Selgin on Henderson and Hummel on Greenspan

George Selgin uses monetary equilibrium theory and the productivity norm (supported by data) to pretty much demolish the David Henderson & Jeff Hummel argument that the Greenspan Fed really wasn't expanding the money supply that much earlier this decade and thus bears little blame for the housing crisis.

A sample:

As I've argued in my pamphlet Less Than Zero and (more briefly) elsewhere, and as many other economists have argued before me, even zero inflation is too much when an economy is experiencing overall improvements in productivity. Sound policy in that case calls for deflation at minus the rate of productivity growth. (The opposite is also true: if productivity declines, prices should be allowed to rise to reflect the new reality of increased unit production costs.) Taking such a "productivity-norm" ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan's Fed may deserve, not only a large share of blame for the housing bubble but the lion's share.

Classic Selgin.

Comments

[Ivan Pongracic, Jr.]

Along these same lines, a very recent piece by Richard Ebeling:

"The Financial Bubble was Created by Central Bank Policy"
http://www.aier.org/research/commentaries/667-the-financial-bubble-was-created-by-central-bank-policy

[matthew mueller]

Could someone provide me with a list of *classic* references on the monetary equilibrium literature?

My impression from reading Steven Horwitz's article on this topic suggests that this analysis is not really Austrian in the sense that it privileges (1) aggregate productivity "norms" over the Hayekian/Lachmann capital structure; and (2) monetary policy over relative price adjustments (which cannot be controlled centrally via the Fed).

Is the notion of a "productivity-norm" consistent with the Austrian interpretation of capital? And can relative price adjustments be managed by the Fed chairman in the form of increases and decreases in the money supply?

[George Selgin]

I find Matthew Muellers questions disconcerting, and not just because I never expected to see "privilege" used as a verb in a discussion of Austrian monetary economics. The productivity norm refers to the overall beghavior of output prices, and its advantages over, say, a norm of zero inflation are precisely that it is less likely to give rise to departures of relative prices from what we might call their "full information" values. It certainly doesn't suppose that central banks are capable of deliberately adjusting relative prices, or that central banking is at all desirable. Pick any monetary system you like, one can still ask how the money stock and general price level will behave in that system, whether that behavior is likely to be associated with any substantial distortions of relative prices, and whether some other arrangement could do better. Indeed, these seem to me to be among the more crucial questions of monetary economics.

[Steve Horwitz]

Matt,

I thought you'd read my book?

[George Selgin]

Ah, so that explains it!

(Just kidding, Steve).

[Dave Prychitko]

Ummm... how about Gunnar Myrdal, Monetary Equilibrium, 1939.

[matthew mueller]

Mr. Selgin,

I wasn't attempting a critique with my post. (I haven't read enough in the literature to really understand what I would want to attack.) You write that:

"The productivity norm refers to the **overall beghavior of output prices**, and its advantages over, say, a norm of zero inflation are precisely that it is less likely to give rise to departures of relative prices from what we might call their "full information" values. ... Pick any monetary system you like, one can still ask how the **money stock and general price level will behave in that system**, whether that behavior is likely to be associated with any substantial distortions of relative prices, and whether some other arrangement could do better. Indeed, these seem to me to be among the more crucial questions of monetary economics."

Now I am confused more than upset or "disconcerted" by this passage. Outside equilibrium, it does not make sense to speak of the productivity of an economy in terms of either the "overall behavior of output prices" or the "general price level." Now a common denominator is needed to "measure" quantitative change in an economy, but the Ausrtians are clear that "money values" cannot provide a valuable standard of measurement. This is because relative price changes disrupt the consistency that is required for this standard unit of "money value."

And Mr. Horwitz, I did read your book. Professor Horwitz was kind enough to mail me a copy of his excellent (and very expensive) Routledge book. Mr. Horwitz is very good on Austrian capital theory, but from what I recall no attempt is made in your book to connect this theory to Mr. Selgin's notion of monetary equilibrium. The natural Austrian response to this research would then be to ask whether "monetary equilibrium" is consistent with "dynamic change."

Again, I am not trying to attack your post; I am aware of your academic accomplishments. I would just like for someone to explain how this is consistent with the Austrian theory of capital.

[Arash Molavi]

Matthew,

you write: "Mr. Horwitz is very good on Austrian capital theory, but from what I recall no attempt is made in your book to connect this theory to Mr. Selgin's notion of monetary equilibrium."

What about part II and III of Horwitz's book, that is, from page 63 to the end of it? Sure you read it?

[Steve Horwitz]

Matt wrote:

"Mr. Horwitz is very good on Austrian capital theory, but from what I recall no attempt is made in your book to connect this theory to Mr. Selgin's notion of monetary equilibrium. The natural Austrian response to this research would then be to ask whether "monetary equilibrium" is consistent with "dynamic change.""

Let's go to the text...

Pages 80-82 are subtitled "Capital-theoretic foundations of monetary equilibrium" and the whole theme of that section is the "sustainability" of the capital structure through time.

[Greg Ransom]

What's Roger Garrison been up to?

[zachary kurtz]

I'm new at this, so please correct me if this is wrong:

Was the problem that Fed policy ensured that real prices weren't able to keep up with the growing rate of production? Was this done by creating monetary inflation by expanding the money supply available to banks?

How would the assumed disparity between real prices and wages and the production rate contribute to the business cycle?

[Steve Horwitz]

The theoretical point is that if productivity is increasing, prices should be falling to reflect that fact. A banking system doing its job should be maintaining monetary equilibrium and allowing prices to fall. If the banking system tries to maintain price stability in the face of productivity gains, it will have to create an excess supply of money, which will have all the distorting effects of inflation even though the price level will not be rising in absolute terms.

Selgin's point is that looking at the price level alone cannot tell you if you have monetary inflation because you need to know both the relationship between the supply of money and the demand for real money balances and also any changes in total factor productivity.