Various Links

1. Noahpinion has a guest post about being honest with time series regressions.

2. Jonathan Finegold asks if Hayek's Austrian Business Cycle Theory work was really "inconsequential".

3. Lars Christiansen has compiled a list of established and aspiring monetary theorists. The ideas is to connect those with related interests. If you have not already, go sign up.

Theory of Money and Credit at 101: The Regression Theorem and Bitcoin (Liberty Fund)

Liberty Fund recently published a set of essays concerning Theory of Money and Credit by Ludwig von Mises. Larry White writes the lead essay, with responses and critiques from Jörg Guido Hülsmann, Jeffrey Rogers Hummel, and George Selgin. Each brings unique insights concerning Bitcoin and the regression theorem.

White presents two attempts to describe the emergence of Bitcoin in terms of the regression theorem,

Two responses to the challenge seem possible. One is to say that the historical component posited by the regression theorem is not strictly necessary to explain the purchasing-power expectations people initially formed for Bitcoin. The historical component is important to the initial medium-of-exchange value of a good that did have a market value the previous day as an ordinary commodity, or as a redeemable claim, but it cannot be important to a new medium of exchange that had neither. In such a case purchasing-power expectations must arise entirely from forward-looking speculation. Early adopters who paid positive numbers of dollars (or traded pizzas or devoted CPU time) to acquire Bitcoins did so because they believed that it might attain a higher dollar value in the future. In this account, the value of Bitcoin is basically a bubble, a self-feeding phenomenon unanchored by fundamentals. The trouble with a bubble story, of course, is that is consistent with any price path, and thus gives no explanation for a particular price path. Consistent with the bubble story, some Bitcoin-imitator crypto-currencies have crashed to zero after trying to launch into positive value. 

The other possible response is to preserve the universal applicability of the regression theorem by saying that Bitcoin must have been a useful commodity to some people before it became a medium of exchange. As Murphy (2013b) puts a version of this case, it could be argued that “the very first people to trade for it did so because it provided them withdirect utility because they knew there was at least a chance that it would serve to chafe the governments of the world with their printing presses.… [T]he early adopters of Bitcoin were doing it for ideological reasons, not for pecuniary reasons.” Then, once it had an observable positive price, “it was off to the races in terms of standard Misesian theory.” This scenario, however, does not deliver what the argument requires, namely, an account of how Bitcoins initially had a positive value apart from their actual or prospective use as medium of exchange. The value at every point in this scenario derives entirely from use or prospective use as a medium of exchange (only such use as a dollar competitor is what might “chafe the governments,” not the existence of untraded digital character strings).

Hülsmann agrees with at least part of the second story,

What is the rock bottom of Bitcoin? Presently it is antistatist ideology. If ever the ideology vanishes, something else will have to take its place. At present, it is not clear what that could be.

Selgin nuances the story,

In short, a clever marketing strategy, including a little strategic sleight-of-hand, can substitute for history in putting a positive sign on the expected value of an otherwise useless potential exchange medium.

And Hummel tackles the fiscal theory of the price level in regard to the regression theorem,

If correct, the FTPL implies that neither fiat nor credit money are true outside money in the sense of being assets only, with no offsetting liability. Instead they are really what current monetary theorists refer to as inside money, with future taxes representing the offsetting liability-side, making them much like shares of stock, whose value depends on an anticipated future income stream. Not only does this conclusion eliminate any real-balance effect that can result from fiat or credit money constituting net wealth (unlike commodity money), but it impinges on the long-standing debate over whether a pure inside-money economy would be feasible. 

Hawtrey on the Weakness of the Gold Standard: Gold, per se, was not the Problem

As I continue my study of the Ralph Hawtrey's analysis of the classical gold standard in The Gold Standard in Theory and Practice, I notice that he sets forward in his narrative an argument that implies the problem that I am currently extrapolating upon in an upcoming paper. (I hope to get it up on SSRN in the next week or two.) He writes:

The immediate effect of the suspension of the free coinage of silver in Europe was to concentrate the whole demand for additional metallic currency upon the gold supply of the world.

As I have argued before, the establishment of the gold standard eliminated metallic substitutes for gold as base money. By definition, this made demand for gold more inelastic, thus creating an environment that encouraged price volatility.

