 This is Mises Weekends with your host, Jeff Deist. Ladies and gentlemen, welcome back once again to Mises Weekends. We're joined as you can see by our good friend, Bob Murphy, Dr. Robert Murphy, who probably needs no introduction to most of you. He is one half of the Lara Murphy report. He is obviously one half of the Contra Krugman podcast with Tom Woods. And I think most importantly, we're really pleased that he is now part of the Free Market Institute at Texas Tech University, working down there with Ben Powell. We're hearing a lot of good things about students potentially choosing Texas Tech for their PhD in econ. So there's some growth and some energy there. So welcome, Bob, it's great to see you. Glad to be here. Thanks for having me. I'm actually gonna be joining Bob in a week. We're having an event in Chicago at the university club there. And also a couple of days later, we're having a weekend event in Seattle. One of the things I think Bob is gonna be discussing in Chicago is because we're in the home of the Chicago school and monetarism. He's gonna be talking about Austrian perspectives versus monetarist perspective on what's going on in the economy. And of course, there's other what people tend to refer to as free market schools of thought. There's supply side, which is kind of a school. There's public choice, et cetera. But really what we call the dominant free market schools are still Austrian versus Chicago. And Bob, I wanna get one thing out of the way. You and I have been talking relative to a Lara Murphy report interview. Economics is science. The libertarians wanna sort of use it for their convenience to reach these normative conclusions about how the world ought to be run. But there really is no such thing as free market economics. Would you agree with that? Yeah, I mean, I use the phrase a lot too just so people understand what I'm saying. But yes, you're right. Strictly speaking, economics is a value-free science. Mises stressed that. And it's important to make that point because to be able to use it, it has to be non-ideological. So just like it wouldn't make sense to say, oh, a Republican versus a Democratic physics or chemistry by the same token, yes, economics, science is what it is. And it doesn't matter what your, or it shouldn't matter what your political views are in terms of government policy prescriptions. Right, and sometimes our opponents use it against us. They dismissively refer to Austrians and what they mean is libertarians. So in other words, they're using the term synonymously. Yeah, and it's, there is an affinity, I would say. And so I don't think we should pussyfoot around that. And I've used the term like referring to someone as an Austro-libertarian. And some people hate that term. So where it comes from, of course, is I mean, Murray Rothbard is probably the prime example of this, is that if you are a libertarian in terms of your views on the proper role of, how should force be used if you endorse the non-aggression principle? And so you don't think it's right, it's moral to initiate force against somebody. Well, if you were a Keynesian in terms of your economics, I mean, those two things could go hand in hand. There's no logical contradiction, but it would be sort of like, ah, yes, the government does have the power to prevent recessions and to spare millions of people unemployment, but I would just find it immoral for them to do so. And so it's sort of reassuring for people who the non-aggression principle sounds great to them, but they're just worried, oh, gee, if we actually followed that, what would be condemned to misery and what we suffer through depressions every decade? So it's sort of nice to realize, oh, wait a minute, no, actually violating the non-aggression principle, my scientific background and training shows me leads to bad consequences also. Well, economists certainly would like to think that their ideas can affect the real world, right? That's part of the, that's one of the big criticisms that we're all living in this theoretical bubble, but what I wanna talk about today is the monetarism for a bit. Alan Meltzer, who was a monetarist died earlier this week. There are a lot of obits going around about him. Interestingly, he was not actually a Friedmanite. I think we tend to think of Chicago School and Friedmanism and monetarism as wholly synonymous when perhaps they aren't. So Joe Salerno has an article this weekend on the Mises.org website that's sort of criticizing Milton Friedman and talking about one of the premises of Friedman's life work was on all sort of paraphrase that the demand for money is in fact very stable. And this is something that Salerno criticizes in this piece. So talk to us a little bit about the concept of demand for money and also velocity of money. What is velocity of money and should we care about velocity of money? Okay, sure. And we should probably give the caveat, we're gonna try to keep this at a high level and not get too much into the weeds here just for people who may