“It is not surprising that Böhm-Bawerk and Mises came to radically different policy conclusions from Wieser and Schumpeter [sc. about the role of money]. Whereas Mises held that the stock of money was ultimately irrelevant, Wieser stressed that money’s function as a measuring rod must not be interfered with. Its value should be as stable as possible, and all destabilizing influences should be eliminated. Wieser suggested that one could optimize the national currency by abolishing commodity money and putting a pure paper money in its place. In fact, paper would be more stable because its value is not subject to the influence of the non-monetary demand for the monetary commodity.” (Hülsmann 2007: 235–236).How times have changed.
But this confirms that there was a forgotten wing of the early Austrian school, whose views were different from modern Austrians, and Wieser was an important member of that wing.
BIBLIOGRAPHY
Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism. Ludwig von Mises Institute, Auburn, Ala.
Hayek advocated 'token' money, and argued against the simple-minded 'gold money' ideology espoused by Rothbardians.
ReplyDeleteThis is a rather inconvenient fact for those who try to use Hayek's writings to justify their completely irrational obsession with shiny metal objects.
'But this confirms that there was a forgotten wing of the early Austrian school, whose views were different from modern Austrians'
Deletey is correct (see: http://mises.org/daily/1854 for more context on Hayek)
I think many modern Austrians would not disagree too much with what Wieser said there.
"I think many modern Austrians would not disagree too much with what Wieser said there."
DeleteYou're thinking monetary disequilibrium GMU Austrians?
But even they don't advocate fiat money, surely.
This school is often defined by its support for "free banking". This can mean support for Fractional Reserve Banking based on a commodity money but there is also interest in non-commodity money.
DeleteSee
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000118
for a discussion in this area.
(Selgin does not call himself an Austrian but is probably the most influential thinker in this area).
Of course this is not really "fiat" money but Wieser does not use that term either.
Right, Selgin doesn't support a return to commodity money. He states:
Delete"I’ve always shied away from arguing that we ought to re-establish a gold standard. Instead, I’ve favored reforms aimed at preserving our existing fiat standard while eliminating the role of bureaucrats, and increasing that of competitive market forces, in regulating that standard."
http://capitalismmagazine.com/2012/06/paper-bugs-or-stupid-arguments-against-gold/
Most in the Free Banking school (not synonymous with GMU Austrian, but with much overlap) would support a Market Monetarist NGDP level targeting rule as a desirable first step on the path towards Free Banking. Conversely, many MMs such as Scott Sumner and Bill Woolsey advocate various degrees of currency privatization.
Also, as Selgin's link mentions, there are both good and bad arguments for commodity money. Kurt Schuler at freebanking.org has particularly emphasized that a commodity standard is not compatible with central banking.
Kurt's relevant posts on gold and Free Banking can be found here: http://www.freebanking.org/?s=gold+glasner
"I think many modern Austrians would not disagree too much with what Wieser said there".
ReplyDelete"Wieser stressed that money’s function as a measuring rod must not be interfered with. Its value should be as stable as possible, and all destabilizing influences should be eliminated".
This is basically what Hayek thought. To Hayek this meant that "an appropriate average of prices" should be "kept constant" over time, i.e. that in general inflation/deflation should remain around 0% on average, such that money generally maintains the same value over time.
This is in complete opposition to Rothbardian gold-bug austrians who argue that constant deflation is the ideal - i.e. that money should gain value over time.
Unfortunately these sorts of austrians often use Hayek's writings to support their arguments regarding "price distortion", without apparently being aware of the fact that Hayek's proposed solutions are the complete opposite of theirs.
If money constantly gains value over time then its value is not stable - it is constantly changing. To Hayek, and apparently to Wieser too, this means that 'economic calculation' is necessarily impaired. As such, following Hayek's logic, a deflationary gold-money system would in fact be a cause of 'price distortions', rather than a cure.
That is a very interesting point, y.
DeleteThough Mises seems to think mild inflation or deflation is consistent with economic calculation:
"For the sake of economic calculation all that is needed is to avoid great and abrupt fluctuations in the supply of money. Gold and, up to the middle of the nineteenth century, silver served very well all the purposes of economic calculation. Changes in the relation between the supply of and the demand for the precious metals and the resulting alterations in purchasing power went on so slowly that the entrepreneur’s economic calculation could disregard them without going too far afield. Precision is unattainable in economic calculation quite apart from the shortcomings emanating from not paying due consideration to monetary changes."
Though actually the 19th century had some quite sharp deflationary and inflationary periods, so Mises was wrong about thinking the period only had slow changes in "purchasing power".
Hayek generally supported keeping MV constant , not the purchasing power of money.
DeleteIn "Denationalization of Money" Hayek recognized that if private currency issuers targeted price level stability rather than MV stability this would have a small distortionary effect on economic calculation but it would likely be minor compared to what happens under government controlled fiat money.
Rob, that's incorrect.
