was why Friedman believed that his k-percent rule – please pardon the expression – trumped the gold standard, accomplishing directly what the gold standard could not accomplish, even indirectly: a gradual steady increase in the quantity of money that would prevent monetary-induced booms and busts.

Moreover, the k-percent rule made the monetary authority responsible for one thing, and one thing alone, imposing a rule on the monetary authority prescribing the time path of a targeted instrument – the quantity of money – over which the monetary authority has direct control: the quantity of money. The belief that the monetary authority in a modern banking system has direct control over the quantity of money was, of course, an obvious mistake. That the mistake could have persisted as long as it did was the result of the analytical distraction of the money multiplier: one of the leading fallacies of twentieth-century monetary thought, a fallacy that introductory textbooks unfortunately continue even now to foist upon unsuspecting students.

The money multiplier is not a structural supply-side variable, it is a reduced-form variable incorporating both supply-side and demand-side parameters, but Friedman and other Monetarists insisted on treating it as if it were a structural — and a deep structural variable at that – supply variable, so that it no less vulnerable to the Lucas Critique than, say, the Phillips Curve. Nevertheless, for at least a decade and a half after his refutation of the structural Phillips Curve, demonstrating its dangers as a guide to policy making, Friedman continued treating the money multiplier as if it were a deep structural variable, leading to the Monetarist forecasting debacle of the 1980s when Friedman and his acolytes were confidently predicting – over and over again — the return of double-digit inflation because the quantity of money was increasing for most of the 1980s at double-digit rates.

So once the k-percent rule collapsed under an avalanche of contradictory evidence, the Monetarist alternative to the gold standard that Friedman had persuasively, though fallaciously, argued was, on strictly libertarian grounds, preferable to the gold standard, the gold standard once again became the default position of laissez-faire dogmatists. There was to be sure some consideration given to free banking as an alternative to the gold standard. In his old age, after winning the Nobel Prize, F. A. Hayek introduced a proposal for direct currency competition — the elimination of legal tender laws and the like – which he later developed into a proposal for the denationalization of money. Hayek’s proposals suggested that convertibility into a real commodity was not necessary for a non-legal tender currency to have value – a proposition which I have argued is fallacious. So Hayek can be regarded as the grandfather of crypto currencies like the bitcoin. On the other hand, advocates of free banking, with a few exceptions like Earl Thompson and me, have generally gravitated back to the gold standard.

So while I agree with DeLong and Krugman (and for that matter with his many laissez-faire dogmatist critics) that Friedman had Keynesian inclinations which, depending on his audience, he sometimes emphasized, and sometimes suppressed, the most important reason that he was unable to retain his hold on right-wing monetary-economics thinking is that his key monetary-policy proposal – the k-percent rule – was empirically demolished in a failure even more embarrassing than the stagflation failure of Keynesian economics. With the k-percent rule no longer available as an alternative, what’s a right-wing ideologue to do?

Anyone for nominal gross domestic product level targeting (or NGDPLT for short)?

Justice Scalia and the Original Meaning of Originalism

humpty_dumpty

(I almost regret writing this post because it took a lot longer to write than I expected and I am afraid that I have ventured too deeply into unfamiliar territory. But having expended so much time and effort on this post, I must admit to being curious about what people will think of it.)

I resist the temptation to comment on Justice Scalia’s character beyond one observation: a steady stream of irate outbursts may have secured his status as a right-wing icon and burnished his reputation as a minor literary stylist, but his eruptions brought no credit to him or to the honorable Court on which he served.

But I will comment at greater length on the judicial philosophy, originalism, which he espoused so tirelessly. The first point to make, in discussing originalism, is that there are at least two concepts of originalism that have been advanced. The first and older concept is that the provisions of the US Constitution should be understood and interpreted as the framers of the Constitution intended those provisions to be understood and interpreted. The task of the judge, in interpreting the Constitution, would then be to reconstruct the collective or shared state of mind of the framers and, having ascertained that state of mind, to interpret the provisions of the Constitution in accord with that collective or shared state of mind.

A favorite originalist example is the “cruel and unusual punishment” provision of the Eighth Amendment to the Constitution. Originalists dismiss all arguments that capital punishment is cruel and unusual, because the authors of the Eighth Amendment could not have believed capital punishment to be cruel and unusual. If that’s what they believed then, why, having passed the Eighth amendment, did the first Congress proceed to impose the death penalty for treason, counterfeiting and other offenses in 1790? So it seems obvious that the authors of Eighth Amendment did not intend to ban capital punishment. If so, originalists argue, the “cruel and unusual” provision of the Eighth Amendment can provide no ground for ruling that capital punishment violates the Eighth Amendment.

There are a lot of problems with the original-intent version of originalism, the most obvious being the impossibility of attributing an unambiguous intention to the 50 or so delegates to the Constitutional Convention who signed the final document. The Constitutional text that emerged from the Convention was a compromise among many competing views and interests, and it did not necessarily conform to the intentions of any of the delegates, much less all of them. True, James Madison was the acknowledged author of the Bill of Rights, so if we are parsing the Eighth Amendment, we might, in theory, focus exclusively on what he understood the Eighth Amendment to mean. But focusing on Madison alone would be problematic, because Madison actually opposed adding a Bill of Rights to the original Constitution; Madison introduced the Bill of Rights as amendments to the Constitution in the first Congress, only because the Constitution would not have been approved without an understanding that the Bill of Rights that Madison had opposed would be adopted as amendments to the Constitution. The inherent ambiguity in the notion of intention, even in the case of a single individual acting out of mixed, if not conflicting, motives – an ambiguity compounded when action is undertaken collectively by individuals – causes the notion of original intent to dissolve into nothingness when one tries to apply it in practice.

Realizing that trying to determine the original intent of the authors of the Constitution (including the Amendments thereto) is a fool’s errand, many originalists, including Justice Scalia, tried to salvage the doctrine by shifting its focus from the inscrutable intent of the Framers to the objective meaning that a reasonable person would have attached to the provisions of the Constitution when it was ratified. Because the provisions of the Constitution are either ordinary words or legal terms, the meaning that would reasonably have been attached to those provisions can supposedly be ascertained by consulting the contemporary sources, either dictionaries or legal treatises, in which those words or terms were defined. It is this original meaning that, according to Scalia, must remain forever inviolable, because to change the meaning of provisions of the Constitution would allow unelected judges to covertly amend the Constitution, evading the amendment process spelled out in Article V of the Constitution, thereby nullifying the principle of a written constitution that constrains the authority and powers of all branches of government. Instead of being limited by the Constitution, judges not bound by the original meaning arrogate to themselves an unchecked power to impose their own values on the rest of the country.

To return to the Eighth Amendment, Scalia would say that the meaning attached to the term “cruel and unusual” when the Eighth Amendment was passed was clearly not so broad that it prohibited capital punishment. Otherwise, how could Congress, having voted to adopt the Eighth Amendment, proceed to make counterfeiting and treason and several other federal offenses capital crimes? Of course that’s a weak argument, because Congress, like any other representative assembly is under no obligation or constraint to act consistently. It’s well known that democratic decision-making need not be consistent, and just because a general principle is accepted doesn’t mean that the principle will not be violated in specific cases. A written Constitution is supposed to impose some discipline on democratic decision-making for just that reason. But there was no mechanism in place to prevent such inconsistency, judicial review of Congressional enactments not having become part of the Constitutional fabric until John Marshall’s 1803 opinion in Marbury v. Madison made judicial review, quite contrary to the intention of many of the Framers, an organic part of the American system of governance.

Indeed, in 1798, less than ten years after the Bill of Rights was adopted, Congress enacted the Alien and Sedition Acts, which, I am sure even Justice Scalia would have acknowledged, violated the First Amendment prohibition against abridging the freedom of speech and the press. To be sure, the Congress that passed the Alien and Sedition Acts was not the same Congress that passed the Bill of Rights, but one would hardly think that the original meaning of abridging freedom of speech and the press had been forgotten in the intervening decade. Nevertheless, to uphold his version of originalism, Justice Scalia would have to argue either that the original meaning of the First Amendment had been forgotten or acknowledge that one can’t simply infer from the actions of a contemporaneous or nearly contemporaneous Congress what the original meaning of the provisions of the Constitution were, because it is clearly possible that the actions of Congress could have been contrary to some supposed original meaning of the provisions of the Constitution.

