I am not in full agreement with Garrison. Nor, am I, in any kind of full agreement with any Austrian, Chicagoan, New-Classicist, or any economist of any school that thinks the market ultimately serves a purpose; meanwhile, I am especially not in agreement with those that think the market is useless or wrongheaded, and even more especially not those that find it detrimental to humanity. I think the market serves a useful function and presents a net gain to both individuals and society as a whole. However, what I intend to show here is meant to be completely unhinged from my own subjective values (as I’ve meant all my writings on economics to be, this far, though I have perhaps not succeeded in such goals).
So far, I have not spoken much of the Keynesian view of the PPF (production-possibilities frontier). The diagram above illustrates it pretty damn well. As Garrison mentions, the Keynesian demand constraint is essentially what locks the path towards and away from a sustainable combination of investment and consumption to a certain angle within the PPF. Keynes describes this angle as bearing forty-five degrees, as consumption and investment in his model increase together and perfectly orthogonally to the minimum consumption present in society; his concept of the “marginal propensity to consume.” I put this in quotes not to deride it, but to point out that these are the words Keynes used to describe the positive point on the Y-axis (consumption) when the X-axis is at zero (production). One can deductively extrapolate, from the combination of marginal propensity to consume and Keynes’ admitted possibility of zero production (as anyone would admit), the point on the Y-axis where X is zero. Think of hand-to-mouth existence that would be the norm for humans if not for capital’s existence: hunting and gathering. Humans have to eat and whatnot, so we take from nature, but to Keynes, our capital structure is merely a construction meant to optimally allocate resources (Austrians agree) but one that is ultimately a game of Hearts that simply serves as an imperfect system of interpersonal transaction that can be perfected, i.e. pushed to the edge of the PPF with solid consistency, with outside fiscal manipulation (Austrians disagree).
Hence the Austrian viewpoint, at least the vast oversimplification of one described in alignment with the Classical school of economists: the PPF is slowly pushed outward by real, secular growth, but ultimately a system of redistribution and currency manipulation will not only diminish the total output of the PPF’s outer bounds and retard its growth, but also, the marginal propensity to consume can be pushed upwards or downwards, perhaps so far downwards that it is actually negative on the Y-axis so it appears as positive on the X-axis, if that makes any sense. Put differently, there could be a marginal propensity to invest instead of one to consume, so long as the marginal propensity to consume is pushed below zero (a stranger, trippier, but perhaps more descriptive way of viewing the zero-lower bound and the various new-schools’ Keynesian problems associated with it). This is one reason many Austrians find the Keynesian cross borderline useless, though it is rarely articulated as being for this reason: again, that the marginal propensity to consume can change and that the slope of the Keynesian demand constraint is indeterminate.
This is, strangely, where market supporters such as Lachmann and Garrison, and equilibrium-hawks such as Keynes and Friedman, switch sides on the effectiveness of market intertemporal equilibration. Society can have, according to Garrison and Hayek, any varying degree of preference toward consumption or investment/savings. Keynes thought his “marginal propensity to consume” and invariable 45-degree angle (1:1) of investment and consumption was the rock that the central bank should stand upon to use the divining rod and find the proper rate of interest. Lachmannians and ultimately all Austrians argue that the slope and x/y intercept of the marginal propensity to spend in one direction or the other is completely left to human desires and motivations, which themselves are ultimately affected and manipulated in their subjective expectations by the systems of currency control, be they fiscal, or monetary, or both.
Garrison explains that Austrians in their panel and Chicagoans in their panel both admit that the market can fall inside the PPF. All Austrians are saying is that some deflationary collapses have government-induced causes, detectable by the push above the PPF, which itself is indeterminate by virtue of the indeterminacy of human action. Really, that some falls along the Keynesian angle that ratioes consumption and investment, are preceded by upticks, themselves indeterminate in size, that are created by non-market attempts to push beyond the PPF, which is essentially the core of Hayek’s decentralized-knowledge understanding of the inevitably poor outcomes of trying to lower the interest rates with new money. The rock Keynesian policy advocates purport that countercyclical tactics stand on is really a trampoline that bounces you higher: you eventually fall back down, sometimes you bite it, and the trampoline just gets more and more janky the more you bounce on it and inevitably fall off again and again… you can’t keep jumping higher and higher without eating shit sometimes and screwing up your trampoline, moreover.
Shifting gears laterally, Garrison posits aptly that his work, like that of Friedman, Keynes, and most other macroeconomists (save forward-thinking Austrians and Post-Keynesians) does not attempt to model the global economy, just a closed one: this is why he explains that MV=PQ and the three-panel capital structure diagram is only meant for a given central bank for a given populace that only buys from its own production, and the reverse. Hence Friedman’s understanding that MV=PQ makes more sense than MV=PT when considering gross national product and such. However, I ask, how are these various systems of intertemporal and interbank coordination aligned with the coordination between countries, largely in these times, simply governed by the floating exchange-rate advocated by Friedman, and the fiat currency advocated by Keynes?
