In the QJAE. Discuss, eviscerate, &c. &c.
Freedom of markets is positively correlated with the degree of evolution in any society...
The only reason why Austrian School is not accepted by the so called mainstream Economics is that Austrian economists refuse to become the hacks of the Establishment or the agents of Wall Street financial oligarchs.
From my quick read it seems that he critiques Austrian monetary policies largely through the setting up of choices and saying the Austrians would more likely than not pick X over Y. It's a false choice. Further, his critique of the gold standard seems a bit flimsy, (at least from an Austrian perspective) as one of his sources explains how central banks holding gold could still create credit booms. Lastly, his "overwhelming" evidence of the Great Depression being caused by a series of negative aggregate demand shocks isn't exactly ovewhelming to say the least.
In my opinion, he repeatedly misrepresents Austrians "Be that as it may—one thing is for sure: possibly, no single currency regime is best for all countries and for all times (Bordo 2003, p. 33) as Austrians want us to believe." Thats not what Austrians want! (At least...not the good ones)
'Yes, I know that Austrians would like to abolish central banks altogether. But we livein the real world and there is a very high probability that central banks will exist inthe future.'
Well we start off with soothsaying. By chance is the real world a 20th century ordeal? Or perhaps the years of the 19th century were all some fabricated memory imposed upon us.
'During an asset price boom monetary policymakers find themselves in a dilemma(Bordo and Jeanne 2002): If they do not prick the asset price bubble, there is the riskthat the boom will be followed by a crash and a credit crunch because decreasingasset prices lead to a decrease in the value of collateral of potential debtors which inturn leads to lower credit lending by banks.'
Translation: Let us simply disregard the fact of how we got into an asset price doom and presuppose that they just naturally occur and ask Austrians what they would do to stop one. Of course not letting them answer, 'well let's start by not having them at all'
'Sure, decreasingprices for single goods are welcome but not in the aggregate. First, given contractuallyfixed nominal wages, decreasing price levels lead to higher real wages and thereby lowerdemand for labor. Second, given nominal interest rates—especially if the lower zeroboundaryis reached (remember Japan!)—deflation leads to higher real interest ratescompressing demand for capital goods.'
The industrial revolution is such a terrible even in these people's minds.
'Third, given that debt is fixed in nominal terms,deflation leads to increasing real debt of firms and households.'
Ah man you mean people actually have to pay back their debt in equal or greater then value? The horror! I rebuke Austrianism, firing up those printing presses, let the debtors free from their shackles!
'Viceversa, the road to recovery from the Great Depression was paved by expansionary monetary policy after the abandonment of the gold standard'
That's right, we 'printed' our way out of the depression. This makes absolute sense!
'First, governments would losetheir ability to tune their economic policies to fit domestic conditions. Second, undera gold standard, the burden of adjustment is always placed on the countries with a“weak currency.” Hence higher average unemployment rates are to be expected undera gold standard than under an alternative monetary regime. Third, the average inflationrate would be determined by gold mining. Thus the inflation rate would be determinedby political factors that interrupted the pace of gold mining. Be that as it may—one thing is for sure: possibly, no single currency regime is best for all countries andfor all times (Bordo 2003, p. 33) as Austrians want us to believe'
First, that is a great thing.
Second, is this a concesion that gold is 'stronger' then 'weak currency'? n
Third, average inflation wouldn't be 3% oh my god someone shot me now.
Fourth, I have yet to hear an Austrian say 'Everyone must consent and utilize gold and gold alone.'
Congratulations, I have never taken a single economics class in college and I can see the absurdity of this article.
'Men do not change, they unmask themselves' - Germaine de Stael
Even as an amateur reader, I can see this paper is full of specious reasoning. Zimmermann starts out by assuming away a central point of the Austrian view that he tries to critique:
Guido Zimmermann:Yes, I know that Austrians would like to abolish central banks altogether. But we live in the real world and there is a very high probability that central banks will exist in the future. So, should central banks raise interest rates preemptively to prevent the development of an asset price bubble? An Austrian would certainly recommend it (e.g., Sennholz 2002).