Be that as it may, for purposes of the following discussion, I will stipulate that we can ascertain an objective meaning that a reasonable person would have attached to the provisions of the Constitution at the time it was ratified. What I want to examine is Scalia’s idea that it is an abuse of judicial discretion for a judge to assign a meaning to any Constitutional term or provision that is different from that original meaning. To show what is wrong with Scalia’s doctrine, I must first explain that Scalia’s doctrine is based on legal philosophy known as legal positivism. Whether Scalia realized that he was a legal positivist I don’t know, but it’s clear that Scalia was taking the view that the validity and legitimacy of a law or a legal provision or a legal decision (including a Constitutional provision or decision) derives from an authority empowered to make law, and that no one other than an authorized law-maker or sovereign is empowered to make law.

According to legal positivism, all law, including Constitutional law, is understood as an exercise of will – a command. What distinguishes a legal command from, say, a mugger’s command to a victim to turn over his wallet is that the mugger is not a sovereign. Not only does the sovereign get what he wants, the sovereign, by definition, gets it legally; we are not only forced — compelled — to obey, but, to add insult to injury, we are legally obligated to obey. And morality has nothing to do with law or legal obligation. That’s the philosophical basis of legal positivism to which Scalia, wittingly or unwittingly, subscribed.

Luckily for us, we Americans live in a country in which the people are sovereign, but the power of the people to exercise their will collectively was delimited and circumscribed by the Constitution ratified in 1788. Under positivist doctrine, the sovereign people in creating the government of the United States of America laid down a system of rules whereby the valid and authoritative expressions of the will of the people would be given the force of law and would be carried out accordingly. The rule by which the legally valid, authoritative, command of the sovereign can be distinguished from the command of a mere thug or bully is what the legal philosopher H. L. A. Hart called a rule of recognition. In the originalist view, the rule of recognition requires that any judicial judgment accord with the presumed original understanding of the provisions of the Constitution when the Constitution was ratified, thereby becoming the authoritative expression of the sovereign will of the people, unless that original understanding has subsequently been altered by way of the amendment process spelled out in Article V of the Constitution. What Scalia and other originalists are saying is that any interpretation of a provision of the Constitution that conflicts with the original meaning of that provision violates the rule of recognition and is therefore illegitimate. Hence, Scalia’s simmering anger at decisions of the court that he regarded as illegitimate departures from the original meaning of the Constitution.

But legal positivism is not the only theory of law. F. A. Hayek, who, despite his good manners, somehow became a conservative and libertarian icon a generation before Scalia, subjected legal positivism to withering criticism in volume one of Law Legislation and Liberty. But the classic critique of legal positivism was written a little over a half century ago by Ronald Dworkin, in his essay “Is Law a System of Rules?” (aka “The Model of Rules“) Dworkin’s main argument was that no system of rules can be sufficiently explicit and detailed to cover all possible fact patterns that would have to be adjudicated by a judge. Legal positivists view the exercise of discretion by judges as an exercise of personal will authorized by the Sovereign in cases in which no legal rule exactly fits the facts of a case. Dworkin argued that rather than an imposition of judicial will authorized by the sovereign, the exercise of judicial discretion is an application of the deeper principles relevant to the case, thereby allowing the judge to determine which, among the many possible rules that could be applied to the facts of the case, best fits with the totality of the circumstances, including prior judicial decisions, the judge must take into account. According to Dworkin, law and the legal system as a whole is not an expression of sovereign will, but a continuing articulation of principles in terms of which specific rules of law must be understood, interpreted, and applied.

The meaning of a legal or Constitutional provision can’t be fixed at a single moment, because, like all social institutions, meaning evolves and develops organically. Not being an expression of the sovereign will, the meaning of a legal term or provision cannot be identified by a putative rule of recognition – e.g., the original meaning doctrine — that freezes the meaning of the term at a particular moment in time. It is not true, as Scalia and originalists argue, that conceding that the meaning of Constitutional terms and provisions can change and evolve allows unelected judges to substitute their will for the sovereign will enshrined when the Constitution was ratified. When a judge acknowledges that the meaning of a term has changed, the judge does so because that new meaning has already been foreshadowed in earlier cases with which his decision in the case at hand must comport. There is always a danger that the reasoning of a judge is faulty, but faulty reasoning can beset judges claiming to apply the original meaning of a term, as Chief Justice Taney did in his infamous Dred Scot opinion in which Taney argued that the original meaning of the term “property” included property in human beings.

Here is an example of how a change in meaning may be required by a change in our understanding of a concept. It may not be the best example to shed light on the legal issues, but it is the one that occurs to me as I write this. About a hundred years ago, Bertrand Russell and Alfred North Whitehead were writing one the great philosophical works of the twentieth century, Principia Mathematica. Their objective was to prove that all of mathematics could be reduced to pure logic. It was a grand and heroic effort that they undertook, and their work will remain a milestone in history of philosophy. If Russell and Whitehead had succeeded in their effort of reducing mathematics to logic, it could properly be said that mathematics is really the same as logic, and the meaning of the word “mathematics” would be no different from the meaning of the word “logic.” But if the meaning of mathematics were indeed the same as that of logic, it would not be the result of Russell and Whitehead having willed “mathematics” and “logic” to mean the same thing, Russell and Whitehead being possessed of no sovereign power to determine the meaning of “mathematics.” Whether mathematics is really the same as logic depends on whether all of mathematics can be logically deduced from a set of axioms. No matter how much Russell and Whitehead wanted mathematics to be reducible to logic, the factual question of whether mathematics can be reduced to logic has an answer, and the answer is completely independent of what Russell and Whitehead wanted it to be.

Unfortunately for Russell and Whitehead, the Viennese mathematician Kurt Gödel came along a few years after they completed the third and final volume of their masterpiece and proved an “incompleteness theorem” showing that mathematics could not be reduced to logic – mathematics is therefore not the same as logic – because in any axiomatized system, some true propositions of arithmetic will be logically unprovable. The meaning of mathematics is therefore demonstrably not the same as the meaning of logic. This difference in meaning had to be discovered; it could not be willed.

Actually, it was Humpty Dumpty who famously anticipated the originalist theory that meaning is conferred by an act of will.

“I don’t know what you mean by ‘glory,’ ” Alice said.
Humpty Dumpty smiled contemptuously. “Of course you don’t—till I tell you. I meant ‘there’s a nice knock-down argument for you!’ ”
“But ‘glory’ doesn’t mean ‘a nice knock-down argument’,” Alice objected.
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to meanan—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

In Humpty Dumpty’s doctrine, meaning is determined by a sovereign master. In originalist doctrine, the sovereign master is the presumed will of the people when the Constitution and the subsequent Amendments were ratified.

So the question whether capital punishment is “cruel and unusual” can’t be answered, as Scalia insisted, simply by invoking a rule of recognition that freezes the meaning of “cruel and unusual” at the presumed meaning it had in 1790, because the point of a rule of recognition is to identify the sovereign will that is given the force of law, while the meaning of “cruel and unusual” does not depend on anyone’s will. If a judge reaches a decision based on a meaning of “cruel and unusual” different from the supposed original meaning, the judge is not abusing his discretion, the judge is engaged in judicial reasoning. The reasoning may be good or bad, right or wrong, but judicial reasoning is not rendered illegitimate just because it assigns a meaning to a term different from the supposed original meaning. The test of judicial reasoning is how well it accords with the totality of judicial opinions and relevant principles from which the judge can draw in supporting his reasoning. Invoking a supposed original meaning of what “cruel and unusual” meant to Americans in 1789 does not tell us how to understand the meaning of “cruel and unusual” just as the question whether logic and mathematics are synonymous cannot be answered by insisting that Russel and Whitehead were right in thinking that mathematics and logic are the same thing. (I note for the record that I personally have no opinion about whether capital punishment violates the Eighth Amendment.)

