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I think a big part of the problem is that you even view it as an issue of "opponents".


"We don't need exotic fixes to seemingly complicated problems, we need a return to the basic lessons of Econ 101. Simple economics is not simple-minded. Think clearly about incentives, think clearly about information processing, and think clearly about how the rules of the game structure the incentives and impact the quality of the informational signals sent and received, and the flow of new information that gets communicated among economic participants."

Is very well said. What's a puzzle is why you think there's a disagreement on these points.

There are real disagreements, of course, but the whole problem with the "fight of the century" mentality is precisely that you (and many others with you) are under the impression the fight is over this sort of stuff, or over liberty.

I have other thoughts here on Glasner:

I thought Glasner's post was superb. I'm sick of this bad mouthing people as enemies of liberty or enablers of cronyism getting a pass as productive debate.

Even with my limited knowledge of the history involved I can see where Glasner gets several points of history wrong.

What I don't understand about guys like Glasner is why they don't care about at least getting the history right.

A really good history of development of economic theories of the 20s & 30s has yet to be written.

It's remarkable how few even get that Keynes in the _General Theory_ was debating Pigou -- when Keynes says "classical economics" he means Pigou.

Keynes random shots at Bohm-Bawerk & Hayek show that Keynes had no idea of the logic of choice he imagined himself to be dealing with.

Glasner's analysis of the events of the 1920s focuses on stability of the "aggregate" demand for money with the "aggregate" supply of money.

And he considers that all was well with the monetary world through the middle years of the 1920s because of the stability of the value of money.

But the point that Hayek focused on was the error or incompleteness of thinking only in terms of "price level" stability. Whereas Hayek was asking us to direct our attention to what may be happening to the structure of relative prices and the intertemporal use of resources in the structure of production "beneath" the "surface" of a seemingly "stable" price level.

It is interesting, perhaps, that Gottfried Haberler, in his most "Austrian" piece from the early 1930s on "Money and the Business Cycle" (1932) actually drew attention to what he considered the limits in the analysis of Ralph Hawtrey and Gustav Cassel (the very people who Glasner points to in his own piece for praise).

The "stable" price level hid from sight the "relative inflation" that the Fed's monetary policy had generated by keeping prices in general higher than they otherwise would have been due to the influences of the "good" supply-side price deflation of greater output due to productivity increases and falling costs of production in many sectors of the economy.

Glasner's observes that an interest rate of 3.5 percent in 1927 does not seem so "expansionary." But what matters, it seems to me, is not the absolute level of the rate of interest set or manipulated by the monetary authority, but rather whether it significantly deflects the market interest rates from where the market would have been tending to set them, if not for the interventions of the central bank.

And, thus, throwing savings and investment out of balance, and setting in motion an pattern of capital, labor and resource use inconsistent with longer-run general market coordination.

These aspects of manipulated money's influence on markets neither Hawtrey and Cassel saw in the same way that Hayek and the Austrians did.

Indeed, Hawtrey reviewed Hayek's "Monetary Theory of the Trade Cycle" and Hayek reviewed one of Hawtrey's books on the trade cycle at the same time in 1933, and the differences in emphasis were very clear in their analysis of each other's work.

I should mention that Ralph Hawtrey was an outstanding economist. His 1927 book on "The Economic Problem" is, still, insightful and very worth reading. His analysis of the nature and workings of the market, and the role of the entrepreneur is well done.

And Gustav Cassel was one of the leading voices for classical liberalism and free market economics in Sweden (along with Eli Heckscher) in the interwar period. Along with Mises, he was one of the modern formulators of the purchasing power parity theory of foreign exchange.

Cassel strongly opposed socialism and government interventionism, and was a friend of free trade. And he wrote an excellent, critical review of Keynes' "The General Theory" in the "International Labor Review" in 1937, challenging Keynes from a general equilibrium perspective.

Richard Ebeling

Richard has beaten me to the point about productivity and inflation. If productivity is improving then prices should deflate, as they did in the US in the late 19th century. But in the world of demand management, price deflation is a strange and un-natural thing.

