Friday, August 31, 2012

Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique

Jesús Huerta de Soto is author of Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup, Auburn, Ala., 2012). It is one of those appallingly long Austrian tomes (like Human Action), whose sheer length seems designed to bludgeon the reader into submission.

But don’t be fooled by the length and prima facie scholarly tone of Money, Bank Credit and Economic Cycles: it is a terrible book, badly flawed.

In what follows I use and cite the 3rd edition of 2012 in a critique of Chapter 1.

You will need a basic understanding of the mutuum contract and the irregular deposit (depositum irregulare).

Huerta de Soto’s book seems to be the most recent and extensive treatise by an anti-fractional reserve banking Austrian. Reading it, I am struck by the many following errors in his interpretation of Roman contract law in Chapter 1 (and I have incorporated an earlier post here):
(1) Huerta de Soto misunderstands the nature of the mutuum contract. He defines the mutuum contract in these terms:
Mutuum (also from Latin) refers to the contract by which one person—the lender—entrusts to another—the borrower or mutuary—a certain quantity of fungible goods, and the borrower is obliged, at the end of a specified term, to return an equal quantity of goods of the same type and quality (tantundem in Latin). A typical example of a mutuum contract is the monetary loan contract, money being the quintessential fungible good. By this contract, a certain quantity of monetary units are handed over today from one person to another and the ownership and availability of the money are transferred from the one granting the loan to the one receiving it. The person who receives the loan is authorized to use the money as his own, while promising to return, at the end of a set term, the same number of monetary units lent. The mutuum contract, since it constitutes a loan of fungible goods, entails an exchange of “present” goods for “future” goods. Hence, unlike the commodatum contract, in the case of the mutuum contract the establishment of an interest agreement is normal, since, by virtue of the time preference (according to which, under equal circumstances, present goods are always preferable to future goods), human beings are only willing to relinquish a set quantity of units of a fungible good in exchange for a greater number of units of a fungible good in the future (at the end of the term).” (Huerta de Soto 2012: 2–3).
The trouble with this definition is that there is no reason why the mutuum contract – legally, morally, economically or historically – should be limited to a specific time period. Certainly in ancient Roman and Anglo-American law there is no such restriction.

Huerta de Soto is adamant that the mutuum contract is repaid by means of fungible goods of the same type or value, but at the end of a specified term or “at the end of a set term.”

But why must there even be a specified term at all? One can freely contract to lend a fungible good to another person, but both agree that the lender can recall the loan on demand, without any specific date being set.

And this does not even need or involve money: e.g., I lend my neighbour a chicken. My neighbour has a dozen chickens, but would like another one. We both agree I can come to my neighbour in a week, month or several months or at any time I want, and say “can I get back a chicken that will repay your loan to me?”

My neighbour may well have eaten the chicken in the meantime but provides a healthy chicken of the same age, size and value, which was all part of the original agreement. Or we may have contracted for some interest, say, 3 eggs with the chicken.

This sort of transaction can be applied to chickens, cows, animals, capital goods, and, above all, money: there is no reason whatsoever where a specified time element need be part of a mutuum contract.

Even looking at the legal history of contract in the Roman Republic and Roman empire, I see no evidence that the mutuum contract from its early history in Western civilization in ancient Rome ever required strict set dates or fixed term contracts (Zimmermann 1990: 155–156).

In Roman law, a loan of money was a mutuum, but interest and a set date (if the two parties wanted one) for repayment would be by additional stipulatio (= stipulation). In fact, without such an additional stipulatio, Roman law said that the lender could recall his loan at any time:
“A loan transaction can hardly achieve its purpose if the capital has to be repaid immediately after it has been handed over by the lender to the borrower. Yet this was, strictly speaking, the case where the mutuum was not accompanied or reaffirmed by a stipulation. For it was the datio [the act of giving over the thing borrowed – LK] that gave rise to the obligation to repay the capital, and this obligation came into effect immediately.” (Zimmermann 1990: 156).
That is to say, the default legal form of a mutuum in Roman law was a callable loan, even callable immediately.

Let us turn to English law. We can cite the The Laws of England: Being a Complete Statement of the Whole Law of England (vol. 2; 3rd edn.; 1964) on the mutuum:
“The contract of mutuum differs from that of commodatum, in that in the latter a bare possession of the chattel lent, as distinguished from the property in it, vests in the borrower, the general property in it still remaining in the lender; where in mutuum that property in the chattel passes from the lender to the borrower. Mutuum is confined to such chattels as are intended to be consumed in the using and are capable of being estimated by number, weight, or measure, such as money, corn, or wine. The essence of the contract in the case of such loans is, not that the borrower should return to the lender the identical chattels lent (for such specific return would ordinarily render the loan valueless), but that upon demand or at a fixed date the lender should receive from the borrower an equivalent quantity of the chattels lent.” (Halsbury 1964: 112).
This explicitly states that, in the case of a mutuum contract, even a demand deposit in a fractional reserve bank, the loan can be repaid either at a fixed future date or on demand.

And it should be noted that, as early as the 18th century, the mutuum contract is also defined in the same terms as seen above by Thomas Wood (1661–1722), an English Doctor of Civil Law (New College, Oxford) and author of the leading work on English law in that era. In the 4th edition of A New Institute of the Imperial or Civil Law (1730; 1st edn. 1704), we have this definition of the mutuum:
“Mutuum (a Loan simply so call’d quod de meo tuum fiat [sc. “because let what is mine become yours”])

It hath no one particular name in the English Language.

is a Contract introduced by the Law of Nations, in which a Thing that consists in weight (as Bullion,) in number (as Money,) in measure (as Wine,) is given to another upon condition that he shall return another thing of the same Quantity, Nature and Value upon demand. More than Consent is required, for the Thing, viz. Money, Wine, or Oil ought to be actually delivered, and more than what was delivered cannot be repaid; but less may be repaid by Agreement. This Contract forces men to be industrious and promotes Trade, and for this reason it may be greater charity to lend than to give. Creditum is a more general Word. In the case of Money, Silver may be repaid tor Gold, unless the Creditor is to be damnified by it; for it shall be understood to be the same kind of Money when it is of the same” (Wood 1730: 212).
So even in the early 18th century in the law of the United Kingdom the mutuum is a loan repayable upon demand: a specific and strict time period (or term) for the loan is not required, though obviously the mutuum can involve a fixed term or a set date for repayment by contract.

Over a century later in America in 1848, a case is recorded in the Court of Appeals of the State of New York, involving Benjamin C. Payne, Executor vs. William Gardiner. In this case, the American court defined the mutuum in relation to deposit banking:
“In cases of mutuum the party borrowing was not held to pay interest upon the money lent; but in cases of irregular deposit, interest was due by the depositary, both ex nudo pacto and ex mora. This distinction between the two classes of deposit, as to interest, is not recognized by our law. The depository being liable in each for interest, in the event of a breach of duty.

A deposit of money with a bank or private person is what is known in the civil law as a mutuum or irregular deposit—the distinction between the two kinds of deposit not being recognized by the common law.

When money is borrowed, and no time of payment is fixed by the contract of loan, the debt, as already stated, is instantly due,
and an action may be brought without demand — the bringing of the action being a sufficient demand to entitle the lender to recover. (Chitty on Contracts, 734; Norton v. JEUam, 2 M. & W. 461.)

Even if the debt is by the terms of the agreement to be paid on demand, yet no special demand is necessary; the money being due without it.” (Tiffany 1865: 168).

“In Story on Bailments (p. 66 § 88), it is said that ‘in the ordinary cases of deposits of money with banking corporations or bankers, the transaction amounts to a mere loan or mutuum, or irregular deposit, and the bank is to restore not the same money but an equivalent sum whenever it is demanded.’” (Tiffany 1865: 169).
So American law follows English law on the mutuum: a loan under such a contract can be repaid on demand, without a specific time being set.

(2) The Classical Roman jurists include Gaius (c. 115–180 AD), Papinian (142–212 AD), Ulpian (c. 170–228), Paul (fl. 228–235 AD), and Modestinus (fl. 250 AD).

In later Roman law by the time of Justinian, there appears to have been a type of contract that modern scholars call the depositum irregulare (or irregular deposit), a term invented by the fifteenth century jurist Jason of Maino. This contract, when involving money, allowed the transferral of ownership (dominium) of money deposited in a bank to the banker. Thus the money could be used by the bank and lent out to provide a return in interest for the “depositor,” and the “depositor” received back the same quantity (or tantundem) of money, not the same money itself that had been deposited (Zimmermann 1990: 215–216). Note how the word “deposit” is highly misleading here, because the irregular deposit is very much like a mutuum (a loan for consumption).

