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Bank of Canada Governor Addresses Austrian Economics and NGDP Targeting

This talk by Bank of Canada Governor Mark Carney from Thursday is of note mostly for the fact that he explicitly addresses both Austrian criticisms of central bank policy and the position taken by NGDP targeters like Scott Sumner.  The bit on the Austrians is below.  He does a decent job of explaining the argument, but a not so good job, I would argue, on what it implies.

Second, the stronger critique of the Austrian school is that inflation targeting can actively feed the creation of financial vulnerabilities, especially in the presence of positive supply shocks. For example, in an environment of increased potential growth resulting from higher productivity, inflation-targeting central banks may be compelled to respond to the consequent “good” deflation by lowering interest rates. From the Austrian perspective, this misguided response stokes excess money and credit creation, resulting in an intertemporal misallocation of capital and the accumulation of imbalances over time. These imbalances eventually implode, leading to crisis and “bad” deflation.

As I will argue later, this critique places monetary policy in a vacuum divorced from broader macroprudential management. Moreover, it offers only a counsel of despair for current problems: liquidate, liquidate, liquidate.

(For the NGDP crowd, there's plenty on that later in the talk.)

Clearly "liquidate" is part of the necessary solution, but it's not all and as many of us have tried to point out, it's not a counsel of despair.  It's instead a caution that central banks cannot solve the problems they created, any more than an arsonist makes a good firefighter.  It's only a counsel of despair if you think that central banks and and the rest of the government macro apparatus is the only process by which economic coordination takes place.  Getting out of the way of the millions of decentralized decision-making units who have to actively and creatively engage in recalculation and resource reallocation would allow them to initiate real recovery.  That's a counsel of hope if only we are humble enough to see it. And that, of course, is in addition to the necessary monetary reforms that move us toward a more decentralized competitive banking system.

It might seem strange that the boss of the Bank of Canada would feel compelled to address the Austrian argument.   Sure Austrian ideas are more in the air than they used to be, but it might help that the head of research at the Bank of Canada and chief advisor to the Governor is the father of one of my current students.  We've had him to campus to give a couple of talks and I've spent some time chatting with him (and his daughter was in my AEH course last fall).   The language of "good" and "bad" deflation is terminology that I have used quite a bit (George Selgin too), so I can't help but wonder if my connection isn't a contributing factor.  If not, then I'm guilty of no more than suffering from my usual case of inflated ego.

(Cross-posted at Coordination Problem)


  1. I gave a talk on the subject of good and bad deflation and the "productivity norm" at the Bank of Canada several years ago. But then I'm only a minor pre-Horwitzian. (Larry White, on the other hand, calls himself a minor pre-Selginian.)

  2. By all means, let's divorce monetary policy from broader macroprudential management.

    Much as I admire George Selgin and share his desire for free banking, I don't fully agree with his designation of particular deflation, resulting from productivity improvement in the context of (otherwise) free banking with an exclusive gold standard for example, as "good".

    If banking is truly free, without any state preference for one standard of value over another, I don't expect a single standard of value to eliminate all competitors. I don't expect gold to predominate either, but that's an empirical question ideally.

    Even if productivity growth lowers the cost of producing all goods, I don't expect people holding money to benefit. I rather expect the producers to benefit by consuming more of what they all produce. If people holding money are benefiting, regardless of their role in the production, I wonder why.

    1. "If people holding money are benefitting, regardless of their role in the production, I wonder why."

      Because no producers will benefit from behaving in a way that prevents unproductive money holders from benefitting.

      If I make my factory more productive, I can increase my profits by lowering my price. If someone is willing to buy from me at my now reduced price, they benefit form increased purchasing power.

      If I wanted, I could refuse to sell at the new price to anyone who has not been productive but I'd have to spend resources determining which customers were productive and which customers were only sitting on cash. Since I'm indifferent between $20 from a ditch digger and $20 from an heiress, why would I bother determining who was productive and who wasn't?

