Money and Libertarianism

Here are my views on money and libertarianism:

1.  It’s an open question as to whether a purely private MOA/MOE regime would outperform a government system. Macro theory suggests a government system might be able to do better, but that doesn’t mean it would do better.  Both public and private regimes are likely to improve over time.

2.  We don’t really know what a private money system would look like in the 21st century.  Indeed it might be nothing more that private banknotes convertible into foreign fiat currencies.  That outcome would be slightly embarrassing for dogmatic principled libertarians.  It might even be a system that leads to a high rate of inflation (I doubt it).  We just don’t know.

3.  The arguments for giving the government a monopoly on the creation of money include the network effects of a single MOA, the wastefulness of a commodity MOA, and the wastefulness of non-price competition in the currency market.  There are also strong arguments against all these claims.  It’s also possible to have a hybrid system, with a government fiat asset used for interbank clearings, and then the rest of the money supply left to the private sector.

4.  I don’t think it makes sense to talk of monetary policy “fixing” the problems created by nominal wage stickiness, although I understand why people disagree with me.  Every day I walk by my TV without kicking it.  If I swung my leg to the right it would smash the TV. So in a sense my normal walk can be viewed as a “walking policy” that makes my TV work better than a silly walk would.  In the same way a stable monetary policy makes the economy work better than one that leads to wild fluctuations in NGDP.

Is my normal “walking policy” something that makes my TV work better?  Yes, but only in a very odd sense.  Ditto for sound monetary policy.  Rather it makes more sense to think of it as a policy that refrains from distorting the labor market.  The real issue here is discussed in point 5.

5.  If a pragmatic libertarian economist opts for a government run fiat money system, it is a compromise with “pure libertarianism” in much the same way as support for the EPA or anti-trust laws would represent a compromise with a 100% laissez faire regime.  But once that compromise has occurred, it makes little sense to talk of one monetary regime as being more interventionist than another.  All targets (The base, M2, P, NGDP, gold prices, exchange rates, interest rates, etc) are equally interventionist.  Perhaps the libertarian/non-libertarian distinction makes sense when considering central bank discretion vs. a futures market targeting approach.

Here’s another way to make the point.  Friedman was right when he told Mundell that floating rates are better than fixed rates.  But wrong when he claimed the regime was more “free market.”  An M2 target is just as interventionist as a stable pound/dollar exchange rate target.  It’s just different.

6.  Calling for the Fed to change it’s current policy doesn’t make one an “activist.”  Many highly libertarian Austrians are unhappy with current Fed policy.  I don’t want my daughter piloting a 747, but if she is suddenly thrust into the captain’s seat I’ll give her the best advice I can.  So would Bob Murphy.  I favor rules, not activism.

7.  If one is a pragmatic libertarian, it is not inconsistent to argue the free market is generally best, but also advocate patents, eminent domain, anti-trust laws, low wage subsidies, the EPA and the Fed.  That still leaves plenty of scope for free markets.  No country even comes close to having a government that small.  That makes the term “libertarian” a useful description of the person’s policy views.  As an analogy, most people would consider it useful shorthand to describe someone who wants the government to run 90% of the economy as a “socialist,” even if there remain dozens of large private businesses.

8.  It’s a useful exercise to consider the optimal monetary policy, regardless of whether the system is public or private.  Nothing should be accepted on faith, so at a minimum advocates of a purely private system need a benchmark for comparison when they argue that the macro outcome of that system would be “good.”  For Hayek, stable NGDP was the benchmark.  Some private money advocates (such as George Selgin) believe free banking would produce this sort of good outcome.  I’m a bit more skeptical.

PS.  Problems are inevitable under any regime.  The existence of problems doesn’t imply (contra Krugman) that a regime has failed.  Germany’s successful labor market reforms solved their high unemployment problem, and introduced a new and lesser problem of lots of low wage jobs and greater inequality.  The only thing that prevents the German policy from being seen as a widespread failure is the much worse situation in nearby countries that did not reform their labor markets.