Indeed, in the time of the Roman jurists Ulpian (c. 170–223 AD) and Papinian (142–212 AD), it appears that the depositum irregulare was merely considered to be a type of mutuum, and it may well be that the whole legal concept of depositum irregulare is a development of later legal theorists, unknown to jurists of the second or third century AD (Oudshoorn 2007: 135–136). Admittedly, there are a number of dissenting modern legal scholars these days who do think that the Classical Roman jurists recognised the depositum irregulare (Evans-Jones and MacCormack 1998: 133), but even if so, it was almost the functional equivalent of the mutuum, and the question is still controversial.

The depositum irregulare (or irregular deposit) is sometimes also called the “improper deposit” or “general deposit” in modern legal terminology, and as a legal concept has been most influential on the civil law systems on Continental Europe, rather than in Anglo-American law.

Now Huerta de Soto has a very questionable definition of the irregular deposit. He asserts that the classical Roman jurists
“had already recognized the irregular deposit contract, understood the essential principles governing it, and outlined its content and essence as explained earlier in this chapter.” (Huerta de Soto 2012: 26).
By the latter clause, Huerta de Soto seems to mean that Roman classical jurists defined the irregular deposit contract in the terms he himself describes on pp. 4–20. But Huerta de Soto’s definition of the irregular deposit (depositum irregulare) includes these two characteristics that are highly dubious:
(1) there is no interest on the money “deposited” (or really lent out) in the irregular deposit, and
(2) the bank is required to keep what Huerta de Soto misleadingly calls a tantundem always available in full for all holders of irregular deposits.
These two aspects make Huerta de Soto’s definition of the irregular deposit utterly unorthodox. He cites certain Spanish legal sources and Spanish legal scholars for his definition, but it is clearly eccentric and aberrant, certainly with respect to Roman law and Anglo-American law.

Huerta de Soto’s assertion that the classical Roman jurists defined the irregular deposit in the way he does (and perhaps in the way certain Spanish legal scholars do) is untrue.

First, as we have seen above, the question whether the classical Roman jurists even had a concept of the “irregular deposit” is intensely problematic (Zimmermann 1990: 217): many scholars think that the irregular deposit (depositum irregulare) was not even recognised by the classical Roman jurists (Schulz 1951: 520), who interpreted “deposit” banking in terms of the mutuum contract. Some scholars also feel that many of texts in Justinian’s Digest from earlier jurists that seem to refer to the irregular deposit are interpolated and hence unreliable (Schulz 1951: 520).

Secondly, contrary to Huerta de Soto, the irregular deposit by the time of post-Classical Roman law in Justinian’s Digest regularly paid interest (Buckland 1963: 470):
“the so-called ‘irregular’ deposit primarily concerned deposits of money upon the terms that the recipient - often but not necessarily a banker - was bound to restore not the same coins but an equivalent, ownership of the deposit being transferred to him. As he was owner the depositee could use the money, in which case it was usual to pay interest on it to the depositor. There are clearly similarities between this contract and mutuum.” (Evans-Jones and MacCormack 1998: 133).
Thirdly, there was absolutely no obligation that the banker had to keep a tantundem always available in full for all holders of irregular deposits at all times. If Huerta de Soto were correct, then no institution taking irregular deposits could ever be a bank or pay interest: it would be the equivalent of a mere warehouse facility. Yet even in late Roman law the irregular deposit paid interest.

In short, Huerta de Soto’s definition of the irregular deposit is at variance with Roman law.

(3) Jesús Huerta de Soto cites Justinian’s Digest 16.3.24 and argues that whenever anyone made an irregular deposit of money in Roman times, he received a written certificate or deposit slip. In fact, the relevant passage of the Digest says nothing of the sort. Here it is full:
Lucius Titius to Sempronius Greeting: ‘I notify you by this letter written by my own hand, that the hundred pieces of money which you loaned to me this day, and which have been counted by the slave Stichus, your agent, are in my hands, and that I will pay them to you on demand, when and where you desire me to do so.’ The question arises whether any increase by way of interest is to be considered? I answered that an action on deposit will lie, for what is the loaning of anything for use but the depositing of it? This is true, if the intention was that the very same coins should be returned, for if it was understood that only the amount should be paid, the agreement exceeds the limits of the deposit. If, in the case which has been stated, an action on deposit will not lie, since it was only agreed to pay the same sum, and not the identical coins, it is not easy to determine whether an account of the interest should be taken. It has, in fact, been established that, in bona fide actions, it is the duty of the judge to decide that, with reference to interest, only such can be paid as the stipulation provides for. But is contrary to good faith and the nature of a deposit, that interest should be claimed before the party who granted the favor by receiving the money, is in default in returning it. If, however, the agreement was that interest should be paid from the beginning, the condition of the contract shall be observed.” (Digest 16.3.24).
This text merely refers incidentally to a letter that Lucius Titius wrote to Sempronius, by which the former informed the latter of the money he had received from him: there is absolutely nothing here to lead us to infer that, when someone made an irregular deposit of money, that person regularly or formally received a written certificate or deposit slip in Roman times.

(4) On pp. 29–30, de Soto commits a quite clear error:
“[sc. Digest 16.3.24] … reveals the immediate availability of the money to the depositor and the custom of giving him a deposit slip or receipt certifying a monetary irregular deposit, which not only established ownership, but also had to be presented upon withdrawal.

The essential obligation of depositaries is to maintain the tantundem constantly available to depositors. (Huerta de Soto 2012: 29–30).
We have already seen that Digest 16.3.24 does establish at all that the depositor received a written certificate or deposit slip when money was left on irregular deposit or even regular deposit (or bailment).

Huerta de Soto’s statement that the “essential obligation of depositaries is to maintain the tantundem constantly available to depositors” when applied to Roman law is utterly wrong and confused, as I have also noted above.

Huerta de Soto has imported questionable legal definitions of the irregular deposit from the various Spanish legal scholars that he cites which do not apply to Roman law, or indeed to Anglo-American contract law. Frankly, I doubt whether his definition of the irregular deposit even applies to interpretations of that concept in many other Continental European civil law systems either.

A tantundem applies to the mutuum loan or irregular deposit (depositum irregulare), and is the quantity of fungible goods of the same value, quality or amount returned to the creditor when he (1) requests repayment (as in a callable loan) or (2) when his loan is due (as in a loan with a set term/time limit). Despite Huerta de Soto, the debtor is not obliged to maintain a “tantundem constantly available to depositors” at all: he is only obliged to repay a tantundem when he is asked or when the debt is due.

On p. 35, the very same error occurs:
“However, the [sc. medieval] codes do not include the important clarifications made in the Corpus Juris Civilis to the effect that, though ownership is “transferred [sc. in the case of the irregular deposit],” the safekeeping obligation remains, along with the responsibility to keep continually available to the depositor the equivalent in quantity and quality (tantundem) of the original deposit.” (Huerta de Soto 2012: 35).
Huerta de Soto is wrong. The Medieval codes did not include any such “clarifications” because they did not exist in Roman law, even in the post-Classical period. In Roman law, no such obligation occurred in the case of the irregular deposit: it was in essence the functional equivalent of a mutuum, and the tantundem was required to be paid when due or (if it was in the contact) on demand. The banker was not obliged to engage in some safekeeping obligation in which he had to “keep continually available to the depositor the equivalent in quantity and quality (tantundem) of the original deposit.”

On p. 31 and p. 34, Huerta de Soto misuses the word tantundem again: he applies the term tantundem to a regular deposit (depositum regulare or bailment), where it is inappropriate.

(5) On pp. 30–32, Huerta de Soto conflates the terms of the regular deposit (depositum regulare) with irregular deposit (depositum irregulare).
All in all, Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles has incredible and shocking errors. And this is just the first chapter.


BIBLIOGRAPHY

Buckland, William Warwick. 1963. A Text-book of Roman Law from Augustus to Justinian (3rd edn.). Cambridge University Press, Cambridge.

Evans-Jones, R. and G. MacCormack. 1998. “Obligations,” in E. Metzger (ed.), A Companion to Justinian’s Institutes. Cornell University Press, Ithaca, N.Y. 127–207.

Halsbury, H. S. G. 1964. The Laws of England: Being a Complete Statement of the Whole Law of England (vol. 2; 3rd edn.; ed. G. T. Simonds), Butterworth, London.

Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup). Ludwig von Mises Institute, Auburn, Ala.

Oudshoorn, J. G. 2007. The Relationship Between Roman and Local Law in the Babatha and Salome Komaise Archives: General Analysis and Three Case Studies on Law of Succession, Guardianship and Marriage. Brill, Leiden and Boston.

Schulz, F. H. 1951. Classical Roman Law. Clarendon Press, Oxford.

Tiffany, J. 1865. Reports of Cases Argued and Determined in the Court of Appeals of the State of New York (vol. II), Weare C. Little, law Bookseller, Albany.

Wood, Thomas. 1730. A New Institute of the Imperial or Civil Law (4th edn.), J. and J. Knapton, London.

Zimmermann, Reinhard. 1990. The Law of Obligations: Roman Foundations of the Civilian Tradition. Juta, Cape Town, South Africa.

