Friday, February 1, 2013

Teaching Austrians Endogenous Money



Last semester a couple PhD students in the economics program at George Mason started a Capital Theory Reading group. While the initial bi-weekly meetings were focused on Austrian Business Cycle Theory (ABCT), the discussion has more recently expanded beyond capital theory and into monetary theory. As the proponent of Post-Keynesian monetary economics among a group of Austrians, the conversation occasionally stalls when I try to explain the implications of endogenous money. The other students are, however, open to learning about endogenous money and we have collectively decided to make that subject the central theme of our next meeting.

This post (bleg) is a request for guidance in selecting the best and most appropriate readings to teach endogenous money to Austrians that are largely unfamiliar with the theory. What academic papers or book chapters would you recommend?

Thanks in advance for your help.

25 comments:

  1. Are there any other students or profs there who are proponents of PK?

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    1. To my knowledge there aren't any professors at this time. As for the students, I would say doubtful but there are probably several who accept monetary propositions similar to PK (and maybe aren't even aware). The classes, so far, have been fairly aligned with today's mainstream and left PK largely off the radar. I'm doing my best to change that among my cohort.

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  2. Austrians at George Mason should be familiar with Larry White. Free banking theory is all about the "endogeneity" or elasticity of the money supply.

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    1. The second half of first year PhD macro, which I'm currently taking, is actually taught by White. So yes, the Austrians are familiar with his work. However, here is a quote from his book The Clash of Economic Ideas:
      "The Free Banking School, led by banker James William Gilbart and Member of Parliament Henry Stuart Parnell, had a similar monetary overexpansion theory of the business cycle, except that they put all the blame for overissues on the Bank of England. They argued persuasively that a competitive country bank, facing reserve losses to surrounding banks through the clearing system should it expand more than they do, is too tightly constrained to expand significantly on its own without additional reserves. The Bank of England’s excess notes, by contrast, don’t promptly come back for redemption but end up lodged in the reserves of the country banks and thereby fuel a systemwide overexpansion. Because they held that only a monopoly bank can significantly overissue, while competitive banks cannot, the Free Banking School proposed to replace the Bank of England’s monopoly with a system of competitive note-issue (“free banking”) in London."

      This sounds very different from the PK version of endogenous money that can create financial instability even with a CB. It's not clear to me that free banking has disbanded with the money multiplier theory under the current institutional setup.

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    2. Glasner is a free banker and has thrown away the money multiplier, even in a system with a central bank. In any case, a free banking setup lets you start talking about "endogenous" money with your Austrians. Foot in the door, so to say. Unless they're the Rothbardian kind.

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    3. Good point. I'll search through Glasner's papers and see where that leads.

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  3. I believe that Warren Mosler is misplaced under Randy Wray. Warren came up with Soft Currency Economics originally and independently, and later aligned with Randy and Bill Mitchell to develop its implications into what came to be called MMT. Mosler calles what he does "Mosler Economics," or "Soft Currency Economics."

    Randy was Minsky's student and one of the chief contemporary expositors and developers of Minkey's thought, and more properly belongs under him rather than Lerner, it would seem.

    The theory of endogenous money stems from Basil Moore, and it was developed by the Monetary Circuitists, notably Marc Lavoie, who co-authored Monetary Economics with Wynne Godley.

    See The Endogenous Money Approach
    by L. Randall Wray, Working Paper No. 17, CFEPS
    http://www.cfeps.org/pubs/wp-pdf/wp17-wray.pdf

    L. Randall Wray, Endogenous Money: Structuralist and Horizontalist
    http://www.levyinstitute.org/pubs/wp_512.pdf

    Wray, The Credit Money, State Money, And Endogenous Money Approaches

    See also Lord Keyes, Endogenous Money: A Bibliography
    http://socialdemocracy21stcentury.blogspot.com/2012/04/endogenous-money-bibliography.html

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    1. How does MMT differ from the work of Knapp?

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    2. "The theory of endogenous money stems from Basil Moore"

      ...and the internet stems from Al Gore. You can find theories of "endogenous" money far back in 18th c economics. The 19th century debate between the banking school and currency school was to a large extent about "endogenous" vs "exogenous". These are old ideas, they don't belong to any particular school of thought.

