milton friedman

Error message

Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/

White and Hogan on Hayek and Cassel on the Causes of the Great Depression

Published by Anonymous (not verified) on Sun, 27/12/2020 - 4:35pm in

Lawrence White and Thomas Hogan have just published a new paper in the Journal of Economic Behavior and Organization (“Hayek, Cassel, and the origins of the great depression”). Since White is a leading Hayek scholar, who has written extensively on Hayek’s economic writings (e.g., his important 2008 article “Did Hayek and Robbins Deepen the Great Depression?”) and edited the new edition of Hayek’s notoriously difficult volume, The Pure Theory of Capital, when it was published as volume 11 of the Collected Works of F. A. Hayek, the conclusion reached by the new paper that Hayek had a better understanding than Cassel of what caused the Great Depression is not, in and of itself, surprising.

However, I admit to being taken aback by the abstract of the paper:

We revisit the origins of the Great Depression by contrasting the accounts of two contemporary economists, Friedrich A. Hayek and Gustav Cassel. Their distinct theories highlight important, but often unacknowledged, differences between the international depression and the Great Depression in the United States. Hayek’s business cycle theory offered a monetary overexpansion account for the 1920s investment boom, the collapse of which initiated the Great Depression in the United States. Cassel’s warnings about a scarcity gold reserves related to the international character of the downturn, but the mechanisms he emphasized contributed little to the deflation or depression in the United States.

I wouldn’t deny that there are differences between the way the Great Depression played out in the United States and in the rest of the world, e.g., Britain and France, which to be sure, suffered less severely than did the US or, say, Germany. It is both possible, and important, to explore and understand the differential effects of the Great Depression in various countries. I am sorry to say that White and Hogan do neither. Instead, taking at face value the dubious authority of Friedman and Schwartz’s treatment of the Great Depression in the Monetary History of the United States, they assert that the cause of the Great Depression in the US was fundamentally different from the cause of the Great Depression in many or all other countries.

Taking that insupportable premise from Friedman and Schwartz, they simply invoke various numerical facts from the Monetary History as if those facts, in and of themselves, demonstrate what requires to be demonstrated: that the causes of the Great Depression in the US were different from those of the Great Depression in the rest of the world. That assumption vitiated the entire treatment of the Great Depression in the Monetary History, and it vitiates the results that White and Hogan reach about the merits of the conflicting explanations of the Great Depression offered by Cassel and Hayek.

I’ve discussed the failings of Friedman’s treatment of the Great Depression and of other episodes he analyzed in the Monetary History in previous posts (e.g., here, here, here, here, and here). The common failing of all the episodes treated by Friedman in the Monetary History and elsewhere is that he misunderstood how the gold standard operated, because his model of the gold standard was a primitive version of the price-specie-flow mechanism in which the monetary authority determines the quantity of money, which then determines the price level, which then determines the balance of payments, the balance of payments being a function of the relative price levels of the different countries on the gold standard. Countries with relatively high price levels experience trade deficits and outflows of gold, and countries with relatively low price levels experience trade surpluses and inflows of gold. Under the mythical “rules of the game” under the gold standard, countries with gold inflows were supposed to expand their money supplies, so that prices would rise and countries with outflows were supposed to reduce their money supplies, so that prices fall. If countries followed the rules, then an international monetary equilibrium would eventually be reached.

That is the model of the gold standard that Friedman used throughout his career. He was not alone; Hayek and Mises and many others also used that model, following Hume’s treatment in his essay on the balance of trade. But it’s the wrong model. The correct model is the one originating with Adam Smith, based on the law of one price, which says that prices of all commodities in terms of gold are equalized by arbitrage in all countries on the gold standard.

As a first approximation, under the Smithean model, there is only one price level adjusted for different currency parities for all countries on the gold standard. So if there is deflation in one country on the gold standard, there is deflation for all countries on the gold standard. If the rest of the world was suffering from deflation under the gold standard, the US was also suffering from a deflation of approximately the same magnitude as every other country on the gold standard was suffering.

The entire premise of the Friedman account of the Great Depression, adopted unquestioningly by White and Hogan, is that there was a different causal mechanism for the Great Depression in the United States from the mechanism operating in the rest of the world. That premise is flatly wrong. The causation assumed by Friedman in the Monetary History was the exact opposite of the actual causation. It wasn’t, as Friedman assumed, that the decline in the quantity of money in the US was causing deflation; it was the common deflation in all gold-standard countries that was causing the quantity of money in the US to decline.

To be sure there was a banking collapse in the US that was exacerbating the catastrophe, but that was an effect of the underlying cause: deflation, not an independent cause. Absent the deflationary collapse, there is no reason to assume that the investment boom in the most advanced and most productive economy in the world after World War I was unsustainable as the Hayekian overinvestment/malinvestment hypothesis posits with no evidence of unsustainability other than the subsequent economic collapse.

So what did cause deflation under the gold standard? It was the rapid increase in the monetary demand for gold resulting from the insane policy of the Bank of France (disgracefully endorsed by Hayek as late as 1932) which Cassel, along with Ralph Hawtrey (whose writings, closely parallel to Cassel’s on the danger of postwar deflation, avoid all of the ancillary mistakes White and Hogan attribute to Cassel), was warning would lead to catastrophe.

It is true that Cassel also believed that over the long run not enough gold was being produced to avoid deflation. White and Hogan spend inordinate space and attention on that issue, because that secular tendency toward deflation is entirely different from the catastrophic effects of the increase in gold demand in the late 1920s triggered by the insane policy of the Bank of France.

The US could have mitigated the effects if it had been willing to accommodate the Bank of France’s demand to increase its gold holdings. Of course, mitigating the effects of the insane policy of the Bank of France would have rewarded the French for their catastrophic policy, but, under the circumstances, some other means of addressing French misconduct would have spared the world incalculable suffering. But misled by an inordinate fear of stock market speculation, the Fed tightened policy in 1928-29 and began accumulating gold rather than accommodate the French demand.

And the Depression came.

Reaganland: Public Education and America’s Right Turn

Published by Anonymous (not verified) on Fri, 18/12/2020 - 12:59am in

In the latest episode of Have You Heard, we talk to Rick Perlstein, author of the monumental new history Reaganland, about America’s ‘right turn’ against public education. As Perlstein recounts, public schools were at the very center of the culture wars of the 1970’s. From parents in the northeast revolting against court-ordered busing to the textbook wars of Kanawha County, West Virginia that culminated in the bombing of the school board offices, 1970’s America was a site of simmering resentment, which was then weaponized by a rising generation of new right activists.