Steve Keen Interview with Max Keiser

A 20 minute interview here with Steve Keen by Max Keiser, covering a range of issues.


Monday, August 27, 2012

Rescuing Menger from the Austrians

I have written before of Carl Menger’s Lectures to Crown Prince Rudolf of Austria (trans. Monika Streissler and David F. Good; Aldershot, 1994).

That book shows that the founder of Austrian economics was worlds apart from the modern cult of anarcho-capitalism.

In chapter VII of Menger’s book, we find him endorsing the following:
(1) public works constructed by the state such as roads, railways and canals:
“Important roads, railways and canals that improve the general well-being by improving traffic and communication are special examples of this kind of enterprise and lasting evidence of the concern of the state for the well-being of its parts and thereby its own power; at the same time, they are/constitute major prerequisites for the prosperity of a modern state.” (Menger 1994: 121).
(2) government established agricultural and vocational training institutions (Menger 1994: 123).

(3) government subsidies to certain sectors:
“The state may also well support the various sectors of the national economy by actual subsidies, of course only when it is useful to the citizens but surpasses their individual means: strictly speaking, such subsidies are intended to become a useful public good, owned by the community as a whole.

This will occur, for example, if the state wants to promote agriculture and especially cattle breeding by purchasing prime quality breeding animals whose price exceeds most people's means; by becoming public property, the animals best serve their purpose, to serve all alike.” (Menger 1994: 123).
(4) state intervention to stop clearing of forests on private property in the mountains of Austria when this clearing had serious and bad effects on agriculture, such as soil erosion and floods on the plains:
“The Southern Tyrol, Istria, Dalmatia are sad object lessons of the blind greed of individuals and thoughtless negligence of former governments”. (Menger 1994: 131).
(5) government intervention to stop child labour (Menger 1994: 129).
All in all, the founder of Austrian economics appears to have accepted the existence of the state and a number of interventions, perhaps on utilitarian grounds.

The progressive liberalism and Fabian socialist sympathies of later Austrians like Eugen von Philippovich, Friedrich von Wieser and Richard von Strigl were not deviations from Menger’s ideas on the state, but a development of them.

BIBLIOGRAPHY

Menger, Carl. 1994. Carl Menger’s Lectures to Crown Prince Rudolf of Austria (ed. by Erich W. Streissler and Monika Streissler; trans. Monika Streissler and David F. Good), E. Elgar, Aldershot.

Sunday, August 26, 2012

Levin Interview with Friedrich Hayek (1980)

This is something of a find: Bernard Levin talks to Hayek at the University of Freiburg, in an interview broadcast on 31st May, 1980.




The opening introduction by Levin seems to me to be an incredible exaggeration of Hayek’s importance, but anyway some other comments also occur:
(1) What strikes me, above all, is that Hayek just sounds like a mainstream neoclassical in his emphasis on the role of prices: what is this but the Walrasian neoclassical view of an economy with a market-clearing price vector that converges to general equilibrium? In other writings at this stage of his career, Hayek was expressing a disillusionment with general equilibrium theory, yet here he just repeats that same tired old neoclassical equilibrium myths.

(2) This interview was conducted in the early years of Thatcher (Prime Minister of the UK from 1979–1990), who appealed to Hayek as one of her economic influences, though in practice her policy owed more to monetarism than Austrian economics.

(3) Hayek’s prescription of high unemployment and bankruptcy as a solution to stagflation evokes the worst nonsense of his liquidationism.

(4) Hayek’s discussion of his conception of liberty (from 19.00) is of some interest.

(5) Some of my posts relevant to this interview:
“Hayek on the Flaws and Irrelevance of his Trade Cycle Theory,” June 29, 2011.

“Did Hayek Advocate Public Works in a Depression?,” September 25, 2011.

“Hayek and the Concept of Equilibrium,” September 20, 2011.

Saturday, August 25, 2012

Debate on the Origin of Money

This article in the Economist has provoked a debate on the origin of money:
“On the Origin of Specie,” The Economist, 18 August, 2012.
For debate on this, see these posts:
David Glasner, “Where Does Money Come From?,” Uneasy Money, August 19, 2012.

George Selgin, “The Economist on Money and the State,” Free Banking, August 21st, 2012.
Some comments:
(1) It is a mistake to think that only one of the theories – barter origin or chartalism – must be true and the other false. It isn’t all or nothing. What is required is an eclectic theory: money has multiple origins. Even David Graeber in his recent book on debt concedes that the long distance barter trade in some instances led to the emergence of money (Graeber 2011: 75). But it isn’t the whole story by any means. In ancient Mesopotamia, we have temple institutions – collectivist, planning institutions – involved in the economy and probably playing a major role in the emergence of money. In other cultures, so-called social currency or non-commercial money seems to have preceded commercial money, and P. Grierson has drawn attention to how wergeld-like customs could create a system of measurement of relative values and play an important role in the development of money (Grierson 1978; Grierson 1977).

(2) It is strange that Menger is faulted for failing to note the role of the state in coining money, for he recognised the “important functions of state administration” in creating coinage and creating public confidence in the “genuineness, weight, and fineness” of coined money (Menger 1892: 255). Menger held that the government reduces the uncertainty associated with “several commodities serving as currency” by official legal recognition of some commodities as money, or where more than one commodity money exists by fixing a definite exchange ratio between them (Menger 1892: 255). In this way, governments perfected precious metals in their function as money (Menger 1892: 255).

(3) Selgin questions whether the earliest coins from Lydia were really minted by the state, and thinks they may have been minted by private agent(s), citing other scholars. Glasner (1989: 30) contends that since these earliest coins had no names of Lydian kings “we can safely conclude that they were privately minted.” Yet that is a highly dubious argument. For a long time, coins did not carry writing at all, and there is no reason why the kings would have bothered to write their names on the coins when people at the time knew perfectly well that they had been minted by the state. Nor did early coins carry images of the living king: they mostly depicted gods, seals or other symbols. In Western civilization, one of the first kings to be depicted on coins was Alexander the Great in the 4th century BC, but centuries after coins had been invented.

Furthermore, no scholar has really explained what private agent(s) would have minted such coins in Lydia and why. Moreover, the evidence suggests that the Lydian kings either controlled the mines in their kingdom (Briant 2002: 400) or levied taxes on mining or extraction of metals (indeed a certain Lydian called Pythius under the later Persian empire, who owned a number of mines in Lydia, may have been a descendant of the Lydian royal family who had inherited these mines as private family property [Briant 2002: 401]), and it follows that, if they extracted and owned much of the silver, gold and electrum (panned from the rivers), it is most probable that the kings also minted the first electrum coins too.

The standard view is that the Lydian state minted the first coins, and did so to pay soldiers and mercenaries (Cook 1958; Kraay 1964; Peacock 2006; on early Greek silver coinage, see Kim 2001 and Kagan 2006).
In general, see my posts here:
“David Graeber’s Response to Robert Murphy,” September 9, 2011.

“Money as Debt,” December 26, 2011.

“Menger on the Origin of Money,” January 5, 2012.

“The Origins of Money,” January 8, 2012.

“Mises on the Origin of Money,” January 12, 2012.

“David Graeber on the Origins of Money,” January 23, 2012.

“David Graeber versus Robert Murphy: A Review,” January 24, 2012.

“Quiggin on the Origin of Money,” February 10, 2012.

“Money as a Unit of Account and its Origins,” February 11, 2012.

“Observations on Non-Commercial Money,” February 18, 2012.

“A Note on Menger on the Nature and Origin of Money,” July 28, 2012.
BIBLIOGRAPHY

Briant, Pierre. 2002. From Cyrus to Alexander: A History of the Persian Empire (trans. Peter T. Daniels). Eisenbraun, Winona Lake, In.

Cook, R.M. 1958. “Speculation on the Origins of Coinage,” Historia 7: 257–262.

Glasner, David. 1989. Free Banking and Monetary Reform. Cambridge University Press, Cambridge.

Graeber, David. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.

Grierson, P. 1977. The Origins of Money, Athlone Press and University of London, London.

Grierson, P. 1978. “The Origins of Money,” Research in Economic Anthropology 1: 1–35.

Kagan, J. H. 2006. “Small Change and the Beginning of Coinage at Abdera,” in Peter van Alfen (ed.), Agoranomia: Studies in Money and Exchange Presented to John H. Kroll. The American Numismatic Society. New York. 49–60.

Kim, H. S. 2001. “Archaic Coinage as Evidence for the Use of Money,” in Andrew Meadows and Kirsty Shipton (eds.). Money and its Uses in the Ancient Greek World. Oxford University Press, Oxford. 7-21.

Kraay, C. M. 1964. “Hoards, Small Change and the Origin of Coinage,” Journal of Hellenic Studies 84: 76–91.

Le Rider, Georges. 2001. La naissance de la monnaie: Pratiques monétaires de l’Orient ancien. Presses Universitaires de France, Paris.