One reason meanings change is because circumstances change. The meaning of freedom of the press and freedom of speech may have been perfectly clear in 1789, but our conception of what is protected by the First Amendment has certainly expanded since the First Amendment was ratified. As new media for conveying speech have been introduced, the courts have brought those media under the protection of the First Amendment. Scalia made a big deal of joining with the majority in Texas v. Johnson a 1989 case in which the conviction of a flag burner was overturned. Scalia liked to cite that case as proof of his fidelity to the text of the Constitution; while pouring scorn on the flag burner, Scalia announced that despite his righteous desire to exact a terrible retribution from the bearded weirdo who burned the flag, he had no choice but to follow – heroically, in his estimation — the text of the Constitution.

But flag-burning is certainly a form of symbolic expression, and it is far from obvious that the original meaning of the First Amendment included symbolic expression. To be sure some forms of symbolic speech were recognized as speech in the eighteenth century, but it could be argued that the original meaning of freedom of speech and the press in the First Amendment was understood narrowly. The compelling reason for affording flag-burning First Amendment protection is not that flag-burning was covered by the original meaning of the First Amendment, but that a line of cases has gradually expanded the notion of what activities are included under what the First Amendment calls “speech.” That is the normal process by which law changes and meanings change, incremental adjustments taking into account unforeseen circumstances, eventually leading judges to expand the meanings ascribed to old terms, because the expanded meanings comport better with an accumulation of precedents and the relevant principles on which judges have relied in earlier cases.

But perhaps the best example of how changes in meaning emerge organically from our efforts to cope with changing and unforeseen circumstances rather than being the willful impositions of a higher authority is provided by originalism itself, because, “originalism” was originally about the original intention of the Framers of the Constitution. It was only when it became widely accepted that the original intention of the Framers was not something that could be ascertained, that people like Antonin Scalia decided to change the meaning of “originalism,” so that it was no longer about the original intention of the Framers, but about the original meaning of the Constitution when it was ratified. So what we have here is a perfect example of how the meaning of a well-understood term came to be changed, because the original meaning of the term was found to be problematic. And who was responsible for this change in meaning? Why the very same people who insist that it is forbidden to tamper with the original meaning of the terms and provisions of the Constitution. But they had no problem in changing the meaning of their doctrine of Constitutional interpretation. Do I blame them for changing the meaning of the originalist doctrine? Not one bit. But if originalists were only marginally more introspective than they seem to be, they might have realized that changes in meaning are perfectly normal and legitimate, especially when trying to give concrete meaning to abstract terms in a way that best fits in with the entire tradition of judicial interpretation embodied in the totality of all previous judicial decisions. That is the true task of a judge, not a pointless quest for original meaning.

The Free Market Economy Is Awesome and Fragile

Scott Sumner’s three most recent posts (here, here, and here)have been really great, and I’ld like to comment on all of them. I will start with a comment on his post discussing whether the free market economy is stable; perhaps I will get around to the other two next week. Scott uses a 2009 paper by Robert Hetzel as the starting point for his discussion. Hetzel distinguishes between those who view the stabilizing properties of price adjustment as being overwhelmed by real instabilities reflecting fluctuations in consumer and entrepreneurial sentiment – waves of optimism and pessimism – and those who regard the economy as either perpetually in equilibrium (RBC theorists) or just usually in equilibrium (Monetarists) unless destabilized by monetary shocks. Scott classifies himself, along with Hetzel and Milton Friedman, in the latter category.

Scott then brings Paul Krugman into the mix:

Friedman, Hetzel, and I all share the view that the private economy is basically stable, unless disturbed by monetary shocks. Paul Krugman has criticized this view, and indeed accused Friedman of intellectual dishonesty, for claiming that the Fed caused the Great Depression. In Krugman’s view, the account in Friedman and Schwartz’s Monetary History suggests that the Depression was caused by an unstable private economy, which the Fed failed to rescue because of insufficiently interventionist monetary policies. He thinks Friedman was subtly distorting the message to make his broader libertarian ideology seem more appealing.

This is a tricky topic for me to handle, because my own view of what happened in the Great Depression is in one sense similar to Friedman’s – monetary policy, not some spontaneous collapse of the private economy, was what precipitated and prolonged the Great Depression – but Friedman had a partial, simplistic and distorted view of how and why monetary policy failed. And although I believe Friedman was correct to argue that the Great Depression did not prove that the free market economy is inherently unstable and requires comprehensive government intervention to keep it from collapsing, I think that his account of the Great Depression was to some extent informed by his belief that his own simple k-percent rule for monetary growth was a golden bullet that would ensure economic stability and high employment.

I’d like to first ask a basic question: Is this a distinction without a meaningful difference? There are actually two issues here. First, does the Fed always have the ability to stabilize the economy, or does the zero bound sometimes render their policies impotent?  In that case the two views clearly do differ. But the more interesting philosophical question occurs when not at the zero bound, which has been the case for all but one postwar recession. In that case, does it make more sense to say the Fed caused a recession, or failed to prevent it?

Here’s an analogy. Someone might claim that LeBron James is a very weak and frail life form, whose legs will cramp up during basketball games without frequent consumption of fluids. Another might suggest that James is a healthy and powerful athlete, who needs to drink plenty of fluids to perform at his best during basketball games. In a sense, both are describing the same underlying reality, albeit with very different framing techniques. Nonetheless, I think the second description is better. It is a more informative description of LeBron James’s physical condition, relative to average people.

By analogy, I believe the private economy in the US is far more likely to be stable with decent monetary policy than is the economy of Venezuela (which can fall into depression even with sufficiently expansionary monetary policy, or indeed overly expansionary policies.)

I like Scott’s LeBron James analogy, but I have two problems with it. First, although LeBron James is a great player, he’s not perfect. Sometimes, even he messes up. When he messes up, it may not be his fault, in the sense that, with better information or better foresight – say, a little more rest in the second quarter – he might have sunk the game-winning three-pointer at the buzzer. Second, it’s one thing to say that a monetary shock caused the Great Depression, but maybe we just don’t know how to avoid monetary shocks. LeBron can miss shots, so can the Fed. Milton Friedman certainly didn’t know how to avoid monetary shocks, because his pet k-percent rule, as F. A. Hayek shrewdly observed, was a simply a monetary shock waiting to happen. And John Taylor certainly doesn’t know how to avoid monetary shocks, because his pet rule would have caused the Fed to raise interest rates in 2011 with possibly devastating consequences. I agree that a nominal GDP level target would have resulted in a monetary policy superior to the policy the Fed has been conducting since 2008, but do I really know that? I am not sure that I do. The false promise held out by Friedman was that it is easy to get monetary policy right all the time. It certainly wasn’t the case for Friedman’s pet rule, and I don’t think that there is any monetary rule out there that we can be sure will keep us safe and secure and fully employed.

But going beyond the LeBron analogy, I would make a further point. We just have no theoretical basis for saying that the free-market economy is stable. We can prove that, under some assumptions – and it is, to say the least, debatable whether the assumptions could properly be described as reasonable – a model economy corresponding to the basic neoclassical paradigm can be solved for an equilibrium solution. The existence of an equilibrium solution means basically that the neoclassical model is logically coherent, not that it tells us much about how any actual economy works. The pieces of the puzzle could all be put together in a way so that everything fits, but that doesn’t mean that in practice there is any mechanism whereby that equilibrium is ever reached or even approximated.

The argument for the stability of the free market that we learn in our first course in economics, which shows us how price adjusts to balance supply and demand, is an argument that, when every market but one – well, actually two, but we don’t have to quibble about it – is already in equilibrium, price adjustment in the remaining market – if it is small relative to the rest of the economy – will bring that market into equilibrium as well. That’s what I mean when I refer to the macrofoundations of microeconomics. But when many markets are out of equilibrium, even the markets that seem to be equilibrium (with amounts supplied and demanded equal) are not necessarily in equilibrium, because the price adjustments in other markets will disturb the seeming equilibrium of the markets in which supply and demand are momentarily equal. So there is not necessarily any algorithm, either in theory or in practice, by which price adjustments in individual markets would ever lead the economy into a state of general equilibrium. If we believe that the free market economy is stable, our belief is therefore not derived from any theoretical proof of the stability of the free market economy, but simply on an intuition, and some sort of historical assessment that free markets tend to work well most of the time. I would just add that, in his seminal 1937 paper, “Economics and Knowledge,” F. A. Hayek actually made just that observation, though it is not an observation that he, or most of his followers – with the notable and telling exceptions of G. L. S. Shackle and Ludwig Lachmann – made a big fuss about.

