Pascal Salin on Money and Micro-Economics

|Peter Boettke|

IEA has published a new monograph by Pascal Salin that I highly recommend -- Money and Micro-Economics.

Highlights for me include Salin's emphasis that: "Statements about money and monetary policy are often inspired by supposed relationships between macro-economic variables. But these statements neglect the monetary behaviour of individuals. A realistic approach should be founded on the rational behaviour of individuals. The reasoning we use is inspired by the strict logic of human action. The approaches we are criticising depend on assumptions which have no necessary link with real human behaviour." p. 9

His discussion of the "economics of illusion" which constitutes the core of Keynesian macroeconomic policy: "In any human activity, we need to know the causes of a problem in order to define the best ways to solve it. This requirement often seems to disappear when people discuss economic problems. Thus, when there is a low rate of growth and/or a high level of unemployment, there is often a plea for an expansionary monetary policy and/or an expansionary fiscal policy without looking for the real causes of this low growth and high unemployment. If low growth is due to excessive taxation and regulation, monetary expansion cannot help. It can, at best, create short-run illusions in some cases. But, by focusing on monetary policy, one diverts attention from the true problems. As the illusions created by monetary policy fade away, the outcome is increased instability without any of the underlying problems being solved. Monetary instruments should be used to solve monetary problems and real instruments to solve real problems." p. 19

Also his diagnosis of "market monetarism", which is one I share -- "The intellectual revolution which is needed is not one which consists of substituting a nominal GDP target for an inflation target; it is one which consists of not defining policy in terms of global quantities inspired by Keynesian economics and, instead, considering the system of incentives that face economic agents given the institutional, tax and regulatory environment." p. 23

And finally, his alternative proposal which he states as follows: "Monetary rules must be defined and associated with sanctions. This could involve fines on monetary authorities which do not respect the rules; removing the governor of a central bank who does not reach the prescribed targets; or diminishing his (nominal) salary in proportion to the rate of money creation.

But there may not be a better rule and set of constraints than having to compete with others. However, even if competition between private money producers was not accepted, it could be possible to increase the degree of competition in existing monetary systems. To such an end, it would be necessary to repeal legal tender laws, i.e. to allow citizens of a country (or those of a monetary area such as the euro zone) to hold and to use the currencies they prefer. This would also imply the freedom to pay one’s taxes with the currency one would choose, in order to avoid the national currency (or the currency of the monetary area) having a privileged position and being protected from competition." p. 31.

 

Anyway, read for yourself and enjoy.

 

Comments

[Roger Koppl]

This looks great! In "From Crisis to Confidence" (also an IEA monograph) I say something quite similar. "A sound monetary constitution that insulates the economy from Big Player influence requires currency competition (p. 137)." My call for a monetary constitution took up about on page of a monograph devoted to a rather different overall purpose. It looks like Salin's monograph is much more focussed on monetary policy and the need for a monetary constitution. I look forward to reading it.

[Roger McKinney]

Nice monograph! Thanks!