Menger, C. 1892. “On the Origin of Money” (trans. C. A. Foley), Economic Journal 2: 238–255.

Peacock, M. S. 2006. “The Origins of Money in Ancient Greece: The Political Economy of Coinage and Exchange,” Cambridge Journal of Economics 30: 637–650.

Picard, O. 1978. “Les origines du monnayage en Grèce,” L’Histoire 6 (November): 13-20.

von Reden, S. 2002. “Money in the Ancient Economy: A Survey of Recent Research,” Klio 84.1: 141–174.

Wallace, R. W. 1987. “The Origin of Electrum Coinage,” American Journal of Archaeology 91: 385-397.

Davis on US Recessions in the 19th Century

Joseph H. Davis (2006) presents a new list of recessions in the 19th century, on the basis of his annual dataset of US industrial production from 1796 to 1915.

Davis uses 43 annual components of the manufacturing and mining industries in the US, which represented about 90% of manufacturing output in the 1800s (Davis 2006: 105).

While Davis’s recession list is based on real manufacturing output, not real GDP, it presents an interesting addition to Balke and Gordon (1989).
US Recessions in the 19th Century
Years (Peak–Trough) | Recession Length (years)

1796–1798 | less than 1
1802–1803 | less than 1
1807–1808 | less than 2
1811–1812 |
1815–1816 |
1822–1823 |
1828–1829 |
1833–1834 |
1836–1837 | less than 1
1839–1840 | less than 3
1856–1858 |
1860–1861 |
1864–1865 | less than 2
1873–1875 | less than 3
1883–1885 | 1
1892–1894 |
1895–1896 |
1903–1904 |
1907–1908
(Davis 2006: 106).
Most interesting here is Davis’s finding that the US had a recession from 1873 to 1875 lasting less than 3 years, since unemployment was rising in these years and continued rising until 1878.

Davis shows a recession from 1883–1885, which is not found by Balke and Gordon (1989: 84).

But Balke and Gordon (1989: 84) also show a recession in 1888, which does not show up in Davis’s data.

All this should alert us to how questionable is the whole project of real GNP/GDP estimates for the 19th century.


BIBLIOGRAPHY

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Davis, J. H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Friday, August 24, 2012

Steven Horwitz on Stimulus Spending and Hayek

Steve Horwitz has the following post here on the London School of Economics (LSE) blog:
Steven Horwitz, “The Work of Friedrich Hayek shows Why EU Governments cannot spend their Way out of the Eurozone Crisis,” LSE blog, 21 August, 2012.
In response, we can say the following:

(1) His analysis is based on the false Austrian business cycle theory (ABCT). Despite Horwitz, the crisis of 2008 did not occur because the US “economy’s productive structure was not sustainable.” It was about the collapse of an asset bubble, excessive private debt, and a financial crisis caused by the collapse in value of the collateralized debt obligations (CDOs) and mortgage backed securities (MBSs) that banks had loaded up on.

(2) Horwitz charges that “advocates of stimulus are arguing is that we need spending, just any old spending, to jump start struggling economies” – a manifestly false claim. Post Keynesians and, I suspect, even New Keynesians understand that spending on asset bubbles would be just another disaster, and that what is needed is thoughtful public investment and social spending, not “just any old spending.”

(3) The issue of using resources that are not idle is raised by Horwitz, but he ignores the obvious point that, even if a stimulus project takes resources already employed, eventually, as a consequence, idle resources will be drawn on by both private and public sector investment projects in need of further factor inputs. Also, Horwitz conveniently ignores that fact that expansionary fiscal policy itself involves not just public investment, but expanding the capacity of the private sector to engage in consumption spending: with more private sector demand, businesses will also hire more workers and increase output.

(4) Horwitz contends that “Politicians and bureaucrats lack the knowledge to know which pieces fit with which pieces as they cannot know the nature of the idled resources and what consumers want.” And yet Keynesian stimulus worked again and again throughout American history when tried: real output soared and unemployment fell when expansionary fiscal policy was done by the US government in 1948–1949, 1954, 1958, 1961, 1964, and 1982. The Austrians might reply that such expansionary fiscal and monetary policies caused Austrian business cycles in all these cases, but that reply is worthless, simply because the Austrian cycle theory is worthless.

(5) Horwitz writes:
“So what can we do? The answer lies in the criticism: free up competition, prices, profits, and losses so that entrepreneurs and others can finish the process of tearing down the mistakes of the boom and figure out how to reallocate those resources to their new best uses. That process takes time, but if politicians cease meddling in it and start allowing market processes to do their job, particularly by allowing failed firms to go bankrupt and sell off their assets for more valuable uses, recovery will take place more quickly.”
This all sounds like liquidationism to me. Horwitz invokes Hayek in his blog title, but fails to tell us that even Hayek eventually repudiated liquidationism, and gave qualified support to Keynesian stimulus in a depression, as we can see here:
“To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations, and not by directly stimulating particular kinds of investment or similar kinds of public expenditure which will draw labour into jobs they will expect to be permanent but which must cease as the source of the expenditure dries up.” (Hayek 1978: 210–212).
(6) The most astonishing statement by Horwitz in the whole post comes at the end:
“Before the advent of Keynesianism, most recessions were very short lived as producers were left free to shuffle the jigsaw pieces into better combinations.”
This distorts history on so many levels it beggars belief.

Take the recession that Austrians claim proves their prescription of liquidationism: the recession of 1920–1921. This lasted 18 months, and was far longer than every post-1945 US recession on record, with the exception of the great recession of 2008–2009 (which also lasted 18 months). This can easily be verified by looking at the NBER data here.

The official estimates from the National Bureau of Economic Research (NBER) show clearly that the length of recessions fell very significantly when modern Keynesian and monetary interventions were used to ameliorate recessions after 1945:
Period | Average Length of Recessions in Months
1854–1919 (16 cycles) | 21.6
1919–1945 (6 cycles) | 18.2
1945–2009 (11 cycles) | 11.1
US Business Cycle Expansions and Contractions, http://www.nber.org/cycles/cyclesmain.html
Now you could complain that the traditional data for the 19th century has been challenged by Romer and Balke and Gordon, but that does not apply to the 1919–1945 period, which shows us quite clearly that the average length of recessions fell after 1945.

The issue of the length and severity of pre-1914 recessions is highly controversial, of course. We will only ever have estimates, whose validity and accuracy is open to question. The old Kuznets-Kendrick GNP series showed beyond any doubt that the pre-1914 era saw far more severe and longer recessions than those after 1945. While that data was challenged by Romer (1989), whose findings could be used to support Horwitz, it is now clear that there are problems with Romer’s estimates and method.

At best, one might appeal to the work of J. Davis (2006; 2004), but he only found no difference between the frequency and average length of recessions in the period 1880-1914 (the National Banking era) and the post-1945 era. If you really think Davis is correct, then that would still refute Horwitz.

In contrast, the work of Balke and Gordon essentially vindicate the Kuznets-Kendrick GNP series in terms of the improvement in output volatility after 1945 as compared with the pre-1914 era (see Appendix below).

Now the measure of how serious a recession is consists of (1) length of output contract, and (2) how long unemployment persists after the recession.

To look more seriously at the 19th century data, let us take the real GDP estimates of Balke and Gordon and the unemployment estimates by J. R. Vernon for the US from 1870–1900.

First, real GDP:
Year | GNP* | Growth Rate
1869 | 78.2 |
1870 | $84.2 | 7.67%
1871 | $88.1 | 4.63%
1872 | $91.7 | 4.08%
1873 | $96.3 | 5.01%
1874 | $95.7 | -0.62%
1875 | $100.7 | 5.22%
1876 | $101.9 | 1.19%
1877 | $105.2 | 3.23%
1878 | $109.6 | 4.18%
1879 | $123.1 | 12.31%
1880 | $137.6 | 11.77%
1881 | $142.5 | 3.56%
1882 | $151.6 | 6.38%
1883 | $155.3 | 2.44%
1884 | $158.1 | 1.80%
1885 | $159.3 | 0.75%
1886 | $164.1 | 3.01%
1887 | $171.5 | 4.50%
1888 | $170.7 | -0.46%
1889 | $181.3 | 6.20%
1890 | $183.9 | 1.43%
1891 | $189.9 | 3.26%
1892 | $198.8 | 4.68%
1893 | $198.7 | -0.05%
1894 | $192.9 | -2.91%

1895 | $215.5 | 11.7%
1896 | $210.6 | -2.27
1897 | $227.8 | 8.16%
1898 | $233.2 | 2.37%
1899 | $260.3 | 11.6%
1900 | $265.4 | 1.95%
* Billions of 1982 dollars
(Balke and Gordon 1989: 84).
It should be noted that these estimates are annualised, and no doubt conceal a number of recessions which lasted for 2 or 3 quarters in one year, where overall annual GDP growth was higher in the year of recession on the previous year. Likewise, where recessions lasted 2 or 3 quarters and spanned two years, but where overall annual GDP growth was higher in the second year on the previous year.

