Monetary Tools and the Mainstream
Chris Westley recently asked a discussion group about "mainstream monetary economists who expressed doubts about conventional monetary tools over the last few years."
I recently saw Kris Mitchener of Santa Clara University present a paper "The Great Depression as a Credit Boom Gone Wrong," which he coauthored with the eminent Berkeley economist Barry Eichengreen.
They cite Hayek, Mises, Robbins and Rothbard and use data from a dozen countries to analyze the hypothesis that the Great Depression was a credit induced boom. They construct a rough measure of credit expansion and find that countries that had a greater expansion of credit in the twenties suffered a greater collapse in the thirties. (Mark Thornton cites the work in his paper on skyscrapers.)
(They examined this line of work because some people at the Bank for International Settlements appear to have been discussing the Austrian view.)
They relate the problem to those experienced within the past few years. I am not sure where Eichengreen stands on normative macroeconomics but after the presentation Mitchener still supported having active monetary policy. He said that even though Greenspan may not know where the economy is in the business cycle, Greenspan still should have the ability to get the economy out of a recession after the fact. As a footnote they also favor increased regulation of the financial sector to prevent credit expansion.
Comments (1)
The Eichengreen-Mitchener paper is a significant one--if only because these mainstream economists are taking the Mises-Hayek seriously. They see the Austrian theory as "complementing" other theories, including, of course, Eichengreen's own gold-based theory. They provide many disclaimers and state repeatedly that the extent of the credit expansion doesn't explain the depth and length of the ensuing depression--as if some defenders of the Mises-Hayek view believe that it does.
Their policy recommendation is essentially the productivity norm--but they never say so explicitly. They do realize that the monetarists' prescription won't do: The monetary rule doesn't rule out the credit-induced boom and bust. (My phraseology) They never consider denationalizing money.
Published: February 7, 2004 8:55 PM