Complete transcript of the episode is here. The financial support of listeners like you keeps this podcast going. Subscribe on Patreon or donate on PayPal.

Jennifer and Jack’s book, A Wolf at the Schoolhouse Door, is out and available wherever you buy books!

Have You Heard · #103 Reaganland: Public Education and America’s Right Turn

14 March 1979: Foucault on Programming Human Capital (XXVIII)

Published by Anonymous (not verified) on Tue, 17/11/2020 - 10:17pm in

I would like to bring out some aspects of American neo-liberalism, it being understood that I have no desire and it is not possible to study it in all its dimensions. In particular, I would like to consider two elements which are at once methods of analysis and types of programming, and which seem to me to be interesting in this American neo-liberal conception: first, the theory of human capital, and second, for reasons you will be able to guess, of course, the problem of the analysis of criminality and delinquency.
First, the theory of human capital. I think the interest of this theory of human capital is that it represents two processes, one that we could call the extension of economic analysis into a previously unexplored domain, and second, on the basis of this, the possibility of giving a strictly economic interpretation of a whole domain previously thought to be non-economic.
First, an extension of economic analysis within, as it were, its own domain, but precisely on a point where it had remained blocked or at any rate suspended....Starting from this criticism of classical economics and its analysis of labor, the problem for the neo-liberals is basically that of trying to introduce labor into the field of economic analysis. A number of them attempted this, the first being Theodore Schultz, who published a number of articles in the years 1950–1960 the result of which was a book published in 1971 with the title Investment in Human Capital. More or less at the same time, Gary Becker published a book with the same title, and then there is a third text by Mincer, which is quite fundamental and more concrete and precise than the others, on the school and wages, which appeared in 1975.--Michel Foucault, 14 March, 1979,  translated by Graham Burchell, Lecture 9, The Birth of Biopolitics, 219-220.

Perhaps, some other time I return to neoliberal history of classical economics that Foucault summarizes in the part I skipped in this quote. And in what follows I also ignore Foucault's acuity in grasping the inner meaning, as it were, of intellectual trends in a different rather technical discipline in real time. 

In the first quoted paragraph, Foucault introduces the central theme of the lecture and, perhaps, of the whole book without alerting his audience (or himself) that he has done so. There are features of American neo-liberalism (in his discussion he mostly confines himself to Chicago economics) that are "methods of analysis and types of programming." That papers and books in economics contain methods of analysis is no surprise. But Foucault insists, without initially making a big deal about it, that they are simultaneously types of programming. And so the question is what (or who) is being programmed and what counts as a program in this context?

While Foucault uses programming (and its cognates) throughout the lecture, Foucault only offers his answer in the final two sentences of lecture nine: "programming of policies of economic development, which could be orientated, and which are in actual fact orientated," toward the development of human capital. (233) So, it is humans and, perhaps, whole societies that are to be programmed. The purpose of this programming can be varied. For, example the focus on developing human capital is to stimulate economic development (locally and internationally) from which many things may follow. (The analysis of delinquency may serve other ends.) 

I do not know if in the 1970s, a French audience, would have heard 'programming' as the thing we do to write software or make computers and robots run. Perhaps, they heard it terms of scheduling. Or perhaps they heard it as an ironic counterpart to the programmatic political projects ordinarily associated with five year social planning. But it is quite clear that Foucault treats these economists not merely as offering (who?) new kinds of descriptions of society, but also offering a new kind of praxis

Foucault's claim here sits uneasily with the self-understanding of many Chicago economists of the period; they, following Milton Friedman's lead , generally claim that they make a sharp description between the descriptive ('positive') and prescriptive ('normative') elements in their work; while leaving practice ('art') largely to the side. So, for example, 

THE new economic approach to political behavior seeks to develop a positive theory of legislation, in contrast to the normative approach of welfare economics. The new approach asks why certain industries and not others become regulated or have tariffs imposed on imports or why income transfers take the form and direction they do, in contrast to asking which industries should be regulated or have tariffs imposed, or what transfers should be made.
Both the normative and positive approaches to legislation, however, generally have taken enforcement of laws for granted, and have not included systematic analyses of the cost of enforcing different kinds of laws. In separate studies we recently formulated rules designed to increase the effectiveness of different laws. We proposed that offenders convicted of violating laws be punished by an amount related to the value of the damages caused to others, adjusted upwards for the probability that offenders avoid conviction. Gary S. Becker & George J. Stigler. "Law enforcement, malfeasance, and compensation of enforcers." The Journal of Legal Studies 3.1 (1974): 1.*

Stigler and Becker (both Chicago Nobels eventually) present themselves as doing something on the 'positive'/descriptive side of things. In their work they explore the costs of enforcements. Yet, even if one grants that their work is firmly grounded in empirical analysis, it is not so odd that Foucault thinks they are doing what he calls programming. For, they offer a rule of punishment intended to decrease 'cost' of punishment and increase the 'effectiveness' of these. To an outsider that does seem prescriptive.  Why do Becker and Stigler not call that normative analysis? To an outsider this seems like obscurification. 

The beauty of Foucault's treatment in lecture 9, is that he shows that part of the confusion stems from the way Robbins' definition of what economists do gets (ahh) operationalized in economics. I quote Foucault (initially quoting Robbins):

“Economics is the science of human behavior as a relationship between ends and scarce means which have mutually exclusive uses.” You can see that this definition of economics does not identify its task as the analysis of a relational mechanism between things or processes, like capital, investment, and production, into which, given this, labor is in some way inserted only as a cog; it adopts the task of analyzing a form of human behavior and the internal rationality of this human behavior. Analysis must try to bring to light the calculation—which, moreover, may be unreasonable, blind, or inadequate—through which one or more individuals decided to allot given scarce resources to this end rather than another. Economics is not therefore the analysis of processes; it is the analysis of an activity. So it is no longer the analysis of the historical logic of processes; it is the analysis of the internal rationality, the strategic programming of individuals’ activity. (222-223)

Economics stops being the large scale study of historical processes. Rather, economics becomes the study of the scarce means given ends. As Foucault notes in the passage I quoted at the top of this post, this definition is topic neutral. And facilitates what (already (recall) back in 1934) Talcott Parsons called 'economic imperialism' (that is, "the extension of economic analysis into a previously unexplored domain, and second, on the basis of this, the possibility of giving a strictly economic interpretation of a whole domain previously thought to be non-economic.") The setting of ends is treated as normative or prescriptive activity. And so when one studies means in light of scarcity one is doing descriptive work.

