In response to this a commentator on the last post remarks:
“In a commodity money standard, production would be increased with increased hiring in response to increased demand for labor.”In a country with no or minimal gold/silver production, such output will not increase in response to an increase in liquidity preference. Even in countries where gold is mined the effect on employment is trivial.
Under the gold standard, when money was a producible commodity, significant production was limited to certain countries and brief times. E.g., if the UK was hit by a deflationary depression in the 1880s, with a rising purchasing power for money as demand for it increased as a hedge against future uncertainty (that is, a rise in its value due to deflation), can UK businesses just hire unemployed workers to “produce” gold in the UK? Of course not.
As Keynes said:
“… money has, both in the long and the short period, a zero, or at any rate a very small, elasticity of production, so far as the power of private enterprise is concerned, as distinct from the monetary authority;—elasticity of production meaning, in this context, the response of the quantity of labour applied to producing it to a rise in the quantity of labour which a unit of it will command. Money, that is to say, cannot be readily produced;—labour cannot be turned on at will by entrepreneurs to produce money in increasing quantities as its price rises in terms of the wage-unit. In the case of an inconvertible managed currency this condition is strictly satisfied. But in the case of a gold-standard currency it is also approximately so, in the sense that the maximum proportional addition to the quantity of labour which can be thus employed is very small, except indeed in a country of which gold-mining is the major industry.BIBLIOGRAPHY
Now, in the case of assets having an elasticity of production, the reason why we assumed their own-rate of interest to decline was because we assumed the stock of them to increase as the result of a higher rate of output. In the case of money, however—postponing, for the moment, our consideration of the effects of reducing the wage-unit or of a deliberate increase in its supply by the monetary authority—the supply is fixed. Thus the characteristic that money cannot be readily produced by labour gives at once some prima facie presumption for the view that its own-rate of interest will be relatively reluctant to fall; whereas if money could be grown like a crop or manufactured like a motor-car, depressions would be avoided or mitigated because, if the price of other assets was tending to fall in terms of money, more labour would be diverted into the production of money;—as we see to be the case in gold-mining countries, though for the world as a whole the maximum diversion in this way is almost negligible” (Keynes 1936: 230–231).
Keynes, J. M. 1936. The General Theory of Employment, Interest, and Money, Macmillan, London.
"A surge in demand for financial assets on secondary markets does not lead to unemployment falling in a recession as financial assets are “produced,” in the way that cars, TVs or DVD players are."
ReplyDeleteMy God, you just keep ignoring points you dont like, do you? Money that goes into secondary financial markets can be quickly converted into cash. and spent on consumption."
"In the case of money, however—postponing, for the moment, our consideration of the effects of reducing the wage-unit or of a deliberate increase in its supply by the monetary authority—the supply is fixed. Thus the characteristic that money cannot be readily produced by labour gives at once some prima facie presumption for the view that its own-rate of interest will be relatively reluctant to fall; whereas if money could be grown like a crop or manufactured like a motor-car, depressions would be avoided or mitigated because, if the price of other assets was tending to fall in terms of money, more labour would be diverted into the production of money;—as we see to be the case in gold-mining countries, though for the world as a whole the maximum diversion in this way is almost negligible” (Keynes 1936: 230–231)."
If what Keynes writes is true, and it is specifically in this case, than it follows that recessions and depressions are entirely, ENTIRELY the fault of the government, either the central bank or the Treasury, for not doing enought, a la Friedman, to stop a passive contraction in the money supply."
Also you ignore the endogenous element of money in our fractional reserve banking system. Not that its powerful when there is a debt crisis, but in general most money that sloshes about is privately created
"Money that goes into secondary financial markets can be quickly converted into cash. and spent on consumption."
ReplyDeleteVast amounts of money get tied up in financial asset transactions on scondary markets. That it can be "quickly converted into cash" doesn't that a great amount of it can be idle. Also, when banks become more conservative in their lending during recessions/depressions money gets held idle as reserves.
"Also you ignore the endogenous element of money in our fractional reserve banking system.
I have done no such thing. Our fractional reserve, endogenous money system is pro-cyclical.
Not that its powerful when there is a debt crisis,"
It is not "powerful" in a debt crisis: it is pro-cyclical: unregulated FR systems even more so.
"but in general most money that sloshes about is privately created"
So what?
Jan said: Excellent!Thank you Lord Keynes!Don´t mind the Austrian bullocks!-"We Must Not Allow Anyone to Put Them Back in the Golden Cage Where They Have Been Pining Their Hearts Out"!!
