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Wednesday, September 26, 2012

Free Market Keynesianism?

Let's say one admits that a general glut is possible. Furthermore, let's say one believes that prices are unlikely to fall fast enough to work off this problem swiftly, and one resists the idea that "the pain is good for us." Is the only answer government stimulus?

Consider the following passage:

"Unemployment develops, that is to say, because people want the moon; — men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control." -- J.M. Keynes, The General Theory of Employment, Interest and Money, Chapter 17

This, I think, is not quite right: money can be produced. Under free banking, it is produced by private banks, and their means of production is the careful management of their reserves, so that the paper they issue is widely believed to be good money. (And that is simply what it is for a money to be good: that it is widely believed to be good.) When there is a heightened demand for liquidity, free banks reserves will increase, and they will be able to issue more currency.

Will this be as effective as Keynes's recommended solution? That's a question for another day: the point of this post is merely that one can except Keynes's understanding of recessions, and want to do something to ameliorate the situation, without necessarily demanding the government do something about it.

6 comments:

  1. When there is a heightened demand for liquidity, free banks reserves will increase, and they will be able to issue more currency.

    Yes, if people store their reserves there, and the bank can lend them out in venues it expects to be profitable, and people (trust the bank's judgment, etc).

    If people just hold on to their banknotes -- or put them in a full reserve bank in expectation of lacking venues for investment -- that doesn't give the banks the means to issue new notes. Also, if the market favored currency deliberately prevented from increasing in supply (like what's done with Bitcoin) then that option is cut off entirely.

    So there are cases where banks could satisfy demand for increased liquidity, but I think that, in the "important" cases, they will find themselves unable to satisfy that demand. Liquidity demand largely comes from demand for option value, which can be satisfied only by a genuine increase in robustness of plans and sustainability of economic coordination, not simply "more loans".

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  2. "This, I think, is not quite right: money can be produced. Under free banking, it is produced by private banks, and their means of production is the careful management of their reserves, so that the paper they issue is widely believed to be good money."

    Private banks can only create new money via debt. When businesses and capitalists have shocked and pessimistic expectations, they are unlikely to take on new debt for capital goods on the scale needed for the return to full employment.

    Nor will the private sector provide the consumption demand when they too are pessimistic, already over-indebted, or suffering high levels of unemployment.

    Fiscal policy is the surefire way of fixing the problem.

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  3. "When businesses and capitalists have shocked and pessimistic expectations, they are unlikely to take on new debt for capital goods on the scale needed for the return to full employment."

    The idea would be to expand the money supply BEFORE the recession gets going, so there are no shocked and pessimistic businessmen.

    "Fiscal policy is the surefire way of fixing the problem."

    Surefire?! Now you are sounding like a pitchman instead of a economic seeker for truth.

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  4. Dr. Callahan,
    Hello. I was wondering if you have seen William Anderson's article entitled, "SAY'S LAW: WERE (ARE) THE CRITICS RIGHT?" If so, would you care to express your opinion of it? It was published in a Mises Institute publication. It is available on-line. Do you let people publish links in their blog comments? If so, in the future I will provide the link. Thank you.

    Senyor

    ReplyDelete
    Replies
    1. Post links, please, so long as they are on topic.

      Delete
    2. "Finally, one must remember that Keynes and others who have criticized Say’s Law in this century do so, according to Sowell (1972), by criticizing a straw man."

      This is a horrific distortion of the import of Sowell's book!

      Delete