 So, thank you everybody for being here this morning. I'm Jonathan Newman. No relation to Patrick Newman as we've already covered I want to start off with a short story. I Was perusing the New York Fed blog so the people at the New York Fed they run this blog and they write about different topics And this was a few years ago And I found a blog about the Panic of 1819 which I was sort of interested in so I read through it and I'm also a professor of economics and so I read papers that my students write and one of the jobs that I have when I'm reading papers is You know you got to check for plagiarism. You got to you know Make sure that the students aren't copying somebody else's work Unfortunately, while I was reading this blog from the New York Fed there were some there were some bits in there And here's here's what here's what I found there were some bits in their blog that sounded exactly like Rothbard's book the Panic of 1819 like that word for word actually so I actually did I feel like I I did catch them Plagiarizing Rothbard and the way that I know that actually did catch them is because they admitted to it afterwards So after I guess they saw there was a bunch of web traffic going to their article from visa start organ They're like what the world? Why is everybody going to this old article about the Panic of 1819? You'll notice that they added this author's update Murray Rothbard's the Panic of 1819 reactions and policies was an additional source for this past For this post and should have been cited. We regret this omission To which I was thinking man. I hope you regret it. Yeah And so the reason I start off with this is because I want to cite my sources here at the beginning major Source for this talk is what I learned from Roger Garrison both at Auburn University and also in his lectures here And not just the content, but also his style. I've got some hopefully I've got some amusing moving parts in the PowerPoints Rothbard was or excuse me. I Garrison was very famous for his the moving parts of his of his PowerPoints so here we have Mises and Rothbard. They're fighting Against Friedman and Cain's so here we go there. They're about to throw the first punches. Oh The first a little bit about The title so I was very intentional with the title It's a long title Austrian economics versus Keynesian and monetarist macroeconomics And there's just three points that I want to make about the title first is that Austrian economics is not divided into micro and macro so Hopefully you've seen over the course of the week That we progressed from talking about human action And what are what are some of the things that we can say about human action that are necessarily logically true? What can we derive? What are the implications of the fact that we make choices? So which is a sort of a micro focus we look at one individual making a choice and we tease out What sort of things apply to all humans making any sort of choice? And then we develop into a theory of prices a theory of money a theory of Interests and so we can talk about how credit markets work and it turns out that this sort of like smoothly flows into talking about Economy-wide phenomena like inflation and business cycles and economic growth So there's not there's not Austrian microeconomics and Austrian macroeconomics. It's one Edifice it's one body of economics and it's all interrelated There's no if you if you found out something that works in the art that you see in the macroeconomy it doesn't really accord with what Austrian micro might say then that means there's some sort of disconnect. There's something wrong So that it doesn't it seems like that the macroeconomy shouldn't be thought of as anything more than just the sum of all the Individuals preferences and their exchanges and what's going on. So so why would we expect any To use a different set of tools to talk about macroeconomic phenomena as opposed to what happens at the micro level Okay, so for Austrian economics all cause and effect happens at the micro level However, it does not mean that we can't talk about economy-wide phenomena. We can so we have this integrated fully integrated body of economic theory Mainstream economics however is divided. There are microeconomists and they're actually subdivided into further fields There's like labor. There's health. There's energy all of these different subdivisions of microeconomists In the mainstream and they all do their own little things in their own little fields and then there's this other group this other umbrella of macroeconomists and just from personal experience talking with people who work in both of those fields they They don't understand each other like I've been in seminars where it was a macro Topic that was being presented and the microeconomists that were sitting there. They told me afterwards. I This doesn't make any sense to me So it's it's not just that you know, they're they're doing different things. They're focusing on different things They literally don't even understand each other, which is good evidence to show that it's it's almost like two totally different sciences two totally different fields, but this definitely doesn't apply to the To the Austrian school. So this is why I called it Austrian economics versus Keynesian and monetarist macroeconomics. So there's this this entire body of thought That we're putting up against just the macro theories from the monetarists and the Keynesians Finally, notice that it's Austrians versus the the Keynesians and the monetarists So if they're grouped together and they were on the right side of the screen and the street fighter example So they're together and I hope that we'll have time to show that the monetarists and Keynesians are actually very similar they have very very similar ways of approaching answering macroeconomic questions and actually Their policy prescriptions can line up as well Okay There's some fraying at the top so it even mainstream