Lack Of Hyperinflation Doesn't Refute Austrian Monetary Theory
Paul Krugman attacks Ron Paul for his Austrian views of monetary issues in his latest column.
His main argument is that one advocate of Austrian economics, Peter Schiff, supposedly predicted hyperinflation 3 years ago, something that hasn't happened.
But Schiff's prediction error doesn't affect the validity of the Austrian view unless it could be shown that it was a necessary implication from the Austrian analysis. And it isn't.
That is because first of all, Austrian monetary analysis not only doesn't have to, but as far as I know haven't ever, said that increases in the monetary base directly create price inflation. It is only indirectly, to the extent it increases money supply, that it will have any effect. And while money supply has increased the last few years it has increased far less so than the monetary base.
And though some Austrians sometimes express themselves as if a higher money supply will necessarily raise prices that is not necessarily the case either if money demand increases. For example if money supply increased in the fictional Duckborg by $1 billion but went directly into Scrooge McDuck's money bin and he just kept it there then the effect on prices will be the same as if there had been no money supply increase, which is to say no effect. The same goes for money in the real world, even when it is many people that hold money and even if it is deposit money rather than physical cash.
And because of lower nominal interest rates as well as the European debt crisis, demand for dollars has increased, cancelling out much of the effect from the increase in money supply.
So no, the lack of hyperinflation doesn't in any way refute Austrian theory or vindicate Keynesian theory
His main argument is that one advocate of Austrian economics, Peter Schiff, supposedly predicted hyperinflation 3 years ago, something that hasn't happened.
But Schiff's prediction error doesn't affect the validity of the Austrian view unless it could be shown that it was a necessary implication from the Austrian analysis. And it isn't.
That is because first of all, Austrian monetary analysis not only doesn't have to, but as far as I know haven't ever, said that increases in the monetary base directly create price inflation. It is only indirectly, to the extent it increases money supply, that it will have any effect. And while money supply has increased the last few years it has increased far less so than the monetary base.
And though some Austrians sometimes express themselves as if a higher money supply will necessarily raise prices that is not necessarily the case either if money demand increases. For example if money supply increased in the fictional Duckborg by $1 billion but went directly into Scrooge McDuck's money bin and he just kept it there then the effect on prices will be the same as if there had been no money supply increase, which is to say no effect. The same goes for money in the real world, even when it is many people that hold money and even if it is deposit money rather than physical cash.
And because of lower nominal interest rates as well as the European debt crisis, demand for dollars has increased, cancelling out much of the effect from the increase in money supply.
So no, the lack of hyperinflation doesn't in any way refute Austrian theory or vindicate Keynesian theory
posted by stefankarlsson at 8:27 PM
4 Comments:
Stefan, Your version of Austrian economics is so reasonable that I can't see the conflict between it and Keynsianism. What is the conflict in your view?
Nice to see you take on Krugman's latest nonsense here and in CSM.
Ralph, there are several areas of conflict, the arguably most important is that Keynesians think that higher inflation is impossible if unemployment is high, at least if there isn't some supply shock like the 1973 Arab oil blockade, while Austrians do think that high unemployment and high inflation can be combined.
What is expected inflation over the next ten years? I find it hard to believe that the low yields on treasuries reflect expected inflation plus a premium. Seems to me they reflect instead fed manipulation and safety more than return considerations. Countries that can print have low interest rates because of the safety the printing press provides re: counterparty risk.
Post a Comment
<< Home