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Gene Callahan Gets it (but Bob Murphy and Joe Salerno Don't)

It seems that, even when I'm not trying to do so, I manage to raise the hackles of some of the 100-percent crowd. Most recently I did so by trying to explain, a couple posts ago, my preference for remaining independent of the Austrian School, or any other economic school of thought. The particular passages at which my critics took aim were this one:

And what sort of economics [do I want to do]? I can't tell you–I've never thought much about it. But perhaps that's just it: I don't "think" about writing any "sort" of economics. I don't want to have to think about whether what I'm up to qualifies as "praxeology" or not, or whether Mises would mind my using terms like "money" and "inflation" the way most contemporary economists use them, instead of the way Mises himself used them a century ago. Nor am I any more inclined to trouble myself over whether my work fits neatly into any other economic school's pigeonhole.

and this:

But if there's one thing I truly believe concerning the "methodology" of economics, it's that thinking about it is as helpful to actually doing economics as contemplating one's steps is to dancing the rumba. In short, having to look over my shoulder while I think or write, at any methodological strictures at all, cramps my style.

According to Joe Salerno, the implication of the first of these passages is "that those of us who pursue a research program within the praxeological paradigm continually sweat and fret about using terms or formulating concepts in exactly the same way as Mises did 'a century ago.'" Joe then goes on to point out, with what (I can't help observing) seems like a fair amount of fretting and sweating, that plenty of Austrian economists, including Mises himself, have in fact not hesitated to depart from Mises' 1912 definitions. To this I can only say, Bully for them! But why is Joe pointing this out to me? He should be telling the legions of self-styled Austrian economists, most of whom presumably formed their opinions by reading various Mises Institute publications, who burst a blood vessel every time someone uses the term "inflation" to mean a general rise in prices, or the term "money" to refer to a fractionally-backed bank deposit or note.

As for me, I wasn't pretending to characterize the preoccupations of each and every Austrian economist, by means of "equivocations, omissions, and errors" (as Joe reckons) or otherwise. Nor did my remarks have much to do with my desire (however fervent it may be) "to prevent 'the 100 percent crowd' from 'hijacking the ‘Austrian’ brand name'." I was just tossing out an example of the sort of ruminating I'd just assume not bother with when setting out to do some economics. (Next time I should be more careful and add a disclaimer like the ones you find in novels, you know, "This illustration is a work of fiction. Any resemblance between my economist worrying about Mises' old definitions and any particular member of the current Austrian school is entirely coincidental.")

As I might have predicted, some of my critics (who never seem to come up short when it comes to putting an uncharitable spin on things) went still further, by understanding me to say that I don't find thinking of any sort especially helpful to doing economics! Bob Murphy, for instance, has fun with what he took to be my suggestion that the best way to dance the rumba is to never have learned it in the first place. In a comment to Gene Callahan's favorable notice of my post, Bob went so far as to characterize me as someone who "rips on the philosophy of science, saying he don't need no stinkin' thinkin' about *what* he's doing."

Ah well, that's the risk one takes in employing a metaphor. The gain, of course, is that the metaphor helps readers who aren't merely interested in playing "gotchya!" Such readers won't bother to put the poor little thing on a rack to see what it will confess to when stretched to the breaking point. Gene Callahan himself, for instance, was quick to come to my defense, both in his own post and in the comments to mine, where he (quite properly) ridiculed the suggestion that, in saying (as he nicely put it) that I didn't want to look over my shoulder "at some 'methodological' scold," I meant to declare, among other things, that I "didn't care about logic or consistency."

Of course I do care about logic and consistency; indeed, I insist upon them both for myself and for others who wish to engage me in a discussion. And of course (news flash!) I believe that good economics takes some thinking! Besides requiring one to think about whether one is being logical and consistent, it takes thinking about whether one's reasoning is consistent with available evidence, and thinking about whether one is expressing his ideas clearly, and (ahem) thinking about whether one is characterizing rivals' views accurately. Indeed, the only sort of thinking that I insist is unhelpful to doing good economics is thinking about, so as to better obey, the methodological credos of some particular school of thought.