Macro economists understand that there's there are some serious issues with macroeconomics as it's performed today And I have a few quotes to to show you this so Noah Smith is saying was commenting on how nobody in the academic Academic macroeconomics was able to predict the the the most recent financial crisis We have a quote from Paul Romer. This is a from a great paper about mathiness where he says presenting a model is like doing a Card trick everybody knows that there will be some sleight of hand There's no intent to deceive because no one takes it seriously. So this is a pretty serious indictment against how macroeconomics is done Larry Summers says real business cycle models have nothing to do with the business cycle phenomena observed in the in the United States Robert Solo who who developed a very Important growth model and mainstream macro has a serious critique of the dynamics to cast a journal equilibrium models man Q who wrote a very important principles of economics a textbook Said that the work of the past several decades in macroeconomics looks like an unfortunate wrong turn and finally one of the Presidents of the the Federal Reserve district banks says that macroeconomics is very little to offer By a way of answers to the questions of why doesn't economy have business cycles and why do asset prices move around so much? So this is a pretty serious indictment and what I'd like to offer today is that Austrian economics Fills this gap. It it doesn't have these sorts of errors. And so we'll see why Okay, so a brief review of what Austrian economics has to say about macro questions macroeconomic phenomena I'm I'm glad that David Howden at the beginning of his talk. He he showed how I think he got this from Hayek We need to understand how things can go right before we can analyze how things go wrong And so the way things can go right for a macroeconomy is if we lower our Rate of time preference if we decide that we're going to decrease how much we want to consume today Which means that we free up resources that can be used for investments so that we can produce more Then what that does is there's a total restructuring a total reallocation of how resources are used in the economy away from consumption and Towards production which means that we're allowing for more production of the goods that we would like to consume in the future So this is the path to economic growth. This is the this is the Austrian answer How do you how do you grow an economy you save you invest you produce more and when that happens? Entrepreneurs will change the way that they they're producing things in accordance with the societal rate of time preference So hopefully that's just a brief review of what you've already learned so far this week How things can go wrong start with manipulation in credit markets So specifically through the banking system if we have an increase in the supply of money This artificially lowers the interest rate and distorts the way production is done So new money enters circulation through credit markets, which is a special case of can't he on effects and it lowers the interest rate Entrepreneurs bid for factors of production and begin to implement new longer lines of production just as if there were increased savings Incomes increase which lead consumers to consume more and bid at the prices of consumer goods real investment However, has not increased so the entrepreneurs will find an increasing scarcity of the capital goods Required to complete their projects which leads to an increase in the cost of production beyond what they anticipated And so they abandoned those projects So this is this is just a very short description of the Austrian boom bus cycle and and it has a very specific very certain Beginning so we know exactly what causes it and we we can trace through the pattern of what will happen When we see this manipulation in credit markets Okay, so now let's do an overview of Keynesian Macro economics, and we'll talk about the I'll do Austrians versus Keynesians and then I'll do Austrians versus Monitors and then at the end I have a slide about how the monitors in Keynesians are the same So Keynesian macro is based on the circular flow model So the this is sort of the the base This is the foundation of Keynesian macro economics, whereas the base or foundation for Austrian macro economics are talking about economy-wide things would be looking at the structure of production So Keynes decided to look at the economy as if it's a circular flow We have the households and individuals who own the factors of production own the firms and also consume the output from the firms They're on the right-hand side and they purchase Goods and services from the firms in this top market. There's the market for goods and services at the top and then firms produce that output by using the factors of production that they get from the households and Individuals in the bottom market. So they purchase those factors of production in the bottom part And so we have a flow of money that emerges in the economy So households and individuals are spending that spending is revenue for the firms And then the firms take that revenue and they pay it out as income to the factor owners So the people who own the labor own the capital and anything that's different They it goes to entrepreneurship or entrepreneurs So entrepreneurs are entrepreneurship is viewed as a factor of production in this model Which is very different from the way Austrians would treat entrepreneurship So this is taken as an equilibrium condition if we have Income which is capital Y in this model if it's equal to the level of expenditure, which is capital E Then Cain said we have an equilibrium This this economy is stable the spinning on the top half is the same as the spinning on the bottom half The flow is is even and so if we can set these two Magnitudes these two spending flows equal to each other We get income equals expenditure and