Following up Joe’s excellent post on price stickiness: Note that the same argument applies to the so-called “real rigidities” — imperfect competition, co-specialized investment, search costs, efficiency wages, and the like — that are central to New Keynesian theories of unemployment. These sorts of institutional arrangements are part of a dynamic, entrepreneurial, innovative market economy, not impediments to it. The complaint that real rigidities are a source of inefficiency reminds me of the “snapshot” view of competition. It’s true that arrangements made in period 1 may limit trading opportunities in period 2, but that hardly means something is wrong once both periods are taken into account. New Keynesian-style real rigidities emerge endogenously through the actions of profit-seeking entrepreneurs and don’t justify policy intervention to offset the effects of monetary shocks, such as a change in the demand for money.
Joe is also right to point out the central role of rigidities in the “monetary equilibrium” approach to Austrian money and banking theory. I’ve heard some Austrians argue that Hayekian tacit knowledge, and the need for Kirznerian discovery, limits the ability of market participants to adjust to changes in the demand for money under 100%-reserve banking. These limits — call them “Kirznerian rigidities” — supposedly call for an elastic money supply generated by competitive fractional-reserve banks. This leads to the bizarre claim that Murray Rothbard must have believed that prices and wages are perfectly flexible downwards, otherwise how could he claim that any supply of money is optimal? But Rothbard didn’t uphold “perfect flexibility” any more than he upheld “perfect competition,” neither of which has anything to do with real-world market processes. Rather, he thought that market participants operating under a 100%-reserve banking system could deal with rigidities, nominal or real, just as they deal with the other imperfections of real people operating in real markets.
Follow Circle Bastiat
http://www.guidohulsmann.com/pdf/Demand_Money_Time_Structure_Production.pdf
“demand for commodity money is a very basic way for
the unsophisticated citizen to bring the structure of production in line with his assessment of the macroeconomic environment. Fiat
money takes this power out of his hands. The consequence is a
greater tendency for capital to be wasted”
I understand Hulsmann’s point, but “fiat money” and “commodity money” are not mutually exclusive terms. David Barker made this point recently in an interview with Stossel around 2:30.
http://video.foxbusiness.com/v/1484348139001/
A statutory gold standard does not eliminate fiat money. The “fiat” in fiat money refers to the state’s forcible circulation of a particular currency, by drawing the currency from circulation through taxation and then spending it, like a pump circulating water by drawing it from a network of pipes at various points and reinjecting it at other points.
A state may also inflate the supply of its statutory. If a statutory monetary policy redeems bills of credit for gold at a fixed price, the state must rely more heavily on taxation to circulate its fiat money, but the fiat money is still fiat money.
Money comprised exclusively of gold coins can be fiat money.
Money comprised exclusively of notes promising a commodity like oil, that does not itself circulate as money, need not be fiat money.
If we don’t make this distinction carefully, people may believe that a statutory gold standard somehow constrains the state. It doesn’t. It only requires the state to change its tax policy, relying more heavily on direct taxation rather than an inflation tax. As libertarians, we want currency competition, not a statutory gold standard.
Mises sometimes confuses this issue by defining money as “universal” medium of exchange. In a free economy, money is any good that people freely accept in trade only to exchange it soon thereafter for other goods. People may use more than one good for this purpose, both gold and silver for example.
People may also (and commonly do) use promissory notes, credibly promising the future delivery of a good, as money. The good promised need not be money itself. It need only be sufficiently standard. Common labor, requiring only common skills like basic literacy and the ability to drive a car, might be such a standard in principle.
Mises seems to make light of this idea in Economic Calculation in the Socialist Commonwealth, with reference to Proudhon’s exchange bank and later to Marx’s “simple labor”; however, Mises actually disputes only the labor theory of value here. He does not suggest that more complex labor (and other, non-human capital) cannot be priced in terms of simple labor. He only says that a monetary standard of this kind does not demonstrate the labor theory of value or eliminate the need for private ownership of capital to create a market from which capital prices may emerge.
Ultimately, free people cooperating through markets should decide what is money, not states or economic theoreticians.
A durable commodity like gold does not have a fundamentally fixed value relative to other, non-durable goods, like food. History is deceptive in this regard. The foreseeable future departs from historical trends.
If people perceive durable commodities as having this fixed value, they may accumulate the commodities as a hedge against inflation in fiat money, but gold can increase in value relative to fiat money while falling in value relative to other goods.
An imbalance exists between current demand for future consumption and the current supply of promised future production. This imbalance is real and unprecedented. It’s not simply an illusion created by an inflationary monetary authority, not this time. The changing policies of central authorities are not easily separable from changing economic fundamentals, but economic fundamentals are changing.
The demographic transition is only beginning. It will last for decades, and short of exterminating the “baby boom”, economic variables will adjust, one way or another.
Some durable good may hold its value relative to non-durable products of free labor during this transition, but I can’t tell you which one. If I could tell you, based on generally available information, the price of this good would rise precipitously now and then fall during the transition, thus falsifying my prediction.
Of course, I’m assuming that labor remains relatively free during the transition. I’m not sure it will. States could tax labor more. These taxes may be unconventional, like rising costs of obtaining a license to work within the corporative state along with declining employment opportunity without it.
This trend seems to emerge already. College costs rise, financing many superfluous expenses adding little value to students’ future labor. States lend to students on attractive terms, including low “teaser” rates, while excluding the debts from bankruptcy. Much of this debt is taxation in disguise, just as many nominally “private” mortgage backed securities turned out to be entitlements to tax revenue in disguise.
This assumed inability of human actors to adjust to the world around them in the most vital arena of life – the economic arena – is a micro version of the macro fallacy that only economists (professional economists ordained by the State) are capable of understanding what is going on in the economy and without them the economy would be in shambles!!! Murray Rothbard’s view is correct – market participants operating under a 100%-reserve banking system could deal with rigidities, nominal or real, just as they deal with the other imperfections of real people operating in real markets.