What's more, I have what I consider to be the best possible reason for having this opinion–an opinion that, remember, is intended only to justify my personal decision not to belong to any school, and not to browbeat others into joining me in my heterodoxy. The reason is simply this: that I have found that, when I set out to address some economic issue, I do not find it at all helpful to concern myself with "methodology" except of the "very small-m" sort that supplies such rules as ought to command the assent of economists of all schools. In particular, though I sympathize with the arguments that underlay what Joe calls "the praxeological paradigm," and what's more believe that I understand them, I don't give that paradigm any thought in pursuing my research; if someone claims that despite this I've been doing praxeology all along, I can only say, like Molière's* Monsieur Jourdain when informed that he's been speaking prose, that I have been quite unaware of it.

Addendum: Joe Salerno's rejoinder. I never accused Joe personally, by the way, of insisting on Mises' 1912 definitions of "money" and "inflation." Much less did I ever mean to hold him responsible for the many "Austrians" (for they present themselves as such) who insist on those old definitions. That such Austrians exist, and in large numbers, cannot reasonably be denied by anyone familiar with the economics blogosphere. As for where their understanding comes from, I should be glad to hear Joe or anyone else offer an alternative to my own conjecture.
*I had previously (and foolishly) written "Proust's." I thank Andras Toth for correcting me.

  • ludwigvandenhauwe

    I don't think that the methodological tenets of the Austrian School are "credos of a particular school"… These are just very general philosophical requirements applied to the study of a particular layer of reality…. For complex historical and other reasons it just happened that the ecoonmists of what became labeled "the Austrian school" were more philosophically sophisticated than certain others…
    One of the first requirements would perhaps consist in drawing a map indicating the boundaries of any sub-fields that can be distinguished whithin what we broadly call the domain of the sciences of human action and then trying to answer the question: do these sub-fields have distinct subject matters, problems and methods, and where does one sub-field end the next begin etc…. For instance do there exist any distinctly legal-theoretic problems to be distinguished from distincly economic problems etc… Same with ethical problems etc… Note that in the natural sciences we take this entirely for granted. We would never consider asking, say, a biologist to solve a problem in particle physics…. Hayek made a good start in that direction by making a first-order distinction between "the order of actions" and "the order of rules"… He also indicated that when we try to solve a problem at the level of, say, "the order of rules" it is not just a matter of weighing costs and benefits etc…

  • VangelV

    "Gene Callahan himself, for instance, was quick to come to my defense, both in his own post and in the comments to mine, where he (quite properly) ridiculed the suggestion that, in saying (as he nicely put it) that I didn't want to look over my shoulder "at some 'methodological' scold," I meant to declare, among other things, that I "didn't care about logic or consistency.""

    And here is the problem. Some methods are not logical or consistent. This is why Friedman was attacked for saying that wrong premised did not matter as long as the model was shown to come up with the right conclusions. The trouble is that in a complex system such as an economy it is very difficult to judge if a conclusion is correct or 'accidently' correct even though the theory itself is wrong.

    • ludwigvandenhauwe

      Friedman's position was logically consistent but it can be criticized for its being somewhat bad philosophy.

  • ludwigvandenhauwe

    You wrote: "I do not find it at all helpful to concern myself with "methodology" except of the "very small-m" sort that supplies such rules as ought to command the assent of economists of all schools."
    Very well, but the matter may be too important to be left only to the economists…. It's not clear that the issue of, say, the most appropriate banking system, can be decided on the basis of, say, what economists think is the most appropriate definition of money etc… As I said, consistency is often very much a domain-specific issue…. Something that may be consistent from a mathematical point of view, may seem nonsense to the economist…. Or something may seem consistent to the economist, and be nonsense to the legal theorist or moral philosopher….

  • Paul Marks

    "A century ago"? Human Action by Ludwig Von Mises (the classic defender of Free Banking in the 20th century) was first published in 1949 (after Keynes was already dead – so if the language of Mises should not be used, the language of Keynes and co should certainly not be used) and the third edition was not published till 1966 (Mises dying in 1973 – if I remember correctly).

    As for any language issus – Mises worked closely with Henry Hazlitt (a native English speaker – and someone involved in all the debates in American economics in the 20th century) so an argument based on the line that the language of Mises was out-of-date simply will not wash. Mises did not stop writing (or stop debating) after "Theory of Money and Credit" in 1912 and Hazlitt was active up till only a few years ago (as regards the public understanding of monetary economics the choice of Newswweek to replace Hazlitt with Friedman in 1966 was a bad one).

