That recessions are caused by drops in 'aggregate demand.' He proposes 'stabilizing' the 'aggregate demand schedule.'
http://www.econtalk.org/archives/finance; min 52.
He also believes that people will accept bank notes backed by a fiat currency, and that the currency school and the peel's act went too far.
Wow, Giles was right! This guy really is an Austrian!
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
The problem with Selgin and Co. is their obsession with nominal rigidities that arise from fluctuations in money demand, the classification of which depend on arbirtrary time intervals. Like much of the mainstream they seem to think that anything that doesn't adjust instantaneously is ipso facto detrimental to the economy and therefore in need of requiring some specially arising institution to solve the problem, i.e., fractional reserve banking.
My problem isn't so much with the fact that they believe "let be whatever shall be", but that they rationalize frb on the basis of poorly reasoned aggregated relationships that supposedly diminish "social welfare". It should be clear that individuals are constantly shifting their money demand schedules so that others are constantly gaining and losing as a result of the consequent price shifts. The idea that frbanking smooths this process is completely mistaken in that it takes the market between lenders and borrowers to be a fluidly adjusting mechanism capable of performing its function. Yet the basis of their argument is that some other mechanism has failed, namely prices, so doesn't it seem absurd that one mechanism is assumed to be capable of performing its function while the other not? It is reminiscient of the government interventionists who rationalize their actions on the basis of market failures yet seem to forget that government failures also exist. Of course, action is not being advocated in their case but the rationalization process is similar.
In any case, the theory further depends on ad hoc empirical generaliations mainly based on the supposed perfect working example of frb, i.e., Scotland. E.g., they seem to think that despite the money supply multiplier, there is, for the most part, no effective increase in the money supply in the presence of frb. Because any net withdrawal results in a diminished reserve, the bank must call on some loans, and thus decrease the effective money supply. It is obvious, though, that the simultaneous cancellation of deposit transferals can persist for some time and thus allow depositers to use their money indefinitely while other borrowers of the reserves also use their money, thus resulting in a larger money supply than would otherwise circulate. Unless you believe in Friedman's helicopter analogy, the distortions should be obvious. The economic reasoning behind their theory is so silly it's curious how it ever got going again; I suppose it was a niche to be filled.
Edward, thanks for your insightful remarks, but I think you're framing the debate incorrectly. For example, you write "Like much of the mainstream they seem to think that anything that doesn't adjust instantaneously is ipso facto detrimental to the economy and therefore in need of requiring some specially arising institution to solve the problem, i.e., fractional reserve banking. ". The problem with this line of thinking is that it presumes full reserves to be the "natural" institution and fractional reserves to be some sort of constructivist idea originating with professional economists (it also works on the assumption that the government can never correct the market, but let's not get into that). I'm sure that a free banker would respond that, in fact, fractional reserves have spontaneously emerged from the market and that imposing centralized bans on fractional reserves would cause the rigidities. On a similar note, I wouldn't say it's an "obsession" on their behalf (nor do I think this is the crux of the argument), rather I see them as emphasizing the less than rigid prices do exist whereas other Austrians tend to take a long run, Humean view when it comes to price rigidities. They're merely emphasizing what other Austrians have failed to do so, and noting where it affects the argument. The point is that free bankers realize that prices and wages aren't perfectly flexible as some other Austrians would have them be, this isn't a normative statement as it is in the new Keynesian view, just a theoretical and empirical observation.
Likewise, you write "Yet the basis of their argument is that some other mechanism has failed, namely prices, so doesn't it seem absurd that one mechanism is assumed to be capable of performing its function while the other not? " and " It is reminiscient of the government interventionists who rationalize their actions on the basis of market failures yet seem to forget that government failures also exist. Of course, action is not being advocated in their case but the rationalization process is similar. ". In the case of the former I think the free bankers would say that, in fact, what is happening is full reserve bankers would stop the interest rate performing its function. In light of this other prices will have to change to bring consumer demands into equilibrium. Now, the point here is that the interest rate is a single price, it needn't perform its function instantly. All that is necessary for the free banking argument is that the interest can adjust quicker than the price leve. This much, however, should be clear from the fact that the price level doesn't adjust instantly, rather, it is a delicate array of millions of price. In regards to the latter quotation I think the point is not that FRB advocates think that we can tweak the market to make it work perfectly, rather, reserve requirements imposed by courts or governments will hamper the market process.
A final point is concerns this remark of yours " It is obvious, though, that the simultaneous cancellation of deposit transferals can persist for some time and thus allow depositers to use their money indefinitely while other borrowers of the reserves also use their money, thus resulting in a larger money supply than would otherwise circulate.". Whilst largely true, this misses the point. What's important is that if there exists more money that the public wishes to hold, it will be known and adjustments will be made through adjustments of the interest rate. There's enough work on this that I don't think I need to explain, but how it is "silly" escapes me. To call anything that isn't 100% reserve banking silly to the extent that it should never have taken off strikes me as arrogant.
A quick, somewhat offtopic, remark would be that whilst a high level of aggregation does obscure the nature of economic relationship, aggregation per se isn't bad. Even Rothbard talks of the price level, the interest rate, the money supply. All of which abstract something. As I heard Roberts and Boudreaux discuss in a podcast the other day, the level of aggregation necessary is an art. As somebody who finds value in Austrian capital theory I think labeling it "K" is too simple, on the other hand a 1 to 1 depiction of the rust belt (to use Garrison's example) isn't very useful either.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Oh I see how this is going, Esuric chooses those answers that he agrees with to be correct, ignores the evidence against his opinion (of which he has a history of doing) and then chimes in with nonsensical taunts claiming that others can't defend their positions!
Fuck science, that shits out of date. Dogmatism is way cooler!
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Of course I do! Science means agreeing with Rothbard and Hoppe!
GilesStratton: Of course I do! Science means agreeing with Rothbard and Hoppe!
I've never read Hoppe/Rothbard.
Esuric:I've never read Hoppe/Rothbard.
you are missing out.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
nirgrahamUK: Esuric:I've never read Hoppe/Rothbard. you are missing out.
I'll get to it.
"The defenders of government interference with the issuance of banknotes and checkbook money justify this policy by declaring that "free trade in banking is free trade in swindling." The poor ignorant people must be protected, they say, against bad banknotes. But no one would be forced to take banknotes if they had not been declared legal tender by the government."
"The essence of the market economy is that the economic actions of the individuals are not performed by order of the government but spontaneously by the individuals. This requires also that the money, the medium of exchange, be independent of political influence."
(Mises, The Free Market and Its Enemies, p. 81)
"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)
It doesn't matter. I am more into Block than Hoppe, and Rockwell than Rothbard, but Giles will strawman you as being a fanboy of either whether it is true or not. Ironically, he was the biggest Hoppe fan boy ever for about 12 months. I mean, this is a guy who couldn't stop referring to Hoppe or sourcing him. It was almost creepy.
But we're all young once, and young people find heroes and move from passion to passion incorporating facets of each into a unique whole. When Giles rags on the LvMI community, it's just because he is in his GMU/Boettke phase. Within a couple years, he will have moved on to something else.
Giles, may I suggest Kevin Carson?
It is a mistake to associate with the notion of free banking the image of a state of affairs under which everybody is free to issue banknotes and to cheat the public ad libitum. People often refer to the dictum of an anonymous american quoted by Tooke: "Free trade in banking is free trade in swindling." However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry of October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer."
Selgin is a member of the LvMI community.