So, in the just quoted passage, the rules offered by Stigler and Becker are rules that govern the means, but not the ends criminal laws are supposed to serve. They are a form of instrumental rationality or conditional/hypothetical rationality. 'Programming' is an excellent term to capture what is going on here because these 'rules' offered by Becker and Stigler are, in fact, supposed to be legally binding on subjects.

Now, a critic may well worry about the immaculate conception of the ends. Who decides what they are? And by what right do Stigler and Becker assume them as given? (Answering these questions has informed my own work on them.) But Foucault, however notices or is interested in something else. (I think this is really spectacular.) I continue with Foucault's analysis of human capital theory:

This means undertaking the economic analysis of labor. What does bringing labor back into economic analysis mean? It does not mean knowing where labor is situated between, let’s say, capital and production. The problem of bringing labor back into the field of economic analysis is not one of asking about the price of labor, or what it produces technically, or what is the value added by labor. The fundamental, essential problem, anyway the first problem which arises when one wants to analyze labor in economic terms, is how the person who works uses the means available to him. That is to say, to bring labor into the field of economic analysis, we must put ourselves in the position of the person who works; we will have to study work as economic conduct practiced, implemented, rationalized, and calculated by the person who works. What does working mean for the person who works? What system of choice and rationality does the activity of work conform to? As a result, on the basis of this grid which projects a principle of strategic rationality on the activity of work, we will be able to see in what respects and how the qualitative differences of work may have an economic type of effect. So we adopt the point of view of the worker and, for the first time, ensure that the worker is not present in the economic analysis as an object—the object of supply and demand in the form of labor power—but as an active economic subject. (223)

To put the point as a paradox: the very theory that seems to objectify humans as capital and that is often accused of treating citizens as optimizing paws in engineering problems, is in fact a theory that treats humans as subjective agents. Now, as my former colleague John Davis has shown in a number of books, as this theory gets developed (in ever more subtle mathematical ways), it becomes difficult to see where, in the effervescent moments of a second derivative, agency ends up being located. But that's for a different time.

Admittedly, the cognitive content of such agency is reductive in character because human motivation is treated in fairly simple fashion. Quoting Foucault again,

People like Schultz and Becker say: Why, in the end, do people work? They work, of course, to earn a wage. What is a wage? A wage is quite simply an income. From the point of view of the worker, the wage is an income, not the price at which he sells his labor power. Here, the American neo-liberals refer to the old definition, which goes right back to the start of the twentieth century, of Irving Fisher, who said: What is an income? How can we define an income? An income is quite simply the product or return on a capital. Conversely, we will call “capital” everything that in one way or another can be a source of future income. Consequently, if we accept on this basis that the wage is an income, then the wage is therefore the income of a capital. Now what is the capital of which the wage is the income? Well, it is the set of all those physical and psychological factors which make someone able to earn this or that wage, so that, seen from the side of the worker, labor is not a commodity reduced by abstraction to labor power and the time [during] which it is used. Broken down in economic terms, from the worker’s point of view labor comprises a capital, that is to say, it as an ability, a skill; as they say: it is a “machine.”And on the other side it is an income, a wage, or rather, a set of wages; as they say: an earnings stream.
This breakdown of labor into capital and income obviously has some fairly important consequences. First, if capital is thus defined as that which makes a future income possible, this income being a wage, then you can see that it is a capital which in practical terms is inseparable from the person who possesses it. To that extent it is not like other capitals. Ability to work, skill, the ability to do something cannot be separated from the person who is skilled and who can do this particular thing. In other words, the worker’s skill really is a machine, but a machine which cannot be separated from the worker himself, which does not exactly mean, as economic, sociological, or psychological criticism said traditionally, that capitalism transforms the worker into a machine and alienates him as a result. We should think of the skill that is united with the worker as, in a way, the side through which the worker is a machine, but a machine understood in the positive sense, since it is a machine that produces an earnings stream. An earnings stream and not an income, precisely because the machine constituted by the worker’s ability is not, as it were, sold from time to time on the labor market against a certain wage. In reality this machine has a lifespan, a length of time in which it can be used, an obsolescence, and an ageing. So that we should think of the machine constituted by the worker’s ability, the machine constituted by, if you like, ability and worker individually bound together, as being remunerated over a period of time by a series of wages which, to take the simplest case, will begin by being relatively low when the machine begins to be used, then will rise, and then will fall with the machine’s obsolescence or the ageing of the worker insofar as he is a machine. We should therefore view the whole as a machine/stream complex, say the neo-economists—all this is in Schultz is it not—it is therefore a machine-stream ensemble, and you can see that we are at the opposite extreme of a conception of labor power sold at the market price to a capital invested in an enterprise. This is not a conception of labor power; it is a conception of capital-ability which, according to diverse variables, receives a certain income that is a wage, an income-wage, so that the worker himself appears as a sort of enterprise for himself. Here, as you can see, the element I pointed out earlier in German neo-liberalism, and to an extent in French neo-liberalism, is pushed to the limit, that is to say, the idea that the basic element to be deciphered by economic analysis is not so much the individual, or processes and mechanisms, but enterprises. An economy made up of enterprise-units, a society made up of enterprise-units, is at once the principle of decipherment linked to liberalism and its programming for the rationalization of a society and an economy. (224-225)

So Foucault understands human capital theory as a theory focused on agents, which are simultaneously programmable machines, that is, as possible generators of income streams. Given the recent focus on risk and uncertainty, and the many social and political challenges (pandemic, climate, financial instability) which lay in the future, it is natural to wonder about how we should think of possible income of these machines with, as the logicians teach, necessarily finite time spans. And this is also natural because Foucault (correctly) treats Chicago economics as a return to the radical utilitarian program of Bentham (248) and given that utilitarianism is as a technique of decision-making resolutely oriented toward the future (and spectacularly useful to forget crimes from the past).