The obvious errors are that there was no price deflation in the US, and certainly not in Germany or Austria during the 20’s.

I would love to see the Hayek review of Hawtry if anyone knows of a copy anywhere on the web.

Also, Prof. Ebeling, I read internet reviews of Hawtry that have him describing a working capital credit induced boom? Do you have an opinion on this?

Greg -
re: "when Keynes says "classical economics" he means Pigou"

It's pretty clearly laid out that he's not just talking about Pigou and he's talking about the common element of a whole range of ideas.

Daniel, read this:


And then we can talk.

Richard, it's clear that Glasner is _not_ engaging theory, he's giving his own back of the envelope assessment of the at-the-time empirical judgments about the state of things as a particular period in history, and he's doing a thumbs-up / thumbs-down on the "economics" of different figures based on how good he judges their empirical assessments at the time to be.

This isn't a sound way to evaluate theory, but it's common practice among tenured professors and 2nd hand dealers in ideas. Glasner is merely joining the party.

Speaking of possible historical misstatements in Glasner's account:
I remember somewhere in Hayek's writings his criticizing England's return to the gold standard at the pre-WWI parity. Do I remember correctly? Does anyone recall the source I'm referring to and its date?

Hayek discusses the British return to the gold standard at the pre-WWI parity in this video:

He also discusses it in the 1978 UCLA interviews, available in video & in transcript on the web.

Mises certainly criticised Britain for returning to the gold standard at pre-war parity.

What I don't understand about the "gold supply" explanation of the Great Depression is the situation with reserve ratios. George Selgin goes to great lengths to show that in the late 18th century banks in backwoods places in Scotland were using very low reserve ratios, less then 10% often less than 5% even 2%. They did that even though banknotes circulated very rapidly at the time.

In 1929 reserve ratios were set by Central Banks and were much higher than they had been a century before in Scotland. If the central banks wanted to increase the money supply then why was gold supply an issue. Why didn't they just decrease the reserve ratio? I can't see why they thought they were close to the limit where doing that would cause bank failures, gold outflow or calls on Central banks to act as LOLR.

Incidentally, Daniel, when Keynes talks about "Classical" economists he doesn't really mean that, well not in terms of monetary theory anyway. He means Pigou and Marshall as Greg says. If you want convincing on that read J.E.Cairne's "Principles of Currency", I'm sure you'll love it.

Keynes didn't understand what was in Pigou because it was too mathematical. He used him as a strawman.

Mario, of course, is right.

And Keynes' great slight of hand was the outrageous pretense that this bogus strawman represented all of non-crank economics here-to-for.

As far as I know, Selgin description is a little wrong, because it wasn't a free banking system. No free banking system can operate with so little reserves. I think Larry Sechrest had a review of Larry Whate's book and, using the same bibliography White used, he reached a different conclusion.

Current -
Of course he meant Pigou, and Marshall. And what we call "Neoclassicals" and their classical roots. He addresses Pigou's book more directly later - this is true. When he is discussing the classicals he cites lots of people and he really boils it down to a common denominator set of ideas that he takes issue with. Yes "classical" of course doesn't mean our "classical", but he's obviously not just talking about Pigou.

Mario -
I'm curious why you think math would stop Keynes from understanding Pigou. Could you explain that a little more?

Is "four" a lot Daniel?

By my count, ch 2 of the GT cites four people:

Pigou (by far the most)
Marshall (second)

and then one-offs to Mill and Ricardo (the latter in a footnote).

He mentions Robbins in a footnote, but no cite.

I'm sorry, but he doesn't cite "lots of people." He's CLEARLY talking about Pigou and that leads him into all kinds of trouble about what the "classicals" believe, especially when he ignores the whole Swedish tradition as well as the Austrians.

Keynes's "classics" reflects the narrowness of his understanding of the history of economics as Hayek noted years later.

On Niko's point....

I don't want to get too much into the argument about whether Selgin is right in his books on Free banking.

Let's just put the question like this... Why do proponents of the gold-supply explanation believe that the banking system was operating with the lowest possible gold demand? That assumption is necessary if you want to show that a fall in gold supply leads to a fall in the quantity of money. Why do they think that the quantity of money was tightly associated with gold supply?