Axel Leijonhufvud, who is certainly an admirer of Hayek, addresses the question of the stability of the free-market economy in terms of what he calls a corridor. If you think of an economy moving along a time path, and if you think of the time path that would be followed by the economy if it were operating at a full-employment equilibrium, Leijonjhufvud’s corridor hypothesis is that the actual time path of the economy tends to revert to the equilibrium time path as long as deviations from the equilibrium are kept within certain limits, those limits defining the corridor. However, if the economy, for whatever reasons (exogenous shocks or some other mishaps) leaves the corridor, the spontaneous equilibrating tendencies causing the actual time path to revert back to the equilibrium time path may break down, and there may be no further tendency for the economy to revert back to its equilibrium time path. And as I pointed out recently in my post on Earl Thompson’s “Reformulation of Macroeconomic Theory,” he was able to construct a purely neoclassical model with two potential equilibria, one of which was unstable so that a shock form the lower equilibrium would lead either to a reversion to the higher-level equilibrium or to downward spiral with no endogenous stopping point.

Having said all that, I still agree with Scott’s bottom line: if the economy is operating below full employment, and inflation and interest rates are low, there is very likely a problem with monetary policy.

The Well-Defined, but Nearly Useless, Natural Rate of Interest

Tyler Cowen recently posted a diatribe against the idea monetary policy should be conducted by setting the interest rate target of the central bank at or near the natural rate of interest. Tyler’s post elicited critical responses from Brad DeLong and Paul Krugman among others. I sympathize with Tyler’s impatience with the natural rate of interest as a guide to policy, but I think the scattershot approach he took in listing, seemingly at random, seven complaints against the natural rate of interest was not the best way to register dissatisfaction with the natural rate. Here’s Tyler’s list of seven complaints.

1 Knut Wicksell, inventor of the term “natural rate of interest,” argued that if the central bank set its target rate equal to the natural rate, it would avoid inflation and deflation and tame the business cycle. Wicksell’s argument was criticized by his friend and countryman David Davidson who pointed out that, with rising productivity, price stability would not result without monetary expansion, which would require the monetary authority to reduce its target rate of interest below the natural rate to induce enough investment to be financed by monetary expansion. Thus, when productivity is rising, setting the target rate of interest equal to the natural rate leads not to price stability, but to deflation.

2 Keynes rejected the natural rate as a criterion for monetary policy, because the natural rate is not unique. The natural rate varies with the level of income and employment.

3 Early Keynesians like Hicks, Hansen, and Modigliani rejected the natural rate as well.

4 The meaning of the natural rate has changed; it was once the rate that would result in a stable price level; now it’s the rate that results in a stable rate of inflation.

5 Friedman also rejected the natural rate because there is no guarantee that setting the target rate equal to the natural rate will result in the rate of money growth that Freidman believed was desirable.

6 Sraffa debunked the natural rate in his 1932 review of Hayek’s Prices and Production.

7 It seems implausible that the natural rate is now negative, as many exponents of the natural rate concept now claim, even though the economy is growing and the marginal productivity of capital is positive.

Let me try to tidy all this up a bit.

The first thing you need to know when thinking about the natural rate is that, like so much else in economics, you will become hopelessly confused if you don’t keep the Fisher equation, which decomposes the nominal rate of interest into the real rate of interest and the expected rate of inflation, in clear sight. Once you begin thinking about the natural rate in the context of the Fisher equation, it becomes obvious that the natural rate can be thought of coherently as either a real rate or a nominal rate, but the moment you are unclear about whether you are talking about a real natural rate or a nominal natural rate, you’re finished.

Thus, Wicksell was implicitly thinking about a situation in which expected inflation is zero so that the real and nominal natural rates coincide. If the rate of inflation is correctly expected to be zero, and the increase in productivity is also correctly expected, the increase in the quantity of money required to sustain a constant price level can be induced by the payment of interest on cash balances. Alternatively, if the payment of interest on cash balances is ruled out, the rate of capital accumulation (forced savings) could be increased sufficiently to cause the real natural interest rate under a constant price level to fall below the real natural interest rate under deflation.

In the Sraffa-Hayek episode, as Paul Zimmerman and I have shown in our paper on that topic, Sraffa failed to understand that the multiplicity of own rates of interest in a pure barter economy did not mean that there was not a unique real natural rate toward which arbitrage would force all the individual own rates to converge. At any moment, therefore, there is a unique real natural rate in a barter economy if arbitrage is operating to equalize the cost of borrowing in terms of every commodity. Moreover, even Sraffa did not dispute that, under Wicksell’s definition of the natural rate as the rate consistent with a stable price level, there is a unique natural rate. Sraffa’s quarrel was only with Hayek’s use of the natural rate, inasmuch as Hayek maintained that the natural rate did not imply a stable price level. Of course, Hayek was caught in a contradiction that Sraffa overlooked, because he identified the real natural rate with an equal nominal rate, so that he was implicitly assuming a constant expected price level even as he was arguing that the neutral monetary policy corresponding to setting the market interest rate equal to the natural rate would imply deflation when productivity was increasing.

I am inclined to be critical Milton Friedman about many aspects of his monetary thought, but one of his virtues as a monetary economist was that he consistently emphasized Fisher’s  distinction between real and nominal interest rates. The point that Friedman was making in the passage quoted by Tyler was that the monetary authority is able to peg nominal variables, prices, inflation, exchange rates, but not real variables, like employment, output, or interest rates. Even pegging the nominal natural rate is impossible, because inasmuch as the goal of targeting a nominal natural rate is to stabilize the rate of inflation, targeting the nominal natural rate also means targeting the real natural rate. But targeting the real natural rate is not possible, and trying to do so will just get you into trouble.

So Tyler should not be complaining about the change in the meaning of the natural rate; that change simply reflects the gradual penetration of the Fisher equation into the consciousness of the economics profession. We now realize that, given the real natural rate, there is, for every expected rate of inflation, a corresponding nominal natural rate.

Keynes made a very different contribution to our understanding of the natural rate. He was that there is no reason to assume that the real natural rate of interest is unique. True, at any moment there is some real natural rate toward which arbitrage is forcing all nominal rates to converge. But that real natural rate is a function of the prevailing economic conditions. Keynes believed that there are multiple equilibria, each corresponding to a different level of employment, and that associated with each of those equilibria there could be a different real natural rate. Nowadays, we are less inclined than was Keynes to call an underemployment situation an equilibrium, but there is still no reason to assume that the real natural rate that serves as an attractor for all nominal rates is independent of the state of the economy. If the real natural rate for an underperforming economy is less than the real natural rate that would be associated with the economy if it were in the neighborhood of an optimal equilibrium, there is no reason why either the real natural rate corresponding to an optimal equilibrium or the real natural rate corresponding to the current sub-optimal state of economy should be the policy rate that the monetary authority chooses as its target.

Finally, what can be said about Tyler’s point that it is implausible to suggest that the real natural rate is negative when the economy is growing (even slowly) and the marginal productivity of capital is positive? Two points.

First, the marginal productivity of gold is very close to zero. If gold is held as bullion, it is being held for expected appreciation over and above the cost of storage. So the ratio of the future price of gold to the spot price of gold should equal one plus the real rate of interest. If you look at futures prices for gold you will see that they are virtually the same as the spot price. However, storing gold is not costless. According to this article on Bloomberg.com, storage costs for gold range between 0.5 to 1% of the value of gold, implying that expected rate of return to holding gold is now less than -0.5% a year, which means that the marginal productivity of real capital is negative. Sure there are plenty of investments out there that are generating positive returns, but those are inframarginal investments. Those inframarginal investments are generating some net gain in productivity, and overall economic growth is positive, but that doesn’t mean that the return on investment at the margin is positive. At the margin, the yield on real capital seems to be negative.