ReplyDelete""but in general most money that sloshes about is privately created"
ReplyDeleteSo what?"
So the whole point of your post was premsied on the fact that private markets cant create money in in response to increase market demand, and i have pointed out to you that they can, albeit within limits.
"Vast amounts of money get tied up in financial asset transactions on scondary markets. That it can be "quickly converted into cash" doesn't that a great amount of it can be idle. Also, when banks become more conservative in their lending during recessions/depressions money gets held idle as reserves. "
Money, even in the secondary markets, is never idle. It always serves some purpose, such as guarding a person's retirement, hedging or speculating, and taking the shares of the primary buyers of non-dividend paying IPOS.
The question is not whether money is "idle" Its whether the FED or the Treasury conducts the right monetary and fiscal policy to enable the private sector to cashsave and invest in everything Else. Too little money in circulation relative to real goods and sevices, you have deflation, too much, inflation. Since the Fed and the Treasury have monopolized the production of money, it is their job to make sure it is done properly.
Jan said: UK was on the gold standard between 1819–1914 and a gold exchange standard from 1925–1931 .Gold standard had it´s own business cycle.Busts were preceded by collapse.A time filled with output collaps and deflation.
ReplyDeleteTo study this period we can take England as an example. From 1873–1896, England experienced price deflation,but had a number of business cycles you can see here:
1873–1879, depression
1879–1883, expansion
1883–1886, depression
1886–1890, expansion
1890–1894, depression
"Money, even in the secondary markets, is never idle. It always serves some purpose, such as guarding a person's retirement, hedging or speculating, and taking the shares of the primary buyers of non-dividend paying IPOS."
ReplyDelete(1) I am not taking about financial assets issued in the primary markets.
(2) Red herring. The issue was whether it is creating aggregate demand causing employment to rise. You're just chnaging the subeject.
"So the whole point of your post was premsied on the fact that private markets cant create money in in response to increase market demand, and i have pointed out to you that they can, albeit within limits."
And I have already told you the endogenous money system is pro-cyclical. Its creation of money is based on issuing of debt. In recessions that is precisely what falls, as demand for debt slumps and banks become more conservative in their lending practices.
Keynes's point that money is not "produced" like cars or TVs is entirely correct and valid.
"Money, even in the secondary markets, is never idle. It always serves some purpose, such as guarding a person's retirement, hedging or speculating, and taking the shares of the primary buyers of non-dividend paying IPOS."
ReplyDelete(1) I am not taking about financial assets issued in the primary markets."
Neither am I. The stocks that say, retirees own are traded within the secondary markets. There are companies out there that havent issued new shares for a while now.
Also, without secondary market speculators investors would find it difficult to profit from their investments. I suppose companies could pay dividends, but a secondary market allows for shares to rise without the company giving up scarce cash. instead the companies would (in normal times) use that cash to expand business operations.
A secondary market is indeed valuable. Keynes was entirely wrong on this
"2) Red herring. The issue was whether it is creating aggregate demand causing employment to rise. You're just chnaging the subeject."
I am capable of adressing two different topics thin one response, of walking and chewing gum at the same time. I was under the impression that you were too. Perhaps I was mistaken?
The first part was about the role of the secondary financial markets.
The second was remarking on whether the monopoly issuer of the currency, is doing its job. Its the whole point of your original post where Keynes said ( in essence, in his tortured linguistics) that if money were aprivate commodity we would see a rising production in response to rising demand. Since it isn't, unfortunately, we are at the mercy of atrociously incompetent governments and central banks.
"So the whole point of your post was premsied on the fact that private markets cant create money in in response to increase market demand, and i have pointed out to you that they can, albeit within limits."
And I have already told you the endogenous money system is pro-cyclical. Its creation of money is based on issuing of debt. In recessions that is precisely what falls, as demand for debt slumps and banks become more conservative in their lending practices."
We are in agreement on that at least. I was just trying to remind you that there is such a thing as partially endogenous market money You seem to have a very close minded idea of what the market is capable of (roads, money) and constantly assert without a shred of evidence that because something has never been done before in the best ("in the fantasy world of Austrians") means it can never be done in the future For example, full reserve banking. If you want to criticize full resrve narrow banking, fine, but why do it on its intrinsic merits and flaws? Rather than closing you mind to new ideas.