By modern standards a central bank would be quite lax to allow that to happen. According to conventional theory the reserve ratio should set demand for base money above what it needs to be. That means that when monetary expansion is needed it can be accommodated without causing the commercial banks to suffer from a shortage of reserves due to redemptions and clearings.

I think that supporters of Central banking are taking an inconsistent line. On the one hand a Central bank can supposedly control the money supply (and things like NGDP) by controlling the discount rate and the reserve ratio, the amount of base money is supposedly not so important. If it were then shifts in demand between fiat notes and bank balances would be important. So, how could it be that Central banks were getting things right in the 30s but were still condemned to fail because of limited gold supply?

Steve -
Citing four people spanning several decades and explicitly stating he's talking about a whole group of people seems to me to suggest he's interested in looking at the common element of a wide swath of theory.

If there's a reason you think he's only talking about one single person, I'm happy to hear your thoughts on why. You say "clearly", but it's not clear to me - so indulge me. My evidence is that he says: "The object of such a title is to contrast the character [i.e., general elements and structure] of my arguments and conclusions with those of the classical theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation as it has for a hundred years past"

In a footnote he states that "I have become accustomed, perhaps perpetrating a solecism, to include in "the classical school" the followers of Ricardo, those, that is to say, who adopted and perfected the theory of Ricardian economics, including (for example) JS Mill, Marshall, Edgeworth, and Prof. Pigou."

How you get from that that he's just talking about one guy is a complete mystery to me.

You put "clearly" in all caps as if the fact that this is a dialogue between Pigou and Keynes is obvious. It's not quite clear to me, Steve. Can you spell it out a little? Obviously Pigou is an important figure in the book. I'd even call him a "foil" in the book. But the idea that the General Theory is just "debating Pigou" as Greg puts it needs a lot more than an all-caps "clearly".

What's most amazing about this line of argument is that usually the criticism is that his word "classical" is far too broad. This I'd agree with simply as a matter of history, but I think it's a reasonable enough way of framing what he has to offer.

Now you're telling me that instead of being too broad, "classical" just means one man?

Daniel loves to give the most generous interpretations imaginable to his heroes -- often to the point of attributing things to them they clearly did not say, saying they made analyses they clearly did not make. Pigou is the only economists listed in the index who gets more than 3 page citations. I was under the impression, reading the book, that Pigou was pretty much the only person he was responding to. A few names thrown out here and there certainly does not indicate Keynes was talking about them in any substantial way.


"Careful analysis of Pigou’s writing proves that he had an unemployment model that Keynes failed (refused?)to understand. I will argue that Pigou’s thesis resembled those of the classical economists (no involuntary unemployment) only in the long-run framework. But, I will also emphasize that to him long-run factors had “little relevance to the problem of unemployment” (Pigou 1933, 188, 248). The Theory of Unemployment attempted to explain short-run unemployment created by business cycles; within such a framework most of Keynes’s criticisms fail to apply."

"Pigou’s Inconsistencies or Keynes’s Misconceptions?" by Nahid Aslanbeigui, in History of Political Economy (1992), pp. 413-433.

Chapter 2 is by any reasonable interpretation an attack on what Keynes believes is the classical system, but in the form of Pigou's version of it. There's a reason that the overwhelming majority of actual names mentioned and works cited are to Pigou.

Thus, he CLAIMS to be going after "the classicals" but his rhetorical approach is to treat (mostly) Pigou as representing the classicals, and if he can thereby show that Pigou is wrong, he will have, by implication (in Keynes's head) taken down the classical system.

In the marketplace, this is known as a "bait and switch." All Keynes does in chapter 2 is to show that the Pigou version of "classical economics" has problems. He does not treat the Swedes. He does not treat the Austrians. He does not treat the early American monetarists.

The "pre-Keynesian" work on money, interest, and unemployment was far more rich and diverse than Keynes's cursory treatment.

And yes, he was both too broad and too narrow in the following sense: he painted over all of the important distinctions among the various thinkers by calling them all "classical" (that's the too broad) and then treated Pigou as their representative (which is too narrow).