What is notable here is the double dip recession of 1893–1896: not a short recession by any means.

Next let us look at US unemployment in the late 19th century:
Year | Unemployment Rate
1869 | 3.97%
1870 | 3.52%
1871 | 3.66%
1872 | 4.00%
1873 | 3.99%
1874 | 5.53%
1875 | 5.83%
1876 | 7.00%
1877 | 7.77%
1878 | 8.25%
1879 | 6.59%

1880 | 4.48%
1881 | 4.12%
1882 | 3.29%
1883 | 3.48%
1884 | 4.01%
1885 | 4.62%
1886 | 4.72%
1887 | 4.30%
1888 | 5.08%
1889 | 4.27%
1890 | 3.97%
1891 | 4.34%
1892 | 4.33%
1893 | 5.51%
1894 | 7.73%
1895 | 6.46%
1896 | 8.19%
1897 | 7.54%
1898 | 8.01%
1899 | 6.20%

(Vernon 1994: 710).
I have highlighted in yellow those years where unemployment was over 5% and the years where unemployment showed a tendency to rise when it was above 5%.

By these figures, there was a marked rise in unemployment in the 1875–1878 and 1894–1898 periods. The double dip recession of the 1890s explains the rising unemployment from 1893–1896, and there was stubbornly high unemployment until 1898.

The high unemployment in the late 1870s also suggests serious problems in these years. The GDP growth after the recession of 1874 was a “jobless recovery.”

Although Balke and Gordon show positive GNP growth rates from 1875–1878, earlier estimates of GNP showed that the US economy experienced a recession in these years, with the NBER data showing the longest recession in US history from October 1873 to March 1879 (a 65 month recession). In view of the unemployment estimates for these years, at the very least there appears to have been contraction in certain important sectors. It is notable that, most recently, Davis (2006: 106) has found a recession from 1873 to 1875 lasting about two years, a contraction of around 24 months, or about 6 months longer than the longest post-1945 contraction on record (that of 2008-2009, which lasted 18 months).

By these figures alone, it is obvious that the late 19th-century US economy was sick in both the 1870s and 1890s. Recovery from recession was not rapid or smooth in either decade. Above all, the double dip recession of the early 1890s was quite long in terms of actual real output contraction.

For the 19th century, when we consider the impact of high unemployment following a recession, this makes nonsense of Horwitz’s statement that before “the advent of Keynesianism, most recessions were very short lived as producers were left free to shuffle the jigsaw pieces into better combinations.”


Appendix: Output Volatility pre-1914 and post-1945

What about output volatility before 1914 as compared with the post-1945 period?

I will quote Selgin et al. (2010) on this, since Selgin and his co-authors are libertarians:
“According to Romer‘s own pre-1929 GNP series, which relies on statistical estimates of the relationship between total and commodity output movements (instead of Kuznets‘ naïve one-to-one assumption), the cyclical volatility of output prior to the Fed‘s establishment was actually lower than it has been throughout the full (1915-2009) Fed era ... More surprisingly, pre-Fed (1869-1914) volatility (as measured by the standard deviations of output from its H-P trend) was also lower than post-World War II volatility, though the difference is slight.” (Selgin et al. 2010: 10)

“Romer‘s revisions have themselves been challenged by others, however, including Zarnowitz (1992, pp. 77-79) and Balke and Gordon (1989). The last-named authors used direct measures of construction, transportation, and communication sector output during the pre-Fed era, along with improved consumer price estimates, to construct their own historic GNP series. According to this series, the standard deviation of real GNP from its H-P trend for 1869 to 1914 is 4.27%, which differs little from the standard–series value of 5.10%. Balke and Gordon‘s findings thus appear to vindicate the traditional (pre-Romer) view.” (Selgin et al. 2010: 11).
While Selgin et al. cite other evidence that they believe vindicates Romer (see their paper), my point here is to make clear that Balke and Gordon confirm that modern macroeconomic management of the US economy has improved output volatility.

BIBLIOGRAPHY

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Davis, J. H. 2004. “An Annual Index of U.S. Industrial Production, 1790-1915,” Quarterly Journal of Economics 119.4: 1177-1215.

Davis, J. H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103-121.

Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas. Routledge & Kegan Paul, London.

Romer, C. D. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869–1908,” Journal of Political Economy 97.1: 1–37.

Selgin, G. A., Lastrapes, W. D. and L. H. White, 2010. “Has the Fed Been a Failure?” Cato Working Paper no. 2 (November 9).
http://www.cato.org/pubs/researchnotes/WorkingPaper-2.pdf

Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.

Zarnowitz, V. 1992. Business Cycles: Theory, History, Indicators, and Forecasting, University of Chicago Press, Chicago.

Tuesday, August 21, 2012

The Origin of Money in the Digest of Justinian

A quick post of purely historical interest.

The late Roman/early Byzantine emperor Justinian I (or Flavius Petrus Sabbatius Iustinianus Augustus to give him his pompous full throne name), emperor from AD 527 to 565, codified Roman law in his monumental Corpus iuris civilis (Corpus of Civil Law), which was issued from AD 529 to 534. The four parts of the Corpus iuris civilis were as follows:
(1) the Institutions (a type of introductory textbook for students);
(2) the Codex (a collection of constitutions by the Roman emperors);
(3) the Digest or Pandects (a collection of excerpts from the works of earlier jurists that now became law), and
(4) the Novellae (new constitutions issued after AD 534).
In Book 18 of the Digest, we have a passage where lawyers speculate about the origin of money, and this is notable as an early example of the barter origin of money theory:
“The origin of purchase and sale is derived from exchanges, for formerly money was not known, and there was no name for merchandise or the price of anything, but every one, in accordance with the requirements of the time and circumstances, exchanged articles which were useless to him for other things which he needed; for it often happens that what one has a superabundance of, another lacks. But, for the reason that it did not always or readily happen that when you had what I wanted, or, on the other hand that I had what you were willing to take, a substance was selected whose public and perpetual value, by its uniformity as a medium of exchange, overcame the difficulties arising from barter, and this substance, having been coined by public authority, represented use and ownership, not so much on account of the material itself as by its value, and both articles were no longer designated merchandise, but one of them was called the price of the other.”
(Paulus, On the Edict, Book 33 apud Digest 18.1.1).
This is a passage that shows us the following:
(1) When people have thought about the emergence of money, even in ancient times, they tend to think of barter, even though the barter origin of money was only one way by which money has emerged, according to the findings of modern anthropology and history. Curiously, it is not stated by whom the medium of exchange was “selected” historically, but let us assume for the sake of argument the text imagines a private, market process.

People might wish to cite this evidence of the universal barter origin of money theory, but in reality what weight does it have? Not much.

This was written by learned legal scholars and jurists in Constantinople in the early 6th century AD, and they cited an earlier jurist called Paulus Prudentissimus from 2nd and 3rd centuries AD.

But none of these jurists had any real knowledge of how money had emerged over 1000 years before their time in ancient Rome and Greece: this is the equivalent of a modern scholar in 2012 trying to tell us how the Anglo-Saxon economy worked c. 800 AD, with no real evidence, but merely using intuition. But intuition can be deeply mistaken, for some things are simply counter-intuitive.

(2) Even in this passage, it is notable how these late Roman lawyers also believed that the state had a major role coining money and establishing it as a uniform medium of exchange.

Steve Keen Interview by Simon Maude

An audio here of Steve Keen interviewed by Simon Maude, hosted by talksNZ:
http://95bfm.com/assets/sm/206935/3/stevekeen.mp3

Friday, August 17, 2012

A Simple Question for Opponents of Fractional Reserve Banking

Yes, the person who left this comment on my blog, I am thinking of you and people like you.

Let us imagine two farmers: Bill and Steve.

They freely make and both agree to the following contract:
(1) Bill lends Steve a chicken as a loan for consumption (or, in legal language, a mutuum loan). Both parties agree that Steve becomes owner of the chicken. Steve can “consume” the chicken by eating it, or can even resell it to someone else.

(2) Bill says to Steve: “Steve, I know you keep a reserve stock of chickens – since you are a farmer – so I want to call back this ‘chicken debt’ (that is, make you repay the debt by another chicken, a tantundem chicken of the same quality and age) on demand at some time this year, but I don't know precisely when. Is that alright?”

Steve says: “Bill, that is perfectly alright, I accept these terms completely and freely. I will repay on demand the ‘chicken debt’ I owe you.”
So what is wrong with this contract?

If the opponents of fractional reserve banking can find nothing wrong with it legally, economically or morally, then all we have to do now is substitute money for chickens to see how a mutuum loan of money, callable on demand, must also be acceptable.

It is only a few further steps to see that there can be nothing wrong with fractional reserve banking (FRB) either (assuming for the sake of argument that all parties understand the terms of the contract), for FRB operates on the very same principles.