Even so, agents don't fall like manna from heaven ready to produce income streams; they need to be educated and cultivated, and constituted by norms and institutions. Capital-ability is the product of history, and the machine-stream ensemble is built over time in society. So, lurking in this theory is a complex analysis relating past and (possibly discounted) future time. And while from one perspective wages merely reflect supply and demand at a given time, in other perspective they become a way to connect individual decisions over time to larger social ends (e.g., development). And as Foucault recognizes, the irony is that a relatively libertarian, intellectual community with distrust of collective planning, pioneers a set of analytical techniques by which policy-makers may come to shape (if not program) human agents toward collectively imposed ends.  



*The paper I am quoting from is not discussed by Foucault. But the papers Stigler and Becker are summarizing are also discussed by Foucault in a later lecture.

14 March 1979: Foucault on Social Contracts, the welfare state, and American Neoliberalism (XXVI)

Published by Anonymous (not verified) on Tue, 03/11/2020 - 10:19pm in

The second contextual element is of course the Beveridge plan and all the projects of economic and social interventionism developed during the war. These are all important elements that we could call, if you like, pacts of war, that is to say, pacts in terms of which governments—basically the English, and to a certain extent the American government—said to people who had just been through a very serious economic and social crisis: Now we are asking you to get yourselves killed, but we promise you that when you have done this, you will keep your jobs until the end of your lives. It would be very interesting to study this set of documents, analyses, programs, and research for itself, because it seems to me that, if I am not mistaken, this is the first time that entire nations waged war on the basis of a system of pacts which were not just international alliances between powers, but social pacts of a kind that promised—to those who were asked to go to war and get themselves killed—a certain type of economic and social organization which assured security (of employment, with regard to illness and other kinds of risk, and at the level of retirement): they were pacts of security at the moment of a demand for war. The demand for war on the part of governments is accompanied—and very quickly; there are texts on the theme from 1940—by this offer of a social pact and security. It was against this set of social problems that Simons drafted a number of critical texts and articles, the most interesting of which is entitled: “The Beveridge Program: an unsympathetic interpretation,” which there is no need to translate, since the title indicates its critical sense. Michel Foucault, 14 March, 1979,  translated by Graham Burchell, Lecture 9, The Birth of Biopolitics, 216

I have deliberately gone slowly through Birth of Biopolitics because I did not want to skip straight to Foucault's discussion of 'American neo-liberalism,' (215-216; especially the celebrated treatment of Becker). In this I echo Foucalt's deliberate procedure. When he arrives at lecture nine, he announces, at its start, "Today I would like to start talking to you about what is becoming a pet theme in France: American neo-liberalism." Foucault knows -- and we have seen him repeatedly remind his audience -- that what he has to say about ORDO-liberalism is of little interest to his audience, which he often castigates as being in the grip of cliches. Their real interest is to take on the new ascending, intellectual hegemony located in Chicago and in the public eye associated with Pinochet, etc. Foucault never mentions Pinochet or the Chicago Boys. His interest is not to contribute to cold-war dialectics; he want, as he says repeatedly through the lecture course, more immanently, discuss liberal govermentality toward which liberal democracies are -- and here Foucault exhibits the political sensitivity of a poet -- already moving. And while Milton Friedman has already won the first of the Chicago nobels, in 1979, Thatcher's first election victory is still a few weeks away, it is by no means obvious that a discussion of Chicago, Becker, and Hayek is then simultaneously prophetic.

In the 'banal' (216) part of his lecture, Foucault ties American-neoliberalism to the Chicago school. He writes, "The first, fundamental text of this American neo-liberalism, written in 1934 by Simons, who was the father of the Chicago School, is an article entitled “A Positive Program for Laissez-Faire.” (216) The first remarkable feature here is that Foucault will define the school in terms of a set of fundamental texts. This is a natural move for a philosophical historian, of course. But it is odd claim for somebody focused on practice (i.e., the art of governmentality). So, for example, Foucault ignores the two features of Chicago method, that, in its early self-understanding, can be said to define it as a school: (i) Chicago price theory (the same term is used for a famous introductory course and text-book);* (ii) a commitment to Marshallian partial equilibrium. 

The second remarkable feature is that Frank Knight is completely effaced from the narrative of Chicago. Given Foucault's interests this is no surprise. But it is worth noting: the Chicago legacy of focusing on uncertainty and a kind of meta-methodological sensitivity toward, and the political embeddedness of, the limitations of economics as a science are completely effaced. I don't mean to suggest that the focus on Simons (recall here; here), who was by then long dead and undoubtedly obscure to a European audience, is a mistake.**

The passage quoted at the top is the second of "three" (banal) contextual "elements" against which american neo-liberalism is defined: "Keynesian policy, social pacts of war, and the growth of the federal administration through economic and social programs—together formed the adversary and target of neoliberal thought, that which it was constructed against or which it opposed in order to form itself and develop." (217) But as usual with Foucault, his asides are incredible illuminating. 

It may seem that to oppose the Beveridge plan is to oppose social planning. And undoubted social planning -- collectivism in the jargon of the age -- is one of the targets. But Foucault recognizes that the legitimacy of social planning is ground in a new kind of social contract. In Foucault's presentation the need for a social contract is felt by the elites, who recognize that after a decade of economic suffering calling people up for war may require justification that  goes beyond ordinary war propaganda. 

As an aside, Foucault here subtly historicizes the renewal of the social contract tradition then a decade underway by those who had been foot-soldiers (Rawls) in that great war. Rather than focusing on Rawls' religious roots, one can better understand this renewal as a (renewed) demilitarization of the social contract.

Be that as it may, to oppose Beveridge is not just to oppose social planning, but to oppose the very terms of the war-time social contract. For this social contract trades the non-negligible risk of death (or the death of a loved-one/breadwinner) in war for an obligation toward other forms of (social) security.+ That is to say, to criticize Beveridge is not just to criticize economic policy, but the very conceptualization of the polity. 

Why might one wish to do so? For one, in this hostile perspective (and it seems Foucault kind of endorses it), the very conceptualization of the welfare state is a war-state. This is a trope going back to the Vienna critic of Neurath (and Bismarck), but here it is part of the very conceptualization of the legitimacy of the welfare state. Second, it is by no means obvious that this social contract is liberal. And the problem is not so much the welfare state side of the equation (the benefit), but the war-side (the cost). The very point of a liberal state is the preservation of (bare) life. This is why, as Nick Cowen alerted me, life becomes before "liberty and the pursuit of happiness!"