Whatever else is true of Keynes's system in the GT, chapter 2 is a shambles as a history of economic thought and as a fair treatment of the views that preceded him.

Speaking of shambles, has anyone read Wapshott's Hayek / Keynes book?

The gold standard critique _is_ a critique of monetary authorities. While there may be some countries that had very thin gold reserves, and so were compelled to allow spending on output in their countries to fall off _if_ they remained on the gold standard, the U.S. were not in that situation.

For the U.S., to keep the money supply growing (as traditional monetarists favor) or better, to keep nominal income growing on trend, gold reserves would have to be released.

It is possible, of course, that the Fed would have run out, even if no one had worried about suspension or devaluation. But if reserves were being released, those both become possibilities, and so a gold run could happen. Still, the Fed had substantial room for a more expansionary monetary policy. During many periods the U.S. was accumuating gold reserves!

Now, my view, is that the Fed should have still kept nominal spending growing on target, and then suspended if it ran out of gold reserves. If a gold run happened, then suspend.

But, if you are very committed to avoiding suspension, then it seems sensible to head off the run by greatly limiting the release of reserves to start with. And so, from that perspective, staying on gold "requires" allowing reduction in nominal expenditure. Still, it seems to me that accumulating gold reserves (to be better prepared for the run?) is pretty counterproductive.

And, of course, it is France that is usually counted as the real villan in this story. Their effort to accumulate massive gold reserves increased the demand for gold and so required an increase in its relative price, and so, lower money wages and prices.

Does anyone have O'Driscoll's email address?

I'd like to get a copy of his recent paper on Hayek's monetary economics.


Are you saying that the other nations of the world had very thin gold reserves before 1929? If so wasn't it rather remiss of them not to have dealt with this problem earlier?

Troy, Mario, and Steve -
I must have been confused. If the contention is that Pigou is an important figure that Keynes identifies, misinterprets, and spends time critiquing than I am obviously an unambiguously on your side.

That seems to be all you're trying to prove to me. If that's the case, I most definitely agree.

Mario -
Your quote is a great example of how I think Keynes uses Pigou and the "classics" (his classics - our classics and neoclassics). He is offering a theory of stable unemployment equilibrium. Your quote seems to suggest Pigou held such a view. I've read large portions of his Industrial Fluctuations, but will have to take your word on his Theory of Unemployment.

Troy -
I really wish I could get through a conversation with you without some accusation of a breach of decorum on my part.

Steve -
re: "All Keynes does in chapter 2 is to show that the Pigou version of "classical economics" has problems. He does not treat the Swedes. He does not treat the Austrians. He does not treat the early American monetarists."

Right. I'm failing to see your point. Is there some demand for the General Theory to be a critique of the entire range of theories out there or a history of thought? I'm honestly not quite sure what you're trying to say with this.

Troy -
I'm going to be obnoxious and continue on this point, because I get it repeatedly from you and others.

Take a look at everything you've ever written online about Keynes, Krugman, and DeLong. Now take a look at everything I've ever written online about Hayek, Steve, and Peter.

I don't recall if I've ever read a single sentence you've written that is positive - to say nothing of simply charitable - about any of them. Furnish me with an example, but none come to mind. I have good things to say all the time about Hayek, Steve, and Peter. And yes I like Keynes - but perhaps that because I find the arguments convincing. What possible interest could I have in simply having a positive disposition towards a guy that's been dead for sixty years, thus motivating me to give his arguments a too-charitable reading? I haven't staked a career on this. My short career in economics has had nothing to do with macroeconomics or history of thought. There's no reason to give him a break for the sake of giving him a break. I don't do that. Keynes is dead. I have no concern whatsoever about criticizing him, and I've shown no hesitation in communicating how highly I think of Hayek, Steve, Peter, or others in that camp and in pointing out what I think they have right.

You've got strength in numbers here, Troy - but try examining how fairly you go about thinking and talking through these ideas before you cast stones at me.

Well the goal posts have been moved again...

