Getting the Measure of Money

The IEA have recently published my book on UK monetary policy, called "Getting the Measure of Money".

Throughout the last century or so, economic theory and history have marched together. At certain times, in certain places, new ideas (and the new packaging of old ideas) have captured the attention of the public and policymakers, and been adopted. At other times, and in other places, experiences have prompted an appetite for something different. Arguably, for much of the twentieth century we have seen the latter – the perceived failure of the existing system has required something new. The experience of the 1930s led to the rise of Keynesianism. The experience of the 1970s led to the rise of monetarism. I believe that the experience of the 2008 financial crisis has led to an ongoing revival in Austrian economics. Whilst I do not anticipate the Austrians matching the scale the Keynesian and Monetarist revolutions, the book is my modest attempt to help, by applying some specific Austrian insights to a UK context.

2012 saw the centenary of the original publication of Ludwig von Mises’ The Theory of Money and Credit. I wrote an article (co-authored with Robert Thorpe) that was published in the Review of Austrian Economics, justifying Mises’ position as a quantity theorist. We argued that Mises’ understanding of the equation of exchange differs from both of the conventional textbook versions, and warrants recognition as being a distinct contribution. Most importantly, the equation of exchange can be utilized for distinctly Austrian analysis.

Austrians might argue that you can’t show the business cycle in an aggregated way, but I would argue that the equation of exchange is still the best way to approach it. Indeed according to Ludwig Lachmann, “Austrian aversion does not pertain to these aggregates as such… It pertains to the construction of an economic model in which these aggregates move, undergo change, and influence each other in accordance with laws which are devoid of any visible reference to individual choice” (1978, p.8). It therefore isn’t non-Austrian to utilize economic aggregates, provided they have adequate microfoundations. As Cachanosky (2009) has pointed out, Mises rejected the use of price indices for pure theory. However,

“Their application is appropriate for history and politics. Catallactics is free to resort to them only when applying its theorems to the interpretation of events of economic history and of political programs. Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misrepresentation can possibly result and pedantic heaviness of expression can be avoided” (Mises 1949 [1996], p.423).

According to Egger (1995), Athur Marget was a neglected economist because he became known purely as a historian of the “Quantity Equation”, and this focus on aggregate variables was at odds with claims of being attentive towards methodological individualism and subjectivism. However Egger goes on to argue that Marget helped show that the “conceptual organisation” of the “Quantity Equation”, is “capable of the disaggregated, individualistic, and subjective analysis of temporal process that has always identified the Austrian method (Egger, 1995, p.20)”.

Finally, the aim isn’t to provide a definite “Austrian” account of the crisis, because that is simply too ambitious. Indeed as Opper (2002) says an intention to provide one would be falling into the same trap as the mainstream of the profession,

“it appears that the wholesale rejection of Austrian ideas in the post-war era went too far. This rejection reflected a drive by the economics profession to develop a detailed theoretical macroeconomic framework that applied to all business cycles, a goal that is now recognized as overly ambitious”

Rather, if you are engaged in UK monetary policy debate, but are worried that our standard indicators are misleading, this book shows what the Austrian school can add. Data and appendices are available on my personal website.