The Apple as a Whole

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?”

 

9 thoughts on “The Apple as a Whole

  1. Daniel Kuehn

    I’m a little confused. The first sentence you quote is just pointing out that excess demand for money can be caused by broad gluts too – causality can go both ways. That had nothing to do with free banking specifically.

    re: ” Or, even, are these scenarios realistic, given what we know about how the economy works?”

    What about the last several years?

    I’m not even sure how to approach your second section. Natural selection operates both in and outside of markets – markets have nothing specifically to do with it. Natural selection is just a matter of probability applied to systems that either die off or continue. And we have plenty of historical examples of public provision of non-public goods that die off because it’s not fit. Not observing successfully sustained cases of free banking is an excellent reason to ask ourselves whether free banking can be successfully sustained. Observing lots of successful examples of private provision of food is an excellent corroboration of our theories which say that the market should be the best way of providing food. I don’t see how this simple point would make you either laugh or cry. It seems like basic common sense to me.

    Reply
    1. Jonathan Finegold Catalán Post author

      In the first quote, I only quoted part of the paragraph, but was referring to the general point (not the specific point of that sentence). Your broader argument was: how does free banking deal with problems other than a change in demand for money? And, that it has nothing to do with free banking in specific is precisely the point I am trying to bring up — that is, these are problems which deal with divergences in the theory that the respective parties hold as true, so the issues have to be dealt with there, before the theory of free banking can be redirected to reflect on now settled relevant issues.

      I don’t think the “last several years” prove anything, especially when you have so many different opinions on what has caused the crisis. Most free bankers probably believe in some variation of the intertemporal discoordination theory (i.e. the Austrian story), and see the subsequent rise in the demand for money as a secondary ripple that needs to be dealt with, before it causes a greater depression.

      With regards to “natural selection,” I think it’s still a bit silly and you’re missing a lot of obvious elements in your story. For instance, do you think that absolutism/fascism is successful, because it continues to survive today (think of third world countries)? Are countries that have been consistently poor for a very long time (such as Russia) just as successful as countries that are very wealthy (a product of relatively recent changes, by the way), just because “natural selection” hasn’t done away with these types of governments and their policy? I just don’t think your idea here holds much water — what’s more, I just don’t see it as being very serious.

      The private provision of food survived, because it wasn’t crowded out by government competition. In many African countries, where it is crowded out, we see that the private provision of food can’t come into being — it just isn’t allowed to. The same is the case with free banking, and I think that if you took the effort of researching the history of free banking you would see just this. The same is true, for example, of a truly provision of car or medical insurance. It’s just hard to compete, because the rewards of joining the public-private realm are too high, even if it makes society worse off.

      I just can’t see how anybody can see the possibility of there being a process of “natural selection” for market processes that just aren’t allowed to survive, because of exogenous (i.e. government) forces.

      Reply
      1. Daniel Kuehn

        Well I’d be curious just to know how free banking deals with changes in the value of money. To put it simply: why are free banks not hurt by falling asset values and generally dismal investment prospects in the same way that other companies are.

        It seems to me the only reason why the Federal Reserve can deal with the problem of excess demand for money is that it doesn’t care about these things. Free banks will care about these things, so how do they circumvent the problem?

        Surely excess demand for money is not a point of theoretical divergence, is it?

        re: “Most free bankers probably believe in some variation of the intertemporal discoordination theory (i.e. the Austrian story), and see the subsequent rise in the demand for money as a secondary ripple that needs to be dealt with, before it causes a greater depression.”

        So… wouldn’t that be exactly what I said? Broad problems that start in the market for goods and services that then impact the demand for money? You seem to be agreeing with me Jonathan – I’m really confused.

        Reply
        1. Jonathan Finegold Catalán Post author

          No, Daniel, re-read what I quoted straight out of your blog post. You asked what happens when an excess demand for money is caused by a general glut. You implied that there were other problems going on; i.e. a more “Keynesian” business cycle (disconnect between savings and investment).

          To put it simply: why are free banks not hurt by falling asset values and generally dismal investment prospects in the same way that other companies are.

          This is a more sensible question. A lot of free bankers will answer that banks will just expand fiduciary media during periods of recession, but I think they aren’t being careful enough.