If, as appears likely, our economy is underperforming, estimates of the real natural rate of interest are not necessarily an appropriate guide for the monetary authority in choosing its target rate of interest. If the aim of monetary policy is to nudge the economy onto a feasible growth path that is above the sub-optimal path along which it is currently moving, it might well be that the appropriate interest-rate target, as long as the economy remains below its optimal growth path, would be less than the natural rate corresponding to the current sub-optimal growth path.

Exposed: Milton Friedman’s Cluelessness about the Insane Bank of France

About a month ago, I started a series of posts about monetary policy in the 1920s, (about the Bank of France, Benjamin Strong, the difference between a gold-exchange standard and a gold standard, and Ludwig von Mises’s unwitting affirmation of the Hawtrey-Cassel explanation of the Great Depression). The series was not planned, each post being written as new ideas occurred to me or as I found interesting tidbits (about Strong and Mises) in reading stuff I was reading about the Bank of France or the gold-exchange standard.

Another idea that occurred to me was to look at the 1991 English translation of the memoirs of Emile Moreau, Governor of the Bank of France from 1926 to 1930; I managed to find a used copy for sale on Amazon, which I got in the mail over the weekend. I have only read snatches here and there, by looking up names in the index, and we’ll see when I get around to reading the book from cover to cover. One of the more interesting things about the book is the foreward to the English translation by Milton Friedman (and one by Charles Kindleberger as well) to go along with the preface to the 1954 French edition by Jacques Rueff (about which I may have something to say in a future post — we’ll see about that, too).

Friedman’s foreward to Moreau’s memoir is sometimes cited as evidence that he backtracked from his denial in the Monetary History that the Great Depression had been caused by international forces, Friedman insisting that there was actually nothing special about the initial 1929 downturn and that the situation only got out of hand in December 1930 when the Fed foolishly (or maliciously) allowed the Bank of United States to fail, triggering a wave of bank runs and bank failures that caused a sharp decline in the US money stock. According to Friedman it was only at that point that what had been a typical business-cycle downturn degenerated into what Friedman like to call the Great Contraction.

Friedman based his claim that domestic US forces, not an international disturbance, had caused the Great Depression on the empirical observation that US gold reserves increased in 1929; that’s called reasoning from a quantity change. From that fact, Friedman inferred that international forces could not have caused the 1929 downturn, because an international disturbance would have meant that the demand for gold would have increased in the international centers associated with the disturbance, in which case gold would have been flowing out of, not into, the US. In a 1985 article in AER, Gertrude Fremling pointed out an obvious problem with Friedman’s argument which was that gold was being produced every year, and some of the newly produced gold was going into the reserves of central banks. An absolute increase in US gold reserves did not necessarily signify a monetary disturbance in the US. In fact, Fremling showed that US gold reserves actually increased proportionately less than total gold reserves. Unfortunately, Fremling failed to point out that there was a flood of gold pouring into France in 1929, making it easier for Friedman to ignore the problem with his misidentification of the US as the source of the Great Depression.

With that introduction out of the way, let me now quote Friedman’s 1991 acknowledgment that the Bank of France played some role in causing the Great Depression.

Rereading the memoirs of this splendid translation . . . has impressed me with important subtleties that I missed when I read the memoirs in a language not my own and in which I am far from completely fluent. Had I fully appreciated those subtleties when Anna Schwartz and I were writing our A Monetary History of the United States, we would likely have assessed responsibility for the international character of the Great Depression somewhat differently. We attributed responsibility for the initiation of a worldwide contraction to the United States and I would not alter that judgment now. However, we also remarked, “The international effects were severe and the transmission rapid, not only because the gold-exchange standard had rendered the international financial system more vulnerable to disturbances, but also because the United States did not follow gold-standard rules.” Were I writing that sentence today, I would say “because the United States and France did not follow gold-standard rules.”

I find this minimal adjustment by Friedman of his earlier position in the Monetary History totally unsatisfactory. Why do I find it unsatisfactory? To begin with, Friedman makes vague references to unnamed but “important subtleties” in Moreau’s memoir that he was unable to appreciate before reading the 1991 translation. There was nothing subtle about the gold accumulation being undertaken by the Bank of France; it was massive and relentless. The table below is constructed from data on official holdings of monetary gold reserves from December 1926 to June 1932 provided by Clark Johnson in his important book Gold, France, and the Great Depression, pp. 190-93. In December 1926 France held $711 million in gold or 7.7% of the world total of official gold reserves; in June 1932, French gold holdings were $3.218 billion or 28.4% of the world total.

monetary_gold_reservesWhat was it about that policy that Friedman didn’t get? He doesn’t say. What he does say is that he would not alter his previous judgment that the US was responsible “for the initiation of a worldwide contraction.” The only change he would make would be to say that France, as well as the US, contributed to the vulnerability of the international financial system to unspecified disturbances, because of a failure to follow “gold-standard rules.” I will just note that, as I have mentioned many times on this blog, references to alleged “gold standard rules” are generally not only unhelpful, but confusing, because there were never any rules as such to the gold standard, and what are termed “gold-standard rules” are largely based on a misconception, derived from the price-specie-flow fallacy, of how the gold standard actually worked.

My goal in this post was not to engage in more Friedman bashing. What I wanted to do was to clarify the underlying causes of Friedman’s misunderstanding of what caused the Great Depression. But I have to admit that sometimes Friedman makes it hard not to engage in Friedman bashing. So let’s examine another passage from Friedman’s foreward, and see where that takes us.

Another feature of Moreau’s book that is most fascinating . . . is the story it tells of the changing relations between the French and British central banks. At the beginning, with France in desperate straits seeking to stabilize its currency, [Montagu] Norman [Governor of the Bank of England] was contemptuous of France and regarded it as very much of a junior partner. Through the accident that the French currency was revalued at a level that stimulated gold imports, France started to accumulate gold reserves and sterling reserves and gradually came into the position where at any time Moreau could have forced the British off gold by withdrawing the funds he had on deposit at the Bank of England. The result was that Norman changed from being a proud boss and very much the senior partner to being almost a supplicant at the mercy of Moreau.

What’s wrong with this passage? Well, Friedman was correct about the change in the relative positions of Norman and Moreau from 1926 to 1928, but to say that it was an accident that the French currency was revalued at a level that stimulated gold imports is completely — and in this case embarrassingly — wrong, and wrong in two different senses: one strictly factual, and the other theoretical. First, and most obviously, the level at which the French franc was stabilized — 125 francs per pound — was hardly an accident. Indeed, it was precisely the choice of the rate at which to stabilize the franc that was a central point of Moreau’s narrative in his memoir, a central drama of the tale told by Moreau, more central than the relationship between Norman and Moreau, being the struggle between Moreau and his boss, the French Premier, Raymond Poincaré, over whether the franc would be stabilized at that rate, the rate insisted upon by Moreau, or the prewar parity of 25 francs per pound. So inquiring minds can’t help but wonder what exactly did Friedman think he was reading?

The second sense in which Friedman’s statement was wrong is that the amount of gold that France was importing depended on a lot more than just its exchange rate; it was also a function of a) the monetary policy chosen by the Bank of France, which determined the total foreign-exchange holdings held by the Bank of France, and b) the portfolio decisions of the Bank of France about how, given the exchange rate of the franc and given the monetary policy it adopted, the resulting quantity of foreign-exchange reserves would be held.

