Austrian/Niskanen Debates: What's Missing?

It's not easy in the U.S. to take what is now a political "road less traveled". Plus, the road of the moderate has become so ill defined as to resemble a disappearing path in the landscape. Are moderate policy efforts little more than a "sell out" to the political enemy? For some it seems that way. Of course, trying to legislate rigid rules of any kind for a diverse population of more than three hundred million, is no walk in the park. Since a political middle is mostly MIA, groups such as Niskanen face an uphill struggle, in their efforts to contribute to the national conversation.

Nevertheless, they deserve credit for trying, given the present dialogue of partisan outrage. Last year, Samuel Hammond penned an essay for Niskanen titled "The Free-Market Welfare State: Preserving Dynamism in a Volatile World". Interestingly enough, Hammond referenced Arnold Kling in the footnotes, prompting Kling to ask recently, "Am I a Welfare State Advocate?" Kling's post also highlighted a response to Samuel Hammond from Kai Weiss: "No Such Thing as a Free-Market Welfare State"

Instead, advocates of the free market should look to a strengthening of civil society, combined with a job-rich economy, to help those left behind. In the end, responding to skepticism about the role of free markets by arguing for more statism might be an oxymoron after all.

In fairness to Niskanen voices, their arguments are more nuanced than Weiss implies. And the "strengthening of civil society", a volunteerism which Weiss understandably promotes, is - alas - not so simple anymore. Yes, once the U.S. had a civil society which contributed greatly to the bottom line in terms of well being and a social safety net. However, that earlier reality also included citizens who could freely practice what were the medium and even high skill activities of their time. Yet much that contributed to well being which involved interchange with others, has since been made either illegal, or at the very least, limited to those who undertake extensive formal education.

This loss of production rights included economic factors to some degree (such as alternative healthcare practitioners), alongside the voluntary level of what citizens once freely provided for one another. How does one argue for a restoration of civil society, knowing that many earlier knowledge and skill production rights which were beneficial for social interaction, have long since been withdrawn?

Some Austrians come across a bit flippant as well, in reminding us how healthcare is not a right. This makes me want to pull my hair out, of course healthcare is not a right! However, it's a crying shame this fact of life didn't get stressed in the historical moments that really mattered for U.S. citizens. If everyone basically understood they wouldn't have healthcare rights, how would governments and private associations have gotten the chance to sway citizens to give up their own rights of healing, which contributed so to mutual assistance and a natural form of safety net? What was really gained for that extensive loss of freedom?

Worse, those now exclusive production rights went to limited sets of healthcare practitioners with extensive time scarcities and severe geographic constraints. Basically we're talking about what eventually became the loss of millions of practical, sometimes necessary aspects of healing, in everyday life. Why was a mere fraction of the population given the keys to such basic forms of knowledge production, to the detriment of everyone else? Are not Austrians major supporters of human freedom? If we all believe civil society needs strengthening, why can't we find ways to prove it?

Meanwhile, extensive supply side limits in healthcare practice, have also translated into overhead institutional costs which make it impossible for any level of taxation and redistribution to get to the heart of what matters for a public safety net. If and when governments become subject to austerity, much of our public or private non tradable sector activity is hardly positioned to take up the slack.

From time to time, people across the political spectrum (including individuals at Niskanen) have in fact attempted to deal with pressing supply side structural limitations. One reason this process has borne little fruit, is the fact a full frontal assault on general equilibrium settings for applied knowledge - especially in a large nation - is impractical. It can't work in part because high income skills arbitrage value is indirectly responsible for extensive valuations throughout the economy.

Yet high powered skills arbitrage in aggregate, also accounts for the extensive loss of time value on the part of millions, which is expressed in the trillions of debt we collectively owe in terms of national budget obligations. And why have governments still not realized that time based product, regardless of its marketplace value, can only scale up through increased supply side participation? Non tradable sector private interests know it, even if it isn't in their best interest to share this crucial understanding with their government benefactors.

Nevertheless, a structural approach for production reform, needs to occur in ways which won't undermine the overall wealth framing of general equilibrium. Most long term solutions actually lie outside of today's existing systems of structural organization. And the costs of living today, are such that citizens can't be expected to resume earlier societal safety net obligations on non economic terms.

