Wednesday, June 19, 2013

MMT vs. the Austrian School Debate

I do not think this is the final high-quality video of the debate, but a version of the raw video. The debate begins at 22.30.





I will write some extended comments at another time, but some random comments here.

Right on cue at 34.36, we get Bob Murphy giving us the Austrian view of prices: flexible prices are fundamental communicators of economic knowledge, and (presumably) like other Austrians he thinks that flexible prices moving towards their market-clearing values equate demand with supply, to allow a market economy to achieve economic coordination. This is a misguided and ignorant view of real world market economies. All one has to do is point out the fundamental importance of administered prices and fixprices in a market economy to show how deluded and far from reality Austrian price theory and its view of economic coordination is.

At 36.00, Murphy says that a “market interest rate” is a fundamental economic value, and government interference with it disastrous. But what does he mean by “market interest rate”? Does he mean a Wickellian natural interest rate? If so, such a thing does not exist and is completely irrelevant to any real world market economy outside of imaginary equilibrium states. Strangely, Murphy himself acknowledges the non-existence of the natural interest rate.

If Murphy means a “market clearing interest rate” as in loanable funds theory, this is also unacceptable and a wrong theory of interest rates. For example, if business expectations are subjective and can be shattered, loanable funds theory does not work, because lower interest rates will not induce the necessary investment to clear the money market.

Murphy’s simple blaming of the Fed for the asset bubbles of 1990s and 2000s is also unacceptable. Asset bubbles existed long before central banks and even under commodity standards. In poorly or minimally regulated financial systems, asset bubbles were endemic, and even when the collapse of an asset bubble causes disaster, this does not stop asset market gamblers some years later from doing the same thing and unregulated financial systems from providing the credit for doing so.

5 comments:

  1. I think if prices cleared markets we would see similar patterns in price movements as we see in stock exchanges (where prices actually DO clear markets but only there): prices would jig around in a random walk every second. If you look at prices of BMWs, hamburgers or GE washing machines they look completely different - they stay constant over prolonged periods of time.

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  2. Many economists seem eager to opine on monetary policies, yet make no effort to learn how banks function. Friedman comes to mind as the par exemplar in this regard; pumping out cracked theories that devastated whole nations, while ignorant of monetary structures and showing no interest in amnding that ignorance after his repeated failures.

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  3. The official video is up at https://www.youtube.com/watch?v=cUTLCDBONok c/- Rohan Grey

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  4. But what does he mean by “market interest rate”? Does he mean a Wickellian natural interest rate? If so, such a thing does not exist and is completely irrelevant to any real world market economy outside of imaginary equilibrium states.

    Such rates can be calculated quite easily actually - but this is not something pure Austrians have thought much about. Pure Austrians seem to use Wicksell's natural rate as something akin to NAIRU which also maybe due to their lack of interacting with data. The word "natural" is I think I badly chosen word which comes from Bohm Bawerk - he was trying to define the return on capital that flows to investors. Myrdal (Swedish social democrat) suggested a way to calculate such rates. They provide a great deal of insight into credit disequilibrium highlighting the fundamental flaws within neoclassical equilibrium theory.

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  5. Final version is up here:

    http://www.modernmoneynetwork.org/mmt-vs-austrian-school.html

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