Let me make an attempt to answer my own question. MV=PQ is meant to understand PPF coordination within a closed economy, MV=PT bridges the gap to the outside. What is the difference between MV=PQ and MV=PT? Simply one argues that output is the Atlas that carries society on its back, and the other, the total amount of transactions. We can model the whole world with MV=PQ and the Garrisonian three-panel if there were a world central bank and world government (I personally am not advocating this) but if there are competing central banks and governments, then their PPF’s are linked by MV=PT (which strangely would be the case if we had free banking and governments, but not without governments).
Let me explain the mechanism this works by. The idea of MV=PQ is that introducing new money, modeled using the the “helicopter” analogy, will eventually raise the overall level of prices. Austrians argue that the prices rise variably, monetarists of all stripes that they rise evenly and proportionally, hence the helicopter mind-experiment (kind of a circular logic floated upon their choice of modeling premises and variables). The over-explained Austrian objection to this is that the money is not dumped out of a helicopter, but injected into specific places chosen by policymakers and the banks they work with (or work for, strangely). I pursue no further so as to not insult your understanding of this simple, though effective, Austrian objection.
Panel D of the Chicagoan monetarists describes properly the Friedmanite tradition I explained previously as an economy maintaining investment/savings and consumption equilibrium with only government mistakes (allowing a collapse in the money supply) plucking it downward. Chicagoans such as Friedman saw movements as depicted in panels A, E, and F as only occurring with real growth (Austrians agree, Keynes saw it as a façade) while movements such as those in B and D caused by policy perversities, as Austrians would agree of C, the Austrian theory of the unsustainable boom, as well.
Stepping away as I meant to before, with my digression-gone-regression, Friedman argued that MV=PQ for a closed economy and Garrison argues that his three-panel model of the capital structure and its monetary underpinnings is also for an economy with one central bank that is its own monopsonist (single buyer of all goods). Where this can be linked with the Fisherian MV=PT is at the production-possibilities frontier. Q is what comprises the Hayekian triangle, disaggregated in one way, and the PPF, which is actually a simple disaggregation into two parts (consumption and investment/savings). Now think about this: why would MV=PQ if that economy’s total output is not all bought by itself? It wouldn’t. It would really be T, when thinking of a global economy, because all output is traded in transactions. So Why does T matter? Because those very transactions are what link the outputs of individual territories (perhaps with competing central banks, as in modern times).
International trade, on the aggregative outset, really looks like MV=PT linking up a bunch of little guys buying and selling their outputs, some better-off and some worse-off, for whatever given reason. Essentially, the individuals are trading their outputs through the mechanism of transactions. Just as in a closed economy with a money supply held constant or with low, robotic inflation, the velocity of money would (almost) determine the rate of growth (if we were always on the PPF or close to it, of course, and secular growth were near-constant); as would T, cetus paribus to the max, determine the total share of output being pumped back into any given economy, its own share its output traded through floating interest rates and such with the marginal product taken in by their amount of transactions with others.
This is basically a massive interconnected web of central banks, attempting to imitate what market participants themselves would, without economic controls in place. This is Lachmann’s kaleidoscope: relatively stable and usually coordinated in the micro short-run, stable without attempts to make it so in the meso mid-run, and ever-shifting in the macro, long-run (by meso I refer you to Garrison’s dynamic equilibration without end or ultimate victory I am always so intrigued by). This is still, Lachmann spits in the face of central planners and students of static equilibrium, entirely chaotic and unpredictable on a more cosmic level. Markets themselves change.
Anything at a given point in time is just one of a set of a massive amount of possibilities. Mises’ concept of human action, here, is no axiom; in the actual, formal sense, or in the hipster internet-Austrian sense: the former because it is not knowable without synthetic a priori, and the latter because most people who have never learned logic in an academic setting essentially know jack shit about it: ask a poorly-read Austrian to define an axiom properly for you. Further to the point, Lachmann would merely say, well human action is just a part of circumstance, it is not a law of reality because humans might not have even come to exist or may have been born with some kind of tics borne of pure brain spasms. Either one falsely argues that “all action is intentional” which is blatantly false, “all intentional action is intentional” which, while, a priori and axiomatic, is borderline-useless, or “all intentional action coordinates means to ends” which is impossible to prove using only analytic a priori; synthesis is required. Even then the third option is only really useful when considering other synthetic a priori truths such as marginal utility and such.
Back to the point. The world is a complex swarm of central banks that work in concert, funneling output in and out through exchange rates and interest rates. The mechanism this output uses to travel is of course, the sum of transactions (like velocity’s cosmic cousin). There is a tendency, without central banks, for each human to conduct his or her business as he or she pleases, to produce more stability in the long run. But there is no stable system, and stable systems are not entirely desirable.