If Austrians could make any one single policy recommendation it would probably be to abolish central banks. To assume that this is unrealistic is tantamount to dismissing the minority Austrian view simply because it is a minority view. Sure an Austrian may say that central banks, if they are to exist, should probably set interest rates higher, but this is within the context that Austrians profess that there is no way for a central planner to know what the interest rate should be. So his argument starts off on extremely unstable ground.
Even if we accept this, later we shall see that Zimmermann's assumption comes back to bite him.
Guido Zimmermann:During an asset price boom monetary policymakers find themselves in a dilemma (Bordo and Jeanne 2002): If they do not prick the asset price bubble, there is the risk that the boom will be followed by a crash and a credit crunch because decreasing asset prices lead to a decrease in the value of collateral of potential debtors which in turn leads to lower credit lending by banks. In this case a preemptive “strike” in the form of interest-rate hikes would have to be interpreted as an insurance against the risk of a credit crunch.
Note the bolded text (mine). He claims to critique Austrianism, but this framing runs counter to the Austrian view. Austrians hold that the crash is a necessary thing, so it's not a risk, and there's no need to "insure" against it. Zimmermann apparently does not even have a rudimentary grasp of the Austrian theory.
Guido Zimmermann:The optimal monetary policy when dealing with asset price developments therefore depends on the relative costs and benefits of this insurance policy.
Besides the incorrect "insurance policy" interpretation, "The optimal monetary policy" implies that the optimal monetary policy is knowable, but Austrian theory holds that it is not. The Journal was generous to publish Mr. Zimmermann.
He proceeds to the issue of deflation, noting some possible drawbacks without balancing these with the drawbacks of inflation. "But," he concludes,
Guido Zimmermann:the overall effect of decreasing prices is ambiguous (e.g., DeLong and Summers 1986). Due to the possible destabilizing effects of deflation there is a broad consensus that deflation has to be fought by central banks via aggressive and preemptive increases in the money supply or interest rate decreases respectively (e.g., Bernanke 2002).
In other words, even though the overall effects of deflation (equated with falling prices) are ambiguous, [insert argument ad populum] central banks must act preemptively and aggressively against this "ambiguous" evil. Because hey, if you're going to use a non sequitur you might as well make it a really huge one!
Also note how inflation is, by implication, better than "ambiguously" good. Naturally, this is also probably the "consensus" view, but the whole point here is to deconstruct Austrianism on its own merits, rather than its popularity. Notice how many times Zimmermann implicitly and explicitly appeals to popularity among economists (99% of which did not see the current crisis coming, but the Austrians did).
He goes on to attack the historical gold standard with the same silly reasoning we've seen countless times before. I'll leave it to others to take on such claims, except for the following:
Guido Zimmermann:DeLong (1996) gives a nice survey of the likely adverse effects of a reestablishment of a gold standard: First, governments would lose their ability to tune their economic policies to fit domestic conditions.
Austrian theory maintains that this would be a good thing. If you want to critique it, you've got to argue against that. The wording "lose their ability to tune their economic policies to fit domestic conditions" assumes that such ability exists in the first place.
Guido Zimmermann:Second, under a gold standard, the burden of adjustment is always placed on the countries with a “weak currency.” Hence higher average unemployment rates are to be expected under a gold standard than under an alternative monetary regime.
I don't know enough economics to address this one. Someone else?
He wraps up the case against the gold standard with this knee slapper:
Guido Zimmermann:Third, the average inflation rate would be determined by gold mining. Thus the inflation rate would be determinedby political factors that interrupted the pace of gold mining.
Hilarious! The inflation rate would be determined by gold mining, in other words it would be very, very, very slow. And about political factors, I'm not going to embarrass Mr. Zimmermann any further than his statement already does.
Guido Zimmermann:Be that as it may—one thing is for sure: possibly, no single currency regime is best for all countries and for all times (Bordo 2003, p. 33) as Austrians want us to believe.
Austrians, as far as I know - Rothbard in particular, are careful to point out that gold, silver, etc. are only what are likely to be decided on in the free market. Now Zimmermann is presumably still on about the idea that Austrians prefer the gold standard to fiat, and in that he may have a point, but again this is not the central Austrian argument. The main policy recommendation, as far as I know, is that legal tender laws be abolished. In short, the quoted section is a strawman.