One might object that many holders of demand deposits or FR transactions accounts these days do not understand that the bank becomes owner of their money, but this is a very different objection from the usual ignorant arguments offered by anti-FRB Austrians (and I have addressed the issue of public ignorance of FRB here).

Normally, the main arguments against FRB put forward by the big name Austrians (e.g., Mises, Rothbard, Hoppe) consistent of the following:
(1) ignorant inability to understand that banknotes (or fiduciary notes) are debt instruments, not property titles.

(2) similar ignorant inability to understand that the “demand deposit” is also nothing but a debt instrument on the bank’s books, not a depositum or bailment. A demand deposit is never a bailment. Thus it is not the case that two property titles to the money exist: the bank becomes the owner of the money, and the FR client is simply a lender, with a debt owed to him by the bank.

Wednesday, August 15, 2012

Post Keynesian Economics: A Panel Discussion

The following is an audio of a panel discussion on Post Keynesian economics, during the book launch of A Modern Guide to Keynesian Macroeconomics and Economic Policies (ed. Eckhard Hein and Engelbert Stockhammer; Cheltenham, 2011).

The panel discussion is with Engelbert Stockhammer, Victoria Chick, John Weeks and Simon Mohun:
“Post Keynesian Economics: Achievements, Limitations, Future,” 8 November 2011, UCL, London.

BIBLIOGRAPHY
Hein, Eckhard and Engelbert Stockhammer (eds.). 2011. A Modern Guide to Keynesian Macroeconomics and Economic Policies. Edward Elgar, Cheltenham.

Tuesday, August 14, 2012

Israel Kirzner on the History of Austrian Economics, Part 2

Israel Kirzner concludes his history of the Austrian school in this second video.




Some comments:
(1) Kirzner notes (from 6.50 onwards) that the defeat of the Austrian school in the 1930s went well beyond the perception of its defeat in the debate with Keynes: it also included defeat in Hayek’s debate with Sraffa, Frank Knight (over the nature of capital) and in the Socialist Calculation debate.

(2) Kirzner argues that Mises and Hayek learnt in the Socialist Calculation debate that the standard neoclassical price theory had serious flaws. Kirzner provides an alternative account of price theory from Mises and Hayek.

(3) Towards the end of the talk Kirzner speaks of the revival of Austrian economics from the 1970s.

Skidelsky on the Keynesian Beauty Contest

A short interview with Robert Skidelsky here by the Financial Times (FT) on the state of Eurozone financial markets and the UK, with a brief comment on the metaphor of the Keynesian beauty contest.


Saturday, August 11, 2012

Huerta de Soto on the Mutuum Contract: A Critique

Jesús Huerta de Soto defines the mutuum contract in these terms:
Mutuum (also from Latin) refers to the contract by which one person—the lender—entrusts to another—the borrower or mutuary—a certain quantity of fungible goods, and the borrower is obliged, at the end of a specified term, to return an equal quantity of goods of the same type and quality (tantundem in Latin). A typical example of a mutuum contract is the monetary loan contract, money being the quintessential fungible good. By this contract, a certain quantity of monetary units are handed over today from one person to another and the ownership and availability of the money are transferred from the one granting the loan to the one receiving it. The person who receives the loan is authorized to use the money as his own, while promising to return, at the end of a set term, the same number of monetary units lent. The mutuum contract, since it constitutes a loan of fungible goods, entails an exchange of “present” goods for “future” goods. Hence, unlike the commodatum contract, in the case of the mutuum contract the establishment of an interest agreement is normal, since, by virtue of the time preference (according to which, under equal circumstances, present goods are always preferable to future goods), human beings are only willing to relinquish a set quantity of units of a fungible good in exchange for a greater number of units of a fungible good in the future (at the end of the term).” (Huerta de Soto 2012: 2–3).
The trouble with this definition is that there is no reason why the mutuum contract – legally, morally or historically – should be limited to a specific time period. Huerta de Soto is adamant that the mutuum contract is repaid by means of fungible goods of the same type or value, but at the end of a specified term or at the end of a set term.

But why must there even be a specified term or time at all? One can freely contract to lend a fungible good to another person, but both agree that the lender can recall the loan on demand, without any specific date being set.

And this does not even need to involve money: e.g., I lend my neighbour a chicken. My neighbour has a dozen chickens, but would like another one. We both agree I can come to my neighbour in a week, month or several months or at any time I want, and say “can I get back a chicken that will repay your loan to me?”

My neighbour may well have eaten the chicken in the meantime but provides a healthy chicken of the same age, size and value, which was all part of the original agreement. Or we may have contracted for some interest, say, 3 eggs to be paid as interest with the chicken.

This sort of transaction can be applied to chickens, cows, animals, capital goods, and, above all, money: there is no reason whatsoever why a specified time element need be part of a mutuum contract. The contract may just be to return the item borrowed on demand. When the borrower keeps a reserve stock of the fungible goods in question (such as animals or money), then the transaction becomes convenient for both parties: the lender has the flexibility of calling back his loan at short notice, and the debtor can use much of his stock of things borrowed for economic or consumption purposes, but keep a reserve buffer stock to repay his creditors. Fractional reserve banking works in this way.

Even looking at the legal history of contract in the Roman Republic and Roman empire, I see no evidence that the mutuum contract from its early history in Western civilization ever required strict set dates or fixed term contracts (Zimmermann 1990: 155–156).

In Roman law, a loan of money was a mutuum, but interest and a set date (if the two parties wanted one) for repayment would be by additional stipulatio (= stipulation). Yet a stipulatio between two parties might set no fixed date for repayment, but make repayment on demand. In fact, without such an additional stipulatio, Roman law said that the lender could recall his loan at any time:
“A loan transaction can hardly achieve its purpose if the capital has to be repaid immediately after it has been handed over by the lender to the borrower. Yet this was, strictly speaking, the case where the mutuum was not accompanied or reaffirmed by a stipulation. For it was the datio [the act of giving over the thing borrowed – LK] that gave rise to the obligation to repay the capital, and this obligation came into effect immediately.” (Zimmermann 1990: 156).
That is to say, the default legal form of a mutuum was a callable loan, even callable immediately, although obviously in practice most loans involved some period of time before repayment.

The serious flaw running through the strident statements about fractional reserve banking in Money, Bank Credit and Economic Cycles is the idea that mutuum requires a term/time limit with set date for repayment. That is simply not true.


BIBLIOGRAPHY

Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala

Zimmermann, Reinhard. 1990. The Law of Obligations: Roman Foundations of the Civilian Tradition. Juta, Cape Town, South Africa.

Randall Wray Interview on the State of the Economy

This a link to the audio of an interview with L. Randall Wray on wide range of issues, on Suzi Weismann’s Beneath the Surface on KPFK:
Randall Wray Interview, August 3, 2012.

Paul Krugman versus Robert Murphy Debate?

Some time ago Robert Murphy challenged Paul Krugman to a debate. In this curious video, Tom Woods tries to promote the idea of such a debate.




Three points occur to me:
(1) Frankly, I wonder why Austrians are so hung up on Krugman. Maybe it is Nobel Memorial Prize in Economic Sciences he has, or his media prominence. As a mainstream neoclassical, Krugman represents a heavily neoclassical version of Keynesianism, and he most certainly does not represent all Keynesians.

(2) Woods tells us that Murphy is a member of the “free market Austrian school of economics.”

Yet it strikes me that Murphy is a highly idiosyncratic Austrian. His PhD Unanticipated Intertemporal Change in Theories of Interest (New York University, 2003) included (1) a critique of the pure time preference theory of interest (the view of the interest rate held by all Austrians I know), and (2) a defense of a monetary theory of interest. On his blog, he has cited a comment of Keynes on the monetary theory of interest with approval, which provoked a howl of protests from his regular readers:
Robert P. Murphy, “Is Keynes from Heaven or Hell,” 7 July 2011.
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html
Add to this Murphy’s work attacking the idea of a Wicksellian, unique natural rate of interest and the consequence of this that all modern Hayekian versions of the Austrian business cycle theory are flawed:
“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.

Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of “the” originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).

“Lachmann’s demonstration—that once we pick a numéraire, entrepreneurship will tend to ensure that the rate of return must be equal no matter the commodity in which we invest—does not establish what Lachmann thinks it does. The rate of return (in intertemporal equilibrium) on all commodities must indeed be equal once we define a numéraire, but there is no reason to suppose that those rates will be equal regardless of the numéraire. As such, there is still no way to examine a barter economy, even one in intertemporal equilibrium, and point to “the” real rate of interest.”
Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 14).
In light of all this, Murphy hardly even seems to be a good representative of the Austrian school at all.

(3) A more promising debate would be a big name Austrian (e.g., Mario Rizzo) against a big name Post Keynesian (say, Steve Keen): that is a debate I would prefer to see.