this is the equilibrium condition in the Keynesian model Expenditures are disaggregated a bit into consumption spending investment spending and government spending and also net exports But just for our purposes today. I'm just going to assume a closed economy So consumption spending is C Investing spending is I and government spending is G the first graphical model of Using this equation was called the Keynesian cross or the incoming and expenditure model So you take those three components of expenditure and You stack them on top of each other and that gives you the total level of expenditure in the economy So you have consumption spending and then you add investment spending and then you add government spending And that gives you the total level of expenditure notice that there's this diagonal line coming out of the origin That's the equilibrium condition line That's the line where all levels of it of income equal the levels of expenditure And so if we have if our economy is is on that line It means that we're in macro macro economic equilibrium from the Keynesian perspective. Okay, so you'll notice that only one of the One of the components of expenditure has a slope and that's the consumption function there at the bottom The consumption function is the only one that has a slope and it's it's totally dependent on income So you add the intercept is autonomous consumption and you have Income multiplied by what's called the marginal propensity to consume which turns out to be the only Variable that goes into determining the Keynesian spending multipliers Which you've heard a lot about I'm sure and then you you stack on investment spending Which isn't dependent on income importantly and government spending which also was not dependent on income Notice the slope of the that investment spending line and the government spending line is totally dependent on the the consumption Function so you just sort of stack it on top in my classes I like to refer to it as a stack of pancakes You've got a stack of consumption pancakes the stack of investment spending pancakes and a stack of Terrible tasting government spending government spending pancakes Okay, so the reason I talk about the stack of pancakes is because it makes it easier for students to think about taking some of those pancakes out So if we start taking away some spending and in the Keynesian model what's typically done is we say there's this Unanticipated decrease in an investment spending so you see that investment spending line What I'm about to do when I when I click the button here is it's gonna fall But you'll notice that the top line falls down at the same rate. It does the it does the same exact thing So and that's because what we're going to stipulate is that there is no response from the government There's no government policy that steps in it says we're gonna change the we're gonna change the way We're spending because of the change in investment spending. So so watch what happens when we when we have an Unanticipated decrease in investment spending. Well, it wasn't very smooth So they both fall together and the economy collapses and the reason for that is because of a very important Keynesian assumption that's that's put in and that is that wages are sticky Everybody's heard of this the whole sticky wage thing and so since wages are sticky if we have a decrease in spending Which means that firms are receiving lower revenue They firms still have to pay those those higher wages or those stuck wages And so they decrease output But then they can't lower the wage so that they can have full employment at the new lower level of spending and the New lower lower level of output. So there's this inherent mismatch. There's these inherent persistent Disequilibria and labor markets because wages are stuck at too high of a level for whatever reason There are few reasons that are offered like maybe there's a psychological reason workers don't want to accept a lower wage. There are maybe Legal issues so like what if the wage is at the minimum wage already, which means it's illegal to lower it So whatever the case if we have sticky wages labor markets can't clear and so the economy just spirals down into depression So like there's this initial decrease in investment spending that causes the whole economy to collapse Which by the way in the Keynesian system would happen a lot because investment spending is considered as very unstable It's guided by these animal spirits. It's impossible to predict If investors are optimistic, then they'll increase their spending if they're pessimistic, then they'll decrease their spending That's that's basically it just comes out of nowhere there's just the major changes in investment spending that come from nowhere and Because of this inherent instability of investment spending then the entire macroeconomy is is in this fragile position so the whole economy crashes Okay, so let's look at the ha the story of the Keynesian story of how things can go right So we had this this unstable investment spending component However in this scenario here, we're stipulating that the government spending component Completely makes up for any changes in the investment spending component So that there's a rule so there's a change in investment spending then the government Increases or decreases they're spending to perfectly offset it so you notice that the top line doesn't move in this case So the animal spirits are moving that investment spending line up and down So investment spending increases and decreases all the time because of animal spirits But the government thankfully is there to step in and prevent us from spiraling downward into depression Because whenever the investment spending pancakes come out the government adds some pancakes right on top So the total stack of the pancakes doesn't change So and that's what matters We just want the stack of pancakes to stay the exact same size so we don't have the spiral