ReplyDeleteHayek explicity advocates general price level stability (equivalent to an average inflation/deflation rate of 0%), i.e. "stable purchasing power of money":
"If we are right that, being able to choose, the public would prefer a currency whose purchasing power it could expect to be stable, this would provide a better currency and secure more stable business conditions than have ever existed before". (p.101)
"The reason why people will tend to prefer a currency with a value stable in terms of commodities will thus be that it will help them to minimise the effects of the unavoidable uncertainty about price movements because the effect of errors in opposite directions will tend to cancel each other out. This cancelling will not take place if the median around which the deviation of individual prices clusters is not zero but some unknown magnitude". (p.74)
"a currency stable in terms of raw material prices is probably also the nearest approach we can hope to achieve to one conducive to stability of general economic activity". (p.75)
"My expectation would be that, at least for large regions much exceeding present national territories, people would agree on a standard set of wholesale prices of commodities to treat as the standard of value in which they would prefer to have their currencies kept constant. A few banks that had established wide circulation by accommodating this preference, and issued currencies of different denominations but with roughly constant rates of exchange with one another, might continue to try and refine the precise composition of the standard 'basket' of commodities whose price they tried to keep constant in their currency". (p.75-76)
"Neither a general increase nor a general decrease of prices appears to be possible in normal circumstances so long as several issuers of different currencies are allowed freely to compete without the interference of government. There will always be one or more issuers who find it to their advantage
to regulate the supply of their currency so as to keep its value constant in step with the aggregate price of a bundle of widely used commodities. This would soon force any less provident issuers of competing currencies to put a stop to a slide in the value of their currency in either direction if they did not wish to lose the issue business altogether or to find the value of their currency falling to zero". (p.95)
"A stable price level and a high and stable level of employment do not require or permit the total quantity of money to be kept constant or to change at a constant rate. It demands something similar yet still significantly different, namely that the quantity of money (or rather the aggregate value of all the most liquid assets) be kept such that people will not reduce or increase their outlay for the purpose of adapting their balances to their altered liquidity preferences. Keeping the quantity of money constant does not assure that the money stream will remain constant, and in order to make the volume of the money stream behave in a desired manner the supply of money must possess considerable elasticity". (p.81)
and the quote from my original comment:
ReplyDelete“If the value of money is so regulated that an appropriate average of prices is kept constant, the probabilities of future price movements with which all planning of future activities will have to cope can be represented as in Figure I. Though in this case the unpredictability of particular future prices, inevitable in a functioning market economy, remains, the fairly high long-run chances are that for people in general the effects of the unforeseen price changes will just about cancel out. They will at least not cause a general error of expectations in one direction but on the whole make fairly successful calculations based on the assumption of the continuance of prices” (p.71-72)
Well, your quotes indeed show that Hayek came to believe that stable prices would be be a practical method of achieving economic stability under private currency issues, which I already agreed with you on.
DeleteHowever at a purely theoretical level he recognized that this was still sub-optimal.
'It is now generally recognised
that even those additions to the quantity of money that in a
growing economy are necessary to secure a stable price level
may cause an excess of investment over saving. But though I
was among those who early pointed out this difficulty,l I am
inclined to believe that it is a problem of minor practical
significance. If increases or decreases of the quantity of money
never exceeded the amount necessary to keep average prices
approximately constant, we would come as close to a condition
in which investment approximately corresponded to saving as
weare likely to do by any conceivable method. Compared,
anyhow, with the divergences between investment and saving
which necessarily accompany the major swings in the price level,
those which would still occur under a stable price level would
probably be of an order of magnitude about which we need
not worry.' (DoM, pp87)
So, while I accept it is rather a pedantic point, I do think I am correct.
"your quotes indeed show that Hayek came to believe that stable prices would be be a practical method of achieving economic stability under private currency issues"
ReplyDeleteActually he thought that general or average price level stability was *necessary* for overall economic stability.
He thought that a system of competing private token-money issuers could achieve this, whereas governments could not.
"However at a purely theoretical level he recognized that this was still sub-optimal".
No, he thought that "additions to the quantity of money... are necessary", but believed that these additions would have the least negative impact - on the balance between investment and saving and on the structure of relative prices - if the general rate of inflation/deflation was maintained at 0%.
I quoted the exact passage above where Hayek explicitly and unambiguously says that increasing the money supply to maintain a 0% rate of inflation will have some small distortianary effects in a growing economy.
DeleteHere is the most relevant sentence again:
"It is now generally recognised
that even those additions to the quantity of money that in a
growing economy are necessary to secure a stable price level
may cause an excess of investment over saving."
"If increases or decreases of the quantity of money never exceeded the amount necessary to keep average prices approximately constant, we would come as close to a condition in which investment approximately corresponded to saving as we are likely to do by any conceivable method".
DeleteHe is saying is that increasing the money supply to maintain a 0% rate of inflation is necessary to avoid 'distortionary effects'.
At the same time he says that increasing the money supply to avoid distortionary effects may potentially also have some distortionary effects, but that these are "of minor practical significance", and "about which we need not worry".
was my comment deleted?
ReplyDelete