To sum up, it's really misleading to argue that if government would only get out of the way, private markets would get along just fine. Today's private sectors include extensive non tradable sector organizational patterns which are compromised so as to inhibit dynamism and long term growth. These markets are so distorted that no amount of taxation or redistribution could provide sufficient remedy, regardless of the tax burdens that will soon fall on the shoulders of citizens. Let's face our structural problems for what they actually are. Publicly despising "wrong" political viewpoints as an institutional main course of action, is simply the wrong approach.

What Really Preserves the Labour Theory of Value?

Who still believes in the labour theory of value, rather than the more recent subjective version? Or, perhaps there's actually a more relevant consideration: How much personal belief in a labour theory of value manifests unconsciously, instead of at an ideological level? Chances are, unconscious attributions for labour value are a stronger contributor to economic outcomes than what is often debated. One might envision the general equilibrium result as power relationships in skills arbitrage, for that matter.

Indeed, underlying assumptions regarding labour value, greatly affect how high skill human capital has been conceptualized, especially since the workplace transitions of the twentieth century. Professional groups often rely on a non tradable sector structural framework which allows human capital inputs to take precedence over the aggregate outputs of time based product.

In this instance, it turns out that subjectivity cuts both ways. Consider how a subjective theory of value in terms of product, previously benefited from direct correlation with good deflation and recognizable gains in standards of living. It made sense to emphasize the subjective reality of product value regardless of labour contribution, when progress could be largely attributed to tradable sector productivity gains. But more recently, subjectivity has become associated with societal expectations as to what quality product represents. The consequent emphasis away from baseline utility, has muddied the waters for product subjectivity, especially for potential labour value contributions. Alas, quality time based product often includes excessive inputs at multiple institutional stages, before the product output intended for consumers actually takes place.

While my impressions re subjectivity dovetail somewhat with those of the Austrian school, many such discussions feel more relevant for historical periods of tradable sector dominace. Madson Pirie reflects on Carl Menger's many contributions to subjective value, and notes:

He founded what is now called the Austrian school. His crucial insight was to recognize that price is not based on what it costs to produce goods, as traditional economists had supposed, giving rise to the labour theory of value on which the edifice of Marxism is built, but on what the demand is for them.

He adds:

...value does not reside in the object, deriving from its input, but resides instead in the mind of the observer, representing his or her estimation of its worth. 

Even if arbitrary definitions for quality standards reduced the impact of good deflation for tradable product, at the very least many forms of tradable sector product provide standard utility which can be readily discerned. Alas this hasn't proven the case in non tradable sectors, where a reasonable baseline for product utility has long been abandoned in favor of requirements which - among other things - have muddied the waters of true productivity gains.

Given the subjectivity of economic outcomes, a better utility baseline is needed for non tradable sector product in general. A better definition of basic non tradable sector utility - especially for housing and time based product options - could clear some of the present fog as to how aggregate productivity, hence potential economic gains, might once again be measured with confidence.

The Decentralization Option

One of the problems with present day income inequality, is that some believe monetary policy should be addressed as though it were a great divide to be bridged by bringing spending "under control" for the average household. However, this is a wrongheaded approach, given the fact monetary policy needs to meet the actual monetary obligations that are held on the part of all concerned.

It's difficult to know for certain, whether some central bankers who overreact to today's imaginary inflation, are also being swayed by a subset of Austrian economics which actually reasons that the poor are "better off" when central bankers refuse to print more money. However, this is the same reasoning which - when carried too far - leads to bad deflation. Such deflation scarcely helps anyone living on a small income, it only makes everyone worse off. Even though the disinflation of recent years is not in the same category as depression level bad deflation, it nonetheless has cumulative effects which can't be lightly dismissed.

Fortunately, there are far more productive ways, to bring the marketplace within reach of those with smaller incomes. Instead of attempting to address inequality by destroying existing wealth - whether by war, further redistribution or excessive monetary tightening - why not allow the kinds of innovation that would also reduce the life struggles of those who are sometimes lacking in physical stamina and/or high skill levels. A new form of corporate structure could begin this process, via an alternate equilibrium which would not pose a threat to either the monetary or supply side conditions of general equilibrium.