Its the same thing. with NR Natural Rights Theory. You can easily attack Rothbard and Hoppe, beacuse they are the low hanging fruit, but somehow, in you intolerant mind, NR theory ONLY means Rothbard. I mean forget Aristotle, Thomas Aquinas, Francisco Suárez, Richard Hooker, Thomas Hobbes, Hugo Grotius, Samuel von Pufendorf, John Locke, Francis Hutcheson, Jean Jacques Burlamaqui, and Emmerich de Vattel. You cant seem to grasp moder new lockeanism, wehere one can be a social contract theorist, a (modified) NR theorist, and a rule utilitarian at the same time.
"In recessions that is precisely what falls, as demand for debt slumps and banks become more conservative in their lending practices."
ReplyDeleteMore than that. Money goes dormant - as it is returned to the bank via the deleveraging process.
Essentially you can see 'unlent potential' as a stock of money assets and money reserves in the private bank. Which represents the 'loans and deposits' the private bank could put into circulation at the current price of money but isn't doing due to a combination of conservative lending practices, lack of demand for new lending and increases repayment of old loans.
This is where the neo-classicals trip up. They don't realise that private banks essentially keep money 'in stock'. They think that if spending stops in one area it must pop up somewhere else.
"Keynes's point that money is not "produced" like cars or TVs is entirely correct and valid."
ReplyDeleteIt's produced more like an intangible asset.
When you're granted a patent a load of potential value pops up by magic on the balance sheet.
Similarly when you're granted a credit licence a load of potential value pops up by magic on the balance sheet.
"> (1) I am not taking about financial
ReplyDelete> assets issued in the primary markets."
Neither am I. "
Yes, you were, with the following statement (to which I was referring in my comment above):
"and taking the shares of the primary buyers of non-dividend paying IPOS."
Edward@November 19, 2011 12:45 AM
IPOs are issued in the primary market, for god's sake. If you are going to deny that, it is clear to me your comments on my blog should no longer be taken seriously.
"Its the whole point of your original post where Keynes said (in essence, in his tortured linguistics) that if money were a private commodity we would see a rising production in response to rising demand. Since it isn't, unfortunately, we are at the mercy of atrociously incompetent governments and central banks."
You mean we live under some "atrociously incompetent governments and central banks" whose policy action is informed by the absurdity of the present neoclassical consensus economics. In an earlier age (1945-c. 1971), we had quite competent government policy, and outstanding economic management and prosperity, when neoclassical economics got tamed by the Keynesian revolution.
"You cant seem to grasp moder new lockeanism, wehere one can be a social contract theorist, a (modified) NR theorist, and a rule utilitarian at the same time. "
Name me one professional philosopher who advocates such a hodgepodge ethical theory.
I fail to see how one can support even "modified" natural rights and be a rule utilitarian.
Apart from which, even natural righst does not ncessarily have libertarian/anarcho-capitalist/classical liberal economic or political implications.
"Also, without secondary market speculators investors would find it difficult to profit from their investments. I suppose companies could pay dividends, but a secondary market allows for shares to rise without the company giving up scarce cash. instead the companies would (in normal times) use that cash to expand business operations.
ReplyDeleteA secondary market is indeed valuable."
Just another red herring, an obvious hand waving attempt to distract attention away from the original issue.
Keynes never said that financial asset transactions on secondary markets can never serve a useful economic and social purpose. Nor do I.
His point - and that made by Post Keynesians and by me above - is that when money is diverted from purchasing of commodities (goods and services), whose production employs most of us, this is subtracting from aggregate demand, and in this sense money spent on these secondary financial asset markets is functionally different in its effects from spending it on producible commodities. This is one of the reason why Say's law is a fantasy:
http://socialdemocracy21stcentury.blogspot.com/2010/10/myth-of-says-law.html
None of your comments above have refuted that.
"Keynes said ( in essence, in his tortured linguistics)"
ReplyDeleteYeah, what a cheap shot. Try reading Mises's awful, rambling, arrogant, confusing prose. Even his translators and editors couldn't do anything for it.
Cantankerous writing for a cantankerous old fraud. The name calling game is easy, Edward.
Seems to me that an MMT style JG program makes money a producible, sort of. Doesn't it?
ReplyDeleteThe government fixes the value of the currency to unskilled labor, and lets the deficit float.
"Honey, we're out of money, I'll just pop down to the JG office and produce some more".
Hugo,
ReplyDelete"Seems to me that an MMT style JG program makes money a producible, sort of. Doesn't it?"
Not really. Large numbers of people are not employed to "produce" or "manufacture" money. The accounting actions involved in a government deficit require a few already-employed people at the Treasury or Fed, essentially to punch keys on computers. And, anyway, when bonds are issued $for$ to cover deficits, is new money really being created? (MMT would say new financial assets are created, which is true, I suppose).