    Also George Selgin (like Milton Friedman) is on record as praising Irving Fisher – Mises was active long after Fisher, and it was Fisher (not Mises) who was baffled by the bust of 1921 and the bust of 1929.

    • George Selgin

      "A century ago" refers to the date of publication of The Theory of Money and Credit.

      And if you mention me praising Fisher, ought you not to say what I praised about him, rather than suggest that I approve of his errors? Or is it your position that one must reserve praise only for gods and angels?

      • Paul Marks

        Good point about Fisher – you have indeed never (as far as I know) supported his idea of expanding the money supply in line with the "price index", or the idea that there is a straight forward mathematical relationship between the increase in the money supply and the increase in prices (MV=PT). In this Fisher seems to be closer to David Hume than the more complex approach one finds with Richard Cantillon.

        As for Mises – the point of my comment was that you implied that he stopped thinking about money with "The Theory of Money and Credit" (1912) and I do not think that is true. Mises may not have changed his position (or language) – but that is not evidence that his position (or language) was mistaken – or that he stopped listening to other people.

        Not changing one's position is not evidence that one has stopped thinking about it.

        • VangelV

          "Not changing one's position is not evidence that one has stopped thinking about it."

          Actually, if yours is the best argument it will not be changed no matter what new fad comes along to muddy the waters.

  • Beta Hater

    George, have you compiled a list of 100% reserve banking advocates? Here's a few:

    David Hume, Adam Smith, David Ricardo, John Stuart Mills, Irving Fisher, Frank Knight, Ludwig Von Mises, Henry Simons, Benjamin Graham, Milton Friedman, Murray Rothbard

    Can you think of any others?

    • Beta Hater

      Here's a few more:

      Jacob Viner, Paul H. Douglas, Henry Schultz, Frank D. Graham, Lloyd Mints, Earl J. Hamilton, Aaron Director, G.V. Cox, Willford King, Charles R. Whittlesey, A.G. Hart, James W. Angell, John Commons

      Sadly, I cannot find the list of 400 economists who supported Irving Fisher's "A Program for Mometary Reform".

    • George Selgin

      Beta Hater, your list is quite inaccurate. Smith, Ricardo, Mill, Mises, and Friedman certainly do not belong on it (though Friedman did endorse the idea at one time, even then he recognized free banking as an alternative solution; later on he moved further toward the free banking view). Smith wrote eloquently of the advantages of fractional-reserve banking; Ricardo favored a gold bullion standard, which would have involved especially low fractional reserves. Larry White has written extensively concerning Mises' (admittedly complicated) position.

      • Beta Hater

        I disagree with your stance on Smith, Ricardo, Mill, Mises, and Friedman. At the very least, they all advocated 100% reserve banking at some point in their lives. I won't waste time trying to convince you.

        Here's a few more names you can add to the 100% reserve crowd:

        J.B. Say, Thomas Jefferson, Destutt de Tracy, John Adams, John Quincy Adams, Condy Raguet, Raymond T. Bye, John B. Canning, Everett Goodhue, Harold Groves, Harold Hotelling, Theodore Kreps

        Compiling a list of 100% banking advocates makes one realize that the list is long and distinguished. The list of free banking advocates is also long and distinguished. Both sides of the debate have respectable ideas advanced by respectable men.

        • George Selgin

          As you cannot be bothered to make any attempt to convince me regarding your claims about Smith et al., you will presumably not be surprised at my remaining unconvinced.

          • Beta Hater

            Theory of Money and Credit p. 491
            The Causes of the Economic Crises and Other Essays – p. 39, 129,161

            For Ricardo and Friedman, see William Allen:

            Program for Monetary Stability – p. 65-76

            I admit that Smith and Mill are not typically considered 100% reserve advocates. However, Smith advocated the elimination of small notes to prevent fractional reserve banking in small deposits held by the poor. Smith only advocated fractional reserve banking in large deposits held by the rich. (See Rockoff, in "The Oxford Handbook of Adam Smith" p. 313).

          • George Selgin

            Smith's position is a long way from 100-percent reserves. The system he endorsed was essentially what Scotland had following the 1765 small note ban there. By the 1820s, despite the ban, Scottish bank specie reserve ratios were around 1%–a very long way from 100%!