downward effect because of sticky wages. Oh By the way So we're in the judges room We're I guess I should say the judges jurisdiction and so he allows questions People have encountered these models in their classes and so it's okay with me if you raise your hands We can have a more informal Question and answer if you'd like so if any question if you have any questions along the way, please please raise your hand and ask Okay, so this is the the Keynesian story of things working right Government saves the day is the moral of the story So that was an early Keynesian model the There was another model in between so there was the ISLM model and then after that came the aggregate supply And aggregate demand model, but the story didn't really change So the the policy prescriptions don't change if we have the if we have any sort of Unanticipated decrease in spending this time. We'll call it aggregate demand So aggregate the aggregate demand curve is that downward sloping Curve here in this graph if we have any decrease in aggregate demand Then we pull away from the long run level of output the full the full employment level of output We slide down the short run aggregate supply curve Which has its own really weird reasons for being slow sloped upward like sticky wages and misperceptions Other sticky prices. So there's some some funny things going on in the in the way that these Curves are sloped, but the the moral of the story is the same So the only hope is for some non-market entity to decide to increase spending to offset the original decrease so I've seen this graph used to explain the Great Depression So there was this unexpected unexpected decrease in Investment spending and then there was a subsequent decrease in consumption spending and thank goodness FDR came in and increased government spending and then we had a huge increase in government spending with World War two And that's what allowed at the aggregate demand curve to to get us back to our long-run equilibrium question Okay, so sticky way the question is about sticky wages. What exactly are sticky wages? So sticky wages is the site this Keynesian idea that Wages can be stuck for for non-market or maybe even non voluntary reasons So we we know that wages are set by the labor's diminishing marginal Revenue productivity, sorry searching for the word revenue productivity However, if there is some sort of decrease in demand for labor Based on the change in there in the in that workers revenue productivity Then what they what a Keynesian economist might say is for some reason the equilibrium wage in that labor market won't come down For whatever reason and and it could be that though the workers just won't accept it They won't accept a lower wage or it could be that there are regulations or cultural reasons for this So there I've seen a number of different reasons for it But the idea is that for some reason wages won't come down to the market clearing rate another question Yeah, yeah, so it's it's a there's this distinction between nominal wages and real wages So the even even if the workers can achieve the same or even a higher real wage by accepting of lower nominal wage The argument is that the nominal wages won't go down They're not so they won't accept the the lower pay even if the goods and services that they can purchase with that lower Nominal pay is the same or even higher so as it's a lot of the reasons have to do with the psychology of workers and the wages That they'll accept good point any other questions before we move on okay good So let's compare the Austrian story with the with the Keynesian story So the the shape of the business cycle for Austrian economists is boom and then bust So we have this we have a cause of the boom and the cause is the artificial credit expansion So it's boom and then bust for the Keynesians the the shape is bust and then boom So there's this unexpected decrease in investment spending that sort of comes out of nowhere and then the government steps in saves the day Or there's some other exogenous increase in spending exogenous exogenous just means outside of the system There's some sort of increase in an invest investment spending or government spending or consumption spending perhaps That allows aggregate demand to increase so that we get back to our long-run equilibrium and we're out So it's a bust and then boom So so a lot of times when Austrians and Keynesians are debating each other discussing business cycles with each other Just because the shape is different in the in the minds of these economists there They start to talk past each other So the if you consider the the bust is the first part of the business cycle Then you're gonna talk past or you're not gonna be speaking the same language as somebody who considers the boom as the as the first phase of the cycle The causes are totally different the cause for Austrians is the artificial credit expansion for Keynesians It's the instability of investment spending specifically an unexpected decrease in investment spending and the diagnosis For Austrians is the malinvestment and overconsumption that that dr. Howden talked about in his in his lecture So we we produced the wrong things in the wrong ways and consumers Increase their consumption beyond what they would have done absent the artificial credit expansion For Keynesians the diagnosis is there's there's this steep decrease in aggregate demand The cure for Austrians is to simply let the busts run its course dr. Howden did a good job explaining how the recession is actually The healthy process of figuring out where the factors of production Should be in the structure of production So how should we be using all these capital goods and in labors that we have available? How should we be using all these resources in a productive and profitable way and that's what the recession is It's discovering Refiguring out how to how to how to produce the things that consumers demand the cure for the