In his rhetorically charged polemic, Simons (1945) presciently himself calls attention to this, "Written by a nominal Liberal, radical-reactionary in its substantive proposals, libertarian in its rhetoric, thissecond Beveridge Report may forecast or largely determine the course of British postwar policy." (212) Part of Simons' ire is that Beveridge is clothed as liberal, but substantively it is an odd mix of radicalism (that is, as Foucault had already explained in lecture 2, Benthamite utilitarianism) and reactionary-ness (that is, committed to war and hierarchy). And, indeed, Simons recognizes that for all its noble social ends, Beveridge plan is also a contribution to survival of (declining) political imperialism, "England's commercial power is to be mobilized and concentrated, to improve her terms of trade, to recruit satellites for a tight sterling bloc, and to insulate herself and them from unstable, unplanned economies, i.e., from the United States." (Simons 1945: 213)

That is to say, on the Simons interpretation of Beveridge, which Foucault shadows even amplifies beyond Simons' own rhetoric (notice the language of the "demand for war"), American neo-liberalism understands itself not merely as a critique of the welfare state, but it understands itself as a critique of an illegitimate social contract that underpins it; for from a truly liberal perspective, one cannot really, if one has minimal Hobbesian intuitions (one cannot contract away the natural right to mere self-preservation), consent to the pact inscribed in Beveridge. And, in fact, Simons is clear that if executed fully, the Beveridge plan would involve in open-ended trade wars leading to the real kind (Simons 1945: 227-228).** The point had been foreshadowed in lecture 5 (see what Foucault says about Ropke on p. 110).

Let me close with a remark. In what follows, Foucault is largely uninterested in Friedman (the focus is on Becker then still much more obscure). But the 'banal' point he has made in terms of Simons' criticism of Beveridge helps explain the increasing popularity of Friedman in the 60s and 70s. For Friedman was one of the most eloquent and visible critics of the draft (during the Vietnam war). His argument (inspired by Simons but not identical) was as much economic as it was political, "large armed forces plus the industrial complex required to support them constitute an ever-present threat to political freedom."   



*Of course what price theory, which evolved over the decades, is may well be thought contested. Glen Weyl does a good job offering a definition, even if anachronistic, that captures most of what falls under it: an "analysis that reduces rich (e.g. high-dimensional heterogeneity, many individuals) and often incompletely specified models into ‘prices’ sufficient to characterize approximate solutions to simple (e.g. one-dimensional policy) allocative problems."

+There is subtle points lurking here. First, Beveridge was British, and one may think the United Kingdom's entry in WWII was existential, and so really did not require some such pact. But Foucault's eyes are on the US here, and its entry was to a considerable degree a matter of choice. Second, it's interesting that Foucault focuses on Simons here, since Hayek was also a critic of the Beveridge plan, and Foucault had already noted, in an earlier lecture, the significance of Hayek's movement from Austria to LSE to Chicago.

**I return to Simons before long. In his criticism of Beveridge, Simon notes, en passant, "one must plan for free-market controls just
as carefully as (indeed, more so than) for socialization." (213) This is a point worth returning to.

‘I’ on Vote by Chileans to Get Rid of Pinochet Constitutions

Here’s a piece of good news from Tuesday’s I for 27th October 2020. According to this piece by Aislinn Laing, entitled ‘Citizens vote to scrap Pinochet-era constitution’, the Chilean people overwhelmingly voted to get rid of the constitution that’s been governing the country since General Pinochet’s Fascist dictatorship. The article runs

Citizens poured into the country’s main squares on Sunday night after voters gave a ringing endorsement to a plan to tear up the country’s Pinochet-era constitution in favour of a new charter drafted by citizens.

In Santiago’s Plaza Italia, the focus of the massive and often violent social protests last year which sparked the demand for a new “magna carta”, fireworks rose above a crowd of tens of thousands of jubilant people singing in unison as the word “rebirth” was beamed onto a tower above.

With more than three-quarters of the votes counted, 78.12 per cent of the voters had opted for the new charter. Many have expressed hopes that a new text will temper an unabashedly capitalist ethos with guarantees of more equal rights to healthcare, pensions and education. As votes were counted on live television around the country, spontaneous parties broke out in the streets.

It’s clearly not only Spain that is voting to get rid of the legacy of its Fascist dictators. Pinochet seized power thanks to a coup organised and assisted by the CIA, because America could not tolerate a democratically elected Marxist regime on its doorstep. The former president, Salvador Allende, vanished and left-wingers were rounded up and sent to prison camps in which they were raped, tortured and massacred. And just to make it clear that Pinochet himself thought he was Fascist, the regime’s military uniforms were deliberately modelled on those of the Nazis.

Pinochet was a Monetarist, and Milton Friedman and others from the Chicago school went on trips to Chile to see how he was implementing their wretched economic theories. Friedman and the rest looked forward to the seizure of power by a Fascist dictator, because they realised that people would not vote for a leader determined to destroy the welfare state.

He was also a friend of Maggie Thatcher. She liked him because of the assistance he gave Britain during the Falkland’s War. And doubtless the other reasons behind their friendship was that she had also started her career as a Monetarist and similarly wanted to destroy socialism. When Pinochet came to Britain, I think she put him up at her house, and complained bitterly when Blair attempted to have him arrested for the murder of a Spanish lad.

Pinochet may have made Chile safe for capitalism, but his legacy has been terrible. He wrecked his country’s education when he adopted the Monetarist scheme to give its citizens vouchers, which they could spend on state or private schooling. Buddyhell, Guy Debord’s Cat, put up an article about how this destroyed the Chilean education system and resulted in gaping educational inequalities.

I think it’s brilliant that the Chilean’s have decided to get rid of the dictator’s constitution, and hope that the new constitution they decide on will give its people greater access to welfare benefits.

And I hope it won’t be too long before the legacy of Pinochet’s friend Thatcher is thrown out over here.


Friedman vs. Wicksell

Published by Anonymous (not verified) on Wed, 12/08/2020 - 12:53pm in

Slowly, but steadily the Wicksellian concept of a natural, normal or neutral rate of interest is making a come back and becoming more relevant and cited than Friedman's natural rate of unemployment and its awkward twin the Non Accelerating Inflation Rate of Unemployment (NAIRU).