            And the cherry-picking of quotations from Mises proves nothing as against White's long and careful considerations of his views on the subject, which include dozens of quotations from him suggesting the opposite opinion.

            Ricardo, like Friedman, flirted with the idea only. But he is more famous for his advocacy of a gold bullion standard, which would, as I've indicated, have moved England (and ultimately did move it, after WWI) further from 100% reserves than a conventional free banking arrangement (with open minting of precious metal coins) would have.

          • Beta Hater

            The idea that 100% banking has only been advocated by a small group of Austrians is incorrect.

            Many monetarists have supported 100% reserve banking. Irving Fisher, Frank Knight, and Henry Simons advocated 100% reserve banking. Milton Friedman wrote a book proposing 100% reserve banking (hardly a flirtation).

            Benjamin Graham, The father of value investing, also advocated 100% reserve banking.

            400 economists the late 1930s supported Irving Fisher's 100% reserve plan.

            Even if you could remove Smith, Ricardo, Mises, Mill, and Friedman, The list of 100% reserve advocates would be long and distinguished.

          • Beta Hater

            Prof. William Allen of UCLA indicated that Milton Friedman had read his paper on Irving Fisher and the 100% reserve proposal before its publication in 1993. (See Allen's acknowledgements)

            Milton Friedman liked the paper, but he told Allen not to submit it to the Journal of Political Economy. The paper was not a good fit for that journal because there was no mathematics. Instead, the paper was published in the Journal of Law and Economics.

            This indicates to me that Milton Friedman was at the very least sympathetic to 100% reserve banking in 1993. However, Allen identifies Milton Friedman as a 100% reserve supporter in that paper. Milton Friedman, having read Allen's paper, did not protest. In short, Milton Friedman did not deny being a supporter of 100% reserve banking in 1993.


        • George Selgin

          Beta Hater, I'm going to give you the benefit of the doubt as someone unfamiliar with how the academy, and the journal editorial process in particular, works. For you obviously don't understand that Friedman was in fact rejecting Mr. Allen's paper, albeit politely; and even if he rejected it despite "liking" it, "liking" a paper and agreeing with it are two quite different things. You must do a lot better than this in order to sustain the claim that Friedman favored 100% reserve banking as late as 1993. Certainly he indicated no such preference in his 1986 paper (with Anna Schwartz) on government's role in money, or in any of his other post-1960 published writings.

          (By the way, your claim that Friedman rejected Allen's paper only because it lacked mathematics also doesn't pass my smell test, for Friedman himself published several papers with little or no equations in them in that journal.)

          Reviewing Allen's paper, I see that you quite misread his passing reference to Ricardo; you also patently misrepresent Allen's reference in the paper to Friedman, which says, not that he was a 100% advocate at the time when Allen was writing (ca. 1993), but that he had given the idea "serious attention and support" decades earlier, and particularly in the Program for Monetary Stability (the only work by Friedman that Allen actually refers to).

          None of this is to dispute your claim that a fair number of well-known economists have at one time or another been 100-percent reserve proponents of some sort. But it is to say that in seeking to defend it you are extremely loose with your facts.

          • Beta Hater

            Milton Friedman wrote "a program for monetary stability". In that book Friedman advocates 100% reserve banking. This FACT alone is enough to prove that Milton Friedman was an advocate of 100% reserves.

            I agree the Allen story is anecdotal, but it shows that even Milton Friedman in 1993 did not deny that he gave 100% reserve banking "serious attention and support".

            As for Allen's paper, your comments are pure conjecture. Friedman was never in a position to reject Allen's paper because that paper was never submitted to the JPE for publication.

            Happy Valentine's Day

          • gcallah

            "This FACT alone is enough to prove that Milton Friedman was an advocate of 100% reserves."

            At some point in time.

            "Friedman was never in a position to reject Allen's paper because that paper was never submitted to the JPE for publication."

            Ooh boy: there is a difference between rejecting a paper and rejecting it for publication!