Keynesian is both Expansionary monetary and expansionary fiscal policy So I didn't talk through the details, but there are two ways to increase aggregate demand by policy You can just increase government spending which is a component of aggregate demand and we saw that directly in the old Keynesian cross model We just increase government spending whenever there's a decrease in investment spending Then we avoid spiraling downward into depression. However, in the aggregate supply and aggregate demand model It's it's common for students to to list out what what are the shifters of aggregate demand and one of the shifters of aggregate demand Is monetary policy it turns out that if you increase the money supply through credit markets, you make it you make it cheaper for Businesses to borrow to purchase factors of production You also make it cheaper for consumers to borrow to purchase homes and cars And so you can increase consumption spending and investment spending through expansionary monetary policy There's not as much literature that I'm familiar with but you can also it seems like it's easier to increase government spending as well when you Engage an expansionary monetary policy because the government can finance debts cheaper. There's less literature on that though So the moral of the story here is you can use expansionary monetary or fiscal policy to increase all sorts of spending In the economy and that's the cure To restate the cure Austrians would say we need to let consumer demand dictate how the factors of production are allocated how resources are allocated We want prices to be in accordance with what consumers demand Including the imputation of value from the consumer good back to the factors of production So we want consumer demand to reign supreme the cure for the Keynesians restated is the government needs to step in and be in charge of what prices are and what spending should be This is a very critical point in in my lecture the prevention for Austrians is don't let Don't let there be an artificial credit expansion basically leave money production out of the whims of bureaucrats Don't don't let money production belong to somebody who can just increase it or decrease it especially if the increases come through credit markets the prevention for Keynesians is the is Let let the government have complete control in these sorts of cases So if we need the government to have the ability to increase and decrease spending Increase and decrease the money supply in the case we have this all of a sudden decrease in in aggregate demand All right So the reason I said this is a critical point is because you'll notice that the prevent the prevention for the Austrians is the cure for the Keynesians So the Keynesians say we need to use expansionary monetary policy to fix the recessions Austrians say no That's what caused the problem in the first place. That's how you prevent future booms and bust That's how you prevent the the business cycle So there's a very extreme divergence of views in terms of the the view on expansionary monetary policy Okay, I'm about to move on to monetarism any questions about the differences between Austrian school and Keynesians. Yes Yeah, there's a great paper by dr. Salerno that explains this the secondary depression in in the boot Austrian boom bus cycle story the paper is Austrian business a reformulation of Austrian business cycle three am I getting that right and so he I recommend that you read That paper that explains that secondary depression. Yeah, it's a very good very good paper Any other questions? Okay, so monetarism It's not very complicated really It's really just one equation. They sort of hang their hat on this this quantity theory of money so we can explain Almost all maybe all macroeconomic phenomenon just by looking at the quantity theory of money also called the equation of exchange Okay, so let's review the elements here. So we have the money supply is M Skip over V for a second P is the price level which I talked about in my previous lecture if you weren't there There's no such thing as the price level. I'll talk about that later And then Q is output sometimes it's T for the total volume of transactions or lowercase y for real output I prefer just Q. This is how Roger Garrison taught me and by golly I'm gonna follow Roger Garrison so in in V equals P Q All right, so the reason I saved V for last is because it's actually Defined by the other elements in this in this equation So V is called the velocity of money or the velocity of circulation of the money supply The turnover rate of the money supply or how many times the average dollar is spent in the economy which you Get by taking the total level of expenditure which is prices times the quantity P times Q and you divide it by the money supply So V is literally it's it's like when it's like super endogenous It's just defined by the other variables in the system and rock part in the man economy estate has a very good section Talking about how absurd it is to have a variable in this equation That's that's only there because you need it to make the two sides Equally each other and the reason this is important is because There's no such thing as the velocity of money in in purely Logically derived economic theory. So the velocity of money doesn't enter into anybody's choice There's no like when I'm going out to the grocery store to purchase, you know the elements to make a burrito perhaps I'm not considering. You know, what is the velocity of money today? I'm also not considering. What is the general level of prices? I'm making my own individual choices based on my value of the of cat the cash that I have my cash balance and also the Goods that I would use to to to construct the burrito. Okay, so the velocity of money is a is a strange Figure here, but in its defined as total level of expenditure P times Q divided by In the money supply. So if you have a hundred dollars in a very small economy