Look, you argued that he was trying to respond to a "wide swath" and a "common denominator." My point is that he wasn't. He was responding to a very narrow conception of classical economics and thought it was sufficient to overthrow all that came before him. By not treating those other, very distinct, "classical" traditions, he created a strawman and then gave it a good push over.

In other words, you are simply incorrect in claiming he was going for the wide swath/common denominator. He was doing just the opposite: picking out one easy target, focusing on it, and arguing that everyone else before him was therefore wrong.

That's my point.

In other words: Keynes's critique of the classics isn't worth very much at all.

Steve -
Moving goalposts is exactly how I feel like. Keynes was crticizing a wide swath of "classical" economics which he felt had an underlying - sometimes even unstated - assumption that had lead many people astray since Malthus. He thought his theory remedied this.

That's always been my position and still is.

You all are coming at me with the very obvious point that he talked about Pigou an awful lot. If that's the question at hand, then yes, I agree, he certainly did address Pigou directly and even that in some cases his criticism of Pigou was of dubious fairness.

But that's a move of the goalpost Steve. The initial claim was something like Pigou and the "classicals" were one and the same in Keynes's mind and that is certainly not true and I'm still not sure why you guys think that's true.

We're all just talking past each other at this point, so I will leave it with my last comments.

The important point for today is that so many economists have little or no knowledge of pre-Keynesian theories of the business cycle and monetary theory. So they think that the macro-paradigm is the only way to analyze problems of inflation, cyclical unemployment and so forth.

This is what I understand some philosophers would call a [Thomas]"Kuhn loss" -- knowledge lost when the paradigm shifts.


I don't think that having a central bank build up gold reserves is desirable. Given the situation developing in the thirties, immedate suspension is the wise course--and target nominal GDP.

Because the U.S. had vast gold reserves, it could target nominal GDP for a long time and maintain redeemabilty by just running down the reserves. When they can't do that anymore, then suspend. Maybe they wouldn't have needed to.

My understanding of France is that they were imposing a 100% marginal gold reserve requirement. That was a foolhardy policy.

Of course, I believe that Mises was a fan of that approach. And I just read a long quote from Hayek on DeLong's blog where Hayek seemed to think that such an approach was wise. The quantity of money in a nation should change with international gold flows, just as if it was a pure gold coin standard. Yikes!

I think that free banks under a gold standard would never have a 100% marginal reserve requirement according to "foreign" gold flows. I would expect them to keep very thin gold reserves and suspend.

But if some foreign country, like France, had a 100% marginal reserve requirement, then the resulting increase in the world demand for gold would force our free banks to suspend. And depending on exactly how their option clauses worked, they would generate the deflationary pain needed to depresses prices and wages consistent with the rising relative price of gold. You are left at the mercy of other countries that are on the gold standard no matter how crazy their policies.

For example, if the U.S. had free banking in 1914, it would have still suffered inflation as Great Britain, France, and Germany all used their gold reserves to finance their war effort.

Ah, another debate about History of Economic thought with Daniel Kuehn....

Can everyone please take what follows as mild criticism :)

The same thing happens every time. He makes some broad generalisation, then someone else makes another broad generalisation in return. Then he redefines what he was talking about when someone tries to make the debate more specific. Then everyone else gets irritated. Not only is nobody ever convinced about any aspect of the debate, but normally we don't even nail down exactly what the specific questions that need answering are.

But, when we talk about specific issues and often when we talk about economics things are more productive. That's because we can get down to a specific subject more quickly and leave complicated controversies that involve huge groups of thinkers (like "Classical Economists") behind.

Daniel will not be convinced into a view of the Classical economists that differs significantly from Keynes and Krugman's. That's just because he trusts them and not us. There's nothing wrong with that. He'll discover the complexities of the question when he reads some of the Classical economists for himself.


It's not a matter of lack of decorum, but a tendency to see the ideas of certain people through rose-colored glasses.

Now, it would be easy to argue that you are being patently unfair to me in regards to what I have written about people like Krugman and Keynes, since among the things I have said about them including the following:

And you should also be on the lookout for my paper on cities in an upcoming Advances in Austrian Economics, in which I use Krugman's work extensively (to completely support Austrian economics -- which I am sure would horrify him). I'm pretty sure I don't criticize him even once in that paper.

