Daniel Kuehn comments on a recent guest post by Lee Kelly at the blog “The Market Monetarist.” I could say a lot on the issue, since I disagree with elements of both of their posts. Instead, I will focus on some things that Daniel writes that I find outrageous.
1. Writes Daniel,
While Lee is right that excess demand for money results in general gluts, it can also be caused by general gluts (yes, you read that right).
Daniel’s general point can be interpreted as follows: how will a free banking system respond to crises that cannot be solved by simple fiduciary expansion, or where simple fiduciary expansion is not possible (because banks cannot afford a larger number of liabilities).
The way I see it is that the burden of proof is on Daniel to show why these possibilities are even relevant. I can make up any number of scenarios that would be impossible to solve, but are these scenarios relevant to the real world? Or, even, are these scenarios realistic, given what we know about how the economy works?
In some cases, Daniel will say, “Sure they are! Just look at the wealth of literature that elucidates on these cases.” This is the bigger problem: you cannot just focus on free banking. The debate is much broader, and it involves who is right about what. Furthermore, these are not just minor differences in opinion. We are talking about deep-rooted divergences in thought (for example: Austrian capital theory versus the Keynesian “marginal efficiency of capital”). The free banker will consider the Keynesian (or whatever) criticism irrelevant, and the Keynesian will feel unsatisfied.
What Daniel is basically asking is this, “Can you show how your system deals with these problems which do not exist in your world view?” We have to create a unified world view, or we have to show how these problems fit in the free banker’s world view. Otherwise, these questions will forever go unanswered. The moral of the story: in order to answer deep economic questions, you have to consider the entire corpus of economic theory.
2. Then, Daniel writes,
If free banking were really that much better you would think it would be naturally selected into more widespread existence.
I am not sure whether to cry or laugh out loud.
The system of “natural selection” is the market. But, how does the market select out of existence an institution which is protected from failure by the government?
Let us transcribe Daniel’s argument to a different subject: the food industry (humor me). Over the past three thousand years, world governments have preferred rationing over individual economization (i.e. the market process). One day, some “crackpot” economist writes a book called “Free Agriculture,” and it is about how the market process would provide food and how this would be more efficient than government rationing. Daniel Kuehn then publishes a blog post and in it writes, “If private food provisioning is so great, why isn’t it used today?”