BIBLIOGRAPHY

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf

Thursday, August 9, 2012

A Question for Austrians: Who Wrote This?

Who wrote this passage?:
“Government thus has to intervene in economic life for the benefit of all not only to redress grievances, but also to establish enterprises that promote economic efforts but, because of their size, are beyond the means of individuals and even private corporations. These are not paternalistic measures to restrain the citizens’ activities; on the contrary, they furnish the means for promoting such activities; furthermore, they are of some importance for those great ends of the whole state that make it appear civilized and cultured.

Important roads, railways and canals that improve the general well-being by improving traffic and communication are special examples of this kind of enterprise and lasting evidence of the concern of the state for the well-being of its parts and thereby its own power; at the same time, they are/constitute major prerequisites for the prosperity of a modern state.

The building of schools, too, is a suitable field for government to prove its concern with the success of its citizens’ economic efforts.”
Was it some evil statist?

Well, no, it was none other than Carl Menger, the founder of Austrian economics, in his Lectures to Crown Prince Rudolf of Austria, p. 121.

A hat tip to Isaac Marmolejo. Please see his original post here:
Isaac Marmolejo, “A Passage by Carl Menger on the State,” The Radical Subjectivist, August 3, 2012.
This confirms for me how far some of early Austrian school were from the modern extremism of Rothbardian anarcho-capitalism.

In fact, some of the early Austrians such as Eugen von Philippovich, Friedrich von Wieser and Richard von Strigl had progressive liberal and even Fabian socialist sympathies, as I have noted before in this post:
“Why are There No Austrian Socialists?,” June 3, 2011.


BIBLIOGRAPHY

Menger, Carl. 1994. Carl Menger’s Lectures to Crown Prince Rudolf of Austria (ed. by Erich W. Streissler and Monika Streissler; trans. Monika Streissler and David F. Good), E. Elgar, Aldershot.

Randall Wray Interview on Money

A great audio interview with L. Randall Wray by Tom O’Brien on money and monetary theory.

There is some excellent discussion of the origin of money and the theories of G. F. Knapp, and, towards the end, analysis of the oil market speculation from 2004 to 2008.



N.B. when checking this post I noticed the embedded audio did not seem to show up. Please leave comments if it is not working.

What was the Greatest Mistake of Lionel Robbins’s Life?

The short answer, according to the man himself, was his support for the Austrian business cycle theory:
“I shall always regard this aspect of my dispute with Keynes as the greatest mistake of my professional career, and the book, The Great Depression, which I subsequently wrote, partly in justification of this attitude, as something which I would willingly see be forgotten.” (Robbins 1971: 154).
The Austrians make much of the success that Hayek gained at the London School of Economics (LSE) in the early 1930s with his business cycle theory, but pay less attention to the fact that the leading supporter of Hayek there repudiated the theory.

Robbins made this now famous statement:
“Now I still think that there is much in this theory as an explanation of a possible generation of boom and crisis. But, as an explanation of what was going on in the early ’30s, I now think it was misleading. Whatever the genetic factors of the pre-1929 boom, their sequelae, in the sense of inappropriate investments fostered by wrong expectations, were completely swamped by vast deflationary forces sweeping away all those elements of constancy in the situation which otherwise might have provided a framework for an explanation in my terms. The theory was inadequate to the facts. Nor was this approach any more adequate as a guide to policy. Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments and the easing of capital markets by fostering the disposition to save and reducing the pressure on consumption was completely inappropriate.

To treat what developed subsequently in the way which I then thought valid was as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating.” (Robbins 1971: 154).


BIBLIOGRAPHY

Robbins, Lionel. 1971. Autobiography of an Economist. Macmillan, London.

Israel Kirzner on the History of Austrian Economics, Part 1

Israel Kirzner, a moderate subjectivist Austrian, gives a history of the Austrian school in this first video. Although I take a Post Keynesian view of economics, I nevertheless find this very interesting.





There is, quite simply, a lot here to comment on, but I will limit myself to these remarks:
(1) Kirzner sees Menger’s immediate successors as developing a “static” form of subjectivism. As Lachmann would later say, the “subjectivist” revolution was not complete until subjectivism was applied to expectations. Kirzner sees “dynamic” subjectivism as the more advanced from that replaced the early Austrian school (1871-1930s).

(2) Kirzner notes that by the 1940s virtually everyone thought that the Austrian tradition was dead. Indeed, Kirzner says it was an embarrassment to admit he was studying under Mises in the 1940s (from 10.20).

(3) Eugen von Böhm-Bawerk and Friedrich von Wieser were not students of Carl Menger (1840–1921), but colleagues. Kirzner notes the conflict between the early Austrian school and the German Historical School, over economic method (the “Methodenstreit” or “debate over methods”). The term “Austrian school” was first coined by members of the German Historical School as a derogatory term for their enemies in Vienna.

(4) A serious shortcoming of this talk is its failure to examine the progressive liberal and even Fabian socialist sympathies amongst some of the early Austrian economics, such as Eugen von Philippovich, Friedrich von Wieser, the early Hayek, and Richard von Strigl. For that, see here:
“Why are There No Austrian Socialists?,” June 3, 2011.
(5) Kirzner speaks on the role of Lachmann (from 29.37), and how he witnessed the rise and fall of Hayek in the UK. Kirzner is mistaken in saying that when Lachmann came to London in 1933 “everybody was a Hayekian.” What Lachmann said was this:
“When I arrived at the London School of Economics in the spring of 1933, all important economists there were Hayekians. At the end of the decade Hayek was a rather lonely figure, even though he remained editor of Economica throughout the war.” (Lachmann 1994: 160).
That is to say, it was only at the LSE that “all important economists there were Hayekians.” That is quite a big difference.

(6) The merits of subjectivism have their limits, however. For example, just because economic “value” might be defined as the subjective pleasure, utility or satisfaction we derive from commodities, this does not mean prices are therefore all subjective. It is necessary to distinguish “price theory” from “value theory.” The price of a commodity and its value are two different things. It is clear that the normal price of many newly produced commodities is related to the cost of production. For what business could offer a long run, standard price for its commodities below its costs of production? There is no contradiction in also saying that whatever economic “value” (that is, utility or satisfaction) that a commodity has to any individual human being is subjective.

(7) From 52.00, Kirzner makes a very important point: he cites the view of Fritz Machlup (1902–1983) that everything that was important in the Austrian school of the 1920s had been successfully absorbed into the neoclassical mainstream. Kirzner agrees with this. Thus Machlup did not even find it necessary to identify himself as an “Austrian,” because he saw the Austrian tradition as having been successfully absorbed. When Machlup was asked to list the most important tenets of the Austrian school, he produced this list:
(1) methodological individualism;
(2) methodological subjectivism;
(3) marginalism;
(4) opportunity cost;
(5) time structure of production;
(6) dominance of utility.
Kirzner argues that all of these are part of the neoclassical mainstream now.

The only two features that Kirzner thinks are unique in modern, post-1950 Austrian economics not taken into account by the mainstream are (1) that markets are processes of learning and discovery, and (2) that choice is taken in the context of radical uncertainty.

(8) For reference, here is a list of the early Austrian economics:
Carl Menger 1840–1921

First Generation of the Austrian School
Eugen von Böhm-Bawerk 1851–1914
Friedrich von Wieser 1851–1926
Eugen von Philippovich 1858–1917

Second Generation of the Austrian School
Ludwig von Mises 1881–1973
Joseph Schumpeter 1883–1950 (who became a neoclassical)
Karl Schlesinger 1889–1938
Hans Mayer 1879–1955, professor at Vienna
Richard von Strigl 1891–1942
Leo Illy (Leo Shönfeld) 1888–1952

Third Generation of the Austrian School
Friedrich August von Hayek 1889–1992
Oskar Morgenstern 1902–1976
Gottfried von Haberler 1900–1995
Fritz Machlup 1902–1983
Ewald Schams 1899–1955
Paul N. Rosenstein-Rodan 1902–1985
Ludwig M. Lachmann 1906–1990
Friedrich A. Lutz 1901–1975
Vera C. Smith (Lutz)
Felix Kaufmann 1895–1949
Alfred Schütz 1899–1959, social scientist

Foreign Associates of the Austrian School
Philip H. Wicksteed 1844–1927
Knut Wicksell 1851–1926
Irving Fisher 1867–1947
William T. Smart 1853–1915
Frank A. Fetter 1863–1949
Michel Auguste Adolphe Landry 1874–1956
Herbert J. Davenport 1861–1931
Frank H. Knight 1885–1972
Lionel C. Robbins 1898–1984
John R. Hicks 1904–1989
George L. S. Shackle 1903–1992

BIBLIOGRAPHY

Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. Don Lavoie). Routledge, London.

Wednesday, August 8, 2012

Top 30 Heterodox Keynesian/MMT Economics Blogs

Updated

I have already drawn attention to a list of the top 40 Austrian economics blogs.