These local and decentralized economies would benefit from a formalized version of imputed time value, which is particularly important since time value would gain monetary compensation as a starting point for economic activity. A time continuum for services generation and asset structure would be linked with coordinated group processes, in knowledge use systems. The same imputed time value efforts that would provide a cushion for those with disabilities who want to work - for instance - would be the same group supported time use which contributes to local research and development.

Via much needed innovation and new organizational capacity, non tradable sector activity would "move closer" to those who have struggled to meet these requirements on general equilibrium terms. Still, it's not about "dumbing down" or otherwise creating less "exceptional" environments, but providing innovation for desirable environments which encourage the capacity and stamina of the average individual. Of innovation, Alberto Mingardi recently wrote:

Innovation is not about technological progress per se, it is not even about "new stuff", per se: it is about what Deirdre McCloskey calls "market-tested progress", and the market-tested part is not trivial. Making new technology a means to better answer consumer's demands is not trivial, is not a mere "last mile" of innovation. It is its essence. Innovation is about "products", and "products" are about serving people's needs and wishes, not just doing something which was never done before.

The decentralization option would - in some instances - put a name to people's needs and wishes that they did not even realize existed. Often, this is exactly what new products in the marketplace have done, and people have wondered afterwards, how life must have been before those options became available. Indeed. It's time to allow innovation a chance to simplify our environments, so that more of us can gain the ability to move beyond what are all too often, unnecessary burdens and limits on our abilities.

Market Monetarists and the Great Divide

In a recent post, Scott Sumner reflects on the market monetarist effort to make headway in public dialogue, after Noah Smith highlights a "powerful" Neo-Fisherian argument, so to speak.

Unfortunately, market monetarism is still a fringe movement, even less popular than other heterodox theories like ABCT.

Neo-Fisherian thought provides a too convenient rationale, that "normalization" can occur by means of the interest rate peg. Steve Williamson and John Cochrane in particular, have found an audience that is willing to see whether economic logic can be turned inside out. Scott Sumner was clearly frustrated in the above linked post. How could an economist from the University of Chicago, so easily dismiss the veracity of QE at the zero bound?

Like many, Cochrane is focused on an increasingly limited equilibrium which is credit driven, instead of the broader equilibrium which markets seek to maintain. In recent decades, some have become convinced that monetary policy is just another name for credit policy. Apparently, central bankers at the Fed feel the same way - given the fact one hardly finds mentions of monetary factors in FOMC minutes. Instead, there are constant mentions of the interest rate.

Indeed the idea of credit as primary for wealth origination is important for Austrians in terms of private industry, just as Keynesians consider credit integral for government's role in the economy. Further, the average citizen is exposed on a regular basis to watered down versions of these opposing poles of economic thought. Since central bankers have proven to be more concerned about credit circumstance than monetary circumstance, Neo-Fisherism appears as though a "useful" concept whose time has come.

There has been insufficient time for market monetarism to influence public opinion to any real extent, at least in the U.S. Some years earlier, it didn't appear that a broader public understanding would be necessary. But who could have known, the degree to which public opinion would also contribute to an ongoing path of monetary tightening? With a little luck, market monetarism could influence monetary policy in the next presidential election. But in this one, as Bonnie Carr recently noted, only Marco Rubio has a market monetarist adviser on his team.

Market monetarist thought has yet to benefit, from the kinds of personal associations that populations hold in regard to Keynesian and Austrian thought - even if those associations are a crude reflection of the theoretical realities. For instance it is far too easy to align internet Austrians with anti-government rhetoric, much as crude versions of Keynesian thought are associated with government interests - especially those of major cities and U.S. coastal areas. Neither of these represents a cohesive interpretation, for the vast panorama that is today's economic activity.

Perhaps market monetarism needs an identification with something tangible, i.e. a concrete image or symbol in the public's mind. At the very least, balance could play a role. Thus far, without some degree of public support and understanding regarding monetary policy, it is not clear that central bankers will be willing to act in the public's best interests, any time soon.

Even though I believe market monetarism could help bridge the divide between pro and anti government factions, plenty of obstacles remain in the way. How to find identity in the middle of opposing forces, which seek to gain strength through opposition and divisiveness? Everyone needs to take part in healing the rift between pro and anti government forces. Perhaps the next political election will have more market monetarist representation, than the coming election holds thus far.

