Sunday, August 11, 2013

Final Response to Andy Katherman

About a month ago I wrote a post critiquing a video by Tom Woods and Jeff Herbener.  In the video Woods and Herbener were having a Q & A discussion on deflation.  You can find my initial write-up here as well as a link to the video.  Andy Katherman's originally reply is here, and my response to this reply can be found here.  Finally, Andy Katherman's latest reply can be found here.  

In my opinion, what I said was economically non-controversial and I think Woods and Herbener did not address deflation in an appropriate manner.  No economist that I have read argues that people will put off buying coffee indefinitely because of falling prices.  No economist argues the lowering of prices due to advancements in technology is a bad thing (the  argument in the video about computers implies this).  My original write up focused on the reality that in general economists agree that deflation is not going to hurt the economy as long as it is not caused by drastic cuts in the money supply.  If there is deflation caused by drastic cuts in the money supply there will be negative consequences to the economy just as there are negative consequences to the economy when there is a drastic increase in the money supply.  I want to emphasize that this is not a controversial position.

Andy Katherman, who is well read and very knowledgeable on the Austrian theory, turned the argument into a philosophical debate about what money is and why deflation is good when it is due to increased productivity.  While his replies were thorough they ultimately did not address the points I made.  If Andy is trying to argue that drastic cuts in the money supply will have zero negative effects on the economy he is simply mistaken.  Drastic cuts in the money supply will necessarily cause negative effects in the economy and there is nothing more to be said on that matter.

In his most recent response he makes arguments that I agree with, namely that the market can correct for the supply of money.  I never said it couldn't.  I initially argued that if we have a federal reserve its goal should be to maintain a stable dollar.  This seems highly non-controversial, for the alternative is to have an unstable dollar.  At this point, I am not arguing about the philosophical definition of a dollar etc.  It seems as though Austrians tend to direct the debate toward an avenue that fits their philosophical positions which is why arguing with Austrians is such a daunting task - instead of staying on the point I was making the debate is changed into what a dollar is.  I made a non-controversial claim that is not a part of Austrian theory and Katherman turns it into a debate that should not even exist, which is a debate between Austrian theory and Chicago school/monetarist theory.  Instead of discussing the economic consequences of deflation the debate is all of a sudden arguing against Milton Friedman's positions and why they are allegedly wrong.  I would have little to disagree with if Katherman had said, "I hold to the Austrian theory of deflation and money but agree that Herbener and Woods do not address deflation properly."  Instead, he defended the video and as I have already pointed out the video lacks economic rigor; when the arguments in the video are weighed they are found wanting.

I present this final question to Andy:  If the Fed cut the money supply by 50% in one day, would that have a negative effect on the economy?  If your answer is no, then I seriously question the Austrian lens you are examining the world with.  If your answer is that the market will adjust to the new supply that is a non-sequitur.  If your answer is yes, then you agree with my point.  This is a yes or no question, which Andy can answer by utilizing the Austrian "imaginary construction" method.  This question has nothing to do with the optimal supply of money so any answer alluding to this should be considered as dodging the question.  


  1. Hey Jacob,

    I'm sorry I'm not sure if I ever responded to this post and for whatever reason stumbled upon it.

    I know we have gone back and forth, around and around on this subject and I apologize if I have not been clear, shifted the context of the issue at hand, or simply confused you. So, I'll try my best to answer the following question:

    "If the Fed cut the money supply by 50% in one day, would that have a negative effect on the economy."

    First, it's hard to really quantify or define the "money supply" since we could consider the money supply different things. Are we talking about M0, M1, M2, M3, MZM or just strictly speaking the Fed's balance sheet? The reason this is important is because sometimes it is hard to qualify what counts as "money" at all (which is another critique of the very premise knowing what "the money supply" really is). Also, many people who live paycheck to paycheck and supplement their lifestyle with lines of credit consider said credit as "money" in the sense they are dependent on this to purchase goods, services, or simply keep their businesses afloat (especially considering we are deeply dependent on debt-based and uber low interest rates these days).

    Since I'm not exactly sure what you mean by "the supply of money" I'll simply say this. A sudden fall in the supply of money (and/or credit) would naturally have consequences. We could qualify these consequences as both positive ones and negative ones. So, if you want a "YES or NO" I would respond and say naturally YES there would be negative consequences or effects to the economy. But, I would also say in the same breath positive consequences will emerge as well. There will be winners and losers.

    Take for example the current increase in the supply of money which has been brought about by Bernanke's QEs I, II, III, ..... etc. I submit that there are and will be significant consequences (negative effects) which will occur by continuing to increase the supply of money and credit. The positive effects are that it keeps the party going and propping up institutions that otherwise would either be insolvent or bankrupt. Conversely, if the Fed tried to shrink the Balance Sheet/Money Supply by raising interest rates, it would also cause significant negative consequences to those dependent on the money printing (QE) and most likely cause many businesses to go under, etc. But, it would also have positive effects (which I won't go into now).

    Also, in the Austrian tradition holds there is a non-neutrality of money in that money is injected into the economy through certain institutions, sectors, and industries. So, the same holds for when the supply of money falls. If the Fed is going to try and shrink it's balance sheet (say from about $4T in securities it holds to $2T), I could present numerous reasons how this would have positive consequences and negative consequences on the economy in both the short run and long run.