          Their real argument is that they will deal with changes in the demand for money as they occur, so they don’t have to deal with sudden spikes in the demand for money (caused by a lack of elasticity in the money supply in response to these things in the first place).

          But, for you, these changes in the value of assets are also caused by other factors. These factors aren’t recognized by a lot of free bankers, because they originate from theory that they haven’t adopted. For you, it’s not only about a change in the demand for money. There are other things going on.

          This applies to the free banker’s adherence to the theory of intertemporal discoordination, but the real answer to that is that a free banking system would never be able to cause a massive overexpansion of fiduciary media (of the type necessary to induce an Austrian business cycle). Here the theory is quite clear and explains itself very well — it’s all in Selgin’s The Theory of Free Banking.

          I know you’re a busy man, but this is < 200 pages and it really is worth the read. It’s also very easy to read (very simple and straight-to-the point — as economic prose ought to be).

          Reply
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  3. Daniel Kuehn

    re: “With regards to “natural selection,” I think it’s still a bit silly and you’re missing a lot of obvious elements in your story. For instance, do you think that absolutism/fascism is successful, because it continues to survive today (think of third world countries)? Are countries that have been consistently poor for a very long time (such as Russia) just as successful as countries that are very wealthy (a product of relatively recent changes, by the way), just because “natural selection” hasn’t done away with these types of governments and their policy? I just don’t think your idea here holds much water — what’s more, I just don’t see it as being very serious.”

    OK, my jaw dropped when I read this.

    Jonathan – fascism and absolutism and socialism have been steadily selected out over the last several centuries. Even the cases that do exist are highly unstable and feed on each other. This seems like an obvious case of an institution that has been selected out of competition.

    re: “I just can’t see how anybody can see the possibility of there being a process of “natural selection” for market processes that just aren’t allowed to survive, because of exogenous (i.e. government) forces.”

    Governments aren’t exogenous if we’re talking about the institutional landscape. If you want to talk about one particular element of a market economy, perhaps its appropriate to talk about government as being exogenous (but even that is a stretch… people usually endogenize government behavior with policy reaction functions now). But in the grand scheme of institutional evolution, government certainly isn’t exogenous.

    Reply
    1. Jonathan Finegold Catalán Post author

      This seems like an obvious case of an institution that has been selected out of competition.

      But, as you concede, it hasn’t been selected out of existence. In Russia, for instance, Communism was replaced by some type of oligopolic cronyism, hidden under the veneer of “capitalism.” There are countries, like Russia, in which capitalism was never really adopted. Does this mean that capitalism hasn’t passed the test of natural selection?

      But in the grand scheme of institutional evolution, government certainly isn’t exogenous.

      It really is, and in two ways,

      1) There is a market process. The government lies outside of the market process — it not subject to profit and loss (in the same sense).

      2) The evolution of government is wholly separate from the evolution of the market process, for the same reason said above (not constrained by profit and loss) and because it has a monopoly on force. I really suggest Robert Higgs’ Crisis and Leviathan. For instance, I hardly think one can say that the growth of the American government during the 20th Century was held to the same constraints as the market process (the latter also being constrained by the former).

      Reply
      1. Daniel Kuehn

        And unfit animals still exist.

        Natural selection is a numbers game, not an ideal-type. I’m not sure what’s so difficult about this.

        Russia’s also pretty screwed up by right now – think the cronyism and bad implementation of a market economy and a representative government might maybe have something to do with that? And that’s how bad institutions are selected out over the long run – because they result in bad outcomes.

        Reply
        1. Jonathan Finegold Catalán Post author

          I don’t understand any of your comment, Daniel. How does any of this support your argument?

          My argument, with regards to Russia, is that bad institutions in Russia have not been selected out over the long run. In fact, in most countries, bad institutions have not yet been selected out. Liberal market economies really make up a minority in the global context (although they make up a majority of economic power).

          You also stopped addressing the fact that some institutions are not part of this process of “natural selection.” You also haven’t addressed the fact that market institutions run through a different process of selection than do government institutions. Namely,the former runs through a process of profit/loss, the other through a process of voter confidence. But, voters are not always known for choosing the best economic policies, are they? The two processes are not one in the same.

          Reply

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