Monday, June 1, 2009

Dolla Dolla Bills Ya'll

Today's post is about Money. Not about how to make it, how to invest it, or anything like that. Such earthly pleasures are beneath the consideration of your host, whose only goal is to inform and educate. (Pay no heed to the pop-up ads, coming soon) If you've come looking for financial planning advice, I would recommend Macro Man and Snoop Dogg.

Personally, I'd rather spend some time looking at this odd phenomenon of "currency" that has been used in every organized civilization that has ever existed.

First, a little background for the non-economists: Wikipedia will tell you everything you need to know about money although there isn't much there that you won't have already picked up in introductory micro, or even just a few minutes of intelligent thought on the subject. Money serves as a medium of exchange, a store of value, etc etc.

Things only start to get interesting when we start talking about monetary policy. Before we go any further, a brief primer on the two major schools (and one bonus non-major school) of thought on the subject. These are the Keynesian, Chicago, and (least fashionable by a country mile) Austrian schools.

The Austrian view on monetary policy is the simplest to explain, so I'll begin with it. Basically, the ideal Austrian policy is: No policy. Step 1) Create a supply of currency. Step 2) Do nothing else for the next 100,000 years. Contemporary Austrians (there are maybe 10 of them) advocate a return to the gold standard, or the creation of a fixed amount of fiat currency, followed by chaining anchors to the currency printing presses and sinking them in the Mariana trench.

The Keynesian view is that markets are beset by irrationality, stupidity and greed, which leads to booms and depressions. To correct these unnecessary and jarring shocks, the central government must enter the fray and rein in the economy during periods of irrational exuberance, and stimulate the economy during slumps. The preferred Keynesian tool for this is deficit spending, which is to say the government borrows money from it's citizenry (or whoever) and spends it on whatever it is governments spend money on. Personally, I am fairly skeptical of any theory that assumes federal government bureaucrats in cheap suits can do a better job than centimillionaire hedge fund managers of determining what is or isn't rational, but that's just me. The Keynesians hold what is certainly the dominant viewpoint within the economics profession today, and they seem to hold sway over policy in the United States.

The Chicago School, or Friedmanite view of money is similar in many ways to that of the Keynesians. The primary difference is that the Chicago School prefers to conduct stabilization actions through the Federal Reserve, rather than the federal government balance sheet. Friedman and Co., being as they are free-market radicals (not at all a pejorative here at R4R) think that individual consumers and investors will do a better job of allocating resources than a centralized governing body. Rather than massive, New-Deal-style stimulus packages, the Friedmanites would prefer the induced spending to come from individuals, rather than central planners.

Now, I've been a committed Friedmanite for some time now. In a showdown with Keynesianism, I'll still take my boy Milt any day. But lately I've been having trouble seeing exactly why it is that respect for the Austrian school perspective on monetary policy is almost non-existent in mainstream economics. I've been doing some reading on the Great Depression, Monetary history, and the current financial crisis. The Austrian story makes sense, fits the facts, and (I think) has a lot to offer in terms of policy to encourage stability and economic growth.

The bottom line is that contemporary economists should be a lot more familiar than they currently are with Austrian Business Cycle Theory. I'm not asking for a wholesale conversion, mainstream economists, but please: at least figure out why it is, exactly, that the Austrian school deserves the ignominy currently heaped upon it by your profession. Here's a reading program for anyone inclined to take up this offer:

1) Wikipedia. Start at the link, and follow the "Related Topics" to your heart's content.

2) Once you've got the basic ideas, start poking around here. If you're a current events junkie, throw together a little case study of your own. Compare the stories being told by the Austrians and the mainstream and see whose strikes you as more plausible. Just sayin'

3) If you're in the market for some light summer reading, pick up a copy of Rothbard's Man, Economy and State. Skip the first volume if you're short on time, the good stuff is mostly in the back.

4) Not for the faint-of-heart, but Monetary History of the United States is a good primer on the history of money, credit and business cycles. The author is a, uh, Friedmanite, but as a historical account, it makes a pretty solid case against what Rothbard would call "The Inflationists".

I'm not convinced the Austrians have it right. In fact, there are a lot of points on which I'm convinced they are dead wrong. In any discussion of business cycles and monetary policy though, the Austrian perspective deserves a fair showing.