Note that up to Friedman's infamous presidential address the normal rate dominated the field. But in all fairness, even thought it has lost space it seems that Friedman's natural rate of unemployment has a lot of inertia, and might be with us for a while.

The macroeconomics of Robert Solow: A partial view

Published by Anonymous (not verified) on Tue, 05/05/2020 - 10:09am in

During a hearing before a Congressional Committee on Science and Technology, Robert Solow (MIT) described himself as a "generally quite traditional, mainstream economist".

In my view, either Prof. Solow is unaware of who qualifies as a "traditional, mainstream economist" these days or the definitions of the words "traditional" and "mainstream" need to be completely changed!

Consider, for instance, his views on the notion of "expansionary fiscal consolidation":

[H]ow does a human race with limited with situations in which the short run need for policy are quite different from the long run need for policy? The feeble-minded, it seems to me, attempt to solve this problem [by asserting] that fiscal consolidation is really expansionary in the short run. I have never been able to understand the mental processes that underlie that statement. But I will take it seriously only -- only -- when its protagonists faced with a situation of clear excess demand propose fiscal expansion. Because if fiscal consolidation is expansionary then fiscal expansion must be contractionary. I don't believe that would happen. So I don't take that argument seriously at all. I think it's cooked up to make a real difficulty go away. (The Feasibility of European Monetary and Fiscal Policies: Rethinking Policy from a Transatlantic Perspective)

...on the supposed lack of microfoundations in Keynesian economics:

You know, there is something a little ludicrous in the belief that microfoundations for macroeconomics were invented some time in the 1970s. If you read Keynes's General Theory or Pigou's Employment and Equilibrium (or many lesser works) you will see that they are full of informal microfoundations. Every author tries to make his behavioral assumptions plausible by talking about the way that groups or ordinary economic agents might be expected to act...But you can recall Keynes's argument that the marginal propensity to consume should be between zero and one, or his discussion about whether the marginal efficiency of investment should be sensitive to current output or should depend primarily on "the state of long-term expectations". Those are microfoundations. (2004, p. 659)

...on the claim there is a connection between the money supply and price level:

[T]he financial press sometimes writes as though there is some special direct connection between the money supply and price level. So far as fundamentals are concerned, monetary policy works through its effects on aggregate nominal demand, just like fiscal policy, in the long run, too. The only direct connection I can think of is itself the creation of pop economics. If business people and others become convinced that there is some causal immaculate connection from the money supply to the price level, completely bypassing the real economy, then the news of a monetary-policy action will generate inflationary or disinflationary expectations and induce the sorts of actions that will tend to bring about the expected outcome and thus confirm the expectations and strengthen the underlying beliefs. (1998:4)

...on the problem with Milton Friedman's reliance on correlations between and M and other variables to infer policy conclusions and the assumption of an exogenous money supply (with John Kareken):

The unreliability of this line of argument is suggested by the following reducto ad absurdum. Imagine an economy buffeted by all kinds of cyclical forces, endogenous and exogenous. Suppose that by heroic, and perhaps even cyclical variation in the money stock and its rate of change, the Federal Reserve manages deftly to counter all disturbing impulses and to stabilize the level of economic activity absolutely. Then an observer following the Friedman method would see peaks and troughs in monetary changes accompanied by a steady level of economic activity. He would presumably conclude that monetary policy has no effects at all, which would be precisely the opposite of the truth. (Karaken and Solow, 1963, p. 16)

...on choosing the right model in macroeconomics:

[I] believe rather strongly that the "right" model for an occasion depends on the context --  the institutional context, of course -- but also on the current mix of beliefs, attitudes, norms, and "theories" that inhabits the minds of businessmen, bankers, consumers, and savers. (2004, p.xi)

...on the problems with the DSGE model:

I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether. (For more, see here and here)

...on the difference between budgetary and real resources costs:

The trouble is that the great world -- including a large part of the intellectual world -- has lost sight of the fundamental difference between budgetary costs and real resource costs. An unemployed worker and an underutilized or idle plant is not something we're saving up for the future. Today's labor can't be used next year or the year after. And the machine time in a plant that's down can't be redone two years from now or three years from now. Three years from now we hope that the plant will be running for current uses. So there's that important sense in which idle resources are almost - and maybe literally - free to the economy. The problem is to get them used in a reasonable way. (see 22:00 here):

...on the importance of fiscal policy for stabilization purposes:

I start from the belief that non-trivial imbalances of aggregate supply and demand do occur in modern industrial capitalist economies, and last long enough that public policy should not ignore them...When such imbalances occur, fiscal policy is a useful tool. The single instrument of monetary policy can not do justice to the multiplicity of policy objectives; and the Ricardian equivalence claim is in practice not nearly enough to convince a realist of the ineffectiveness of fiscal policy. The real obstacles to the rational conduct of fiscal policy are the uncertainties about the proper target for real output and employment, and the tendency for stabilization goals to become inextricably tangled in and distracted by distributional and allocational controversy. (Is fiscal policy possible? Is it desirable?, p. 23)

...on the long run potency of deficit spending financed by bonds vs. deficits financed by money creation, and on the contractionary nature of open market purchases of government bonds (with Alan Blinder):

[N]ot only is deficit spending financed by bonds expansionary in the long run, it is even more expansionary than the same spending financed by the creation of money. [Foonote: An interesting corollary of this is that an open-market purchase, i.e. a swap of B for M by the government with G unchanged, will be contractionary!] (Blinder and Solow: Does Fiscal Policy Matter? 1973)

...on how statements by a central bank can influence how the public translates relative price changes into expectations about the consumer price index:

There are various interest groups in the economy: bankers, investors, savers, lenders, borrowers, buyers and sellers and what not. There is no reason for them to react in the same way. How does one aggregate expectations?

