Ok, as Long as We're Talking about Scott Sumner, How About the Money Multiplier?

    He had another one of his sophistic defenses of the money multiplier-yes, it's useless, but it's not wrong just an identity, and it does no harm so let's keep using it.

    "David Glasner argues the money multiplier is a useless concept.  I’m sympathetic to that claim, and yet I think he goes to far in his criticism of Friedman and other monetarists.  Although the concept is useless, it’s not wrong, and it’s hard to see how it does much damage.  Here’s David:

So in Nick’s world, the money multiplier is just the reciprocal of the market share. In other words, the money multiplier simply reflects the relative quantities demanded of different monies. That’s not the money multiplier that I was taught in econ 2, and that’s not the money multiplier propounded by Monetarists for the past century. The point of the money multiplier is to take the equation of exchange, MV=PQ, underlying the quantity theory of money in which M stands for some measure of the aggregate quantity of money that supposedly determines what P is. The Monetarists then say that the monetary authority controls P because it controls M. True, since the rise of modern banking, most of the money actually used is not produced by the monetary authority, but by private banks, but the money multiplier allows all the privately produced money to be attributed to the monetary authority, the broad money supply being mechanically related to the monetary base so that M = kB, where M is the M in the equation of exchange and B is the monetary base. Since the monetary authority unquestionably controls B, it therefore controls M and therefore controls P.

    "If I understand David correctly he’s a bit confused about the money multiplier.  It is simply a ratio, regardless of what David was taught in school. In his example the multiplier equals k, which is the ratio M/B.  But unless I misread him, he seems to believe multiplier proponents viewed it as a constant, which is clearly not true. Rather they argued the multiplier depends on the behavior of banks and the public, and varies with changes in nominal interest rates, banking instability, etc.  This is how it’s taught in the number one money textbook, and this is the version Friedman and Schwartz used in the Monetary History, which focuses heavily on explaining changes in the multiplier."

     http://www.themoneyillusion.com/?p=26479

     Glasner came back:

     "Scott, Noah was right (about this post, I mean). Also Andy’s point about the difference between the average and marginal money multiplier was spot on. I was going to mention it myself, but I was getting tired. And I think that it is clear that the old Monetarists thought that the multiplier was a critical variable for the conduct of monetary policy. Otherwise how could Friedman have imagined that it would be possible, as he claimed, to replace the Fed with a computer programmed to implement his k-percent rule?"

   Sumner replies to Glasner's reply:

   "David, I basically agree with Andy’s point. My only point here was that the monetarists and the textbooks are both aware that the multiplier changes under certain circumstances. Also that the textbooks define the multiplier in an AVERAGE sense. But as far as the utility of the concept, I’m completely with you."

    Frances Coppola made this comment:

    "Scott, there are an awful lot of people out there who ARE perplexed by the money multiplier. Or rather, they are perplexed when they discover that it doesn’t work in the way that they were taught. It would be immensely helpful if it was taught properly in the first place."

     Sumner answered her:

     "Frances, Good point. My only point is that some people suggest that the economists who use the multiplier concept are deluded. That’s very different from saying some undergrads get the wrong message. Many undergrads also think the fiscal multiplier is a constant."

      See, this is the kind of Sumnerian argument where you have to ask what's his real aim here. It's the fault of undergrads because their teachers can't explain the money multiplier in such a way that doesn't lead to confusion? His overall argument is rather elusive. He says mm is useless but it's not wrong and does no harm. If it does no good though as he himself says why have it?

     Why sow confusion if there is no net gain from the mm concept? Tom Brown I'm talking to you now-only because if memory serves me, you know a lot about the mm thing.