Re: von Mises and money

[bellofio@xxxxxxxxxxxxx (riccardo bellofiore)]

There has been recently on this list a discussion on von Mises and money,
in which the old debate of Patinkin vs Mises and the relative strengths and
weaknesses of the two positions has been raised again. I found both Roger
Koppl and the forwarded George Selgin's post very useful and sound. But let
me add the following:

(i) In his regression theorem Mises assumed that the price system is given
for any single agent because agents expect for the present period the
previous period prices, going back until the value of money is deduced from
the value of gold in the last period of a non monetary system. Mises was
replying to the charge of Hellferich according to which there was a
circularity problem in the deduction of the value of money from the
marginal utilities of the goods money can buy - here, of course, the
utility of money is seen only as an *indirect* utility, the utility of
money *spent*. In the Hicksian developments the reconciliation of the value
of money with the marginalist theory of value has been pursued within an
approach which underlines the *direct* utility of *holding* money. If we
are already in a monetary economy, Patinkin, which belongs to this second
tradition - started in fact by Karl Schlesinger in German in 1914, three
years after Mises' Theory of Money - shows that the circularity claimed by
Hellferich and refuted by Mises is non-existent. Mises is imagining an
'individual experiment', "where the amounts of the excess demands are the
variables to be determined and money prices are the independent variables
whose values *must* be given in order to conduct the experiment". When
determing the equilibrium money prices and then the value of money (the
inverse of the price level) we are rather doing a 'market' experiment.
"Clearly, there is no circularity in stating that the market excess
demand-equations derived from such individual experiments are then used to
determine the equilibrium money prices of the market experiment" (Patinkin
1962, p. 116).

(ii) A (the?) first problem which must interest PK authors is that the
General Economic Equilibrium model which is the basis of Patinkin's
solution is in fact a barter-like model which rules out the presence of
money. Thus Patinkin's solution is no monetary equilibrium at all.

(iii) The Austrian rejoinder to Patinkin is that even accepting his
'solution' one still needs to explain the origin of monetary equilibrium.
Mises' regression theorem in fact uses Menger's theory of the origin of
money to solve the problem of explaining the value of money in coherence
with marginalist value theory. There are at least two problems here. First:
is Menger's story the only one in town? For an alternative account which
affirms that debt money precedes commodity money see Heinshon and Steiger's
several articles - amongst them, "Private property, debt and interest. The
origin of money and the rise and fall of monetary economics ", Studi
economici 1983. Second, and more important: even giving Menger's story for
granted does not compell to accept the idea that the historical origin of
money tells us something on the logical core of the phenomenon of money.
Take Schumpeter, who indeed thought that" in very many  cases, although
perhaps not universally, the origin of money was to be found in the fact
that some commodities, being particularly salable, come to be used as a
medium of exchange"; and at the same time thought that" as a matter of
logic" the nature of money was "quite independent of the comodity character
of its material" - see, especially, Das Wesen des Geldes; but it is a
recurring theme in his works.

(iv) For (ii) and (iii) together I accept neither Patinkin nor Mises.

(v) A digression: there are places in which Mises did not deny in principle
that fiat money created ex nihilo from the State could exist - this would
rather have been, according to his own words, a confirmation of his theory
of the value of money, which he saw as non-metallist. But he thought that
fiat money was not even present in reality, if not as an evolution from
credit money, which evolved from commodity money.

(vi) There were two other big disagreements between Mises and Patinkin. The
second, and explicit, one was about the long run neutrality of money after
supply shocks in general economic equilibrium: Patinkin was in favour,
Mises was *against*. But the latter's argument was based on exogenous
unexplained changes in agents' subjective expectations during the
adjustment process. Here, once again, Patinkin's logic was more stringent
than Mises', though the latter was moving in the right direction.

(vii) The third, *implicit*, disagreement was about the reading of
Wicksell's monetary model. Patinkin saw Wicksell's model through the lens
of the gold standard and stressed the internal and external drains as the
readjustment mechanism to disequilibrium. Wicksell was the hero of the real
balance effect as the equilibrating process in the (finite) cumulative
process. Mises saw Wicksell's monetary model through the lens of the pure
credit system, in which there is no internal and no external drain, and
where in the cumulative process no authomatic readjustment mechanism is
working, *from the money side*. And Mises thought that Wicksell's position
was quite *right* on this issue - he even (wrongly, in my opinion)
criticizes Wicksell because he was not pursuing the pure credit case at its
extreme consequences, giving legitimacy at interpretations like the one
which will become the Patinkin's authoritative reading.

(viii) I think that PK authors should be especially interested in this last
feature of Mises's monetary theory. I have just written a paper in English
on this last topic (the abstract is below - it is a long paper, though it
is only a partial translation of a much longer paper in Italian where also
the problems of the nature of money, the regression theorem, the demand for
money, and the free banking relative to von Mises theory, are treated). I
would be happy send the paper to the interested parties, if there are out
there, since I am looking for comments.

riccardo

P.S.: It should be clear I am not a 'resident Austrian'. I am rather a
Marxian with strong PK and Schumpeterian influences. And I think Mises and
Hayek should be taken seriously.


ABSTRACT

Between Wicksell and Hayek: A New Look at Mises' Theory of Money and Credit

by Riccardo Bellofiore
Dept. of Economics
University of Bergamo

email: bellofio@xxxxxxxxxxxxx
voice: ++39 35 277505
fax:   ++39 35 249975


Abstract: A widespread reading of the Austrian theory of business cycles
sees the upper turning point as determined by the limits which banks face
to their lending power due to the exhaustion of reserves caused by
inflation (an authoritative example is Schumpeter 1954, p.1120). On the
other hand, Mises' followers underlines the 'capital-allocation effect'
against what are, in their views, the minor consequences of the Wicksellian
cumulative process, interpreted à la Patinkin as a readjustment mechanism
(see, for instance, Garrison 1981, ch. 4 and ch.5). The paper contends that
Mises' Theory of Money and Credit is rather grounded on the
'ultra-Wicksellian' idea that the pure credit system adequately represents
the working of a modern monetary economy; that in this system the supply of
bank credit at the going rate of money interest can go on without limit;
and that therefore the reason forcing banks to raise the rate of money
interest needs not operate through some binding bank-liquidity constraint.
It is only the rise in the relative price of consumption goods against
production goods (i.e. the rise in what Mises calls the 'interest on
capital'), reflecting unchanging individuals' spending behaviour, which
accounts for the end of inflation. However, for Mises it is in the power of
the banks to resist this readjustment, pegging the money rate of interest
at the lower level and inflating the economy with an increasing flood of
money: in this event, the only end to hyperinflation comes from the
breaking of the monetary system. Hayek mainly develops the second side of
Mises' argument, the capital-allocation effect, while the first side, the
ultra-wicksellian picture of the monetary economy, is either weakened or
taken for granted. The paper also recalls some neglected features of the
debate surrounding the book, with special emphasis on Wicksell's 1914
reaction to Mises's criticism. A puzzling omission in the English
translation of Mises' books is detected, and some criticism of Mises's
readjustment mechanism from a Keynesian-Schumpeterian point of view is
offered in the concluding remarks.


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Riccardo Bellofiore             e-mail: bellofio@xxxxxxxxxxxxx
Department of Economics         Tel:    (39) -35- 277505 (direct)
University of Bergamo                   (39) -35- 277501 (dept.)
Piazza Rosate, 2                        (39) -11- 5819619 (home)
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Italy
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