      • ludwigvandenhauwe

        Re: Mises' complicated position — Is there any quotation from Mises to the effect that he believed fractional-reserve banking is needed because an elastic quantity of money is needed, say, in order to allow changes in the demand to hold money to be accommodated? I don't think so. Generally it may be more illuminating to focus on the _rationale_, _the reasons why_ some economists think we need fractional-reserve banking. The 100 pecenters are consistent to the extent that they do not believe that there is any use in having an elastic quantity of money, a view they find already in Hume…. I tend to believe one of the main reasons Mises did not explicitly reject fractional-reserve banking is simply because the positive law permitted it… I have no recollection of any suggestion in Mises that we need fractional-reserve banking because we need an elastic quantity of money…. Hayek's view, however, seems to have been different beccause he believed, in quantity-theoretic terms, that MV should be held constant as much as possible — this is the so-called productivity norm. Any comments?

      • Unsal Cetin

        Selgin, that is meaningful. They abuse Mises in their favor by claiming that they are true Misesians. But you clarify that Mises was not on their side despite you are not "Austrian".

        Btw, I do not know Larry White's paper you mentioned. Can you please give us its location online or not?

        • George Selgin

          Lawrence H. White "Mises on Free Banking and Fractional Reserves," in John W. Robbins and Mark Spangler, eds., A Man of Principle: Essays in Honor of Hans F. Sennholz (Grove City, PA: Grove City College Press) pp. 517–33. Also

          • ludwigvandenhauwe

            If I remember well Larry sent that paper to me a very long time ago…. I must have it somewhere in my papers, I will dig it up… Thanks for reminding.

        • Unsal, Larry's a very good piece. You may also want to have a look my "Mises on Fractional Reserves: A review of Huerta de Soto's Argument"

          • ludwigvandenhauwe

            An important part of Huerta de Soto's argument concerns the issue of the "legal contradiction" inherent in fractional-reserve banking. Now I understand that this is something of which most economists will think "Why should I take this seriously?" or "Why should I be concerned with that? The law is a field for mediocre minds anyway…." Well, perhaps, perhaps not…. However, it's unlikely that in a libertarian society the views of legal theorists, legal scholars etc. could be entirely ignored and economists would have a monopoly on deciding these matters…. It's not merely a matter of semantics….

          • Unsal Cetin

            Selgin and Cachanosky, thanks a lot for these references.

          • Ludwig, my piece is about history of though, namely, Mises's interpretation regarding the 100-percent reserves requirement. I only touch the legal issue tangentially. It is an important issue, but not one I cover in this piece.

          • ludwigvandenhauwe

            Nicolas, Thanks for providing the reference to your paper; I will have a look into it. I am working on a different subject matter right now but I will get back to free banking theory in due course.

          • ludwigvandenhauwe

            I also reviewed Prof. Jesús Huerta de Soto's book; see:

    • And, correct me if I'm wrong, but some of those favored 100% reserve banking for completely different reasons — i.e. to maintain the Fed's ability to influence the money supply.

      • Paul Marks

        JonCatalan – the Federal Reserve (or any Central Bank) has the final say on the money supply)whether there is fractional reserve banking or not. General Peron banned fractional reserve banking – and still produced hyper inflation.

        Indeed it was the argument in favour of Free Banking by Ludwig Von Mises (see Human Action) that, without a Central Bank (such as the Federal Reserve) fractional reserve bankers would be far more limited (careful) in their activities. Although credit expansion might still happen it would be more limited in nature – without people such as Benjamin Strong (in the 1920s) and Alan Greenspan (in more recent years) backing it up – every step of the way.

        There is a view that fractional reserve bankers would be far more extreme without a Central Bank – I firmly believe that this is the exact opposite of the truth.

        • George Selgin

          Paul, once again we fully agree (may the trend continue!). But I doubt that Jon Catalan really disagrees with your points. I hope he doesn't, in any event.

          • Paul Marks

            George my position is that commercial banks are unable to (on their own) expand the long term money supply. The bust will liquidate the credit expansion (whether or not the banks involved go bankrupt – or manage to survive). Otherwise the 19th century (indeed the period of time up to 1914) is inexplicable.

            As you know, at that time, the Bank of England did not stand behind credit expansion by commercial banks. If a bank became overextended it went bust (as did the leading bank in my hometown – as I have said before, I think that Thomas Gotch as a painter and Alfred Gotch as an architect were of more use to the world, than they would have been working in a, bailed out, family bank).