Let’s follow Friedman a bit further in his foreward as he quotes from his own essay “Should There Be an Independent Monetary Authority?” contrasting the personal weakness of W. P. G. Harding, Governor of the Federal Reserve in 1919-20, with the personal strength of Moreau:

Almost every student of the period is agreed that the great mistake of the Reserve System in postwar monetary policy was to permit the money stock to expand very rapidly in 1919 and then to step very hard on the brakes in 1920. This policy was almost surely responsible for both the sharp postwar rise in prices and the sharp subsequent decline. It is amusing to read Harding’s answer in his memoirs to criticism that was later made of the policies followed. He does not question that alternative policies might well have been preferable for the economy as a whole, but emphasizes the treasury’s desire to float securities at a reasonable rate of interest, and calls attention to a then-existing law under which the treasury could replace the head of the Reserve System. Essentially he was saying the same thing that I heard another member of the Reserve Board say shortly after World War II when the bond-support program was in question. In response to the view expressed by some of my colleagues and myself that the bond-support program should be dropped, he largely agreed but said ‘Do you want us to lose our jobs?’

The importance of personality is strikingly revealed by the contrast between Harding’s behavior and that of Emile Moreau in France under much more difficult circumstances. Moreau formally had no independence whatsoever from the central government. He was named by the premier, and could be discharged at any time by the premier. But when he was asked by the premier to provide the treasury with funds in a manner that he considered inappropriate and undesirable, he flatly refused to do so. Of course, what happened was that Moreau was not discharged, that he did not do what the premier had asked him to, and that stabilization was rather more successful.

Now, if you didn’t read this passage carefully, in particular the part about Moreau’s threat to resign, as I did not the first three or four times that I read it, you might not have noticed what a peculiar description Friedman gives of the incident in which Moreau threatened to resign following a request “by the premier to provide the treasury with funds in a manner that he considered inappropriate and undesirable.” That sounds like a very strange request for the premier to make to the Governor of the Bank of France. The Bank of France doesn’t just “provide funds” to the Treasury. What exactly was the request? And what exactly was “inappropriate and undesirable” about that request?

I have to say again that I have not read Moreau’s memoir, so I can’t state flatly that there is no incident in Moreau’s memoir corresponding to Friedman’s strange account. However, Jacques Rueff, in his preface to the 1954 French edition (translated as well in the 1991 English edition), quotes from Moreau’s own journal entries how the final decision to stabilize the French franc at the new official parity of 125 per pound was reached. And Friedman actually refers to Rueff’s preface in his foreward! Let’s read what Rueff has to say:

The page for May 30, 1928, on which Mr. Moreau set out the problem of legal stabilization, is an admirable lesson in financial wisdom and political courage. I reproduce it here in its entirety with the hope that it will be constantly present in the minds of those who will be obliged in the future to cope with French monetary problems.

“The word drama may sound surprising when it is applied to an event which was inevitable, given the financial and monetary recovery achieved in the past two years. Since July 1926 a balanced budget has been assured, the National Treasury has achieved a surplus and the cleaning up of the balance sheet of the Bank of France has been completed. The April 1928 elections have confirmed the triumph of Mr. Poincaré and the wisdom of the ideas which he represents. The political situation has been stabilized. Under such conditions there is nothing more natural than to stabilize the currency, which has in fact already been pegged at the same level for the last eighteen months.

“But things are not quite that simple. The 1926-28 recovery from restored confidence to those who had actually begun to give up hope for their country and its capacity to recover from the dark hours of July 1926. . . . perhaps too much confidence.

“Distinguished minds maintained that it was possible to return the franc to its prewar parity, in the same way as was done with the pound sterling. And how tempting it would be to thereby cancel the effects of the war and postwar periods and to pay back in the same currency those who had lent the state funds which for them often represented an entire lifetime of unremitting labor.

“International speculation seemed to prove them right, because it kept changing its dollars and pounds for francs, hoping that the franc would be finally revalued.

“Raymond Poincaré, who was honesty itself and who, unlike most politicians, was truly devoted to the public interest and the glory of France, did, deep in his heart, agree with those awaiting a revaluation.

“But I myself had to play the ungrateful role of representative of the technicians who knew that after the financial bloodletting of the past years it was impossible to regain the original parity of the franc.

“I was aware, as had already been determined by the Committee of Experts in 1926, that it was impossible to revalue the franc beyond certain limits without subjecting the national economy to a particularly painful readaptation. If we were to sacrifice the vital force of the nation to its acquired wealth, we would put at risk the recovery we had already accomplished. We would be, in effect, preparing a counterspeculation against our currency that would come within a rather short time.

“Since the parity of 125 francs to one pound has held for long months and the national economy seems to have adapted itself to it, it should be at this rate that we stabilize without further delay.

“This is what I had to tell Mr. Poincaré at the beginning of June 1928, tipping the scales of his judgment with the threat of my resignation.” [my emphasis]

So what this tells me is that the very act of personal strength that so impressed Friedman about Moreau was not about some imaginary “inappropriate” request made by Poincaré (“who was honesty itself”) for the Bank to provide funds to the treasury, but about whether the franc should be stabilized at 125 francs per pound, a peg that Friedman asserts was “accidental.” Obviously, it was not “accidental” at all, but it was based on the judgment of Moreau and his advisers (including two economists of considerable repute, Charles Rist and his student Pierre Quesnay) as attested to by Rueff in his preface, of which we know that Friedman was aware.

Just to avoid misunderstanding, I would just say here that I am not suggesting that Friedman was intentionally misrepresenting any facts. I think that he was just being very sloppy in assuming that the facts actually were what he rather cluelessly imagined them to be.

Before concluding, I will quote again from Friedman’s foreword:

Benjamin Strong and Emile Moreau were admirable characters of personal force and integrity. But in my view, the common policies they followed were misguided and contributed to the severity and rapidity of transmission of the U.S. shock to the international community. We stressed that the U.S. “did not permit the inflow of gold to expand the U.S. money stock. We not only sterilized it, we went much further. Our money stock moved perversely, going down as the gold stock went up” from 1929 to 1931. France did the same, both before and after 1929.

Strong and Moreau tried to reconcile two ultimately incompatible objectives: fixed exchange rates and internal price stability. Thanks to the level at which Britain returned to gold in 1925, the U.S. dollar was undervalued, and thanks to the level at which France returned to gold at the end of 1926, so was the French franc. Both countries as a result experienced substantial gold inflows. Gold-standard rules called for letting the stock of money rise in response to the gold inflows and for price inflation in the U.S. and France, and deflation in Britain, to end the over-and under-valuations. But both Strong and Moreau were determined to preven t inflation and accordingly both sterilized the gold inflows, preventing them from providing the required increase in the quantity of money. The result was to drain the other central banks of the world of their gold reserves, so that they became excessively vulnerable to reserve drains. France’s contribution to this process was, I now realize, much greater than we treated it as being in our History.

These two paragraphs are full of misconceptions; I will try to clarify and correct them. First Friedman refers to “the U.S. shock to the international community.” What is he talking about? I don’t know. Is he talking about the crash of 1929, which he dismissed as being of little consequence for the subsequent course of the Great Depression, whose importance in Friedman’s view was certainly far less than that of the failure of the Bank of United States? But from December 1926 to December 1929, total monetary gold holdings in the world increased by about $1 billion; while US gold holdings declined by nearly $200 million, French holdings increased by $922 million over 90% of the increase in total world official gold reserves. So for Friedman to have even suggested that the shock to the system came from the US and not from France is simply astonishing.

Friedman’s discussion of sterilization lacks any coherent theoretical foundation, because, working with the most naïve version of the price-specie-flow mechanism, he imagines that flows of gold are entirely passive, and that the job of the monetary authority under a gold standard was to ensure that the domestic money stock would vary proportionately with the total stock of gold. But that view of the world ignores the possibility that the demand to hold money in any country could change. Thus, Friedman, in asserting that the US money stock moved perversely from 1929 to 1931, going down as the gold stock went up, misunderstands the dynamic operating in that period. The gold stock went up because, with the banking system faltering, the public was shifting their holdings of money balances from demand deposits to currency. Legal reserves were required against currency, but not against demand deposits, so the shift from deposits to currency necessitated an increase in gold reserves. To be sure the US increase in the demand for gold, driving up its value, was an amplifying factor in the worldwide deflation, but total US holdings of gold from December 1929 to December 1931 rose by $150 million compared with an increase of $1.06 billion in French holdings of gold over the same period. So the US contribution to world deflation at that stage of the Depression was small relative to that of France.