Finance, Government, Monetarism: Some Assembly Required

...yet how to put it all together, given the fact these "pieces" scarcely coordinate at all in central banking settings? Even though these areas are vastly different, they remain the expected convergence for present day monetary policy. Truth be told, most among the public are more familiar with the ongoing gyrations of finance and government, than what is at stake in the monetary policies which affect their lives. As a result, market monetarism has more of an uphill climb for broad acceptance, than otherwise might be the case.

This issue has been on my mind since Richard Wagner and Vipin Veetil of George Mason University, dismissed NGDP targeting - basically on "general principle" - in a recent paper. In Bill Woolsey's response to their arguments, he noted that Richard Wagner was his finance professor decades earlier, which at least provides perspective for their rationale. Perhaps this also explains why Woolsey - as a "charter market monetarist member" - seemed nonplussed by their objections!

However, Wagner and Veetil's broad based attack on market monetarism, makes it difficult for some of us to counter their critique on specific terms. Indeed, it almost appears that their lack of confidence in market monetarism is due to a lack of confidence in the monetary role of central banking. For one thing: insisting that NGDP stabilization is a centralized dictate which does not consider microeconomic realities, misses the point. Of all the centralized activities a nation could assume, a nominal target is possibly the most benign of all. Unlike many centralized functions, this is one which seeks to represent all economic participants to the best degree possible.

Among other issues I already have with their assessment, recessions and depressions certainly do not cleanse, as Marcus Nunes also notes. Any lack of monetary stabilization only exacerbates already difficult circumstance in these cycles. In particular, monetary tightening which generates deflation is not helpful, as some Austrians assume. "Bad" deflation is not the result of normal price adjustments or productivity gain. Instead, shorting aggregate spending capacity means negative AD shocks which derail prior commitments on the part of numerous participants. The worst part about this situation is that resource potential is needlessly lost, and is not necessarily regained afterward.

In recent decades, financial and governmental interests have become more closely entwined. In the meantime, important monetary lessons from the Great Depression have been forgotten. One odd aspect of the financial perspective, is that it generates a political common ground among some who would otherwise be ideological opposites. Perhaps this alignment has bearing why the primary monetary interests of central banking appear as though lost in the shuffle. Who will tend to real monetary policy, if the Fed won't?

As Benjamin Cole indicated in a recent post, time aggregates also matter:

The unvarnished truth is that Americans are working the same amount of hours now as they did in 2009 - and also as in 1999.

Whereas the labor force since 1999 has grown by 13 percent. However, these facts are being missed as the media portrays a "back to normal" economy. What monetary printing has been possible, was often disparaged - not just by the right, but many on the left who remain disappointed that more hasn't gone to fiscal activity. Is it possible to return to a central bank which is willing to stress to the public, the primacy of the monetary role? In a sense, the only thing a monetary offset even asks for, is that after financial institutions and governments get their representation, the public gains permission for their monetary representation as well.

Macroeconomics is Real

Does this seemingly obvious element of life even need to be asserted? Apparently it does, because even as nations everywhere grapple with budgets and monetary concerns, there are those who insist that macroeconomics as a discipline is not real. Somewhat misguided in the present? Of course. Something to be done away with? Certainly not. As long as there are nations, and nations are in fact a part of the budget coordination and consideration of any group of people,  there are going to be economic issues which fall under the rubric of macroeconomics.

How could it possibly be any other way? And yet, people - quite often serious scholars who really should know better - try to insist that macroeconomics is not real. What's more, macroeconomics is monetary, as Marcus Nunes pointed out in this post as a reply to Robert Higgs. Monetarism matters now more than ever, because it continues to utilize a dynamic concept of economic thought which allows a focus on future potential.

Whereas older forms of monetarism often focused on the gold standard and other aspects of resource use which readily aligned with the standard, Market Monetarists now focus on aggregate spending as measured by the time elements of individual participants. This active conception of economic activity is presently missing from both Keynesian and Austrian thought, which both assign a greater role to credit allocation in the marketplace.