never heard these things before. No, I want you to dumb it down for me. Yes. So probably a good thing to start with is the so-called equation of exchange, which is you'll see like MV equals PT. So that's the amount of money times the velocity of money V is an accounting principle equals the P, the price level times T, the number of transactions. Or sometimes you'll see it with Q with the amount of real output. And so Friedman and others who are stressing the monitor isn't a monetary approach to things. They like to start with that equation, which it's a tautology, it's true. And so in that thing, it's money, how many dollars, think of it in terms of the US, how many dollar bills are there? And then the velocity would mean how many times in a given period, like a year, does the typical dollar bill turn over? Does it change hands? So if you think about that, okay, except for the moment that definition, then N times V is the total amount of expenditures, right? How many dollars are there times, how many times they change hands? And then that has to equal the right hand side of the equation, which is the average price of a good times the total number of transactions. So what's the point of that? Well, if you then wanna focus on the money supply, if you wanna sort of keep things from getting distorted, Friedman's point is, hey, as long as velocity is fairly constant, that V will then, we can kind of keep things moving stable. What if M just rises at a predictable level year after year, a certain percentage, let's say, as long as V's not bouncing around, well, then now we've got stability. So that means P times T has to rise stably. And so the idea was this will just cause a gradual rise in the price level over time and everything's predictable. So we're not distorting the economy from the monetary side. So that's kind of where he's coming from. So then there's lots of problems that Austrians have raised with that sort of perspective. So one thing, I think the most fundamental is Murray Rothbard's pointing out, those definitions like P, the average price level, what does that even mean? People don't think in terms of price levels. There's particular prices of particular goods and given transactions and that's how people think entrepreneurs just care about a certain subset of prices of their inputs and what they project to be the outputs. And so nobody ever uses that. And in fact, that kind of flies in the face of the whole subjectivist-marginalist revolution of the 1870s, where we threw out the old classical view of thinking in terms of just macro holistic things and focused on individual transactions on the margins. So that's one problem with that approach is it's sort of harking back to the classical tradition rather than the modern view of how you analyze action. And then as far as what Salerno was getting at, Joe Salerno, again, Friedman's whole enterprise there breaks down if, like say during the business cycle, what if the demand to hold money? So if you really want to hold money and hoard it as it were, that means measured velocity would fall, right? Because now people are holding onto money, so in terms of measuring it, they would change hands fewer times, people aren't spending as much. So if V can bounce around like crazy for its own, let's say, endogenous reasons, well then even if you did stabilize the growth of them, you're not achieving what the alleged goal was. So that's part of the issue. And Joe was talking about this new paper by these three econometricians, who don't seem to have a dog in the fight. And they're just pointing out, hey, what Milton Friedman and his co-author Anna Schwartz did in their empirical work, they smoothed a lot of this data by averaging it and so on and detrending it and blah, blah, blah. And so for them to say, oh, money demands pretty much stable, that's not in the actual data. They kind of impose that. And then use that as one of the assumptions to get them with their theory to work. Well, so the analogy that Milton Friedman uses is the accelerator and the brake. Monetary money supply can be an accelerator or a brake on the economy. I mean, to us anyway, this sounds an awful lot like meddling. This sounds like a lot like demand side stimulus using fiscal or government policy as the accelerator or the brake, which we think of as a sort of a Keynesian notion. And it also seems to me that Austrians say, well, what's so bad about people deriving some sort of satisfaction from money held? This idea that they're stuffing it in their mattresses and it's not out there pinging around and creating velocity. Well, is that the government's business or is that a central bank's business? Right, so yeah, there's two separate issues here. One is just sort of the, as economists, how are we gonna view things and modeled, if you will, or just characterize it? And you're right. So Mises, for example, pointed out often that there's no such thing as money in circulation, right? And it's wrong to think of it as dollar bills moving around the