...on the use of "expectations" to explain macro policy outcomes:

[T]o rest the whole argument on expectations -- that all-purpose unobservable -- just stops rational discussion in its tracks. I agree that the expectations, beliefs, theories, and prejudices of market participants are all important determinants of what happens. The trouble is that there is no outcome or behavior pattern that cannot be explained by one or another drama starring expectations. Since none of us can measure expectations (whose?) we have a lot of freedom to write the scenario we happen to like today. Should I writing a different play, starring somewhat different expectations? No thanks, I'd rather look at data. (1998:93)

...on the claim of self-correcting markets and the role of aggregate demand in causing output fluctuations:

Capitalist economies do not behave like well-oiled equilibrium machines. For all sorts of reasons they can stray above or below potential output for meaningful periods of time, though apparently they are sightly more likely to stray below than above. Even apart from considerations of growth, macro policy should lean in the general direction that will nudge aggregate demand toward potential, whenever a noticeable gap occurs. The relevant point is that this strategy is also growth-promoting. Whatever the level of real interest rates, excessively weak aggregate demand -- and the prospect of weak and fluctuating aggregate demand -- works against investment. Few things are as bad for expected return on investment as weak and uncertain future sales...Successful stabilization contributes to growth too. (Role of macroeconomic policy, p. 301)

...on the need for public policy to address the unemployment of unskilled labor:

It needs to be insisted that the root of the problem lies in the enormous range of earning capacities generated by the interaction of modern technology (and other influences on the demand for unskilled labor) with the demographic and educational outcomes on the supply side of the labor market. There is no really good way for a market economy to deal humanely with that spread. (Too Optimistic)

...on the fallacy of self-correcting markets and the limits of monetary policy during deep recessions:

One important lesson that I hope we have learned from the crisis and the deep recession still going on is that economies like ours can experience uncomfortably long intervals of general excess supply or excess demand. Of course, we -- economists and interested civilians -- used to know that. But it was widely forgotten during the Great Moderation and the accompanying optimism among economists and civilians about smoothly self-correcting markets. The general belief than was that monetary policy was an adequate tool for taking care of any minor blip. During long and deep recessions, however, it has become evident that monetary policy may reach its limits without being able to generate enough aggregate demand to close the excess supply gap. (IMF Talk: Macro and Growth Policies)

...on the problems with Ricardian equivalence:

What might interfere with [the claim that it is optimal for households to save a tax reduction]? Any number of things: if households had been unable to consume as much as their optimal plan required because they lacked liquid assets and could not borrow freely, then the added liquidity provided by the tax reduction would enable them to consumer more now. If the Treasury were a more efficient, less risky, borrower than many households, then the appearance of some new public debt would also affect real behavior. And, of course, if consumers do not look ahead very far or very carefully, if they give little weight to the interests of descendants, or if they tend to ignore or underestimate the future implications of current budgetary actions, then Ricardian equivalence will fail, and tax reduction financed by borrowing will indeed be expansionary. All those "if" clauses strike me as very likely to be real and quantitatively important, and that suggests that Ricardian equivalence is not a practically significant limitation on fiscal policy. (Is fiscal policy possible? Is it desirable?, p. 12)

...on the problem with the natural rate of unemployment hypothesis:

Let me try to explain what nags at me in all this...We are left here with a theory whose two central concepts, the natural rate of unemployment or output and the expected rate of inflation have three suspicious characteristics in common. They are not directly observable. They are not very well defined. And, so far as we can tell, they move around too much for comfort -- they are not stable. I suspect this is an intrinsic difficulty. I have no wish to minimize the importance of, say, inflationary expectations. But we are faced with a real problem: here is a concept that seems in our minds to play an important role in macro behavior, and yet it's very difficult to deal with because it escapes observation and it even escapes clear definition. 

On the natural rate of unemployment, I think the behavior of the profession exhibits problems. In order to make sensible use of this kind of theory, you want the natural rate of unemployment to be a fairly stable quantity. It won't do its job if it jumps around violently from one year to the next. But that's what seems to happen. We, the profession, are driven to explaining events by inventing movements of the natural rate, which we have not observed and have not very well defined. The issue came up first in the passage of the big European economies from 2 percent unemployment, on average, to 8 or 9 percent unemployment, on average, within a few years. The only way to explain that within the standard model is to say that the natural rate of unemployment must have increased from something like 2 percent to something like 8 or 9 percent. The actual facts that could account for any such dynamics never seemed to me or to any critical person to be capable of explaining so big a change. So we are left with inventing changes in the natural rate of unemployment to explain the facts, and it is all done in our heads, not in any tested model. I regret to say that you often find this kind of reasoning: the inflation rate is increasing because the unemployment rate is below the natural rate. How do you know that the unemployment rate is below the natural rate? Because the inflation rate is increasing. I think we are all good enough logicians to realize that this is exactly equivalent to saying that the rate of inflation is increasing, and nothing more. 

It seems to me that we ought to be thinking much more about the determinants of whatever you choose to call it. I hate to use the phrase "natural rate" but of course I do. It was a masterpiece of persuasive definition by Milton. Who could ever want an unnatural rate of unemployment? (Fifty years of the Phillips Curve: A Dialogue on what we have learned, p.84)

...and more on the natural rate of unemployment:

There is nothing like an adjustable, unobservable parameter to keep a theory afloat in rough seas...I think the doctrine [of the natural rate of unemployment] to be theoretically and empirically as soft as a grape. To say that in the long run the unemployment rate tends to return to the natural rate of unemployment is to say almost nothing. In the long run the unemployment rate goes where it goes. You can call where it goes the natural rate; but unless you have a more convincing story than I have seen about the length of the long run and the location of the natural rate, you are only giving a tendentious name to a vague concept (1998, pp. 9, 91)

The Keynesian-Monetarist debates and reverse causation (or how Keynesians destroyed monetarism using only logic)

Published by Anonymous (not verified) on Fri, 01/05/2020 - 11:45am in

Traditional monetarist theory held that changes in the money stock are the best indicator of monetary influence on the economy, and that these influences have a significant impact on the course of economic activity over the business cycle.

The idea that "money matters" in this sense is not new. In many ways, monetarism's basic premise dates back to the beginning of political economy as a discipline. However, in the 1950s, the idea gained prominence when a number of "money supply theorists", as they were called back then, began producing studies and charts that appeared to lend support to the view that changes in the money supply had a predominant role in causing fluctuations in (nominal) income and output.

Initially, (neo-)Keynesian economists -- who as a result of their reading of events of both the onset of and recovery from the Great Depression viewed income (output) as determined largely by aggregate demand or the spending of firms, government and household spending -- were not phased. At first, Keynesians responded by saying that their preferred theoretical approach, the Hicks-Hansen IS-LM model, already recognized the role of money in affecting economic activity via the LM curve.* However, these Keynesians also argued that, while money does have a role in driving economic activity, it was of secondary importance, behind consumer and investment spending.**

Also, while Keynesians admitted that fluctuations in the money supply can affect economic activity, they also argued that the seemingly causal relationship between money and output portrayed in monetarist studies could partly be explained by changes in the public's demand for money, the propensity to hold financial assets in the form of money.