      1. If I make my factory more productive, I can increase my profits by lowering my price. If someone is willing to buy from me at my now reduced price, they benefit form increased purchasing power.

        People benefiting from a lower price presumably are producers themselves and have money because they produce other goods and exchange these goods for money before purchasing other goods.

        If I wanted, I could refuse to sell at the new price to anyone who has not been productive …

        The issue is not your willingness to exchange your goods for money. The issue is how your consumers obtain their money. What "money" describes affects how people obtain their money. If "money" describes only notes issued by some central authority, then this central authority has considerable influence over how people may obtain money. If "money" describes only gold or notes promising gold, because some central authority limits "money" this way, then people holding gold have more "money" than they otherwise would.

  3. So far Canada has been fairly luckey with the financial/economic crises.

    I have even heard it argued as a pro Bank of Canada thing….

    The argument runs as follows….

    There was no domestic Canadian reason to set up the Bank of Canada in 1935 – the major Canadian banks had held up to the Great Depression well (much better than the Federal Reserve dominated American banking system had), BUT Canada had still been hit by the Great Depression (the same boom-bust event that had hit the United States) with mass unemployment and so on.

    It was felt that the Canadian economy was too tied to the American economy – and that having a Central Bank of their own would weaken those ties ("like being roped to a man who has gone over a cliff" and on and on).

    Actually I do NOT believe this argument (nor do I think the Bank of Canada is wonderful in any way) – but I can understand why people say these things. Looking at events since 2007/8.

    Indeed this Canadian self confidence has actually had some positive effects – some of the more insane international "governance" measures (such as world taxes on financial services and so on) have been opposed by the Canadian government – indeed effectively blocked by them.

    I repeat I do NOT believe that the Canadian banking system (today) is fundementally better (although it IS better at the margin)than the American banking and financial system – or those of the various European countries.

    But the Canadians believe it is better (and would point to evidence that they believe supports their belief) – and this leads them to oppose various world "governance" measures (and that is good).

    As for the Governor of the Bank of Canada being interested in Austrian School ideas – well even if he is trying to refute the Austrian School (on things like an expanding "broad money supply", i.e. an expanding credit bubble, being a bad thing) it is still good that he is interested.

  4. Without getting into the question of which standard would predominate, Martin Brock's statement that people holding money would not benefit from productivity growth must be countered. Everyone who consumnes goods sold for lower real prices gains from productivity growth, not just producers. The real value of the savings of holders of money also increases, unlike in the current economy where they may well be negative.
    Everyone who holds money benefits regardless of their role in production, not just "producers".
    (I put "producers" in quotation marks, becuase he doesn't define the term; and in a market economy most poeple are producers, including capitalists, entrepreneurs, and laborers.)

    1. Everyone who consumnes goods sold for lower real prices gains from productivity growth, not just producers.

      If prices generally fall, then people holding money benefit by definition. The question is whether productivity growth necessarily leads to generally lower prices, as opposed to higher consumption for producers relative to consumers holding money but not producing.

      Everyone who holds money benefits regardless of their role in production, not just "producers".

      This is a question. It should end with a question mark. If people holding money without producing benefit from productivity gains, why is that?

      (I put "producers" in quotation marks, becuase he doesn't define the term; and in a market economy most poeple are producers, including capitalists, entrepreneurs, and laborers.)

      I agree that entrepreneurs are producers. "Capitalist" is another undefined term. If I hold a Treasury note, I'm a nominal "capitalist". A gun is also "capital", I suppose. Is a mugger in a dark alley a capitalist?

      Let's agree on a definition for the sake of argument. If I'm born severely disabled with zero productivity but inherit a million dollars in the form of a pile of dollar bills, and if the purchasing power of my inheritance increases with time, then I'm consuming more while not producing.

      We can agree that a severely disabled person with zero productivity ought to consume. That's a separate issue. The question involves the purchasing power of this pile of money, not the proper consumption of the disabled person.

      Also, a parcel of fertile land is a productive asset that does not (or need not) consume its own produce. If I own the land, I'm entitled to consume the land's marginal value. We can argue about the utility of this entitlement, but that's also a separate issue. The land itself is not money.