            Blaming long term inflation on commercial banks is, therefore, false. Whatever the rights and wrongs of fractional reserve banking may be – it is not the cause of long term major inflation.

      • George Selgin

        That's correct. In the writings of Simons, Mints, and Friedman on the topic, it is understood as a way to make the fed's job easier by preventing the base money multiplier from fluctuating along with changes in the public's relative demand for currency. It was in this connection that Friedman, in a note (I think) to his Program for Monetary Stability, observed that the same purpose could equally be served by ending the Fed's currency monopoly and instead allowing commercial banks to issue notes on the same terms as those allowed them for creating demand deposits.

        • ludwigvandenhauwe

          I would be interested in being given the exact reference to that note in Friedman's A Program for Monetary Stability. Thanks in advance.

        • ludwigvandenhauwe

          In fact I would be interested in _any_ quotations from Friedman's writings explicitly criticizing central banking _before_ his 1986 article with Anna Schwartz in the Journal of Monetary Economics, _Has Government Any Role in Money?_.

          • George Selgin

            Concerning the first, Friedman, Program for Monetary Stability, p. 69. As for the second, it depends what you mean by "central banking." Of course as a critic of commodity money (more so, again, before '86 than later) Friedman couldn't be opposed to the existence of a fiat-money issuing monopoly. But he was opposed, as is well known, to vesting such institutions with discretionary powers.

  • Paul Marks

    The 18th century Scottish banking position is something I should research for myself at some point (if only I was younger and so on). I hear contradictory messages from various people.

    Some saying it worked fine, and others saying that if a person put gold in a Scots bank that is the last time they would see it – and if they went to court, the court would laugh at them.

    The only way to know the truth (other than by time machine) would be to research the matter myself – and that would take a lot of hard work.

    Of course the Scots did not really have separate fiscal or monetary system, not after 1707, although they may be getting one – real soon.

    • ludwigvandenhauwe

      A good reference on Scottish Banking to start with is: Checkland, S. G. 1975. Scottish Banking – A History 1695-1973, London: Collins.

      • Paul Marks


        Yes this work (by Checkland) is the source (or one of the sources – the other one that is often cited is by Frank Fetter) of the claims that putting gold into a Scottish bank was a foolish thing to do – because it was very difficult to get it out again (even with legal action). As well as such things as the 400 hundred thousand Pound (a vast sum at the time) British government bailout of the Scottish banks in 1793 (four years before even the pose of convertibility was abandoned in 1797).

        But this (that it was difficult to get one's gold out of a Scottish bank) is exactly what Dr Selgin and Dr White deny.

        So to see whether Checkland and Fetter were right or whether Selgin and White were correct, I would have to do primary research.

        Going back the documents (letters, journal entries and so on) where people either said how it easy and straightforward it was to get their gold out of Scottish banks, or said how difficult it was.

        Of course Dr Selgin's reference (in passing) to Scottish banks pushing out 100 Pounds for every one Pound (in cash gold) they actually had (in the 1820s) does not exactly inspire confidence. But one can not go on a hunch – one has to go and hit the dusty old documents.

        I continue to believe there is a way out of this.

        Those people who hand over their gold (or whatever the money is) to banks to be lent out on interest, should be clearly told "you do not have this money any more – it is to be lent out". This should be treated as an INVESTMENT (a risk) – not a "deposit". They should only get the gold back at a specified future time (not "on demand") when, and if, the loan is repaired.

        And those people who really want their gold to be "deposited" (and thus available to be taken out of the bank) should pay the bank for looking after the gold (not expect interest from the bank).

        But all this would require a revolution in how banks (and so on) present their accounts – and not just on the side of real savings.

        For example, borrowing money should be written as just that – borrowing money (and the gold should be physically handed over to the borrower).

        Instead we get "credited to the account" and so on.

        We also get such things as the expansion of "broad money" (bank credit) over and above cash (real savings) – which sets the system up for "deflation" during a banking bust.

        As I never tire of pointing out……

        When people (such as the late Milton Friedman) complain of the "deflation" between 1929 and 1933, no one was going around destroying Dollar bills and coins in bank vaults – it was "broad money" (bank credit) that was hit by "deflation".

    • George Selgin

      And White's Free Banking in Britain, surely!