Like Hutt, I want to attack the following notion: that money held in cash balances and deposit accounts is somehow “unproductive,” “barren,” or “sterile,” offering a “yield of nil;” that only consumer goods and producer (investment) goods are productive of human welfare; that the only productive use of money lies in its “circulation,” i.e., in its spending on consumer or producer goods; and that the holding, i.e., the not spending, of money diminishes future consumption and production. FULL ARTICLE
Source link: http://archive.mises.org/9948/the-yield-from-money-held-reconsidered/
“The Yield from Money Held” Reconsidered
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This is being debated on the Austrian Economic blog too. See:
http://austrianeconomists.typepad.com/weblog/2009/05/larry-white-on-hoppe-on-the-yield-on-money-held.html
Hoppe’s basic assumption of an economic goal of “human welfare” came as a shock to me. I have not heard it debated; rather the debate has been between “wealth” creation and preservation, and “jobs” creation and preservation. I enjoy the concept.
Hoppe is wrong about the difference between uncertainty and risk. I am not a good underwriter or actuary, but have known some. The only fairly acurate insurance underwriting is life insurance. All else is winging it. In most ventures, the accurate term for determining insurance risk is “PFA,” plucked from air. In my youth, I knew some underwriters who worked on Three Mile Island, before and after it became famous. I also had the opportunity, as the “kid at the table” to break bread with the inspectors. Just as the capital committed to insure Three Mile Island was PFAed, so, ultimately was the loss. The entire industry had no clue, and the ultimate risk and liability was determined politically.
As a grown man, I was chairman of a Health Benefits ERISA trust in 1987, the year that the Federal Accounting Standards Board issued a letter that U.S. corporations must show the present value of promised future medical benefits on their bottom line. They delayed to 1989, then reneged entirely, as the net value of the NYSE, assets minus present value of future promised benefits, was zero.
That brings me to my criticism of economics. We use the wrong math. Stochastic regression of data, followed by Newtonian analysis, will produce an illusion of linear determinism, but has nothing to do with the subject being studied. ( Newton was aware of the limitations of his calculus, and got into wierd cultures and religions looking for some answers.) When cosmologists go far enough beyond Newton to solve three body, four body, five body, etc., to turbulence, problems, we can borrow the math. Until then, we are reduced to doing what FASB did, pretend there is some cause-effect between prosperity and our decisions, and play the game according to the rules.
Jonathan: “even if we would agree – if only for the sake of the argument – that excess demands for money must be accommodated by quantity adjustments rather than by relative price adjustments, it is _technically impossible_ for a free banking system to accomplish this.”
First of all, it isn’t a question here of “relative” price adjustments: the shortage of real money requires either an increase in the nominal stock of money or a uniform decline in _all_ money prices, with relative prices unchanged; this is the classical neutrality doctrine (a counterpart of the classical quantity theory), which is also very much an aspect of Walrasian analysis. Of course, the theory doesn’t imply that prices will adjust uniformly in actual fact, at least in the short run. On the contrary, most who accepted the logic of the quantity theory (and Mises should be reckoned among them) understood that the process of nominal price adjustment following a disturbance to money supply or demand would involve potentially large short-run distortions to relative prices. Such non-neutralities play a crucial part in the ATBC. But the suggestions that short-run relative price distortions are only relevant in the case of adjustments in response to an excess supply of money, and not in that of adjustments in response to an excess demand, is a view peculiar to Murray Rothbard and a select group of his followers.
Second: your claim concerning the “technical impossibility” of nominal money stock adjustments in response to excess demand for (or supply of) money under free banking only serves to show that you don’t know the free banking literature at all. My (1988) “Theory of Free Banking” is subtitled “Money Supply under Competitive Note Issue” for good reason: it is mainly devoted to explaining just how the adjustments you carelessly declare to be “impossible” will occur. I also offer a more formal analysis of the same topic in my _Economic Journal_ article, “Free Banking and Monetary Control.” If you think these theories don’t make sense you are invited to explain why. But be forwarned: they have a provenance going back to Edgeworth, and to dismiss them you have to dismiss the whole modern theory of the precautionary demand for money balances–a theory that’s intimately connected to the very “yield on money” notion that HHH defends, and which I defended long before him (without confusing “demand for money” with “excess demand for money”).
It is really quite sad to observe the tendency of so many commentators to this blog to make assertions about free banking that only serve to reveal their lack of familiarity with the literature on the subject. You can’t make a reasoned choice between two positions after having only familiarized yourself with one. Nor can you tell when someone is misrepresenting another person’s thought.
