Wednesday, November 18, 2009

Am I a Monetary Central Planner?

In a comment on the Austrian Economists blog, Richard Ebeling takes me to task, writing:
(Try this link and scroll down if the other doesn't work.)

But I find myself in disagreement with Bill Woolsey. Why should the government "target" anything, including nominal income?

In a free market, including a free monetary system, nominal income would be whatever the cumulative interactions of the market participants generated in terms of their demand to hold various forms of money and the supply of commodity money and money substitutes.

End of story. I'm sick and tired of social engineering of any type or form. Who are these nominal income targeting "experts"? How do they know how much nominal income should be in the economy and what its "growth path" should be?

This is just another form of monetary central planning. Another form of Friedman's "rule" following.

I don't think nominal expenditure targeting is monetary central planning. What should the target for nominal expenditure be at any time? It should be 3% higher than the previous period. Where does 3% come from? The long run trend growth rate in real output.

But where does the growth path start? I start it from 2nd quarter 2008, before the downturn in nominal expenditure started. However, it doesn't really matter. If nominal expenditure targeting had been implemented in 1985 or 1929, a much different initial level of nominal expenditure would have been appropriate. I don't think starting from the current level of nominal expenditure is appropriate, because it has recently decreased and I don't believe that prices and nominal incomes have adjusted.

Ebeling holds out an alternative of commodity money and free banking. I favor free banking as well, so the difference is the commodity money. Which commodity? What should happen to the price of the commodity? Stay fixed forever? Then at what price should it start? The answers to those questions is what determines the nominal anchor of the free banking system he proposes. Does the answer to those questions amount to monetary central planning?

Abolishing all money, returning to barter, and seeing what evolves is not a realistic approach.

Returning to a gold standard at some particular price of gold would be a significant government intervention.

Still, it isn't monetary central planning. Nominal values will adjust to this anchor.

Under Eberling's approach, the government is going to be fixing the price of one good. And then all nominal prices in the economy will adjust in order to clear the market for that good. Nominal income will depend on those nominal prices and a volume of real production determined by market forces--roughly the productive capacity of the economy. In my view, the market process by which prices and nominal incomes adjust throughout the economy to clear the market for the one good serving as nominal anchor is likely to be very disruptive to the process of production.

With nominal expenditure targeting, nominal prices will adjust to clear various markets. Real income will depend on the same market forces that determine productive capacity. The price level will change with fluctuations in productive capacity, but it should remain stable on average. Generally, nominal prices will rise for goods with higher relative prices and fall for goods with lower relative prices. Nominal interest rates will change with real interest rates. If productivity is temporarily impaired, nominal prices of goods and services rise to reflect the greater scarcity of products. If productivity is enhanced, the greater abundance of good will be signaled by lower nominal prices.

What is the better macroeconomic environment for microeconomic coordination? I think fixing the nominal price of gold is not as effective as slow, steady growth in nominal expenditure. And so, the nominal anchor for free banking should, if it is possible, be a growth path for nominal expenditure that reflects slow steady growth.


  1. How do you differentiate between a "classical" gold standard and a gold-exchange standard? I believe Austrians prefer the former in which money is not "fixed" to a particular price of gold but defined as a specific weight of gold, and the price floats.

  2. Leo:

    Thank you for your comment.

    I reponded with a new post.

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