    2. A definition of "money" seems more useful here than a definition of "producer". Money is something that I accept from you, in exchange for a good that we both value, only to exchange it later for something else.

      In a free market, people do not often uses things with a rising expected value (appreciating things) as money. We instead use depreciating things.

      You will exchange a depreciating thing for something else, depreciating or otherwise, that you value. I will accept a depreciating thing from something else that I value, because I accept the depreciating thing only to exchange it for something else, before it has depreciated very much.

    3. Correction: If I'm born severely disabled with zero productivity but inherit a pile of a million dollar bills, and if the purchasing power of my inheritance increases with time, then I'm entitled to consume more while not producing.

  5. A capitalist is anyone who invests his savings in production, and who works within the rule of law. See Mises and Rothbard. That excludes muggers.

    1. A mugger works within the rule of law as long as mugging me is lawful. Mises and Rothbard don't make the laws governing me. I might be better off if they did.

      Witticisms aside, why do you expect the purchasing power of a unit money in a free market to increase? I don't expect it to increase. If the purchasing power of money is increasing, I look for the forcible coercion behind this increase, and I always find it.

      Again, examining this question begins with definitions of "money" and "free market".

      Money is a good that free traders commonly accept only to exchange it later for something else.

      A trader is free in this sense if the money is an unfettered choice, if no coercive force compels him to use it.

      Do you agree?

      If a particular good is a legal tender, the market clearly is not free in this sense, because a court may order traders to accept the good or to provide it to settle debts.

      If traders must pay taxes in a particular good, the market also is not free, because traders must always trade for the particular good at least in part, and this compulsion along with convenience, economies of scale and other network externalities make the good more common as money than it would otherwise be. If the rates are high enough, the necessity of paying taxes in a particular good effectively ensures that the good is the most common money, even a practically universal money.

  6. A mugger is definitely a capitalist, whether he works within the rule of law or not. It takes a particular set of skills to be a (decent, successful) mugger, and those skills are definitely human capital.

    Trying to arbitrarily exclude muggers and other 'undesirable' occupations from our definitions is to let our politics taint our science. Naught no no there.

  7. MichaelM – I know that the words "capitalism" and "capitalism" were first spread by the socialist enemies of private property – free enterprise. However, they have come to mean private property based free enterprise.

    A mugger does not respect the nonaggression principle (a very much more specific thing than J.S. Mill's vague "harm" principle), in that he or she violates the private property of others.

    As for law generally – for the pro civil society view of what "law" is see (for example) Frederick Bastiat's "The Law".

    The "legal positivist" view of law (of Thomas Hobbes and others) makes "law" a concept of no moral importance – simply the arbitrary WILL of rulers (with no connection to the principle of justice – i.e. to each their own). Such as view of law makes such things as the United States Bill of Rights (for example the Ninth Amendment – which, in the orignial ordering of the Bill of Rights, was to be the First Amendment) utterly meaningless.

    As for falling prices.

    It was the central error of Irving Fisher and Gustav Cassel in the 1920s to think that the money supply should be expanded in order to maintain a stable "price level".

    This led Fisher to see nothing wrong with the situation in 1920 (because his mind was fixed on the "price level" he could not see the danger of the credit money bubble) and in see nothing wrong with the situation in 1929 (again his obsession with the "price level" led him to simply not see the danger of the credit-money bubble).

    It is tragic that this basic matter is still not understood.

    It is fashionable to blame the Keynesians for this lack of understanding. However, the new (as opposed to the old) Chicago School of Milton Friedman, and others, must also bare some of the blame.

    After all Milton Friedman highly praised Benjamin Strong of the New York Federal Reserve (who created the late 1920s credit-money bubble), and described Irving Fisher (of all people) as "perhaps the greatest economist America has ever produced".

    To praise such people as Benjamin Strong and Irving Fisher shows a quite astonishing lack of understanding of basic monetary economics.