As the price of any good becomes more expensive, individuals tend to substitute away from it. By preventing the employment of substitutes for gold, gold standard countries – meaning, in practice, all western nations after 1879 – made more fragile the international monetary system. This is a fact too little appreciated in the literature concerning the gold standard - with the exception research from Bordo and Reddish that I posted recently, and probably David Glasner, Scott Sumner, and other interested market monetarists. The restraint provided by the classical gold standard appears to garner support for it among libertarian leaning economists. As a result, the effects of intervention in the classical gold standard have gone on generally ignored as arguments concerning it have become polarized. i.e., in debate gold becomes either a barbarous relic or a beacon of growth and economic stability. 

Researchers should be asking: “How did the gold standard change when silver was demonetized?” and “Why did it fail?” Hawtrey baldly explains the problem:

Since there is nothing in the circumstances of either metal [gold or silver] to make it more stable in value than the other, are we to be driven to the conclusion that the precious metals are inherently defective for that purpose? That would be a mistake. The true moral of the nineteenth-century monetary experience is rather that the defects in gold and silver as standards of value have been attributed to causes within human control. Governments have been too prone to modify their currency systems without regard to the reactions they might cause in the world markets for the precious metals, and therefore in the currency systems of their neighbors.

Conflicting policies from independent central banks destroyed the stability provided by the gold standard. Hawtrey preferred that central banks might cooperate to avoid the problems associated with the monometallic standard, but such hopes were dashed by political reality.

Arguments concerning the gold standard in history too often devolve into a fight about the merits of the gold standard per se. Consider George Selgin’s “The Rise and Fall of the Gold Standard in the United States” (which, despite my qualms, I still recommend for anyone attempting to gain familiarity with the gold standard. His discussion of silver demonetization quite informative!). Although he clarifies that a gold standard does not depend on “’legal tender’ status”, the complications associated with the adoption of a monometallic standard under a legal tender regime breeds complications that are ignored. In defending the gold standard against the claim that it is inherently deflationary and therefore suppresses economic growth, he writes:

…actual statistics for the [deflationary] interval in question reveal healthy average growth rates for both total and per capita real income … with declining prices reflecting, not flagging demand (as they did in the 1930s) but robust growth.”

The gold standard itself was not itself exceptionally deflationary, but a monometallic regime enforced by law was deflationary. This was not due to an increase in production. The growth of the gold stock could not keep pace with demand for gold after silver was demonetized. Deflation was more a result of the elimination of metallic substitutes than of increases in production. (See my earlier post.) It is for this reason that we see a strong downtrend in gold denominated prices between 1873, around the time that most major nations demonetized silver, and 1896.

Surely the debate can be improved. If the gold standard was destroyed by “causes within human control,” by governments that were “too prone to modify their currency systems without regard to the reactions they might cause,” then the interesting story to be told concerns political economy. In this story, the gold standard is more of a bystander than a system of instability or inherent promoter of deflation. 

While researchers like Barry Eichengreen and Peter Temin suggest that the gold standard was overly constrained monetary policy, I suggest that the classical gold standard overly constrained markets. The limitations of a monometallic legal tender monopoly impeded the formation of expectations in regard to future prices as substitution away from gold could no longer limit swings in prices. (For insight, see Barsky and De Long on inflation expectations under the classical gold standard.) If we are to discuss the gold standard, we must first ask "before or after silver was demonetized?"

Some Fodder from Hayek for the Conspiracy Folks

I was surprised to find that Hayek proposed some of Alex-Jones-sounding talking points before the man was born.

The problem assumes the greatest importance when we consider that we are probably only at the threshold of an age in which the technological possibilities of mind control are likely to grow rapidly and what may appear at first as innocuous or beneficial powers over the personality of the individual will be at the disposal of government. The greatest threats to human freedom probably still lie in the future. The day may not be far off when authority, by adding appropriate drugs to our water supply or by some other similar device, will be able to elate or depress, stimulate or paralyze, the minds of whole populations for its own purposes. If bills of rights are to remain in any way meaningful, it must be recognized early that their intention was certainly to protect the individual against all vital infringements of his liberty and that therefore they must be presumed to contain a general clause protecting against government’s interference those immunities which individuals in fact have enjoyed in the past. (The Constitution of Liberty, 2011 [1960], 325)

 He also includes a footnote concerning Aldous Huxley's Brave New World.

For a none too pessimistic account of the horrors that may be in store for us see Aldous Huxley, Brave New World: A Novel ... and Brave New World Revisited... and, even more alarming, because not intended as a warning but expounding a 'scientific' ideal, Burrhus Frederic Skinner, Walden Two.

My guess is that, in some manner, Hayek had in mind the eugenics movement that had peaked shortly before he published The Constitution of Liberty. I'd be delighted if any readers could share their insight.