The debate intensified when Milton Friedman and other monetarists produced studies (seemingly) showing the empirical importance of money over spending and investment in explaining output fluctuations. In order to show that fluctuations in the money supply cause fluctuations in output, monetarists had to demonstrate that the demand for money was stable (to support their view regarding the predominant role of the money supply in affecting economic activity), and that fluctuations in aggregate demand were a weak source of fluctuations in income.

With respect to the stability of the demand for money, Keynesians argued that the demand for money was not stable (i.e., as a stable function of interest rates, expected inflation, wealth and other variables), nor predictable (thus countering the monetarist view that the predictability in the demand for money would enable the monetary authority to expand or contract the money supply to offset any predicted changes in money demand). The neo-Keynesian view was later proven right when the stability in money demand collapsed in the 1970s and 1980s in the US.

As for the monetarist claim that money supply fluctuations outperformed the traditional Keynesian drivers such as investment and other forms of spending in explaining output fluctuations, which figured most prominently in Friedman's "A Monetary History of the United States", neo-Keynesians responded in several ways.

First, Keynesian critics proposed that the apparent causal relationship stemming from money to income (and economic activity overall) might be a fallacious case of post hoc ergo propter hoc (i.e., what comes before must therefore be the cause), or at the very least, a statistical illusion caused by the fact that investment is recorded in national income accounts in periods subsequent to monetary aggregates, which capture the same transaction but at an earlier stage when investors first come to the money market.

Also, Keynesians challenged the methodological approach used by Friedman and other monetarists to support their claim that the money supply is the key variable explaining fluctuations in output. Most importantly, Keynesian critics suggested that Friedman's approach in the "Monetary History" of assuming an exogenous money supply under the full control of the monetary authority and completely independent from the influence of other economic variables, was unrealistic and overstated the influence of money on economic activity.

Over 50 years ago, neo-Keynesian economists John Kareken and Robert Solow, using simple logic, pointed out the fatal flaw in the monetarist assumption of the exogeneity of the money supply:

The unrealiability of this line of argument is suggested by the following reducio ad absurdum. Imagine an economy buffeted by all kinds of cyclical forces, endogenous and exogenous. Suppose that by heroic, and perhaps even cyclical variation in the money stock and its rate of change, the Federal Reserve manages deftly to counter all disturbing impulses and to stabilize the level of economic activity absolutely. Then an observer following the Friedman method would see peaks and troughs in monetary changes accompanied by a steady level of economic activity. He would presumably conclude that monetary policy has no effects at all, which would be precisely the opposite of the truth.

Karaken and Solow in this example were not suggesting that the money stock was endogenous in the sense that the money supply was negatively correlated with aggregate spending shocks. Rather, they were suggesting that abstracting from the actual behavior of the central bank as Friedman did could result in flawed conclusions about the magnitude of monetary policy's impact on the economy.***

Also, this line of reasoning suggested that the statistically significant relationship (correlation) between money and output highlighted by the monetarists should not be understood as implying that changes in the supply of money cause changes in income. Instead, this objection suggested the possibility that the observed relationship could just as well be the consequence of reverse causality, that is, that spending shocks, by affecting money demand and generating pressure on the interest rate, led to accommodating changes in the supply of reserves provided by the Fed during that period, and ultimately resulted in changes in the money supply.

Having then demolished the Friedman assumption of an exogenous money supply, neo-Keynesians in the 1960s thus allowed for the possibility that the relationship between money and economic activity could be the result of actions from the public, as they respond to current economic conditions, and that these actions from the public could have such a significant influence on observed movements in the money stock that one could not tell the direction of causality between money and economic activity simply by looking at measurements of monetary aggregates and income.

For a few years later, a lively debate on reverse causation followed between monetarists and the economic staff of the St. Louis Federal Reserve Bank on one side and neo-Keynesians and staff economists of the Federal Reserve Board on the other. Empirically, a breakthrough in favor of the reverse causation argument occurred in 1973 when two staff economists of the Federal Reserve Board, Raymond Lombra and Raymond Torto, demonstrated in a paper entitled "Federal Reserve Defensive Behavior and the Reverse Causation Argument" that during the 1953-1968 period the supply and demand for money was interdependent and that this interdependence provided an avenue for the reverse influence of the business cycle on money.

In doing so, Lombra and Torto confirmed the endogeneity of the monetary base and money supply resulting from the Fed's offsetting and accommodating actions whenever it sought to stabilize conditions in the money market by pegging the level of short-term interest rates over the short-run:

If the demand for money is, in part, a function of the level of economic activity and the supply of money has been at least partially demand determined, then the money stock is endogenous whether or not the Fed has the power to control it

However, the conclusions by Lombra and Torto were eclipsed by the conclusions of a paper published one year earlier by Christopher Sims utilizing newly developed statistical techniques which contended that the hypothesis of unidirectional causality running from money to income could not be rejected. Of course, monetarists, in their attempt to support their case, cited this work with approval since it appeared to support the monetarist assumption of an exogenous money supply.

In 1982, Sims published another paper recognizing that his earlier work and work based on it was open to serious question. This paper along with Lombra and Torto's paper should have demolished the monetarist case from the start. Unfortunately, such an attack was not enough to stop the monetarist ascendancy that was gathering support within and outside the economics profession (such as the St.Louis Federal Reserve Bank) in the 1970 and 80s.

Today, we know that this monetarist view influenced later New Keynesians (not older New Keynesians like Stiglitz, Akerlof and Blinder). Some Post Keynesians adhere to reverse causation in their monetary economics.

* The LM curve had been relegated to the background (as a supporting role) during the war years and early post-war years when interest rates were pegged as a result of the Treasury-Fed accord

** The main changes through which the real money supply affects the economy are: the real balance effect, the portfolio effect, and money as a medium of exchange effect.

*** More specifically, by assigning total control over the money supply to the central bank in their model, Friedman and other monetarists were effectively dismissing the potential influence of both the banking system and the real economy in influencing the money supply.