Austrians know this, only teenagers who have read more Rand than Hayek deny this. There is no long-run equilibrium, only tendencies toward equilibration in the short- and mid- run. This is why Austrians believe central banks are harmful: they ensnare and manipulate vast swathes of people who would’ve produced a better outcome on their own. Keynesians and new-school monetarists only differ in that one thinks humans are imperfect even in the mid-run, so we need central banks, whereas New-school monetarists and New Classicists think that humans are so rational and equilibrating, at least in any way important to economics, that central banks can do whatever the fuck they want, so long as they don’t allow deflation in prices (but this fear of deflation is unrelated as far as theories go). Austrians are strangely, as Garrison describes, put in the awkward position of being the moderate for once.
Let’s take a look at what the world economy looks like, as a collection of structures of capital, whether countries have central banks and governmental regulation or not (as this is a static image). Imagine a bunch of centrally-banked states interconnected by their capital structure and loanable-funds systems. Where does this leave us? Some countries siphon off money, others siphon off goods. This is my idea of MV=PQ locally, MV=PT globally: exchange rates and deficits/surpluses merely give rise to the marginal productivities of inflation versus exports. Here I will merely explicate a simplified version of the complex interplay between separate “economies,” using four identical models of capital strictures and their credit markets.
The problem, of course, with this simple depiction (other than its symmetry and lukewarm aggregation) is that it misleads one to believe that central banks and states directing and manipulating market decision-making produces a similar situation to as if individuals were controlling themselves. The problem, Lachmann might say, is that we are viewing merely a static picture of the kaleidoscope, not the dynamic and ever-changing morphology of said structure that essentially defines it.
We are not saying, of course, that the modern economist, so learned in the grammar of equilibrium, so ignorant of the facts of the market, is unable or unready to cope with economic change; that would be absurd. New-Classicists would look at this model and find it perfectly descriptive. Austrians are saying that the static-equilibrium economist is well-equipped only to deal with types of change that happen to conform to a fairly rigid pattern. In most of the literature currently in fashion change is conceived as a transition from one equilibrium to another, i.e., in terms of comparative statics.
-Ludwig Lachmann, The Market and the Distribution of Wealth
Static conceptions of general equilibrium make no sense in a kaleidic world. Note the difference between “kaleidic” and “kaleidoscopic.” One describes the actual motion of the moving parts that slide around and interlock in various ways, working in concert with each other and spilling into and out of the equation. The other, the kaleidoscope, describes the apparatus with which you view said phenomena. The kaleidic is the real and the kaleidoscope is our own understanding of it: one is ontological, the other methodological by means of the epistemological.
Garrison’s explicit vision for the future of his work, to be carried on by others, is one wherein his closed system is made an open one. Put more clearly, one where his admittedly simplified three-panel depiction of capital-based macroeconomics can be made to apply to the world in its current state of competing central banks, rather than merely describing a single closed economy with net output becoming net input, hence my attempts to show his theory as the disaggregation of MV=PQ and mine as a disaggregation of MV=PT on a global scale, interconnecting output with transactions.
Transitioning, Garrison writes articulately and credibly on the topic of the “real business cycle theory.” It is essentially a New-Classical and new-school monetarist theory, advanced by only a fraction of them and to varying degrees of course, that real advances in technology displace resources and cause problems visible enough to their empiricism; this is where Austrians step in and explain. Austrians agree there may be temporary, consistent reconstructions of capital, but not that periods of fluctuation can be mitigated by a central bank. Friedman types agree as well, with the exception of monetary disequilibrium, which itself only describes outcomes of a certain policy misguidance in policy aims in a central-banking system, in any full construction of the theory. However, Austrians have the further insight that governments have an incentive to push down on interest rates when there is an upward pressure on them due to technological advances, their clustering being more or less frequent. On top of this, they tend to hide interest rates being too low, because they are able to push it out as best as they can mimic the “helicopter” model, but are still ultimately limited by the inherently dis-coordinating nature of injecting money into markets, even if it involves dummy banks fucking up and getting browbeaten by Gresham’s law and flushed through mv=pq, which without the state system, would regulate itself, because people would get rid of shitty money sooner and the bank would only have its own monopoly-money bullshit to blame. Instead, the Austrians correctly point out that nominal changes in money have real effects in the market: the attempts to paper over busts, and make paper bridges between booms, is the primary factor in the volatility of the “cluster of errors” Rothbard spoke of, which underly the repeated and dramatic crises we face today, even though RBCT may have its merits in the short- and mid- run (which are still based on mere positivism).
Hence the tyical business cycle, the simple circumstance wherein interest rates sometimes rise when people want to borrow more to start new businesses when technology is quickly progressing, so booms are often real at first. However, governments want to use the other aggregates they can (seemingly) control to target others, such as lowering the interest rate to stimulate employment, or here, to accommodate an actual boom. However this just, of course, makes the bubble a net loss, whereas otherwise (sans central bank) there may have only been small shocks but a still-greater overall net positive addition to the capital structure. This, of course, is the Wicksellian (as opposed to Walrasian) streak in most Austrians that aren’t afraid of the word “macro” preceding the word “economics:” that the economy would’ve been on a growth trajectory with both a higher y-intercept and a steeper slope, if not for central banking and the systemic damage it inflicts upon markets.
More on the RBCT next time. Hope you enjoyed the companionship of another blinking light.