To be sure, i am just learning here although i have the position that in an honest and full disclaim FRB system (not sure if historic examples could be classified as such) good money will drive out bad money through discounts between “promisses to pay ” gold (or other) and gold or 100% certificates.
Seems to me that “excess” demand or “excess” supply are dangereous terms, In reality we cannot say that there is excess supply or demand for anything.
But when money costs near “0″ to produce, the “excess” classification is more accurate since would mean more easily that more money is being “produced” than full market forces with marginal costs to mining of gold and silver or other.
in FRB, “promisses to pay gold” would be evaluated by the market and competing with 100% reserve certificates and physical gold itself
In the end, they are credit money in which to retain value (FRB theory claim that they are vallued at par value), the creditor must be very good and not expanding too much.
If some bank goes bankupt demand for physicall money and 100% RB notes will go up, but this will not constitute “excessive” demand. Why “excessive ” if there is a very good reason to increase monetary balances?
I would like to thank you for your comments which I much appreciate. I am actually a proponent of free banking, but I prefer the variant proposed by Mises, which I believe deviates somewhat from your own variant. I also believe that the arguments for 100 per cent reserve free banking are worth being considered but these are, in my opinion, more of an ethical or/and legal-theoretic nature rather than strictly economic.
Mises avoided a few claims about the working characteristics of free banking, which you make, and to some his picture of free banking will therefore appear ultimately more credible. But I am prepared to reconsider your arguments. As I read Mises he believed that _in practice_ free banking would remain close to 100 per cent reserve banking; credit expansion would remain very limited. It seems to me he did not argue (1) that changes in the demand to hold bank money must and/or would somehow be offset by new issues of bank liabilities and (2) he did thus not argue that
free banking would guarantee monetary equilibrium and/or lead to the implementation of a productivity norm. At least there is no active role for the banking system in view of implementing any such norm.
I also believe that if he would have made claims of this kind, he would have taken greater care than you do to describe in more detail the microeconomic processes involved, in particular relative price and injection effects.
Part of the problem I have with your proposal is of a purely semantic nature. It is not by renaming certain phenomena that their fundamental nature can be modified.
It is not clear to me for instance why the fact that one or more market participants increase their holdings of bank-issued money is in and by itself to be considered evidence of a shortage of money that must somehow be accommodated or offset by new issues of bank-issued money. If A (or B or C) wants to change his/her spending patterns and increase his/her holdings of money, his/her increased demand to hold money can be satisfied simply be refraining from spending. It is not obvious there is anything further to be offset.
That the supply of money is under free banking so to speak “demand-elastic” creates the impression that free banking has a definite advantage in this respect but it is far from obvious that this is more than a semantic trick.
@ganpalou –
You wrote “Hoppe’s basic assumption of an economic goal of “human welfare” came as a shock to me. I have not heard it debated; rather the debate has been between “wealth” creation and preservation, and “jobs” creation and preservation.”
Then whoever taught you ECO101 ought to be taken out and SHOT. Everything in economics has, at its absolute core, the notion that consumers maximise utility (or felicity, or HAPPINESS). Producers maximise profit in order to use that profit as income, with which to fund their consumption… to enable them to augment their happiness. (And no, nobody says that utility/felicity/happiness comes only from the consumption of goods, or that interpersonal utility is irrelevant).
I’m also intrigued that you think that, under conditions of absence of uncertainty (i.e., all CDFs for all variables have 100% of probability mass at the actual outcome) that there could still be risk.
To put that in context, consider securities pricing via discounted cash flows. IF all future cash flows are known with certainty, and all discount factors (interest rates and rates of time preference of consumption) are likewise perfectly known, then there is one, and only one, invariant valuation for the stock under consideration.
Personally, the moment I read Keynes’ assertion that holding cash balances did NOT stem from an intertemporal optimisation problem, I knew that this work was not goingto be worth studying except as an exercise in polemic. (I was taught consumer theory in a relatively ‘math-ish’ way, but by a VERY good economist… far better that, than to be taught it in a hand-waing way by a half-talented mathematician like Keynes)
What Keynes is saying is that people somehow just ‘wind up with’ money balances after having performed their optimisation. They then decide to let sit idle when there are consumption possibilities available. These mythical people are not even ‘satisficing’ in anything except a single-period world (because if they discovered that they made a mistake by kleaving unexploited consumption possibilities, then they would change their behaviour at t=2).