a hundred dollars worth of spending and Only twenty dollars exist in this economy. So the true money supply the money supply for this economy is twenty dollars. It would take Spending that twenty dollars on average five times to achieve the total level of spending So that's a good way to think about what the velocity of money is. Okay, so how do we use or how do we think about this equation? so they It depends on who's writing which monitors your reading Freedmen probably the father of monetarism Assumed that the velocity of money is relatively constant doesn't change much from year to year and over the time spent that he was looking at it There's been some debate over whether or not he fudged the numbers or that he smoothed it out too much But in his his book a monetary history of the United States Over the time period that he was looking at. Yeah, it was relatively stable now outside that time period It's been shown that there have been some pretty big changes in the velocity of money, but for Friedman's Use of this equation he assumed the velocity stays constant and as a policy goal We're gonna try to stabilize prices so the policy goal of of Keynesians was to maximize employment and we want to maintain that full employment level of income the policy Goal for monetarists is to keep prices stable and the idea here is that if we keep prices stable That makes it easier for consumers and businesses to make decisions about the present in the future So we so if and if they can work confidently with less uncertainty Make those decisions because of a stable price level prices aren't changing too much then we'll have consistent economic growth Which would look like this so we'll have you know study increases in Q study increases in output Which means for the for this equation to balance out you have to have the same increases in M at the same time so simultaneous or or Yeah Balanced increases in output with increases in the money supply So here you can see immediately there's going to be a big disagreement between monetarists and Austrians about That about increasing the money supply Specifically because Austrians will say if you increase the money supply then you're going to start the boom bus cycle Okay, so this is one way of looking at the at the elements of the equation of exchange The way I've seen some monitors described the the Great Depression is that there was the Fed allowed this big decrease in the money Supply so they allowed all the bank failures, which caused the money supply to collapse so the money supply decreased and There was this big decrease in output and actually was so big and because of the the price the price level Excuse me the money supply was falling prices also fell in the velocity so we had this this Decreases all around so the the Great Depression was just money supply is falling velocity of money was falling as people They're more reluctant to to spend money so the velocity of money decreases prices also fall in output Obviously fell by about a third. So this is the monetarist This is really the the main apparatus that monetarists used to analyze macroeconomic phenomena Okay, so this is not cherry picking. So this is a direct quote from The book by Friedman and Schwartz so here They say changes in the behavior of the money stock have been closely associated with changes in economic activity money income and prices The interrelation between monetary and economic change has been highly stable monetary changes have often had an independent origin so If if we have a central bank that has discretion over the money supply, that's that's what they're talking about that independent origin They have not been simply a reflection of changes in economic activity So so we can use in as a policy variable So it's outside of the market system use in as a policy variable to achieve the macroeconomic ends that we would like Namely stable price level so that we can have consistent economic growth. Okay, so what are the Austrian responses to this? There are quite a few Probably the most fundamental response is that the analysis starts with data Availability as opposed to sound economic theory, so they're not starting from the ground up How do people make choices? Why do people purchase this as opposed to this or or talking talking about things from from a microfound out foundation as some Economist might say it starts with well, we've got this money supply data We can construct data on the velocity of money by taking total expenditures and dividing it by the money supply And we know it's true So it has to be true that the money supply times the number of times it's spent It must be equal to to total expenditure price times quantity So we we have this data So let's use this as our main apparatus of considering changes in the macroeconomy as opposed to the the Austrian method Which was we start with human action You get diminishing marginal utility you get law of demand law of supply and onwards and upwards until you construct this massive Business psychotherapy or critique of socialism for example Another criticism is that Well, this really isn't a criticism. It's just a statement MV equals PQ is a tautology There's really no argument over the truthfulness of this So even if you consider P an array of prices or a vector of prices You can still multiply it by the vector the horizontal vector of all of the different goods that are produced in the economy So you can still calculate total spending on the right hand side and that must equal. There's no argument over this The money supply times the the velocity if the velocity is defined as whatever number it takes to get these two sides to equal each Other so there's no argument over the the truthfulness of this equation The argument is over the cause and effect and just if you just look at an equation the cause and effect Isn't clear in fact if you notice the two examples that I went through one time I started with an increase