Friday, June 8, 2012

Krugman and Diocletian: stretching the metaphor


Today's Mises Daily, by Peter C. Earle, aims to compare the economic policies advocated by Paul Krugman with the disastrous decisions made by Roman emperor Diocletian. I'm not a huge Krugman fan, but I must say that Earle is straining credibility somewhat with his comparison.

The historical aspects of the article are interesting, chronicling the circumstances which led to hyper-inflation and a series of ill-fated price controls in the Roman Empire. Laws were passed restricting prices of over 900 commodities and wages for 130 occupations.
...the Romans learned a lesson that wouldn't be repeated again for almost 1600 years: that attempting to control inflation through price controls is like attempting to control obesity by wearing tight clothing: the results are generally frustrating, often painful, and sometimes deeply embarrassing.
To Krugman, again: while it is true that he has not, as yet, advocated for a capping of consumer or capital-goods prices, he has vociferously defended the existence of central banks and endorsed their mission to set the price of money via interest-rate targeting, which is tantamount to fixing prices across the entire economy in a singular monetary contrivance.
It's a neat debating tactic to pass off your crucial assumptions as uncontroversial. I bolded the part of the quote I'm referencing.

Earle thinks that monetary injections are non-neutral, that is, they affect relative prices in the economy. This is a point of serious contention between Austrians and Monetarists, the latter camp believing that monetary injections are largely neutral. Personally, I think the Austrians are ahead on this point, but it's inaccurate to portray this as a closed issue.

Also, even if we accept that injections affect relative prices, that is not the same as a widespread campaign of coercive price fixing by the state.

Austrian capital-based macroeconomics says that monetary injections to lower the interest rate will impact goods depending on what stage of production they are in; the lower interest rate tends to favor long-term purchases (e.g. housing) over immediate consumption. That disrupts the structure of economic production over time.

Price ceilings are different than monetary injections. A price ceiling will cause shortages of the good in question, which is largely why they are so damaging to the economy. Monetary injections just push the interest rate down, helping borrowers and hurting savers. A shortage of savings is created, but it is covered up (at least in the short-term) by the injections. This can distort the structure of investment but the mechanism is very different from other forms of price fixing, and to treat them as all the same is overly reductive.

The price mechanism can still function to a large extent even under activist monetary policy. Distortions occur, but they are not nearly on the same scale of magnitude as those from overt price caps. Earle, in his attempt to indict Krugman and support Paul, pushes the historical analogy past its breaking point.

There are plenty of over avenues along which Paul Krugman's views can be criticized, but a historical argument relying on such tenuous assumptions will probably only convince those who are true believers already.

2 comments:

  1. Hi Nick,

    Thanks for your comments. Two replies:

    1. "Earle thinks that monetary injections are non-neutral, that is, they affect relative prices in the economy. This is a point of serious contention between Austrians and Monetarists, the latter camp believing that monetary injections are largely neutral. Personally, I think the Austrians are ahead on this point, but it's inaccurate to portray this as a closed issue."

    I do believe that, but I don't view it as a closed issue, nor did I claim that it's a closed issue. But one would expect, I'm sure, that in an article espousing the Austrian perspective, one would apply the Austrian theory.

    2. However, you are absolutely correct, and I confess to having sloppily described my position. Setting/targeting interest rates is not "setting prices across the entire economy"; that's an oversimplified, erroneous description; rather, I should have said that the Fed's activity prices (or attempts to price) present money in terms of future money, which is arguably a form of 'price control' in the sense that it influences prices variously across an economy - differently, depending upon what stage of production they are in, and unevenly over time. Written better, I would have been clearer. "Tantamount" to price fixings, whether floors or ceilings, it is not.

    Thanks,

    Pete Earle

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  2. Hi Pete,

    thanks for stopping by. While my praise to your article was limited in my first post, I found it overall very informative and interesting. I just couldn't miss the opportunity to nit-pick.

    My goal was definitely not to shoot down the overall point I took from your article - the questionable economic policies advocated by a certain NYT columnist - or discredit your Austrian style of analysis. I just thought it interesting to note which parts were most dependent on particularly Austrian assumptions, and possibly seen as more controversial by the "average" economic reader. It may also have been sloppy wording on my part to infer that you viewed it as a closed issue.

    The general analogy between money creation's effect on different stages of production and price fixing makes sense to me, and I can see the logic which led you to it in your Mises Daily article. I know my own evaluation - that price controls are worse than monetary manipulation - could potentially be argued as well, although a quantitative demonstration either way would be difficult.

    Thanks for your response, and I'll keep an eye out for your writings in the future to perhaps continue the conversation.

    -Nick

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