In response, here is my list of top 30 heterodox Keynesian/MMT economics blogs and web resources. It is not based on objective criteria like number of web hits, but is very much a subjective list, on the basis of how popular various sites seem to be and (in my view) their importance:
I. Post Keynesian Blogs

(1) Debt Deflation, Steve Keen
http://www.debtdeflation.com/blogs/

(2) Post Keynesian Economics Study Group
http://www.postkeynesian.net/

(3) Naked Keynesianism
http://nakedkeynesianism.blogspot.com/

(4) Lars P. Syll’s Blog
http://larspsyll.wordpress.com/

(5) Philip Pilkington, Fixing the Economists
http://fixingtheeconomists.wordpress.com/

(6) Thoughts on Economics, Robert Vienneau
http://robertvienneau.blogspot.com/

(7) Social Democracy for the 21st Century
http://socialdemocracy21stcentury.blogspot.com/

(8) Dr. Thomas Palley, PhD. in Economics (Yale University)
http://www.thomaspalley.com/

(9) Debtonation.org, Ann Pettifor blog
http://www.debtonation.org/

(10) Ramanan, The Case For Concerted Action
http://www.concertedaction.com/


II. Modern Monetary Theory (MMT)/Neochartalism

(11) New Economic Perspectives
http://neweconomicperspectives.org/

(12) Billy Blog, Bill Mitchell
http://bilbo.economicoutlook.net/blog/

(13) Mike Norman Economics Blog
http://mikenormaneconomics.blogspot.com/

(14) Warren Mosler, The Center of the Universe
http://moslereconomics.com/

(15) Centre of Full Employment and Equity (CofFEE)
http://e1.newcastle.edu.au/coffee/


III. Other Heterodox Blogs and Resources

(16) Prime, Policy Research in Macroeconomics
http://www.primeeconomics.org/

(17) Michael Hudson
http://michael-hudson.com/

(18) New Economics Foundation
http://www.neweconomics.org/

(19) Unlearningeconomics Blog
http://unlearningeconomics.wordpress.com/

(20) Yanis Varoufakis, Thoughts for the Post-2008 World
http://yanisvaroufakis.eu/

(21) Heteconomist.com
http://heteconomist.com/

(22) Real-World Economics Review Blog
http://rwer.wordpress.com/

(23) Econospeak Blog
http://econospeak.blogspot.com/

(24) James Galbraith
http://utip.gov.utexas.edu/JG/publications.html

(25) Robert Skidelsky’s Official Website
http://www.skidelskyr.com/

(26) The Other Canon
http://www.othercanon.org/

(27) Levy Economics Institute of Bard College
http://www.levyinstitute.org/

(28) Multiplier Effect, Levy Economics Institute Blog
http://www.multiplier-effect.org/

(29) John Quiggin
http://johnquiggin.com/

(30) The Progressive Economics Forum
http://www.progressive-economics.ca/


Staff Pages of Post Keynesians
(1) Paul Davidson, Holly Chair of Excellence in Political Economy, Emeritus
http://econ.bus.utk.edu/department/davidson.htm

(2) Marc Lavoie, Professor in the Department of Economics at the University of Ottawa
http://www.socialsciences.uottawa.ca/eco/eng/profdetails.asp?id=64

(3) Mark Hayes, Robinson College, Cambridge
http://people.pwf.cam.ac.uk/mgh37/

Skidelsky Interview on How Much is Enough?

An interesting interview by Institute for New Economic Thinking (INET) Executive Director Robert Johnson with Robert Skidelsky and his son Edward Skidelsky about their new book How Much is Enough?: Money and the Good Life (Allen Lane, London, 2012), taking up a theme of Keynes in his essay Economic Possibilities for Our Grandchildren (1930).






Top 40 Austrian Economics Blogs

This has been attracting some attention: it lists the top 40 Austrian economics blogs:
Jared Cummans, “Top 40 Austrian Economics Blogs,” Commodity HQ, August 7, 2012.
There are a few here I was not familiar with.

Also, I am not quite sure what the exact criteria were for determining the full order, but the site says the first 12 are decided “(subjectively) as the most active of the list.”

I might put together a top 40, heterodox Keynesian/MMT list of blogs and web resources!

Steve Keen Interview With Finance News Network

A short but nice interview here with Steve Keen on the Finance News Network:
“Steve Keen Refuses to Back Down,,” Finance News Network, August 6.
You can watch the video of the talk or read a transcript.

Wednesday, August 1, 2012

Lachmann and Post Keynesianism on Prices

Ludwig Lachmann wrote the following on the nature of prices that is of some interest:
“In different markets prices are formed in different ways. Not all pricefixing agents have the same interests. Here historical change plays its part. The decline of the wholesale merchant, whose dominating role Marshall took for granted, for instance in textile markets, and who naturally aimed at setting such prices as would permit him to maximize his turnover (a short-run consideration), reduced the range of markets with flexible prices. The rise of the industrial cost accountant as a pricefixer, with his interest in ‘orderly marketing’ (a long-run consideration) and his aversion to frequent price changes, has made most prices of industrial goods in our world Hicksian fixprices. In all markets dominated by speculation of course prices must be flexible. On the other hand, all bureaucracies, including those concerned with production planning in large industrial enterprises, naturally abhor flexible prices.” (Lachmann 1994: 166).
In Classical economics (from Smith to Mill), the equilibrium value of prices in the long run was essentially the cost of production. With the marginalist revolution, value was held to be subjective, and prices a consequence of the marginal utilities of market participants (Lachmann 1994: 165).

Yet, with the existence of “fixprices” in many markets, it is obvious that cost of production plus the profit markup must explain how prices are set in the real world.

That nobody can sell a product for which there is no subjective demand is obviously true, but after that the subjective theory of value has its limitations.

While economic “value” defined simply as the pleasure, utility or satisfaction we derive from commodities is subjective, it is a mistake to think that prices are therefore all subjective, or just determined by subjective utilities. One has to distinguish “price theory” from “value theory,” but curiously modern neoclassical economics has largely dispensed with “value theory.” As I. A. Kerr has pointed out,
“[m]ore recently, the attitude of neoclassical economists to the value/price distinction has been one of indifference, rather than hostility … value theory is virtually synonymous with price theory and many economists would be hard pressed to explain the difference between the two. In fact, the two terms are widely conflated by neoclassical economists” (Kerr 1999: 1218).
Yet that conflation is a mistake.

The existence of price setting/price administration is real.

You might wonder: where does this leave the idea held by neoclassicals and some Austrians of an economy with a strong tendency to a general equilibrium, in which prices gravitate to their equilibrium, market clearing levels? It leaves the idea looking highly suspect, to say the least.

From the perspective of Walrasian general equilibrium theory, all real world prices are “disequilibrium prices” (Lachmann 1994: 165).

While one can point to certain flexprice markets where eliminating excess stock leads to some flexibility in price, and we regularly see “clearance sales” by retailers to liquidate unsold stock, the notion of a general “market clearing, equilibrium price” in many other markets with fixprices/administered prices must be judged a myth. The empirical reality is discussed by F. S. Lee:
“Where reported … business enterprises stated that variations in their prices within practical limits, given the prices of their competitors, produced virtually no change in their sales and that variations in the market price, especially downward, produced little if any changes in market sales in the short term. Moreover, when the price change is significant enough to result in a non-insignificant change in sales, the impact on profits has been negative enough to persuade enterprises not to try the experiment again … The absence of any significant market price-sales relationship in the short term has also been noted in various industry studies … Consequently, business enterprises do not utilize an inverse price-sales relationship when making pricing decisions and nor do they set their prices to achieve a specific volume of sales. Instead, the prices they set are maintained for a variety of sales volumes over time.” (Lee 1994: 319–320).
Lee concludes that this “necessarily means that administered prices are not market-clearing prices and nor do they vary with each change in sales (or shift in the virtually non-existent market or enterprises ‘demand curve’)” (Lee 1994: 320, n. 18).

The inference from this and empirical reality is, of course, that with really large falls in demand, businesses fire workers and cut production. Prices are not adjusted to clear markets with excess volume.


BIBLIOGRAPHY

Kerr, I. A. 1999. “Value foundation of Price,” in P. A. O’Hara (ed.), Encyclopedia of Political Economy, Routledge, London and New York. 1217–1219.

Lachmann, L. M. 1982. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” Journal of Institutional and Theoretical Economics 138.4: 629–645.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. Don Lavoie). Routledge, London.

Lee, F. S. 1994. “From Post Keynesian to Historical Price Theory, Part 1: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.

Web Conference with Steve Keen

A web interview here with Steve Keen, with remarks on a number of issues, held on 29/30 July 2012. Audio is not the best!


Steve Keen on Fixing the Economy Panel

Steve Keen speaks here on a number of economic issues as part of a panel on “Fixing the Economy.” One of the other speakers is Ellen Brown, author of Web of Debt, though I do not agree with all the ideas in that book.