Sometimes we hear that nations are losing their "importance", a sentiment illustrated in discussion of growing state and local importance in economic affairs. However there are some serious concerns with that perspective, in that both state and local economies closely reflect the same valuations and definitions of resource use which nations have previously defined. That, in turn, continues to make local and state economies quite dependent on the national redistribution that such definitions all but made mandatory, even as states express unwillingness to go along with national programs as they are now evolving.

Protection of special interests - which make so much redistribution necessary to begin with - remains just as strong at local and state levels as it is at national levels. Keynesianism in turn is closely connected to those same redistribution patterns. Even as many on the hard right seek to deny the redistribution they rely on, they still offer practically no reflection as to what might take their place. The more that states attempt to deny federal aid because of the impositions it creates, the more class polarization they will experience from their own limitations to choice.

The point is not to negate national identity because it appears helplessly misguided, even if it presently does. Rather, the point is to find new avenues of economic intersection between local and national concerns which make sense.  Knowledge use and services need to be thought of in local terms of wealth creation, while scarce resources need to be able to utilize national coordination strategies, without the excess destruction of free markets which has been going on for so long.

How might local to national avenues of economic activity be reconstructed so that they actually work with one another, instead of fighting with and taking advantage of one another?  National and ongoing conversations in this regard are rapidly becoming necessary, and summits to make this possible really need to happen before the U.S. becomes more divided than ever. Too many people in the U.S. are invested in spreading blame, lies and even historical distortions now - activities which have to be turned around and soon, if in fact they are not going to escalate further.

What's more, macroeconomic realities need to reflect the rationale for realignment, rather than continuing to detract from the potential of realignment. If people are willing to utilize knowledge in more direct ways and establish understandable frameworks for doing so, governments can work with their own citizens to help them become more self sufficient. It would be far preferable to include such coordination strategies into monetary representation than to simply assign a bare minimum of money to people "at the bottom" who supposedly have no rational place in society. The longer government assumes it can take care of citizens when special interests are completely in the way, the more citizens become endangered as to the services they actually need.

Sticky Markets and the "First Mover" Problem

Aahhh, complexity is a many splendored thing, especially when it involves sticky wages which do not readily change just because people say they should! It's tempting to look at wages as the obvious place of correction whenever unemployment rises and economic conditions go south, but then whose wages exactly are we talking about: mine, yours, or that guy over there by the window? And how do we suppose would be the best way to bring that about? Hey, you "go first" (knock down those wages) and someone else will surely go next...well, perhaps not so much. Looks like we could be seeking equilibrium for a long time, especially as this issue has been (once again) moved to the back burner with the better employment numbers of late. Plus, what may appear as a success story in this regard often turns out to be "shared" jobs which are now part time.

As mentioned in my last post, monetary policy has done a reasonably good job of addressing short term and cyclical problems. Over time, at least in the U.S., government is likely to continue decreasing overall its contribution to services as entitlements become more substantial, in the midst of continuing unemployment which has now become more structural than cyclical. While macroeconomic thought readily distinguishes between structural and cyclical issues, it nonetheless is better equipped to address the cyclical aspects. Consequently, structural unemployment realities tend to get "smoothed out" over time without any clear strategies. War is a lousy "strategy" that too often gets utilized as a result. When people ask, "Why do we tolerate war?" they really ought to be asking, "Why do we insist on looking the other way, when people don't have economic access?" Unfortunately, we still have the mid to long term scenario where money does not yet address many of the services which people will increasingly take upon themselves in the meantime.

One of the primary goals of this blog is to return monetary relevance, or equivalence, to many ongoing responsibilities which people know to be important, but don't yet know how to address in realistic terms. We just don't have good ways yet to address this important issue, in the present. Consequently a nation may decide to print money to encourage domestic spending when global cross border capital flows do slow down (60 percent from their 2008 peak) and yet it seems no one really has a clue what to do with that money at local levels, which isn't already being done.  Even though recent globalization flows have reversed, nations fail to see recent printing as efforts for the local stimulation that leaders are actually trying to provide, and no one is in charge who can realistically tend to such structural efforts in any organized way, even though structural issues are now clearly the problem.