    I could write more about this topic and would love to do so, but I think I'll stop here since I think I've answered your question - at least I hope I have - to your satisfaction.

  2. Yes you answered my question after a long debate. It will have negative consequences. Period.

    1. Okay, I couldn't remember if I did or not. Apologies if this was a repetition of what I had already stated.

      "It will have negative consequences. Period."

      Obviously I disagree only negative consequences will follow in both the short run and long run. It was pretty easy to grasp that a fall in the money supply (all other things equal), the purchasing power of money would necessarily increase. Naturally this has implications or effects that can be categorized as positive as well as negative.

    2. Did I ever argue at any point that it will have only negative consequences? NO!

      I argued in one of my first write ups that it will have positive and negative. This is getting ridiculous already. There will be negative consequences was all I was trying to get across, but since Austrians don't ever talk about this you lack the capability to see an elementary economic fact. Leave your paradigm for a moment and think critically.

    3. I apologize if I was talking past your point(s). That was not my intention.

      I recognize that some of your analysis was focused on the negatives of a general money deflation and/or a significant drop in the money supply as was evident preceding the Great Depression.

      But, I think we are focused on 2 different things. It's not that Austrians do not recognize the effects of a money supply contraction. Rather it is the cause and effect analysis of the contraction and the events (if any) that preceded said event that is of utmost importance - especially within the historical context of the 1920s/1930s and the economic history therein.

      I'll leave by saying many in the mainstream seem to think the golden years of the Fed was during the 1920s, yet Austrians have a far different critique of this and have gone to great lengths to show how the Fed sowed the seeds of what necessarily had to follow (a monetary contraction) from the inflationary policies of the 1920s and the artificial expansion of the money/credit which therefore altered the price of money and interest rates.

      It is true that Austrians and Chicago/Neoclassicals focus on different things regarding the 1920s/1930s since both have different interpretations of the economic history of that time as well as being armed with business cycle theory to apply to such an event.

  3. Andy,

    I am happy that you are able to finally concede the original point made many months ago. I find it interesting that you even engaged in such a debate if to only concede the point. I wonder if you entered the debate because the original critique was of a couple of Austrian adherents? By asking the question is to answer it.

    I look forward to when you concede your methodology is incorrect.


    1. Luke,

      Sorry but I fail to see how I conceded anything. I said there will be negative as well as positive effects or consequences.

      As for why I engaged in such a debate, that's a good and fair question.

      My answer would be this. I read Jacob's post on the topic of money, prices, deflation, and the Great Depression (which is something I've spent the better part of the last 5 years being interested in) and thought a dialog (back and forth) on this topic would somehow benefit me and others. That is, my most valued end at that time was forgoing the act of doing other things I enjoy (creating software, spending time with my 2 year old son and my lovely wife, and even sleeping) for the sake of corresponding with strangers about a topic and subject matter (economics) I feel is very important and significant.

      Those who consider themselves Austrian economists or Austro-libertarians are not above reproach and if someone's arguments or reasoning is flawed then I have no qualms with criticizing their position or arguments. But, the topic of deflation within the context of say the Great Depression is both complex and of utmost importance given the role the State has over the supply of money, credit, and interest rates.

      Do I think there are non-Austrians who have made contributions to the history of economic, political, and philosophical thought? Absolutely! Good ideas and reasoning (from wherever they originated) should be highlighted and praised while bad thinking should conversely be identified and corrected.

      In response to your last statement: "I look forward to when you concede your methodology is incorrect." I will say this.

      I have little faith either of us will concede anything (on this topic or about the proper methodology for economic theory) and I think you know this ...maybe you don't. But here is a little secret. I did not write the things I do on this blog or on my blog to convince YOU. I write the things I write to hopefully convince others who are searching for the truth and not to pad my ego.

      Good day

      Andy Katherman

    2. Andy, conceded the only point I was trying to make in my initial write up. Which maybe you forgot. All I said initially was that there would be negative consequences to deflationary policies and you got into what is the definition of money etc. You finally said in the comment there would be negative consequences. That is a concession. Also, to say I ever argued there would only be negative is either a lie or ignorance.

    3. I was referring to your above comment, "Yes you answered my question after a long debate. It will have negative consequences. Period."

      I was not lying nor do I believe I'm "ignorant" of anything (appreciate that very much). Now, if I was "confused" about something you said, that may be the case but again that wasn't my intention. I humbily recognize I am fallible.

      And you spoke about more than "deflationary policies" and recommended Friedman's monetary rule which by definition is purposely inflationary which I spent a lot of time critiquing.

      I did expand a little on the subject of money in the context of what the proper supply of money should be and how should it be determined. Consider me guilty on that, but I'm unsure that is a crime.

      Lastly, I'm happy to see we may "agree" on something but it might not be for the correct reasons. After all, Austrians and Chicagoans both hold the Fed responsible for sins of the Great Depression - but it is afterall for entirely different reasons with different explanations. Does that mean either side "concedes" anything to the other?