In sum, Keynes’ view stems from the rather abhorrent view that the mass of mankind are simpletons who cannot be trusted to make their own decisions: it is the thinking behind the Raj and the Sepy massacre.
And – no surprise – Keynes was a whore to politicians, and he got his Cambridge job through nepotism.
If it were up to me I would dig him up, grind his bones to a paste and feed it to pigs – thereby forcing Keynes to finally make a (sall) positive contribution to the globe having been the charlatan that furnoshedthe economic theology that underpinned the rampant rise of the parasitic, murderous State in the 20th century… and by dint of that, massive, large scale industrial War.
Cheerio
GT
“In sum, Keynes’ view stems from the rather abhorrent view that the mass of mankind are simpletons who cannot be trusted to make their own decisions: it is the thinking behind the Raj and the Sepy massacre.” – G. Transom.
Puh-lease! Triple H (and most Libertarians concur) believe the masses are irrational simpletons hence Democracy doesn’t work. Triple H further states that “Monarchy is better than Democracy” as Monarchs have a private interest in being rational. But, of course, he then states that “private actors are better than Monarchs to rule” hence successful business people/private landowners are better still than Monarchs.
I have been absent from my PC for a little time and apparently in the meantime Ludwig van den Hauwe has already responded in my place. I very largely agree with van den Hauwe´s comments but I would like to add that contrarily to your allegation I am familiar with most of your writings. By “technically impossible” I simply meant that banks do not respond to (what you characterize as) an increase in the demand to hold money (or an excess demand for money) in the same way that, say, producers of cars respond to an increase in the demand for cars (or excess demand for cars) and that it simply has to be that way in virtue of a few simple principles of monetary economics. However, your own semantics tends to conceal some of these facts, as is also pointed out by van den Hauwe. I agree that I could perhaps better have used the expression “economically impossible” or simply “impossible”. I certainly did not mean that a central bank would render it possible. An elementary introduction to monetary principles, as well as further references to the literature, can be found in e.g. Rabin´s Monetary Theory, and also in the somewhat more advanced writings of Leland Yeager. On excess demand the work of Patinkin remains a must.
On the Austrian Economists blog Steve Horwitz asked me why it is so difficult to conceive of the productivity norm as an emergent outcome of the maximizing behavior of the banks under free banking. The point is that even if this would be true – i.e. that free banking would tend to lead to the “implementation” (so to speak) of the productivity norm – it is doubtful whether this would indeed guarantee macroeconomic stability.
In a nutshell this can be explained as follows, and it has everything to do with the maturity mismatch problem and fractional-reserve banking.
Concentrate on the left-hand side in MV=PQ.
Fluctuations in V reflect mainly decisions about changes in spending patterns (decisions to spend or not to spend by market participants holding bank- issued money). Via a transmission mechanism involving the interbank clearing process, this leads to offsetting changes in M (supposedly so as to keep MV constant) via changes in the lending patterns by banks (the granting of loans by banks). These loans will often serve to buy investment goods in the context of composite (roundabout) production processes that require time to be completed, and that require an extended forthcoming flow of credit. They cannot easily be reversed without causing substantive economic losses. The spending decisions to the contrary can easily be reversed (daily or even continually) and they affect the behavior of the quantity of money in opposite direction, that is, in case of a diminution of spending, the quantity of money is expanded, and in case of an incease of spending, it is contracted.
Free banking would thus actually worsen the erratic, volatile behavior of the quantity of money which is so conducive to crises and macroeconomic instability.
George Selgin: “First of all, it isn’t a question here of “relative” price adjustments: the shortage of real money requires either an increase in the nominal stock of money or a uniform decline in _all_ money prices, with relative prices unchanged; this is the classical neutrality doctrine (a counterpart of the classical quantity theory), which is also very much an aspect of Walrasian analysis. Of course, the theory doesn’t imply that prices will adjust uniformly in actual fact, at least in the short run. On the contrary, most who accepted the logic of the quantity theory (and Mises should be reckoned among them) understood that the process of nominal price adjustment following a disturbance to money supply or demand would involve potentially large short-run distortions to relative prices. Such non-neutralities play a crucial part in the ATBC. But the suggestions that short-run relative price distortions are only relevant in the case of adjustments in response to an excess supply of money, and not in that of adjustments in response to an excess demand, is a view peculiar to Murray Rothbard and a select group of his followers.”
In the hypothesis of a uniform decline in all money prices, what is problematic about saying, after the adjustment has taken place, that the relative price of money versus non-money goods has changed?
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