Of course, most of my blog postings on Keynes are negative, but then most of what Keynes said in the General Theory is idiotic.


I wish what you said at the end were true, but Daniel reads Keynes and Krugman like fundamentalist Baptists read the Bible: as the unerrant word of God. One can't argue with True Believers.


If a central bank is targeting interest rates, then it needs to raise its policy rate when the natural interest rate rises and lower it when the natural interest rate falls. If we observe a decrease in the policy rate, we cannot assume that it has pushed the market rate below the natural rate. It may have exactly matched a decrease in the natural interest rate or else failed to decrease the market interest rate enough to match a decrease in the natural interest rate.

I think interest rate targeting is a bad idea, but it is a very common practice. Glasner's (and Hawtrey's)point about 3.5% not being exceptionally low simply suggests that you need to give a reason why you think that the natural interest rate was higher. Of course, it might have been. Just like the 1% rates a few years back might have been equal to the natural rate or todays .2% might be higher than the natural rate. So, I think there is a certain burden of proof for those of us who think that policy rates very low by historical standards in 2002 did not involve a market rate below the natural interest rate. But to explain a massive depression as being due to malinvestment because the market rate was below the natural rate, but market rates weren't exceptionally low, puts the burden of proof on those making the claim.

As for the productivity masking deflation, that is a faulty argument. Imagining a static economy with a one shot increase in productivity, with the price level immediately falling to match the lower unit costs, and then imagining that the quantity of money is increased enough to force the price level back up to the initial starting point has some value. But it is a serious error to imagine a monetary regime that keeps prices steady on average is more or less the same thing. It just isn't the case that we live in a constant output world, and there just happened to be a few favorable productivity shocks in the twenties. Growing output can be expected. In a world with growing nominal expenditures and expecations of stable output prices, there is no need to force the market rate below the natural rate to force prices back up. Prices just don't fall like they would in a deflationary regime. Nominal demands are expected to rise and so prices are set in a way that leaves them stable on average. Prices are set higher for normal goods, expecially luxuries, if producivity grows less than average Inferior goods, or goods with greater than average productivity end up with lower prices. Further, the nominal demand for credit is higher than it would be in a deflationary world, which matches the growing nominal supply of credit, and keeps market rates from falling. There is no persistent decrease in the market rate relative to the natural rate. And even if there is some impact on the allocation of resources (which isn't obvious at all,) there is no reason why it cannot persist. What? It has to stop when productivity quits rising?

As for history, with a gold standard, the price level depends on the supply and demand for gold. If the demand grows faster than the supply, there is a deflationary trend. Productivity impacts real income and the demand for gold. Productivity in gold mining impacts the supply of gold.

With gold a luxury and mining being an increasing cost industry, I think a deflationary trend is very plausible. But there is no "productivity causes deflation" principle. If gold was constant cost and the demand for gold had an income elasticity of one, then a gold standard would result in a stable price level. Growing productivity would not result in a deflationary trend for prices.

Anyway, Glasner is quite aware of Hayek's theory. It is just that he thinks it is doesn't apply to the Great Depression. Even if there had been no malinvestment in the twenties, there would have still been a Great Depression because of a large increase in the world demand for gold.

Given the modest decrease in the policy rate, how much malinvestment could there have been? How much disruption would occur due to a reallocation of resources? So, you have at best a trivial cause that supposedly has a massive effect. And we have an independent cause, that quite plausibly has a massive effect.

How can one even know what the natural interest rate if the central bank is targeting interest rates? One can only know what the natural interest rate is when the market discovers it, and if the central bank is targeting certain interest rates, it is preventing the market from discovering the natural interest rate. We find out we failed to find the natural interest rate when, if it's too low, we have created a bubble that then bursts and puts us in the situation we are now in, or that we have it too high when the central bank has stagnated the economy for a while. It seems that we ought to stop trying to target what emerges naturally, and just let the thing emerge naturally!

