"Macroeconomics As Systems Theory" Book Panel

On this episode of the Hayek Program Podcast, we host our first book panel of 2021 on Richard Wagner’s book Macroeconomics as Systems Theory. This book examines macroeconomic theory from an analytical framework provided by theories of complex systems, in contrast to conventional theories founded on aggregation. In considering macro theory, Wagner contrasts the conventional approach of focusing on the national economy as a collection of aggregate variables with the social-theoretic approach of viewing macro variables as shaped through social institutions, conventions, and other processes. The panel is moderated by Peter Boettke and features:

• Abigail Devereaux, Assistant Professor of economics, Wichita State University
• Erwin Dekker, Assistant Professor of cultural economics, Erasmus University
• Will Luther, Assistant Professor of economics, Florida Atlantic University

Peter J. Boettke
Richard Wagner
Erwin Dekker
Calendar Date: 
Feb 24, 2021
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Positively Valued Fiat Money after the Sovereign Disappears

January, 2017

The case of the Somali shilling defies the historical view that sovereign powers (i.e., legal tender status, public receivability) are necessary to explain the acceptance of fiat money at a positive value. Following the Somali state’s collapse in 1991, irredeemable paper shillings have continued to circulate at a positive value. Acceptance under statelessness is explained by a history that made continued acceptance a focal point among self-fulfilling strategies. Our explanation is consistent with an extended Kiyotaki-Wright model of fiat money. Although sovereign power may be necessary to launch a fiat money in practice, we maintain that it is not necessary for its survival.

Can Bitcoin Become a Major Currency?

June 5, 2014

At present, bitcoin is held mostly as a speculative vehicle, little used to pay for goods and services. Its value has been unstable, which impedes bitcoin’s wider use as a payment medium. We explain why the value of bitcoin has been so unstable. Then, we discuss entrepreneurial efforts that might enable bitcoin to become a more commonly accepted payment medium.

Labor Economics from an Austrian Perspective

August 16, 2012

The compelling case offered by Austrians regarding the recent economic downturn has no doubt encouraged many to take a closer look at the broader Austrian perspective. Similarly, the jobless recovery has prompted some soul searching in labor economics. We briefly review the history and methodology of the Austrian school and describe major contributions to labor economics from those working in the Austrian tradition. Then, we offer a sketch of the Austrian theory of labor markets and discuss its implications. In doing so, we hope to have helped the interested reader along both lines.

Read the full paper at SSRN.com.

The Great Recession and Its Aftermath from a Monetary Equilibrium Perspective

October 25, 2010

Modern macroeconomists in the Austrian tradition can be divided into two groups: Rothbardians and monetary equilibrium (ME) theorists. The name for the latter is somewhat misleading, however, as both groups argue that monetary equilibrium is ultimately achieved where the quantity of money supplied equals the quantity of money demanded. The difference between these two approaches concerns what should adjust so that equilibrium is obtained. Rothbardians argue that “any supply of money is optimal,” provided only that it is above some trivial minimum necessary to conduct transactions (Rothbard 1988: 180). Because Rothbard’s proposal for 100 percent gold reserves ties the money supply rigidly to the supply of gold, Rothbardians effectively hold the money supply constant in the short run and thereby rely on price adjustments to bring about monetary equilibrium in the face of changes in the demand for money.

In contrast, monetary equilibrium theorists argue that an ideal monetary system would expand or contract the supply of money to prevent changes in the demand to hold money from affecting its current value. Whereas price changes are typically desirable to clear markets for goods and services, ME theorists note that money is unique in that it has no price of its own. Because money is one half of every exchange, changing “the price of money” to clear the money market requires changing all prices. The economy-wide price changes necessitated if the price level is to bear the burden of adjustment disrupt the process of economic coordination and lead to macroeconomic instability and either a deflationary recession or inflation and a potential boom-bust cycle. These significant costs of changing all prices to reflect a change in the demand for money are not offset by a corresponding benefit. As such, ME theorists hold that a system under which the supply of money could be reliably counted on to respond to changes in the demand to hold money would be much preferred over a system where the price level bears the burden of adjustment.

The monetary equilibrium approach should not be confused with the standard neoclassical position of price level stability. Both the Rothbardian and ME approaches recognize that prices—and, as a result, the aggregate price level—should fall in response to increases in productivity. Similarly, if goods become more scarce on average—as a result of a natural disaster, for example—the aggregate price level should increase to reflect this. ME theorists do not advocate stabilizing an aggregate price level. Rather, they suggest changing the money supply to offset changes in money demand and allowing the price level to move inversely to changes in productivity. One can characterize this as a desire to keep the MV side of the quantity equation constant, and allow P to move inversely to Y. It is from this perspective that we consider the events of the last few years and offer policy recommendations for the present and future.

Our approach finds its roots in the work of Knut Wicksell, Ludwig von Mises, and Friedrich A. Hayek. These authors claimed that an excess supply or demand for money causes the market rate of interest—that is, the rate that banks charge on loans—to diverge from the Wicksellian natural rate of interest. Entrepreneurs react to these faulty price signals by altering their investments, lengthening or shortening the production process in line with the prevailing interest rate. The resulting malinvestments—to use the Austrian term—are fundamentally at odds with the underlying time preferences of individuals and will eventually reveal themselves as mistakes, leading to the process of self-correction that is the recession that follows the boom.

We argue that the primary source of business fluctuation observed over the last decade is monetary disequilibrium. Additionally, we claim that unnecessary intervention in the banking sector distorted incentives, nearly resulting in the collapse of the financial system, and that policies enacted to remedy the recession and financial instability have likely made things worse. Finally, we offer our own prescriptions to reduce the likelihood that such a scenario occurs again. Those come in two stages. First we suggest some changes to the way monetary policy and banking regulation are conducted under the assumption that we continue to have a central bank in more or less the form that the Federal Reserve System takes in the United States. We conclude by offering a more radical solution that involves a change in the monetary regime, specifically a move toward a truly competitive free-banking system.

The Ordinary Economics of an Extraordinary Crisis

June, 2009

Ordinary economics teaches that markets continually adjust to scarce resources. This paper demonstrates how modern economic theory has neglected ordinary economics in favor of static equilibrium analysis, which led to unrestrained government spending and expansionist monetary policy throughout the 20th century. While these interventions prolonged and amplified historic economic downturns, most economists are still unwilling to let free markets correct the malinvestment created by expanionist monetary and fiscal policy. Boettke and Luther argue for a return to the principles of ordinary economics, which use markets to coordinate information, spur technological innovation, and promote economic recovery.

Citation (Chicago Style)

Boettke, Peter and William Luther. "The Ordinary Economics of an Extraordinary Crisis." Working Paper 09-15, Mercatus Center at George Mason University, 2009.