First mover problems clearly show that such internal coordination will be  necessary for efforts at local levels to work, or local economies will only continue to drive potential workers away, instead of finding ways to create further wealth with what has now become excess markets of human skill. And yet, any institution that would reduce wages would find themselves in a first mover disadvantage, which is but one reason why this problem is so hard to address head on. Plus, reducing wages is simply another way of reconfiguring the pie instead of actually making the pie itself larger. There are many people with skills more than adequate for jobs who don't get hired in the first place, and were wages to decrease to reflect the actual existing pool, there would scarcely be enough left for one's financial responsibilities. That is also one of the problems with the idea of skills auctioning, which is why it not only would need subsidized backing by government in order to be realistic, but is really a back door retreat to subsidized welfare which doesn't address the issue of actual economic integration, in the first place.

A structural nature of economic realities is well reflected in both Austrian literature and ongoing dialogue. However, the still ongoing discussions of production, manufacturing and the efforts of privatization don't really address what people are facing in their circumstances at countless local levels, and right now that matters immensely. Therefore, in the dominant strands of both Keynesian and Austrian thought, I continue to search in vain for the missing human skill factor. Like the Austrians, Keynesian thought sometimes appears backward looking in that it too sees services primarily as both external and government driven, rather than capable of providing wealth creation in a self supporting sense. Cleary I agree with any Keynesian that services are paramount. My concern is that they take the existence of services for granted in ways that appear dangerous for the long run, especially whenever nations run into severe supply side issues, and it is all a government can do to "hold its head above water".

Austrians have much literature that is valuable concerning production processes for actual product that is separate from us and our own time factor. But where are the missing coordination and pricing mechanisms that could assist with the human skill factor so important in the present? This is what people need, to be able to utilize skills amongst one another when in fact their institutions no longer have room for them. Some in the Austrian economic community gave special consideration to Elinor Ostrom who was truly an inspiring individual. Ostrom did excellent work in her lifetime, part of which involved the study of spontaneous organization in communities for shared resources. But, again like so much of economic study, her work in these coordination mechanisms was also intended for actual physical resources which faced certain issues in traditional markets.

The only spontaneous coordination mechanism I have seen to date for skills - outside their primary uses in institutions and familial settings - is a very limited one in the form of time banks, where people are primarily trying to capture valuable skills which, alas, are already restricted in the marketplace to some extent and therefore already needed by others. In other words, the actual arbitrage potential one might expect to find in these time banks is blunted by those who primarily seek the specialized services of those who are already quite connected and busy.

All of this needs to be considered when the idea becomes, "well, if only wages weren't sticky". Are we talking about wages in the now somewhat limited world of manufacturing and production that is still at the center of so much economic dialogue? Or, are we talking about wages in services organizations, which remain set up for institutional and organizational needs, rather than actual market, individual or community needs? Small wonder no true pricing mechanism exists in so many of these organizations that actually corresponds with the realities of economic actors.

Where, then, are Market Monetarists in all of this? Hmmm, one step at a time (maybe you think it's fun to be a radical but to me it's extremely lonely and not fun at all, just, unfortunately, necessary)...I see the pioneers in this movement as looking toward the future in ways that other economists aren't quite as willing to do, and looking towards the future means moving away from the recent past of interest rate targeting which was structured for a much more product oriented and credit oriented economy than will be possible again for some time. I have tremendous hope for the Market Monetarist model because it acknowledges that in a diverse economy, real measurement begins and ends with the economic actor, which is also what skills wealth is about. 

Extensive credit use basically throws the idea of the individual (as integral to the economy) out the window. But people don't seek the same kind of product they sought even a decade ago. Today people look for product in ways that are more about people to begin with: more digital, experience oriented, knowledge and services based, and they do not have strong reasons to be tied to locations which do not promote economic opportunity. Even as I am also Market Monetarist and so promote their cause, I cannot ascribe some of my own positions in this blog to others, many of whom see Market Monetarism through a somewhat more expedient and perhaps practical framework than I do. Still, as a group, Market Monetarists are quite forward looking, especially in that they would provide a monetary rule that would also allow more productive forms of service coordination. In other words, I see Market Monetarists as being in the best position to be a first mover for positive structural change, even if the model is intended for aggregate demand. Therefore, I see Market Monetarists as capable of being first movers in ways which neither Austrians or Keynesians can adequately address, without altering their basic belief systems.