It is government spending in fiscal stimulus involving, say, public investment (public works) or raising income that can be spent (consumption) that is creating production and employment.
Just to clarify: if your MMT program is not issuing bonds, new money would be created, but the people in buffer stock jobs programs are really "producing" money. They would be doing something socially or economically useful.
ReplyDeleteIf interest rates are not at zero or near zero, MMT deficits would still require bond issues to control interest rates.
> Just to clarify: if your MMT program is not issuing bonds, new money would be created, but the people in buffer stock jobs programs are [not?] really "producing" money. They would be doing something socially or economically useful.
ReplyDeleteYes, I know.
But still: In economic theory, there has been debates whether money is a producible or not, hasn't it? Hayek said something like "if there is an increasing lack of money (unemployment), labor will direct towards mining new gold". Which would ultimately create new money.
Keynes would have answered (I assume) "no -- money is not a producible..."
But with a MMT style Job Guarantee program in place, money (or financial assets if you prefer) becomes something akin to a producible after all. True, the unemployed would not direct towards gold mining but rather socially useful stuff. But that's a quibble.
"Honey, we're out of money, I'll just pop down to the JG office and produce some more".
Growing money like a crop is exactly what the Job Guarantee, a labor standard does. It has all the benefits of what Lerner called an Ideal Gold Standard - based on magic mines - in one of his later books. Lerner & Hayek in the 50s had the sort of debate you are having with David, I think that is what Hugo mentions. But perhaps it was here I saw it referred to?
ReplyDeleteHugo is right. Lord K, you may be thinking of bonds & money as having some intrinsic, mystical difference, as when you speak of "money-creation" apparently following the insane mainstream way and its preposterous distinctions. Money, cash is a kind of bond. Bonds are kinds of money (NFA). It just doesn't matter too much whether governments print currency or print bonds, engage in "money-creation" or "bond-creation" because they are basically the same thing. The people in the JG certainly are producing money. Changing the system of selling bonds (which is not borrowing) to just "printing money" is not necessary or so important. A lot of MMTers on the web don't understand that the ZIRP is just not all that important, maybe not even ideal. The JG is what is important.
It is government spending in fiscal stimulus involving, say, public investment (public works) or raising income that can be spent (consumption) that is creating production and employment. The JG is a particular type of this government spending fiscal stimulus, which like stimulus in general has both a direct (hopefully "doing something socially or economically useful") & indirect multiplier ("producing money") effect. But the JG is the kind of stimulus Keynes wanted, is intelligently directed & disinflationary, which was less true of old-fashioned "Keynesian" stimulus.
"If interest rates are not at zero or near zero, MMT deficits would still require bond issues to control interest rates."
ReplyDeleteNo it wouldn't. Interest on bank reserves achieves the same ends.
Bonds are not required, and bonds issued are essentially a form of state 'money' - being government sector liabilities.
Which is why the MMT economists never use the term money. They prefer to know exactly whose liability we're talking about.
"The people in the JG certainly are producing money. "
ReplyDeleteI don't think that's the correct way of thinking about it. They are circulating state liabilities that would otherwise be static - existing largely in the mind of the central bank governor.
In other words JG people are causing transactions in banks.
If you model that the banks produce the money (DR Credit Stock, CR Credit Reserves) when they are granted the ability to create credit then you can see that transactions either move that stock into circulation, return it to stock or move it between circulations.
(For US people I'm using 'stock' in the sense of 'inventory' here).
Unrelated to the thrust of your post here, but of general interest since we're on the subject of Keynes and the elasticity of gold production...
ReplyDeleteKeynes hypothesized a backwards-bending short-run supply curve for gold in 1936. He was subsequently proven correct, notably with respect to South African production. Historically the world's biggest biggest supplier, the supply elasticity of gold in SA is actually negative. To be clear: SA miners have tended to cut back on production when faced with a rising gold price.
While this seems paradoxical, the simple explanation is that they wish to extend the life-cycle of their mines, which are very deep and expensive operations to run. Mining companies thus switch to extracting the poorer quality veins while it is profitable to do so, before returning to richer deposits when margins shrink.
In this instance, it could thus be argued that the supply of gold may fail to rise "sufficiently" when there is increased demand for it (signaled by rising prices)... At least in the short-term.
Despite claims to the contrary, gold is subject to its own collection of strange forces that, indeed, serve to undermine proponent claims of it being a suitably stable currency medium for modern economies.