All in all a silly paper riddled with fallacies, presumptions, and misstatements of the Austrian position.
Why anarchy fails
Yes, I know that Austrians would like to abolish central banks altogether. But we live in the real world and there is a very high probability that central banks will exist in the future.
This is a self defeating statement. We are getting closer to the elimination of central banks each and every day. An intellectual revolution is brewing in these regards. We should be fighting for the elimination of central banks around the world instead of giving up on our principles.
That said, I still understand why Guido Zimmerman would want to develop a theory about what an Austrian school economist should do if he were to be put in charge of the Federal Reserve. It is an interesting mind game, if nothing else.
decreasing prices for single goods are welcome but not in the aggregate. First, given contractually fixed nominal wages, decreasing price levels lead to higher real wages and thereby lower demand for labor. Second, given nominal interest rates—especially if the lower zero boundary is reached (remember Japan!)—deflation leads to higher real interest rates compressing demand for capital goods. Third, given that debt is fixed in nominal terms, deflation leads to increasing real debt of firms and households. This deteriorates the balance sheets of firms leading to deflation-induced bankruptcies. Fourth, deflation gives consumers incentives to delay expenditures to benefit from decreasing prices in the future with the result of decreasing sales of firms.
Mr. Zimmerman clearly doesn't distinguish between falling prices, which can be a good thing, and deflation/monetary contraction, which has always had bad effects on an economy and is not something which can happen in a free market monetary system.
George Reisman makes the distinction in The Anatomy of Deflation:
This is also why we should fight for a free market monetary system. Hayek explains why a gold standard is unnecessary and how a free market deals better with inflation and deflation than central banks in A Free Market Monetary System.
The evidence shows that the gold standard before World War I guaranteed no protection against endogenous credit dynamics. Further, there is no firm theoretical basis for the connections between the exchange-rate regime and endogenous credit dynamics.
This is why Austrians advocate the elimination of other government policies which promote credit expansion, like deposit insurance which promotes fractional reserve banking.
Be that as it may — one thing is for sure: possibly, no single currency regime is best for all countries and for all times (Bordo 2003, p. 33) as Austrians want us to believe.
Which is a straw man, considering that Austrians support a free market monetary system with no government mandates , as I've pointed out before.
It is not due to a grand conspiracy against Austrian scholars but due to their monocausal, often ideological-driven economic reasoning.
This statement ignores the diversity of thought when it comes to Austrian monetary theory. Any serious scholar would not make the above statement, considering the intellectual battles between Austrians like George Selgin and Guido Hulsmann over monetary theory.
“This is not the place to embark on a detailed critique of the Austrian cycle theory. Suffice it to suggest that its exponents took logical possibilities . . . and treated them as logical necessities.”
Of course, no proof was provided for the above statement.
Overall, I found Austrian Monetary Policy Views: A Short Critique by Guido Zimmerman painfully lacking of any real evidence. None of the footnotes prove anything, they are simply opinions, not fact. Moreover, Zimmerman doesn't even provide a thesis. The three questions he asks in regards to interest rate hikes, deflation, and the gold standard are all left unanswered. There is no mention of deflationary growth (e.g. the 1890s and 1920s), no mention of the differing types of falling prices (growth-induced and contractionary induced), no mention of the ingenious solutions provided by Hayek, etc.
In fact, this critique is much, much weaker than critiques provided by economists on blogs and other informal media. At least critiques based on rational expectations seem to have some validity. This critique doesn't. It's simply a summation of the mainstream point of view, without actually critiqing Austrian monetary theory, despite the title. The most that Zimmerman can offer is a kind of appeal to ridicule where he states that Austrians are ideologically driven, thus there is no need to critique Austrian monetary theory. First, this statement is not true, as evidenced by the differing views on monetary theory within the Austrian school (e.g. Garrison vs. Hulsmann); second, Zimmerman provides no evidence for his statement; and third, even if Austrian monetary theory were ideologically driven, that is no reason to simply dismiss it; to do so ignores the possibility of an ideology being correct.
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