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    3. Tom - Thanks for the suggestions both in terms of papers and the chart. I agree with your assessment, so maybe creating a more credible chart will be a task for a future day. Regarding the readings, I'm personally nearly finished with Monetary Economics and have been extremely impressed by the depth of knowledge presented. Unfortunately that book is far too expansive for the current task. Mosler's "Soft Currency Economics II" is much more concise so I'll keep that under consideration.

      JP - Returning to White's "The Clash of Economic Ideas" there is a good overview of the currency school worth highlighting:

      "In their view cyclical booms were due to overissues either by the Bank of England or (in most cases) by the country banks. The overexpansion of the money supply would drive prices up and thereby drive gold out of the country, a process known as the “price-specie-flow mechanism” (where “specie” means coined gold or silver). The bust occurred when the Bank of England was forced to stop expanding and reverse course to stop its loss of gold reserves. As a remedy the Currency School proposed a strict monopoly of note-issue, taking the right of issue away from country banks, and the imposition of a rule on the one remaining issuer (either the Bank of England or a new government-owned bank). The rule, known as the Currency Principle, called for the national stock of banknotes to shrink one-for-one with gold outflows (and expand with gold inflows)."

      The Currency School appears far closer to the version of endogenous money described by PK today and clearly dates back to the early 19th century. I should point out that Hayek was closer to the Currency School and Mises to the Free Banking School. Also, the Banking School was entirely separate and associated with the "real bills doctrine" that informed Fed policy at the very beginning.

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    4. "The Currency School appears far closer to the version of endogenous money described by PK today"

      You might want to double check that. Lavoie, for instance, invokes the banking school here (pg 782). I've never heard a PK look back at the currency school fondly.

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    5. "You can find theories of "endogenous" money far back in 18th c economics."

      Yes. I should have written "The contemporary PKE theory of endogenous money stems from Basil Moore." That got the Circuitists going, which brought in the Chartalists (MMT). The Circuits and MMT Chartalists are now ironing out their differences, and they are now largely in agreement. It's a matter of emphasis that distinguishes them rather than substance.

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    6. "How does MMT differ from the work of Knapp?"

      MMT is an integration of ideas drawn chiefly from 1) Mosler's Soft Currency Economics, focusing on operational description, 2) Innes's credit theory or credit money/deferred payment v. commodity money/barter, 3) Knapp's Chartal theory of state money, 3) Wynne Godley's Stock-flow consistent macro modeling using the sectoral balance approach, 4) Abba Lerner's functional finance, and 5) Hyman Minsky's analysis of finance and economics. What has now come to be called MMT was developed using fixed rate investment manager Warren Mosler's Soft Currency Economics as the basis, with the monetary theory and macroeconomics fleshed out by economists Randy Wray and Bill Mitchell.

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    7. JP - I double checked our lecture notes from class and White clearly draws an opposite distinction between the two schools as shown in the above quotes. During class this week I'll consider asking if views on that part of history are generally mixed.

      Separately, thanks for bringing that Lavoie paper to my attention. I was a bit surprised to see my grandfather cited several times. Maybe I'll add that to the list for fun.

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    8. Mises was heavily influenced by the currency school. From what I've read, White considers himself closer to the currency school than the banking school. And then full reservists usually say "no," and accuse them of being aligned to the banking school. The truth is that there's elements of truth in both schools, and I think free bankers are just interested in an accurate positive theory, rather than strictly distinguishing between schools. This is, I think, an accurate summing up: "White contra Mises on Fiduciary Media."

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    9. Very interesting article...thanks for sharing. Mises' Theory of Money and Credit is one of the first Austrian econ books I read and to some degree responsible for where I am today. The specific portion that sparked my interest was actually his discussion of excessive fiduciary media from private banks driving the business cycle. I'm less well versed in Mises' later works, so I'll have to defer to White and Salerno on his preferred system.

      As for White, I think it's strange that Salerno disregards the Free Banking school by lumping them in with the Banking School. My understanding is that the Banking school favored the "real bills doctrine," which White clearly did not support. The brief impression I've gained so far is that White actually favors the free banking school over the currency school and banking school (in that order). I'll let you know what more I find out as the semester progresses.

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    10. "Yes. I should have written "The contemporary PKE theory of endogenous money stems from Basil Moore." "

      Naaaa....

      It comes from Joan Robinson but more notably Nicky Kaldor. Of course there are others ...