  8. Michael M,

    Capitalism implies the rule of law, as Mises and Rothbard pointed out. Just because a bank thief uses a gun and flees in a car from the scene of his crime doesn't make him a capitalist. If you think it does, then there's no difference between you and the anti-capitalist, anti-banker occumorons.

    1. I should have mentioned that a capitalist invests in anticipation of meeting consumer demand. This is Econ 101, but I'm not surprised if it's not taught at, say, Princeton. A mugger or bank robber is not part of the economic process so defined even if they do use scarce means to attempt to attain their desired ends.
      Rothbard wrote a book–Power and Market–developing the economics of violent intervention. Just think of government as a big mugger, although the mugger doesn't shoot you down without mercy if you resist his demands, because he's too much of a gentleman to do so. Nor does the mugger invoke either the Keynesian multiplier or monetary policy or national security in committing his crime.

      1. I suppose FNMA and AIG, selling mortgage backed securities and credit default swaps before the "crisis", are interested in meeting consumer demand, but they're also happy to fleece whoever's around if their "investments" go south. Consumer demand also interests the guys selling U.S. Treasury securities, because consumers demand entitlement to produce confiscated from subjects of the United States. If the mugger himself is not a capitalist, maybe his fence is.

        But I'm more interested in why you expect a pile of money, gold or otherwise, to increase in value relative to other things. If a particular medium of exchange is increasingly scarce, relative to other things, why would free people not use a different medium of exchange? The gold or whatever might continue increasing in value, but it could cease to be money, unless my local protection racket compels me to seek it.

  9. Oh Bill – Princeton was O.K., at least back when James McCosh was in charge.

    Of course he did retire in about 1890…..

    Seriously though….

    Yes agreed.

  10. How about the Governor of the Bank of Canada addressing the Australian performance? If you are going to talk about optimal targets, that Australia has not had a recession since 1991, and sailed through the GFC and Great Recession, is surely worth discussing.

    Indeed, the general Oz policy performance is a bit of a standout. Low tax, low debt, high growth, high low income growth, low unemployment.

    The Reserve Bank targets an average of 2-3% inflation over the business cycle. The effect is to stabilise growth in Py; if y surges, the RBA pushes down on P: if y weakens, the RBA loosens up P. It is NGDP targeting parading as inflation targeting,

  11. Lorenzo.

    The fiscal position of Austalia is much better than that of the United States (I once really anoyed some Australian friends of mine by prasing that back when the Liberal party was still in power [they had introduced yet more "gun control" in OZ so Australian libertarians were really sick of them] – anyway the Labor majority has been too small for them to really mess things up since then).

    But the monetary and banking position?

    I know Kevin Rudd made a ….. of himself (he was, and is, good at that) by demanding that Australian banks take money they neither wanted or needed (the Americans are doing it, the British are doing it, I must give money to the banks also – to show I am a Big Boy too).

    However, the FUNDEMENTAL position of Australian money and banking is much the same as other places. Although they do not have the ultra crazy American government style housing policy (which led to the housing crises – see Thomas Sowell's "Houseing: Boom and Bust"). Which is not to say that Aussie housing policy (or monetary policy) is perfect (far from it) – it is just not utterly insane, as American policy was (and is). For the utter folly of American monetary policy see Thomas Wood's "Meltdown".

    By the way – in case a certain lovely man should try and mislead you……..

    I do not (and never did) support the AIG bailout. Or any other bailout come to that.

    If people want to buy mortgage backed securities (thus violating the old rule "always know the difference between a bill of exchange and a mortgage") and these mortgages turn out to be worthless government pushed stuff anyway (rated "Triple A" by the two ratings agencies that were in the United States – wonderful government rigged market the "ratings" business, although in this particuar case Fitch did not get involved) that is their look out.

    Although the "bottom line" remains – once a vast credit bubble has been created (in this case by Alan Greenspan – due to his many interventions to save smaller credit bubbles) it is going to come out somehow.