economy like a stream or something that you said, no, at any given moment, every piece of money is owned by someone. It's in somebody's cash balances, right? Even if you're in the middle of a transaction, it's in my possession that when I hand over my $20 bill and get the goods, the titles change hands and now the merchant is the one who owns that $20 bill. But at any given moment, there's no such thing as money that's in limbo that's not owned by somebody. And so the modern, the way certainly Mises established it, but it's not just the Austrians, even other schools of thought, they analyze the demand to hold money in terms of the desire to have a certain amount of cash balances. And so yes, the public derives utility from holding money just like you derive utility from other things. I mean, the specific motives are different, but in terms of as economists, how are we gonna analyze it? That, yeah, you should use the same subjective marginal utility approach. And Mises, in fact, was one of the pioneers there. So that's one issue of what's problematic with this approach, but also you're right in terms of the policy prescriptions that, yes, there actually is an affinity between Keynesianism and freemenite monetarism in that respect that the Keynesians say, oh geez, aggregate demand collapsed during the 1930s. The government should have run big budget deficits in order to prime the pump and stimulate demand. Whereas the freemenites, they're not that far different. They're saying, oh yeah, the demand to hold money increased greatly and the quantity of money collapsed. And so the way, the government needs to fix that. And the method though is not running budget deficits, but by pumping in money from the Federal Reserve. So either way, they're both sort of agreeing the free market left to its own devices would have spiraled down into oblivion. And they're just disagreeing on the particular way that the interventionists, you know, wonk economists are gonna come in and save the day. Well, that is interesting that there's that parallel. And of course, when we're talking about, there is sort of a new mode of thought known as MMT, Modern Monetary Theory. And I know you've tangled with some of its proponents. But what's interesting is that MMT also imagines this priming the pump versus applying the brakes, but through tax policy. So I, you know me, Bob, I'm suspicious of anything with the word modern in it. Then it comes to economics. Would you agree that monetarism is a fundamentally macro outlook and macro versus micro is something that a lot of Austrians have challenged as a meaningless distinction? Yeah, I would definitely agree with that. Like I say, I mean, just that's part of the problem methodologically speaking with the monetarist approach and starting from the MV equals PT sort of framework. It's not just that I would differ with the policy conclusions. A lot of economists would derive from starting with that but also just in principle, like we don't talk about, we wanna say, what's the price of tomatoes? We don't say, okay, we're the total amount of tomatoes in the economy. How many times on average does a tomato change hands? And it's not just that would be a weird way of doing it. That would be completely at odds with the modern price theory in terms of valuing subjective individual items and on the margin. Like, and again, this isn't just an Austrian thing. And this is modern economics now. He's using that term modern since the 1870s. So yes, the monetarist approach, they're starting with the total quantity of money and they're using economy wide aggregates that don't go into any individual's calculations or reasoning when an individual decides, what do I wanna do right now? Or an individual business person decides, what actions do I wanna take? You don't need to know what's the total quantity of money or what's the average price level. That's an empty concept. Well, Bob, let's talk about monetary policy today. What would a monetarist versus an Austrian say about sort of the current monetary policy? We've had extraordinary monetary policy since the crash of eight. We've had successive rounds of quantitative easing. And as a result, we've had interest rates kept what we might say artificially low through all this bond buying and this dramatic expansion in the Fed's balance sheet. So what would be a monetarist view of that or an Austrian view of that? Well, I think for sure, and obviously with all these things there's gonna be nuances among individual exponents. But I think in general, the Austrian school has been very skeptical of the things that the Fed has done since the financial crisis that they stress, hey, the interest rate is a price that actually has some social function to perform. And you're not doing the economy any favors by pushing interest rates down to basically 0% according to certain measures and just leaving them there for years on end that this screws up relative prices. It's not merely an issue of, oh, is there enough liquidity or whatever term