Friedman is correct that fixed exchange rates and internal price stability are incompatible, but he contradicts himself a few sentences later by asserting that Strong and Moreau violated gold-standard rules in order to stabilize their domestic price levels, as if it were the gold-standard rules rather than market forces that would force domestic price levels into correspondence with a common international level. Friedman asserts that the US dollar was undervalued after 1925 because the British pound was overvalued, presuming with no apparent basis that the US balance of payments was determined entirely by its trade with Great Britain. As I observed above, the exchange rate is just one of the determinants of the direction and magnitude of gold flows under the gold standard, and, as also pointed out above, gold was generally flowing out of the US after 1926 until the ferocious tightening of Fed policy at the end of 1928 and in 1929 caused a sizable inflow of gold into the US in 1929.

In thrall to the crude price-specie-flow fallacy, Friedman erroneously assumes that inflation rates under the gold standard are governed by the direction and size of gold flows, inflows being inflationary and outflows deflationary. That is just wrong; national inflation rates were governed by a common international price level in terms of gold (and any positive or negative inflation in terms of gold) and whether prices in the local currency were above or below their gold equivalents, market forces operating to equalize the prices of tradable goods. Domestic monetary policies, whether or not they conformed to supposed gold standard rules, had negligible effect on national inflation rates. If the pound was overvalued, there was deflationary pressure in Britain regardless of whether British monetary policy was tight or easy, and if the franc was undervalued there was inflationary pressure in France regardless of whether French monetary policy was tight or easy. Tightness or ease of monetary policy under the gold standard affects not the rate of inflation, but the rate at which the central bank gained or lost foreign exchange reserves.

However, when, in the aggregate, central banks were tightening their policies, thereby tending to accumulate gold, the international gold market would come under pressure, driving up the value of gold relative goods, thereby causing deflationary pressure among all the gold standard countries. That is what happened in 1929, when the US started to accumulate gold even as the insane Bank of France was acting as a giant international vacuum cleaner sucking in gold from everywhere else in the world. Friedman, even as he was acknowledging that he had underestimated the importance of the Bank of France in the Monetary History, never figured this out. He was obsessed, instead with relatively trivial effects of overvaluation of the pound, and undervaluation of the franc and the dollar. Talk about missing the forest for the trees.

Of course, Friedman was not alone in his cluelessness about the Bank of France. F. A. Hayek, with whom, apart from their common belief in the price-specie-flow fallacy, Friedman shared almost no opinions about monetary theory and policy, infamously defended the Bank of France in 1932.

France did not prevent her monetary circulation from increasing by the very same amount as that of the gold inflow – and this alone is necessary for the gold standard to function.

Thus, like Friedman, Hayek completely ignored the effect that the monumental accumulation of gold by the Bank of France had on the international value of gold. That Friedman accused the Bank of France of violating the “gold-standard rules” while Hayek denied the accusation simply shows, notwithstanding the citations by the Swedish Central Bank of the work that both did on the Great Depression when awarding them their Nobel Memorial Prizes, how far away they both were from an understanding of what was actually going on during that catastrophic period.

In Praise of Israel Kirzner

Over the holiday weekend, I stumbled across, to my pleasant surprise, the lecture given just a week ago by Israel Kirzner on being awarded the 2015 Hayek medal by the Hayek Gesellschaft in Berlin. The medal, it goes without saying, was richly deserved, because Kirzner’s long career spanning over half a century has produced hundreds of articles and many books elucidating many important concepts in various areas of economics, but especially on the role of competition and entrepreneurship (the title of his best known book) in theory and in practice. A student of Ludwig von Mises, when Mises was at NYU in the 1950s, Kirzner was able to recast and rework Mises’s ideas in a way that made them more accessible and more relevant to younger generations of students than were the didactic and dogmatic pronouncements so characteristic of Mises’s own writings. Not that there wasn’t and still isn’t a substantial market niche in which such didacticism and dogmatism is highly prized, but there are also many for whom those features of the Misesian style don’t go down quite so easily.

But it would be very unfair, and totally wrong, to think of Kirzner as a mere popularizer of Misesian doctrines. Although in his modesty and self-effacement, Kirzner made few, if any, claims of originality for himself, his application of ideas that he learned from, or, having developed them himself, read into, Mises, Kirzner’s contributions in their own way were not at all lacking originality and creativity. In a certain sense, his contribution was, in its own way, entrepreneurial, i.e., taking a concept or an idea or an analytical tool applied in one context and deploying that concept, idea, or tool in another context. It’s worth mentioning that a reverential attitude towards one’s teachers and intellectual forbears is not only very much characteristic of the Talmudic tradition of which Kirzner is also an accomplished master, but it’s also characteristic, or at least used to be, of other scholarly traditions, notably Cambridge, England, where such illustrious students of Alfred Marshall as Frederick Lavington and A. C. Pigou viewed themselves as merely elaborating on doctrines that had already been expounded by Marshall himself, Pigou having famously said of his own voluminous work, “it’s all in Marshall.”

But rather than just extol Kirzner’s admirable personal qualities, I want to discuss what Kirzner said in his Hayek lecture. His main point was to explain how, in his view, the Austrian tradition, just as it seemed to be petering out in the late 1930s and 1940s, evolved from just another variant school of thought within the broader neoclassical tradition that emerged late in the 19th century from the marginal revolution started almost simultaneously around 1870 by William Stanley Jevons in England, Carl Menger in Austria, and Leon Walras in France/Switzerland, into a completely distinct school of thought very much at odds with the neoclassical mainstream. In Kirzner’s view, the divergence between Mises and Hayek on the one hand and the neoclassical mainstream on the other was that Mises and Hayek went further in developing the subjectivist paradigm underlying the marginal-utility theory of value introduced by Jevons, Menger, and Walras in opposition to the physicalist, real-cost, theory of value inherited from Smith, Ricardo, Mill, and other economists of the classical school.

The marginal revolution shifted the focus of economics from the objective physical and technological forces that supposedly determine cost, which, in turn, supposedly determines value, to subjective, not objective, mental states or opinions that characterize preferences, which, in turn, determine value. And, as soon became evident, the new subjective marginalist theory of value implied that cost, at bottom, is nothing other than a foregone value (opportunity cost), so that the classical doctrine that cost determines value has it exactly backwards: it is really value that determines cost (though it is usually a mistake to suppose that in complex systems causation runs in only one direction).

However, as the neoclassical research program evolved, the subjective character of the underlying theory was increasingly de-emphasized, a de-emphasis that was probably driven by two factors: 1) the profoundly paradoxical nature of the idea that value determines cost, not the reverse, and b) the mathematicization of economics and the increasing adoption, in the Walrasian style, of functional representations of utility and production, leading to the construction of models of economic equilibrium that, under appropriate continuity and convexity assumptions, could be shown to have a theoretically determinate and unique solution. The false impression was created that economics was an objective science like physics, and that economics should aim to create objective and deterministic scientific representations (models) of complex economic systems that could then yield quantitatively precise predictions, in the same way that physics produced models of planetary motion yielding quantitatively precise predictions.

What Hayek and Mises objected to was the idea, derived from the functional approach to economic theory, that economics is just a technique of optimization subject to constraints, that all economic problems can be reduced to optimization problems. And it is a historical curiosum that one of the chief contributors to this view of economics was none other than Lionel Robbins in his seminal methodological work An Essay on the Nature and Significance of Economic Science, written precisely during that stage of his career when he came under the profound influence of Mises and Hayek, but before Mises and Hayek adopted the more radically subjective approach that characterizes their views in the late 1930s and 1940s. The critical works are Hayek’s essays reproduced as The Counterrevolution of Science and his essays “Economics and Knowledge,” “The Facts of the Social Sciences,” “The Use of Knowledge in Society,” and “The Meaning of Competition,” all contained in the remarkable volume Individualism and Economic Order.

