Joshua Wojnilower and Steve Horrowitz Shed Some Light on Sumner-Murphy Dustup on Cantillon Effects

     I got to love Woj as he's the one macro guy that I'm able to actually talk to semi regularly. He's a very sharp guy-if I'm not wrong he's a PhD economics candidate at George Mason University at this point. He previously worked at FINRA.

      https://plus.google.com/113176718379809288895#113176718379809288895/posts

      http://bubblesandbusts.blogspot.com/

       In the recent back and forth between Sumner and Bob Murphy it seemed to me that while I probably agree with the Austrians on this one-scary thought-Sumner's strongest argument is that you need to distinguish between micro and macro effects. While the location of a monetary injection in the economy may matter on the individual level-if the Fed gives us $10,000 is much better for us personally than it gives it to a bank or our next door neighbor, on the macro level it's irrelevant. There was, a further confusion in Sumner about the distinction between what constitutes a monetary or a fiscal action but at least the macro-micro distinction seemed to me to be a decent argument.

      "People need to pay attention to the distinction between the micro level and the macro level. Bill Gates does not refrain by buying a Ferrari today because he doesn’t happen to be holding any base money. His nominal demand for goods and services is based on his nominal wealth. If the Fed buys $100 million in bonds from Gates and pays him cash, he doesn’t feel energized to go out and buy goods and services (his nominal wealth is unchanged), rather he puts the money in the bank and then invests it elsewhere. Of course the aggregate NGDP will rise a tiny bit, and for that reason everyone, including Gates, will spend a tiny bit more on goods and services."

         "If the Fed spends $100 trillion on financial assets, then nominal expenditure in the aggregate will soar (mostly due to inflation, but output will rise slightly in the short run.) Monetary policy operates at the aggregate level, it cannot be explained at the individual level, except by using the concept of the supply and demand for base money. The hot potato effect. But here’s the problem. In the short run prices are sticky, and individual people’s nominal purchases of goods and services depends on their nominal wealth. So we have to get from here to there via some sort of “transmission mechanism.” In the apple market we often assume a Walrasian auctioneer. But in macro that assumption assumes away all that is interesting. Hence people flounder, unable to conceive that monetary policy is all about debasing the medium of account by increasing its supply relative to demand. They want some sort of understandable mechanism that they can visualize at the individual level–the Keynesian interest rate, the Austrian Cantillon effect, but there just isn’t any. Or perhaps I should say there are far too many, each of which plays only a tiny role."

          "Imagine trying to explain to a wheat farmer why increased wheat production will lower the price. He’d say “I don’t notice any price drop when I sell more wheat.”

             http://www.themoneyillusion.com/?p=17991
             Obviously if you think it does matter you have to explain how drawing this distinction doesn't solve things. Woj left me this comment:

             "In general I think both sides are talking past each other. Sumner seems to be arguing that monetary policy ends when the Fed swaps Treasuries for reserves with the banks. Any further actions by banks, consumers, etc. is fiscal policy. If that's so, then I'd agree it makes no real difference which banks receive reserves and even the nominal effect on the economy would be minimal, at best."

              "Accepting that Fed policy has effects beyond swapping assets with banks (e.g. altering expectations), then relative prices will shift in the economy depending on changes in expectations. Here's a good post from Steve Horwitz on why relative price changes have real effects:"

                http://diaryofarepublicanhater.blogspot.com/2012/12/scott-sumner-and-austrians-haggle-over.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

                Yes, Sumner's particular fiscal-monetary distinction opened up a another whole side debate. The link Woj left for Steve Horrowitz was just what the doctor ordered, getting at the bottom of things.

                "I  have been both busy and traveling the last few days and haven't been able to read all of the controversy set off by a Sheldon Richman column on Austrians and inflation, including the back and forth between Scott Sumner and Bob Murphy. However, I have read some of it and I think folks have focused too much on the question of the wealth effects of who gets the money first as opposed to the fact that money takes a particular path means that money affects prices differentially."

                "What I mean by that is that, yes, a bond dealer who sells to the Fed is just swapping one asset for another (which is also true of anyone who spends money of course), but that particular exchange leads to some banks having additional reserves, which translates into loans (well, normally anyway), which translate into borrowers spending. Those borrowers spend on some goods and not others. Yes, all of these are just swaps of assets, but the important point here is not the change in wealth but the impact on relative prices."

                  Although it's not the main point of the debate, the issue of the neutrality of money raised it's head. I had said that Sumner believes in the non-neutrality of money only in the short-term whereas both Keynesians and Austrians believe it has long term permanent effects. Woj thinks I'm mistaken that Austrians believe in the long term neutrality of money, that this is a view widely held only by the Post Keynesians. My impression is that the Austrians do believe in something they call non-neutrality of money. They believe they do anyway. When money is injected into the economy it never returns to its previous state-Sumner believes that it does in the long run.

                  I'm certainly no expert on Austrian theory-they tend to think that only Austrians can be experts on Austrian theory-though I could point out that Marxists feel the same. What Horowitz says here certainly sounds like he believes in long term effects:

                  "The Austrian understanding of injection effects cannot be separated from its understanding of the price system and capital theory. It doesn't matter so much WHO gets the money first. What matters is that SOMEONE does and that the dispersion across the price system is not even. THAT matters because it ripples through the capital structure with real, not just nominal, effects. The Austrian theory of the business cycle is one kind of systematic real effect, but there can be others."

                  If I were going to distinguish between the long term non-neutrality of Austrian vs. Keynesian theory I'd say that for an Austrian, these long term effects can only be bad-an increasing misallocation of capital investment and mispricing of goods.

                   Keynesians I think can imagine that the long term effects can be good. Woj also argues that only the Post Keynesians  among the Keynesians believe in long term non-neutrality. He's probably right about neoclassical Keynesianism-even Krugman and Delong may not believe in long term real effects. However, a good case can be made that Keynes himself believed in it-since then we've had Joan Robinson's "bastardized Keynesianism."

               

               http://www.coordinationproblem.org/2012/12/sumner-murphy-richman-and-cantillon-effects.html