you wanna use in the economy that you're screwing up relative prices and that's kind of the essence of the Mises Hayek approach to the business cycle that they're not just looking at things like, oh, what's the rate of price inflation and so on. So I think that's the Austrian concern and that a lot of male investments have been made since the Fed engaged in these extraordinary measures. And so entrepreneurs are not investing in the proper lines. And so the whole capital structure of the economy is out of whack. And that type of analysis, you can't even do that in other schools of thought because they don't have a rich enough capital structure in their models. They just have things like the ISLM curve intersecting or what have you or aggregate supply, aggregate demand. So you can't even tell the Austrian story in their framework. As far as monetarists, I know for sure what this new school that calls themselves market monetarism. So they look as the founders, they think their founders are guys like Milton Friedman and so on, but they think they've moved beyond and tweaked it. And so their view, they think what needs to be stabilized is the growth of nominal gross domestic product, right? So like how many total dollars are spent on things or income earned year after year. So not adjusting for price inflation, but just saying, you know, what's the total amount of GDP every year in nominal terms. If you can keep that growing at a steady rate, that's all the Fed should do. So it's ironic, they look at what happened in 2008, 2009 is the Fed being asleep at the wheel and letting nominal GDP growth collapse. So they think that, you know, their diagnosis of the great recession is to say that the Fed had an extraordinarily tight monetary policy. So again, just showing the huge difference here in perspective, you know, whereas most other, even Keynesians were saying, oh yeah, the Fed was inflating, it was really loose. It just wasn't enough. I think the standard Austrian would say, oh yeah, the Fed was inflating was really loose and that's gonna set us up for another crash. This is what got us into the problem the first time after the dot com crash, loose policy blown up a housing bubble. We're just doing the same. Whereas the market monitorists who view themselves as like the modern inheritors of the Friedmanite tradition are saying, no, the Fed was way too tight. Last thing I'll say though is Anna Schwartz did have an op-ed, I think like in the Wall Street Journal where she had been very critical of what Bernanke was doing. And so, you know, she's the one who has the most credibility and authority to say, you know, what would the Friedmanite position have been? So she was concerned about, I mean, because what the, another aspect of all this is Friedman wanted the Fed to follow a rule so that everybody knew what was gonna happen and not allow discretionary, you know, policy. And so clearly part of what was going on with Bernanke's stuff with all those extraordinary measures is nobody even knew what the Fed was doing. You know what I mean? Like they were bailing out getting loans, short-term loans to banks and not even telling the public which banks were getting the loans because all that would defeat the purpose of the program. So that sort of stuff I think is hard for anybody to defend. But as I say, a lot of the modern market monitorists were saying, wow, they were doing that stuff. But yeah, the important thing was to bolster liquidity because there wasn't enough total aggregate demand, which again is a very Keynesian sort of analysis. Well, I think one problem with some of these rules-based models like the Taylor rule is that there's political pressure. Rules are meant to be broken, especially when there's a crisis, so-called. And I would add, if you read Joe Salerno's obituary of Alan Meltzer, again, a monitorist, a very prominent monitorist who died earlier this week, Meltzer also came out as a harsh critic of QE. So let me ask you this, Bob. Who were some of the names who would be modern monitorists that, would they be familiar to us? Yeah, I mean like Timberlake and Meltzer. And as I say, a lot of them, it's, I'm more familiar with the people who are doing the market monitorism thing, you know, Scott Sumner and even guys like George Selgen, who's an Austrian, but is very friendly with those guys. So that's part of the, as far as Austrians are concerned, that's the issue is there's a lot of people trying to say the so-called free banking approach. You know, oh, maybe that's compatible with market monitorism, maybe just a matter of, you know, with the free market implement, you know, decentralized stable NGDP growth. You know, so that's where some of the issue is coming in. So there's, to my mind, it's, I'm more concerned in the stuff I've been doing, if since I think market monitorism is wrong to focus on them, because there's not so much danger of a young Rothbardian, let's say, going over to Keynesianism, whereas there is a lot of superficial, at least affinity, between