in output and said well the what that implies is that we need to have a monetary policy like this and in the other example I said well suppose we allow the money supply to collapse What's going to happen to the other variables in the system? So so there's this big question over what which variable causes what? Which which one is endogenous? Which one is exogenous? What? What direction is is the cause and effect here and it's not clear just from the equation where that is as opposed to the Austrian Apparatus the Austrian theory where cause and effect is at every step along the way Here's a nice quote from Mises He says it's essentially nothing. He's talking about the equation of exchange It's essentially nothing but a mathematical expression of the untenable doctrine that there is proportionality in the movements of the quantity of money And of prices so this is not just an critique of the equation of exchange But also of thinking about changes in the money supply having a proportionate or even effect on the the general level of prices So so Mises did a total smackdown of this of thinking about That relationship as a mechanical one So if we increase the money supply there's going to be this sort of effect in general on the price level and thinking About all prices changing in one direction versus another direction Mises just totally smashed it so it turns out that there's no way to do that even in the angel Gabriel model There's no way to say for sure that all prices are going to rise evenly or decrease Evenly if there's some sort of change in the in the money supply Austrians would also say there's no such thing as the price level so as a number So we can't just plug in one number in this in this equation. There's no such thing as the price level it's The closest thing that we can get to is a constellation of prices one of my favorite analogies is the swarm of bees Analogy that the price the price level is like a swarm of bees So all of these prices that are moving in relation to each other the swarm can go up Then the swarm can go down But if you're just looking at the midpoint of the swarm of bees and you're sort of missing the whole point You're missing the all of the relative changes all of the canty on effects that might happen Another criticism is that there's there's no reason to seek to stabilize P in fact Austrians would say like the whole point of prices is for them to be able to move up and down in accordance with the The total stock of some good and the demand for that good. So we want prices to fluctuate We also want prices in general to be able to fluctuate in accordance with people's change in the demand for money So like we need prices and the entire price level to be able to fluctuate So there's so seeking to stabilize the price level is it seems first of all it seems sort of arbitrary like why why seek to Stabilize something that we need in the functioning of a market economy. We need prices to be able to change We've already talked about how V is pretty much meaningless There's a another quote from Mises here the the mathematical economists refused to start from the various individuals demand for and supply of money They introduced instead the spurious notion of velocity of circulation Fashioned according to the patterns of mechanics Mises also criticized the the idea of money circulating Period so money actually doesn't circulate. I didn't give a moment all dollars are held by somebody They're in somebody's cash balance So even in a transaction at one moment the money belongs to one person in the next moment It belongs to the other person It's not really good to think about money circulating through the economy even though I tend to use this phrase as well but if you're you if you're Thinking about the circulation of money either from a Keynesian or a monetarist perspective And you're sort of missing out on the fact that money is demanded to be held in individual cash balances by individuals as opposed to thinking about money is this independent Abstract variable that's that's flowing through the economy either in a circle or it's it's being Turned over like in the the quantity theory of money Once again similar to the Keynesian Critique that we saw from the Austrian is the policy prescription in a recession which is expansionary monetary policy Restarts the boom bus cycles so Friedman was Very famous for saying that the Fed should have stepped in during the Great Depression or during the initial crash in the money Supply they should have stepped in and prevented that decrease in the money supply by bailing out banks by increasing the money supply in various means So this is what causes the boom bus cycle for Austrians once again So this is a good analogy of the problems of monetarism from Roger Garrison This is a story of the the case of the cabbage eating Mississippi monster So we'll we'll work through this and see what Garrison has to say suppose that in late October of 1929 A thousand pound monster showed up in Mississippi It spent the next three and a half years eating all the cabbages in quite a few rabbits between Jackson and Pascagoula By early March of 1933 the monster weighed 4,000 pounds. It's a big monster Two investigators are sent to Mississippi to get a handle on the situation. One is from Vienna. The other is from Chicago The Vienna the V&E's investigator asked where in the world did this hideous thing come from so the analogy here Austrians are they see a business cycle and they look for what is what caused it what caused the boom that preceded this bust And they're gonna look for expansionary monetary policy They're gonna look for new money entering the the economy through the credit markets And so Garrison says here I seem to stack the cards against the Austrian It's it's hard to even imagine an insightful answer to this question unless of course the monster turns out to be the unintended consequence of some ill-conceived government sponsored