T Nation

What Rothbard Got Right & Wrong

Good post from GMU economics prof Bryan Caplan regarding arch Gold bug Murray Rothbard:

http://econlog.econlib.org/archives/2008/03/what_the_mainst_1.html

[i]What the Mainstream Can Learn from Rothbard’s Monetary Econ - and What Rothbard Should Have Learned from the Mainstream
Bryan Caplan

I just read Murray Rothbard’s The Case Against the Fed ( http://www.amazon.com/Case-Against-Fed-Murray-Rothbard/dp/094546617X/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1205187298&sr=1-1 ), and it brought back to mind my youthful exposure to his whole approach to monetary economics. (See here ( http://www.amazon.com/What-Government-Money-Percent-Dollar/dp/0945466447/ref=sr_1_1?ie=UTF8&s=books&qid=1205185568&sr=1-1 ), here ( http://www.amazon.com/Case-100-Percent-Gold-Dollar/dp/094546634X/ref=sr_1_1?ie=UTF8&s=books&qid=1205185622&sr=1-1 ), and here ( http://www.amazon.com/Americas-Great-Depression-Murray-Rothbard/dp/0945466056/ref=sr_1_1?ie=UTF8&s=books&qid=1205185646&sr=1-1 ) for more). My mature view is that there are a couple of big lessons that Rothbard teaches better than anyone; at the same time, however, there are important mainstream results that he failed to grasp.

Let’s start with what the mainstream can learn from Rothbard:

  1. Government action is the reason why inflation exists. The monetary base is under the Fed’s complete control, and it virtually always goes up ( http://research.stlouisfed.org/fred2/data/AMBSL.txt ). Thus, if the Fed took no action, inflation would almost always be lower. In fact, as George Selgin emphasizes ( http://www.amazon.com/Less-Than-Zero-Falling-Growing/dp/0255364024/ref=sr_1_7?ie=UTF8&s=books&qid=1205186540&sr=1-7 ), the natural tendency of a growing economy is mild deflation.

If you think this is obvious, let’s see what happens if inflation gets much higher. Not only will the public hunt for scapegoats; but even a lot of economists will avoid pointing the finger at the Fed. (And needless to say, the Fed will not point the finger at itself!)

  1. The Fed (like all central banks) virtually never “fights inflation.” Of course, sometimes the Fed creates less inflation than at other times. But popular talk about the Fed moving into “fighting inflation” mode is pure obsfucation. It makes about as much sense as saying that an orange farmer who cuts back orange production by 20% is “fighting oranges.”

If you’ve taught monetary for years, you may dismiss this as obvious, too. But when I was an economic novice, it was a revelation. And if you don’t hit your students over the head with it, most of them will never get it.

OK, now here’s what Rothbard should have learned from the mainstream:

  1. Seigniorage is a trivial fraction of the U.S. federal budget. Contrary to Rothbard’s extravagant claims, printing money accounts for only about 1-3% of the federal budget ( http://research.stlouisfed.org/publications/review/92/03/Seigniorage_Mar_Apr1992.pdf ). There are some Third World countries where Rothbard’s “conspiracy” theory is quite right. But in the First World, the government has much easier - and less unpopular - ways to pay the bills.

  2. Although central banks cause inflation, central bank independence reduces inflation. In The Case Against the Fed, Rothbard joins with populists who object to the Fed’s political independence:

Unfortunately for Rothbard, there is solid evidence ( http://economistsview.typepad.com/economistsview/2005/11/central_bank_in.html ) that Johnny-one-note is right: Central bank independence does lead to lower inflation. If the Fed did nothing, inflation would be lower than today; in fact, we’d probably have deflation. Nevertheless, letting elected politicians boss the Fed around would make inflation higher than it already is. The economists who run the Fed are not inflation hawks in an absolute sense, but they are hawkish relative to elected leaders. After all, our elected leaders win by catering to the economically illiterate voters who cry “Do something, government!” every time the economy hiccups. In contrast, the typical staffer at the Fed understands the long-run neutrality of money. [/i]

The report on seigniorage is in terms of data from the 70’s and 80’s. Secondly, seigniorage is nothing more than revenue gained from money production. Where do deficits get accounted for? Where does money come from?

I don’t quite understand the second claim. How can central banks ever be more independent than a commodity standard? Also, isn’t price deflation a good thing?

[quote]LIFTICVSMAXIMVS wrote:
The report on seigniorage is in terms of data from the 70’s and 80’s. [/quote]

There was a lot more inflation in the 70s and early 80s than there has been in the 90s and 2000s.

[quote]LIFTICVSMAXIMVS wrote:
Secondly, seigniorage is nothing more than revenue gained from money production. Where do deficits get accounted for? Where does money come from?[/quote]

Monetary policy and government spending are two different things, even though they both affect the economy. The real problems occur when the political class tries to inflate away deficits. But that’s controlled much better with an independent central bank (see below) controlling the money supply.

[quote]LIFTICVSMAXIMVS wrote:
I don’t quite understand the second claim. How can central banks ever be more independent than a commodity standard? Also, isn’t price deflation a good thing?[/quote]

A commodity standard enforced by the politicians you mean?

Considered singularly, a small amount of price deflation wouldn’t necessarily be a bad thing, though it would be worse for the economy than the same amount of inflation because it would encourage businesses to conserve cash and would disincentivize risk.

Considered in our current economic structure, which has seen no deflation since the Great Depression, it would be catastrophic - the debt structures people have become comfortable with w/r/t their houses and businesses would be turned on its head, and you would have hundreds of millions of people with large percentages of their net worth tied up in assets worth less than they owed for them.

Obviously we have some of that with the current real estate bubble pop, but it would affect every market nationwide. Again, there would also be an effect on business formation and investment.

I still like lower prices.