Twitterstorm delong: November 17, 2011
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Hoisted from Comments: Blake Johnson on Austrian Monetary Mental Mysteries

Austrian Monetary Mental Mysteries for What I Hope Is the One Last Time…: Blake Johnson said:

I agree with Dan Kuehn that Hayek's monetary theory is more developed than Von Mises', and is the one that should ideally come to mind when thinking about Austrian Business Cycle Theory. If you look at Hayek's work, he does not suggest that expansions of the money supply under a government fiat system is always a bad thing. In fact, in Price and Production, he suggests what is really a proto-version of NGDP targeting, though unlike Sumner's 5% target or Selgins 2-3% target, he chooses a 0% target. During normal economic times, this means gentile deflation, but during a recession when real output is falling, it implies an expansion of the money supply to keep NGDP on trend. Personally, I prefer Selgin's target, but he has had an additional 40-60 years of monetary theory to build upon.

I think Von Mises and Rothbard are often viewed by non-Austrians as the Alpha and Omega of all Austrian thought in all sub-fields, and this is unfortunate. It may be a result of Rothbardian's often making some of the loudest and most controversial claims. As Selgin comments, as a monetary economist Rothbard ranges somewhere from mediocre to bad. Rothbard's claims on fractional reserve banking being both inherently fraudulent and inflationary are demonstrably false. I think Rothbard's work on monopoly is excellent, but he ranges out of his element in monetary theory.

As within any school of monetary theory, there are divisions within the school. I think there are some Austrians who do believe, as you say, that money being based on gold has real value, whereas money based on fiat does not. I think those Austrians are wrong, insofar as the value of the money is in its use as a medium of exchange and as a unit of account, which theoretically could be performed just as well under a fiat standard as it is under a commodity standard. The real argument for a commodity standard is along the lines of the rules vs discretion debate i.e. Kydland and Prescott's famous paper. A commodity standard (and it doesn't have to be gold, Friedman commented that C.O. Hardy's Brick standard could be a feasible alternative if not for the small problem of getting people to think of Brick's as money) helps to solve the time-inconsistency/commitment problem faced by central banks.

Beyond all this, you have White and Selgin's Theory of free banking, which I believe should be viewed as the inheritor of Austrian monetary theory (though Selgin does not consider himself an Austrian anymore.) I think there are Austrian insights which help illuminate some of the problems faced by monetary authorities today, I also think Von Mises and Rothbard failed to properly apply them to Monetary theory. This should not invalidate all of Austrian monetary theory anymore than some of Keynes' mistakes and holes in his theory should invalidate all the work of Neo-Keynesians.

Note why Hayek chooses a 0% nominal GDP growth target. Look at his 1931 “The ‘Paradox’ of Saving,” Economica 32 (May), pp. 125–69. It sees a world of difference between a policy that stabilizes the nominal stock of outside money and one that maintains a stable price level. The second, he believes, distorts private-sector incentives and inevitably paves the way for crises and depressions. Indeed Hayek saw one of his major intellectual tasks as the overthrow of “the dogma of the stable price level”.

This is, I think, a reflection of the deep belief that the value of outside money is in some sense "fake"...