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  4. I agree with JP. The White/Selgin model of free banking explains an endogenous theory of banking. But, I'm not sure that they would embrace endogenous money to the same degree as post Keynesians. I once wrote that the Great Depression was as much a fault of private banking as it was of central banking, just because of the elimination of much of the adverse clearing mechanism, but he responded that blame lied square at the feet of the Federal Reserve (although, I'm not sure if it's because of malinvestment or failure to respond to a rising demand for money). My major problem with post Keynesian endogenous money theory is that I haven't come across a good banking model. On the blogosphere, it comes down to a series of assumptions (as it did in Keen's Debunking Economics), and some post Keynesians seem unwilling to concede that everyone thinks the money supply is endogenous to some point.

    Some papers that come to mind, though, are: James Tobin's "Commercial Banks as Creators of Money;" Giuseppe Fontana's "Post Keynesian Approaches to Endogenous Money;" and Ching-Chong Lai, et. al., "The Money-Creation Model." There's also a lot of work on reconciling liquidity preference theory (of interest) and endogenous money, which is a big topic in post Keynesian thought. Per the above paragraph, I also recommend Selgin's The Theory of Free Banking. If free banking becomes a topic of interest, I'd also recommend contrasting studies such as Larry Sechrest's Free Banking and David Glasner's book by the same title.

    I like, though, that you've forced monetary theory into the discussion of capital theory. Capital theory is really an arm of monetary theory, since the time structure of production requires money to even allow it come into existence. I mean, my weakness is both areas since there's so much more that has been written on both topics than I've been able to read so far, but I'm weaker in monetary theory than in capital theory and it shows.

    I'm jealous, though, that you guys can set up these kinds of discussion seminars!

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    1. JF - My above comments about the differences between the Currency School and Free Banking School clearly depict the difference in degree you suggest.

      When you mention "a good banking model" I'm a bit unsure of the meaning. Could you please clarify? "Monetary Economics" by Lavoie and Godley offers a very rigorous course in stock-flow consistent modeling that highlights many (most?) aspects of the banking system (IMO).

      Thank you for the paper and book recommendations. I'm certainly planning to read much more about Free Banking during this and future courses with Larry White. For the group purpose, however, I'm trying to stick with less known/understood PK material.

      Lastly, you make a very good point about the intersection of capital and monetary theory. In my perspective this is why ABCT can be reconciled with PK endogenous money (depending on how you define ABCT). It's fair to say my weakness is in both areas for a similar reason, though I've read significantly more on monetary theory. Luckily we're still pretty young (making an assumption about you) and have plenty of years to keep catching up!

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    2. Thanks, I haven't had a chance to look through Lavoie's and Godley's new book. There are banking models, but I mean one that's strictly post Keynesian. If Lavoie/Godley have one, then I should take a look at it.

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  5. Don't teach them MMT, for the love of god. That will only confuse them and turn them off (since parts of it are wrong and highly politicized). Start with Lavoie, Godley and maybe Minsky. All have written seminal banking texts.

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    1. Thanks for sharing. For the time being I'm trying to avoid discussing policy prescriptions and sticking with the operational aspects of endogenous money. Lavoie, Godley and Minsky all fit very well in that sense, based on my experience. Do you recommend any specific papers by those three?

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  6. Good Luck Joshua!

    BTW- Any thoughts on how we could come up with a response to the Hayek vs Keynes video? It's a very well done propaganda piece for Austrian/Austerianism, cloaked as "objective". I was depressed to meet some well meaning High School Econ teachers using it as an objective teaching tool. What would a response, especially from Post Keynesian, look like? Could we do a Minsky vs Fama to tear apart the EMH? Or a "Team Fragility" vs "Team Efficiency" ?

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    1. Thanks! We ended up spending the entire time going through the 10 principles outlined in Scott Fullwiler's paper,Modern Central Bank Operations - The General Principles. It went so well we are actually going to continue the conversation next time based on a couple papers by Lavoie and Palley (I might also include the recent post by JKH).

      A response to the Hayek vs Keynes video would be clever. I like the idea of Minsky vs Fama. Another possibility could be Kaldor vs Friedman. IMO Monetarism and RBC are the most distinctly counter to Post-Keynesians. In this case you could pit "Team Inside Money" against "Team Outside Money". I'll give it some more thought and see if I can come up with any better ideas.

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