the modern market monitorists and the Austrian school. Now, did you ever have an opportunity to meet Milton Friedman? No, no. I'm told, I think Lou Rockwell has been there, and I told you he had a beautiful apartment near Coyt Tower in San Francisco. People who are familiar will know that's a very, that's one of the higher points in the city. It has beautiful views and everything. Let me sort of ask you this. We're almost out of time. And we talk about infighting amongst various schools, amongst libertarians, amongst economists. But first of all, is it really infighting when let's say Austrians would say that we have a radically different approach to interest rates, to how money is even provided in a society outside of a central bank? I'm not so sure that's infighting versus just a fundamentally different perspective on money, which is, along with goods and services, basically half the economy. Right, I totally agree with you. And that's, I think, yeah, sometimes the way that manifests itself is people might say, oh, you Austrians are always just trying to be real nitpicky and focus on the one or two things where you disagree with Friedman. Can't you just all agree you're mostly on the same side and it's the Keynesians who are the enemy or whoever the Socialist? And yeah, so I do try to say, I read Friedman when I was younger, he was one of the influential people in my development. So certainly he was important in that respect, but the problem is, because they're considered such an authority on libertarian policy prescriptions or what have you, it gives guys like Paul Krugman can easily say, oh, even Milton Friedman agrees, da, da, da, da, da. And so I think that's why it's important when there is a sharp divide. And also, Rothbard pointed this out a lot that it's funny that a lot of economists are often, the thing that they're known for, their specialty, is the area where they're really not very good. So with Friedman, yeah, I love a lot of what he does, but what he's really known for and famous for is monetarism and his views on central banking. And that's one area where I really disagree with him fundamentally. And again, it's not merely like an ideological thing like, oh, he thinks the Fed should do such or such and I disagree. And again, it's more of a methodological thing that if Friedman's views were applied to oil, they would seem socialist, right? Like, oh, we should have a group of experts who sit around and come up with a rule for how much oil output should grow each year. And as long as the market was informed of that and they knew ahead of time, oil output would grow 3.2% year after year, that would take oil's influence out of the economy. We wouldn't have reset. That would be crazy. What are we talking about? No, I mean, what if the demand for oil changes? So yes, the same thing comes to money. And I think Austrians are more consistent in both theory and history, looking at saying there's no reason to not have free enterprise and money in banking just like we have it in other sectors and all the reasons that government, cartelization, command and control policies in the computer industry or the car sector, we can all see how that would be horrible. So why would you wanna let the government do that with banks and money? That doesn't make any sense. Well, we'll leave it with that, but to be fair to the monetarists, there was a period where the Austrian school was not as lively as it is now. Let's say maybe the 50s to the 70s where Milton Friedman and the monetarists were doing the heavy lifting, presenting the non-Keynesian approach to things. Yeah, I mean, what is great about Friedman, like the way they blew up the Phillips curve, let's say. So that Friedman was great on that, coming up with the permanent income hypothesis, things like that. So showing that yes, even if statistically, it looks like there's this short run Phillips curve, meaning if there's more inflation then unemployment goes down temporarily. It seems like there's this trade-off that the policymaker can exploit. Friedman was one of the great guys, both theoretically and empirically, to show that's an illusion. Once the public catches on to that's what the policymaker's doing, the Phillips curve itself would move. And so that alleged trade-off would just move against you. And so you can't permanently boost the economy by just pumping in money. You're just gonna end up with the worst of both worlds. So yeah, Friedman was great in attacking hydraulic Keynesianism. Well, with that we're out of time. Bob, I wanna thank you so much for joining us. Ladies and gentlemen, if you're in Chicago or they're abouts this coming Thursday, the 18th, I believe, come join us at the University Club there. If you happen to be in Seattle or the Pacific Northwest, we'll be there on Saturday morning, the 20th at the Town Hall venue in downtown Seattle. And ladies and gentlemen, have a great weekend. Subscribe to Mises Weekends via iTunes U, Stitcher and SoundCloud, or listen on Mises.org and YouTube.