by onyx project, so I wonder if Stranger Things could approach Roger Garrison for some ideas on Stranger Things season four. This would be a great story there The Chicago and shows up Shoves the Austrian aside and says never mind how this thing got here The real question is how did it grow from a thousand pounds to four thousand pounds? How did an ordinary run-of-the-mill garden variety recession excuse me monster? Quadruple its weight in 40 months So how do how do these small recessions turn into big recessions the Chicago answer of course is it was all the cabbages It's the cabbages fault that the the monster was eating. He couldn't get good data on the rabbits, unfortunately The correlation between cabbage consumption and weight gain leaves no doubt about the issue So this isn't this is a fun story to show how Monitorists look at recessions and business cycles compared to how Austrians look at business cycles So Austrians show up asked what caused where did the monster come from? Where did the the bust come from and they're gonna look at the boom? Chicagoans when they're looking at changes in the variables after the fact when they're looking at you know changes in the money Supply changes in price changes in output Once there is a bust then there they can talk about all they can talk about this all they want to But they're still not asking the right question, which is where did the bust come from in the first place? Just as an aside if you're interested in researching Sort of the shape of Friedman's business cycle model you should Google the plucking model PLU CK plucking model So like there's this long run growth trend and you can pluck down this line and get the bust and then the boom So the shape for the business cycle for monitor is is the same as the Keynesians is bust and then boom So so Keynesians and monitorists are in the same camp in terms of shape as well as the other things Which we'll get to in one second Milton Friedman died Before the financial crisis, but he lived long enough to have the opportunity to see what was happening While the housing bubble was being inflated And so a professor Salerno found this quote enough. I think import Friedman was interviewed by Charlie Rose December of 2005 when it was it was becoming very obvious that there was a housing bubble and Actually, even in 2002 in 2004 you can find some of the early earliest Austrian predictions of the housing bubble and the consequences that came so here's what Friedman said the United States is At the peak of its performance in its history There's never been a time in the United States when we have had the state of prosperity its level and its spread That we've had in the last 10 or 15 years There's never been a 15 year period in which there has been so little fluctuation in prices in inflation inflation has stayed around two or three Percent or less for the last 15 years. It's unprecedented I certainly do and then it's implied in the interview give credit to Alan Greenspan for that I think monetary policy is primarily responsible for it. So so Friedman totally missed I know it seems unfair because he's dead now, but I Mean if if we can show monitors didn't predict this not just Friedman But other monitors didn't predict this but Austrians did it seems like we should you know take a good look at the perspective In which they were predicting what what happened. Okay, so I said at the at the very end We would talk about the similarities between monetarism and Keynesianism and here they are So both start their analysis with data availability What sort of macroeconomic aggregates do we have available? What can we tally up? What can we count as opposed to the Austrian position, which is let's make an entire edifice of necessarily true apogetically certain Economic theory and then see what we can say about the economy as opposed to what the monitors and Keynesians do Which is what data do we have and what can what can we do with that data? The MV equals PQ equation I don't know if anybody picked up on this is actually the same thing as the Y is equal to E equation They're both tallying up total expenditures for the economy just in different ways So the Keynesians they'll disaggregate expenditure between consumption spending investment spending government spending and net exports the monetarists will Disaggregate it. This is actually there's less Disaggregation there's more aggregation on the monitor side than there is on the on the Keynesian side So at least for Keynesians they disaggregate Q into the different types of products that that people are consumed or consuming and using Consumption and investment in government, but we just have Q. We just have total real output there for the for the Monitor, so there's a higher level of aggregation even on the monitor side The policy prescription is the same so Keynesians would say yeah We can use expansionary monetary policy to get us out of a depression to solve the bust So we had the bust and then the boom Keynesians would add yeah We can also use fiscal policy monitors are generally distrustful of using fiscal policy and using that part of government to fix the problem But they're a okay with using monetary policy just like the Keynesians are so there's a total total alignment in terms of the policy prescription from both monitors and Keynesians and here I have a couple quotes here's one from Friedman We all use the Keynesian language in apparatus and he just says that he rejects the Keynesian conclusions So I would argue that I don't know about that his conclusions seem pretty similar a quote from Krugman that I got from a Robert Murphy blog post You can always count on Murphy to find those good Krugman quotes So Krugman said old-style Friedman type monitors who focus on monetary aggregates are essentially in the same campus Keynesians So why don't they just you know hug and kiss and and just make it clear to everybody in the world? So thank you very much