Orwell on Hayek

Apparently George Orwell reviewed The Road to Serfdom (alongside The Mirror of the Past by K. Zilliacus) and liked a lot of it.

It cannot be said too often – at any rate, it is not being said nearly often enough – that collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamed of.

Professor Hayek is also probably right in saying that in this country the intellectuals are more totalitarian-minded than the common people.

But he did not like Hayek's alternative.

But he does not see, or will not admit, that a return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State. The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led, and since the vast majority of people would far rather have State regimentation than slumps and unemployment, the drift towards collectivism is bound to continue if popular opinion has any say in the matter.

In his review, Orwell suggests no solution; instead he submits to pessimism.

Both of these writers are aware of this, more or less; but since they can show no practicable way of bringing it about the combined effect of their books is a depressing one.

Worth the two minutes it takes to read.

New Year's Resolutions

1. Stop procrastinating.

Already failing.

2. Publish an article in a top journal.

Waiting for a response from JEH. I plan to send off my next paper to Explorations in Economic History.

3. Break 5:00 in the mile/17:00 in the 3 mile.

I've reacquainted myself with the runner's high and want more.

4. Smile a little bit more.

If you know me, you know.

 5. Practice being intentional in my presentation.

Both formal and informal.

 365  364 days left!

The Road to Serfdom in Retrospect: Then and Now

In 1944, Hayek published The Road to Serfdom as a battle cry against collectivism and an affirmation of core liberal principles. It was such a smashing success that in 1945 Reader’s Digest published a condensed version. According to John Blundell, “Hayek thought it impossible to condense but always commented on what a great job the Reader’s Digest editors did.” It is in this spirit that I feel justified in reviewing some of Hayek’s claims from the condensed version.

There is a tension that runs throughout Hayek’s narrative between planning and equality its supposed welfare improving effects. The latter was the excuse for the former at the time of the original publication. Much of Hayek’s efforts are directed toward the act of planning. Thus, Hayek makes the extreme version of planning his focal point. This is well embodied in one of the jacket notes from the first edition of The Road to Serfdom:

In a planned system we cannot confine collective action to the tasks on which we agree but are forced to produce agreement on everything in order that any action can be taken at all.

Having lived through two world wars and observing the rise of collectivism in its most egregious forms in Italy, Germany, and the U.S.S.R and in its softer forms in the U.K. and U.S., Hayek was justified in his concern. He had observed collectivism at its climax. In those forms, the freedom of the individual had been practically extinguished.

The greater danger, one that remains today, that Hayek also identifies is the employment of a particular end to justify actions that subvert institutions which guarantee individual liberty:

There is literally nothing which the consistent collectivist must not be prepared to do if it serves ‘the good of the whole’, because that is to him the only criterion of what ought to be done.

There is no getting around that the common good will be used as justification for any action, no matter how materially or politically constructive or destructive. How much credence society lends these stated ends, as opposed to the likely results of particular action or legislation, is a function of general skepticism. It is especially important that intellectuals, those nodes that guide public sentiment, exercise skepticism in their evaluation of political programs and mature discretion in promotion of interventions that transform long lived institutions. A stable set of “rules of the game” regarding the use of force, i.e., the action of government, constrain that force and make it more predictable. It allows individuals to make plans and feel secure in those plans. This is the core of Hayek's argument. He writes:

Nothing distinguishes more clearly a free country from a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law. Stripped of technicalities this means that government in all its actions is bound by rules fixed and announce beforehand – rules that make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge. Thus, within the known rules of the game, the individual is free to pursue his personal ends, certain that the powers of government will not be used deliberately to frustrate his efforts. 

Throughout the remainder of his career, Hayek wrote in defense of "rules of the game" and it is this part of his legacy that is most applicable to the modern intellectual landscape.

No end is so important that it should justify swift and massive alteration of the "rules of the game". For example, if the zeitgeist of a generation, particularly my generation, carries with it a cry for equality as the highest end, as the most moral principle to be attained at any cost, then the stability generated by “rules of the game” may be placed at risk. It is for this reason that those interested in a prosperous future, especially those who generate ideas and those who reformulate and distribute them, must consider the impact of particular policies and ideas on these rules. If an end is to be accomplished, it must be according to rules agreed upon. If the rules are altered, they must be changed systematically. It is not the crazed dictator that we need to fear in 2014. It is the employment of high-minded ideals that supposedly justify the subversion of these rules. And for this role there is no shortage of candidates.