Hayek again and again testifies to Keynes' ignorance of the economics literature:

"There were of course extraordinary gaps in [Keynes'] knowledge .. I had to tell him every day .. about the earlier English economists [for example] I had to tell him about Henry Thornton."

We know that Keynes only formally studied a single semester or two of economics.

He had no graduate school training in economics.

And we know that Keynes was extra-ordinarily busy with other activities -- working his financial portfolio & that of others, managing the affairs of this friends, helping run a theater, writing for Fleet Street newspapers, involving himself in Liberal Party affairs, advising the government, etc., etc.

For most of his life economics was a Keynes sideline. It seems he learned most of what he knew haphazardly from what he picked up from articles he edited for the Economic Journal.

We have no reason to believe that this man knew a lot of economics, and a great deal of evidence suggesting that he didn't know that much economics.

Hayek's well considered view is that Keynes knew very little economics outside of basic Marshall & extensions of Marshall found in Pigou, etc. -- and we know that Keynes didn't even know Pigou's work that well, because Keynes so badly misrepresents it.


I don't favor interest rate targeting either. But I don't agree that bubbles have anything to do with it, much less that a too low market interest rate can only be discovered after a bubble bursts.

I think it shows up as a shortage of output. No bubble is necessary. And an asset bubble could occur with the market rate equal to the natural rate.

Further, keeping the quantity of money fixed doesn't solve the problem either. Because prices, including wages, are not perfectly and instantly flexible, the market rate can deviate from the natural rate because of an imbalance between the quantity of money and the demand to hold it.

If Hayek is correct that low interest rates encourage riskier investments and high interest rates encourage more conservative investing, then one would expect interest rates to go down when people are being too conservative, and rates to go up with they are being too risky.

If interest rates are being artificially held below the natural rate, this would be a signal, which people are mistaking as coming from the market, that more risk should be taken. When interest rates are low, money is cheaper, and people are willing to borrow more to take ever-greater risks. One might buy a house one was not going to buy before. One might start flipping houses, since the low interest rates make the risk seem low. As people start buying more houses because it's cheap to do so, house prices go up -- much more than they would without the artificially low interest rates. This of course encourages more houses to be built, etc. Should the interest rates go up -- especially on variable loans -- the mortgage costs go up, and people stop buying houses, people suddenly can't afford to pay their mortgages, etc. The housing prices thus drop. Standard boom-bust cycle. This should sound familiar. It should, because it's what happened. Greenspan was putting downward pressure on interest rates, and that policy continued after he left. Note when they let interest rates go back up, we got recessions. This one was bigger because risk was in something more widespread this time -- housing instead of high-tech companies.


I agree that free banks would not have a 100% marginal gold reserve requirement. I also see what you mean about the gold standard leaving one country at the "mercy of others". But my point wasn't so much about free banking as about the market/quasi monetarist view.

What I don't understand is where you say:
"As for history, with a gold standard, the price level depends on the supply and demand for gold."

That doesn't sound very monetarist, or even quasi-monetarist :). How do you get to that from MV=PQ?

Let's suppose I'm the wise and long-lived Central banker of a small south American state in the 19th century. My country is on the gold standard in ~1870 when I start my tenure. I work out that in the future I'm going to need "ammunition" in the form of gold reserves. So, I start slowly stockpiling gold. I buy just a little more each year until I have much more than would be reasonably needed according to a reserve-ratio determined by redemption demand.

Now, suppose an international recession comes along. Suppose that prices are falling internationally. Why can't I use my stockpiled reserves to expand the quantity of money and hence MV? Surely doing that will have international implications, it may cause changes to the balance of trade, but why would that be enough to prevent recovery?

Another CP thread gone off the rails on a lot of personalistic ranting and raving. Gag.

Returning to the main theme, the extremely provocative post by Glasner, several people declared that he made mistakes about history. However, I seem to fail to see any of those people actually listing any of the mistakes he supposedly made. I am not sure what I ultimately think about Glasner's argument, but offhand I did not see any obvious historical mistakes. Anybody want to get specific with that, preferably along with how that would undermine at least part of his argument?

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Web stations and not charging terresrtial stations illegal? BTW, is it really true that terrestial stations pay nothing

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