    If not a property bubble, then as a "dotcom" bubble, or a stock market bubble (like the one that exists right now), or something else.


    people do NOT tend to stop using a medium of exchange when it gradually increases in value (in terms of goods and services) as the late 19th century shows.

    "Paul you are feeding a troll again…"

    Yes I know.

  12. James is correct – there is nothing unlibertian (on economically bad) about so called "unearned gains".

    Henry George observed how, when more people moved into a newly settled area, the land of the first settlers went up in value (even if they had not done much with it), and the poor could no longer afford to buy land.

    He jumped to the conclusion that something was wrong – and needed fixing.

    Actually nothing was wrong – it was just life. Some people get to an area first (or are the sons and daugter of people who did – even more "unearned" as there is no moral merit in whose one's parents happen to be),and other people are unlucky.

    No call for (for example) an "affordable land policy" with people pushed into lending money to people (to buy) who would not be able to pay it back.

    Ditto with some people having money. If other people find better ways to produce goods and servicest that money will be worth more (will be able to buy more and better goods and services) than it could otherwise could.

    No special merit – they may just have inherited the money, and may have spent their lives scratching their backsides (or may have been too lazy to even do that – and employed a special servant to scratch their backsides for them).

    It does not matter. For the money (and the gains) are still rightfully theirs – they got lucky.

    Justice is (contrary to the "social justice" crowd)on their side.

    And so (contrary to thoughts of Jacabins and others)is economics.

    For the general chaos that taking gains from the "undeserving" produces hits the economy generally.

    This stuff has been known for a long time.

    See (for example) Edmund Burke's "Letter to a Noble Lord".

    Burke's open letter to the Duke of Bedford (a useless piece of **** whose family got their land by being toadies back in the time Henry VIII) explaining why he, Burke, was defending the Duke's property rights (including his neck) in spite fo the Duke being dumb enough to ally himself with pro French Revolution people.

    I.E. people who would (although the Duke was too stupid to understand this) confiscate the Duke's estate and kill him and his whole family.

    I suppose Russell (the Duke of Bedford) got lucky twice – first by his wise choice of parents, and then by his good fortune that there were people like Edmund Burke around to save his worthless skin.

    Although Burke (and others)were under no obligation to hide how much they despised the man – for his lack of basic common sense.

    1. What is "wrong", in the sense of George, is that the people arriving first combine forces to compel people arriving later to respect the firsters' monopolization of the land at which they arrived first.

      The firsters threaten to harm the seconders if the seconders will not respect the firsters' assertions of propriety. That's the "wrong". That's essentially always the "wrong" in my libertarian way of thinking.

      But I'm not a completely consistent libertarian, i.e. I'm not an anarchist. I agree, along with other proprietors, to harm other people without the legal priority that I claim along with other proprietors, because this claim benefits me at the expense of others.

      I could invent some "goodness" that I share with these other proprietors and teach my children to respect this "goodness", but I won't go that far with the proprietors. My children may kill every one of them for all I care.

  13. I am told I should not debate with you. But this last comment of yours is important.

    You call owning land "monopolization".

    And "for all you care" your children "may kill every one of them" -meaning landowners.

    So you do not care if people who claim unowned land are killed.

    This has got nothing to do with "goodness".

    Theft is theft.

    And murder is murder.

    Robbing people and murdering people is wrong – regardless of whether they are nice or not.

    "I am not a completely consistent libertarian".

    Sir you are not a libertarian at all.

    You are not even a social democrat.

    I know many members of the British Labour party, and many American "liberals", and most of them are decent human beings.

    You are not.

    Still I must thank you for comming out in your true colours – i.e. as a man who does not care about robbery and murder.

    I thought there was a something worse in you (a lot worse) than your support of credit bubble finance – and now you have confirmed my fears.

  14. As for money….

    What people voluntarly agree to use as money is up to them – at least to a libertarian it is.

    If they choose to use gold – fine.

    If they choose to use copper – fine.

    If they choose to use bits of paper – fine.

    Fraud only comes into play when a person claims to have something (for example gold)that they do not really have.

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