What neoclassical economists who developed this deterministic version of economic theory, a version wonderfully expounded in Samuelson Foundations of Economic Analysis and ultimately embodied in the Arrow-Debreu general-equilibrium model, failed to see is that the model could not incorporate in an intellectually satisfying or empirically fruitful way the process of economic growth and development. The fundamental characteristic of the Arrow-Debreu model is its perfection. The solution of the model is Pareto-optimal, and cannot be improved upon; the entire unfolding of the model from beginning to end proceeds entirely according to a plan (actually a set of perfectly consistent and harmonious individual plans) with no surprises and no disappointments relative to what was already foreseen and planned — in detail — at the outset. Nothing is learned in the unfolding and execution of those detailed, perfectly harmonious plans that was not already known at the beginning, whatever happens having already been foreseen. If something truly new would have been learned in the course of the unfolding and execution of those plans, the new knowledge would necessarily have been surprising, and a surprise would necessarily have generated some disappointment and caused some revision of a previously formulated plan of action. But that is precisely what the Arrow-Debreu model, in its perfection, disallows. And that is what, from the perspective of Mises, Hayek, and Kirzner, is exactly wrong with the entire development of neoclassical theory for the past 80 years or more.

The specific point of the neoclassical paradigm on which Kirzner has focused his criticism is the inability of the neoclassical paradigm to find a place for the entrepreneur and entrepreneurial activity in its theoretical apparatus. Profit is what is earned by the entrepreneur, but in full general equilibrium, all income is earned by factors of production, so profits have been exhausted and the entrepreneur euthanized.

Joseph Schumpeter, who was torn between his admiration for the Walrasian general equilibrium system and his Austrian education in economics, tried to reintroduce the entrepreneur as the disruptive force behind the process of creative destruction, the role of the entrepreneur being to disrupt the harmonious equilibrium of the Walrasian system by innovating – introducing either new techniques of production or new consumer products. Kirzner, however, though not denying that disruptive Schumpeterian entrepreneurs may come on the scene from time to time, is focused on a less disruptive, but more pervasive and more characteristic type of entrepreneurship, the kind that is on the lookout for – that is alert to – the profit opportunities that are always latent in the existing allocation of resources and the current structure of input and output prices. Prices in some places or at some times may be high relative to other places and other times, so the entrepreneurial maxim is: buy cheap and sell dear.

Not so long ago, someone noticed that used book prices on Amazon are typically lower at the end of the semester or the school year, when students are trying to unload the books that they don’t want to keep, than they are at the beginning of the semester, when students are buying the books that they will have to read in the new semester. By buying the books students are selling at the end of the school year and selling them at the beginning of the school year, the insightful entrepreneur reduces the cost to students of obtaining the books they use during the school year. That bit of insight and alertness is classic Kirznerian entrepreneurship in action; it was rewarded by a profit, but the activity was equilibrating, not disruptive, reducing the spread between prices for the same, or very similar, commodities paid by buyers or received by sellers at different times of the year.

Sometimes entrepreneurship involves recognizing that a resource or a factor of production is undervalued in its current use. Shifting the resource from a relatively low-valued use to a higher-value use generates a profit for the alert entrepreneur. Here, again, the activity is equilibrating not disruptive. And as others start to catch on, the profit earned on the spread between the value of the resource in its old and new uses will be eroded by the competition of copy-cat entrepreneurs and of other entrepreneurs with an even better idea derived from an even more penetrating insight.

Here is another critical point. Rarely does a new idea come into existence and cause just one change. Every change creates a new and different situation, potentially creating further opportunities to be taken advantage of by other alert and insightful individuals. In an open competitive system, there is no reason why the process of discovery and adaptation should ever come to an end state in which new insights can no longer be made and change is no longer possible.

However, it also the case that knowledge or information is often imperfect and faulty, and that incentives are imperfectly aligned with actual benefits, so that changes can be profitable even though they lead to inferior outcomes. Margarine can be substituted for butter, and transfats for saturated fats. Big mistake. But who knew? And processed carbohydrates can replace fats in low-fat diets. Big mistake. But who knew?

I myself had the pleasure of experiencing first-hand, on a very small scale to be sure, but still in a very inspiring way, this sort of unplanned, serendipitous connection between my stumbling across Kirzner’s Hayek lecture and, then, after starting to write this post a couple of days ago, doing a Google search on Kirzner plus something else (can’t remember what) and seeing a link to Deirdre McCloskey’s paper “A Kirznerian Economic History of the Modern World” in which McCloskey, in somewhat over-the-top style, waxed eloquent about the long and circuitous evolution of her views from the strict neoclassicism in which she was indoctrinated at Harvard and later at Chicago to Kirznerian Austrianism. McCloskey observes in her wonderful paean to Kirzner that growth theory (which is now the core of modern macroeconomics) is utterly incapable of accounting for the historically unique period of economic growth over the past 200 years in what we now refer to as the developed world.

I had faced repeatedly 1964 to 2010 the failure of oomph in the routine, Samuelsonian arguments, such as accumulation inspired by the Protestant ethic, or trade as an engine of growth, or Marxian exploitation, or imperialism as the last stage of capitalism, or factor-biased induced technical change, or Unified Growth Theory. My colleagues at the University of Chicago in the 1970s, Al Harberger and Bob Fogel, pioneered the point that Harberger Triangles of efficiency gain are small (Harberger 1964; Fogel 1965). None of the allocative, capital-accumulation explanations of economic growth since Adam Smith have worked scientifically, which I show in depressing detail in Bourgeois Dignity. None of them have the quantitative force and the distinctiveness to the modern world and the West to explain the Great Fact. No oomph.

What works? Creativity. Innovation. Discovery. The Austrian core. And where did discovery come from? It came from the releasing of the West from ancient constraints on the dignity and liberty of the bourgeoisie, producing an intellectual and engineering explosion of ideas. As the banker and science writer Matt Ridley has recently described it (2010; compare Storr 2008), ideas started breeding, and having baby ideas, who bred further. The liberation of the Jews in the West is a good emblem for the wider story. A people of the book began to be allowed into commercial centers in Holland and then England, and allowed outside the shtetl and the ghetto, and into the universities of Berlin and Manchester. They commenced innovating on a massive, breeding-reactor scale, in good ways (Rothschild, Einstein) and in bad (Marx, Freud).

Ridley explains how the evolutionary biologist Leigh Van Valen proposed in 1973 a Red Queen Hypothesis that would explain why commercial and mechanical ideas, when first allowed to evolve, had to run faster and faster to stay in the same place. Economists would call it the dissipation of initial rents, in the second and third acts of the economic drama. Once breeding ideas were set free in the seventeenth century they created more and more opportunities for Kirznerian alertness. The opportunities were alertly taken up, and persuasively argued for, and at length routinized. The idea of the steam engine had babies with the idea of rails and the idea of wrought iron, and the result was the railroads. The new generation of ideas-in view of the continuing breeding of ideas going on in the background-created by their very routinization still more Kirznerian opportunities. Railroads once they were routine led to Sears, Roebuck and Montgomery Ward. And the routine then created prosperous people, such as my grandfather the freight conductor on the Milwaukee Road or my great-grandfather the postal clerk on the Chicago & Western Indiana or my other great-grandfather who invented the ring on telephones (which extended the telegraph, which itself had made tight scheduling of trains possible). Some became prosperous enough to take up the new ideas, and all became prosperous enough under the Great Fact to buy them. If there was no dissipation of the rents to alertness, and no ultimate gain of income to hoi polloi, no third act, no Red Queen effect, then innovation would not have a justification on egalitarian grounds-as in the historical event it surely did have. The Bosses would engorge all the income, as Ricardo in the early days of the Great Fact had feared. But in the event the discovery of which Kirzner and the Austrian tradition speaks enriched in the third act mainly the poor-your ancestors, and Israel’s, and mine.

It is the growth and diffusion of knowledge (both practical and theoretical, but especially the former), not the accumulation of capital, that accounts for the spectacular economic growth of the past two centuries. So, all praise to the Austrian economist par excellence, Israel Kirzner. But just to avoid any misunderstanding, I will state for the record, that my admiration for Kirzner does not mean that I have gone wobbly on the subject of Austrian Business Cycle Theory, a subject on which Kirzner has been, so far as I know, largely silent — yet further evidence – as if any were needed — of Kirzner’s impeccable judgment.


About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. 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.

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