Robert Murphy

A few days ago, Bryan Caplan posted on his bet with Robert Murphy regarding inflation. Murphy predicted 10% inflation. He lost … big time. However, was he crazy to make that bet? In other words, what could explain Caplan’s victory?

Murphy was not alone in predicting this, I distinctly remember a podcast between Russ Roberts and Joshua Angrist on this where Roberts tells Angrist he expected high inflation back in 2008. Their claims were not indefensible. Central banks were engaging in quantitative easing and there was an important increase of the state money supply. There was a case to be made that inflation could surge.

It did not. Why?

In a tweet, Caplan tells me that monetary transmission channels are much more complex than they used to be and that the TIPS market knew this. Although I agree with both these points, it does not really explain why it did not materialize. I am going to propose two possibilities of which I am not fully convinced myself but whose possibility I cannot dismiss out of hand.

Imagine an AS-AD graph. If Murphy had been right, we should have seen aggregate demand stimulated to a point well above that of long-run equilibrium. Yet, its hard to see how quantitative easing did not somehow stimulate aggregate demand. Now, if aggregate demand was falling and that quantitative easing merely prevented it from falling, this is what would prove Murphy wrong. However, all of this assumes no movement of supply curves.

While AD falls and before monetary policy kicks in, imagine that policies are adopted that reduce the potential for growth and productivity improvement. In a way, this would be the argument brought forward by people like Casey Mulligan in work on labor supply and the “redistribution recession” and Edward Prescott and Ellen McGrattan who argue that, once you account for intangible capital, the real business cycle model is still in play (there was a TFP shock somehow). This case would mean that as AD fell, AS fell with it. I would find it hard to imagine that AS shifted left faster than AD. However, a relatively smaller fall of AS would lead to a strong recession without much deflation (which is what we have seen in this recession). Personally, I think there is some evidence for that. After all, we keep reducing the estimate for potential GDP everywhere while the policy uncertainty index proposed by Baker, Bloom and Davids shows a level change around 2008. Furthermore, there has been a wave – in my opinion of very harmful regulations – which would have created a maze of administrative costs to deal with (and whose burden is heavy according to Dawson and Seater in the Journal of Economic Growth). That could be one possibility that would explain why Murphy lost.

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There is a second possibility worth considering (and one which I find more appealing): the role of financial regulations. Now, I may have been trained mostly by Real Business Cycle guys, but I do have a strong monetarist bent. I have always been convinced by the arguments of Steve Hanke and Tim Congdon (I especially link Congdon) and others that what you should care about is not M1 or M2, but “broad money”. As Hanke keeps pointing out, only a share of everything that we could qualify broadly as “money” is actually “state money”. The rest is “private money”. If a wave of financial regulations discourages banks to lend or incite them to keep greater reserves, this would be the equivalent of a drop of the money multiplier. If those regulations are enacted at the same time as monetary authorities are trying to offset a fall in aggregate demand, then the result depends on the relative impact of the regulations. The data for “broad money” (Hanke defines it as M4) shows convincingly that this is a potent contender. In that case, Murphy’s only error would have been to assume that the Federal Reserve’s policy took place with everything else being equal (which was not the case since everything seemed to be moving in confusing directions).

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In the end, I think all of these explanations have value (a real shock, a banking regulation shock, an aggregate demand shock). In 25 years when economic historians such as myself will study the “Great Recession”, they will be forced to do like they do with Great Depression: tell a multifaceted story of intermingled causes and counter-effects for which no single statistical test can be designed. When cases like these emerge, it’s hard to tell what is happening and those who are willing to bet are daredevils.

P.S. I have seen the blog posts by Scott Sumner and Marcus Nunes regarding my NGO /NGDP claims. They make very valid points and I want to take decent time to address them, especially since I am using the blogging conversation as a tool to shape a working paper.

The proposition in argumentation ethics is that “arguing for any political position other than libertarian anarchism is logically inconsistent” (wiki). This proposition was set forth in 1988 by Professor Hans-Hermann Hoppe of the University of Nevada at Las Vegas. The basic idea is that the non-aggression principle is a premise implied in every argument, and so it cannot be logically denied in any doctrine. The concept of argumentation or discourse ethics had been developed by several German philosophers, such as Jürgen Habermas.

The non-aggression principle is that aggression – the initiation of force or fraud against a person – is morally evil. The argumentation proposition is that non-aggression is a presupposition of every argument, and so the concept cannot be logically denied within an argument. If a person argues that slavery is justified, the contradiction is that by engaging in argument with another person, he is implying that they are both seeking to arrive at truth by persuasion as equal independent non-slave parties. Since the person who argues for slavery is not using force to make the other person a slave, that implies that he is thereby rejecting slavery. It is then logically and performatively inconsistent for him to argue that enslaving any other person would be justified.

The prevailing argument for a libertarian ethic, based on natural moral law, is based on human nature applied to human action, rather than argumentation. The two premises set forth by John Locke in his Second Treatise of Government are human independence and equality.

Independence is the biological statement that persons think and feel as independent beings. Equality means that human beings have an equal moral worth, which is the basis of Jefferson’s statement that we are created equal, and is the basis of equality before the law. The equality premise is based on the observation that there is no inherent master-slave relation among human beings, and so equality is more consistent with human biology than any inherent moral superiority of any race, sex, or culture.

Hoppe states that concept of human nature is too diffuse to provide a determinate set of premises for natural law. Locke’s premises of independence and equality indeed have fuzzy edges, such as for beings not yet born, but they seem to be clear enough for practical purposes. Libertarians have no consensus on issues such as abortion, capital punishment, land value subsidies, the use of the military, and the justification of imposed government, but argumentation does not resolve such issues either. One needs additional premises to solve issues such as personhood, e.g. under which conditions is a human organism a person with rights. After all, one cannot have discourse with a newly born baby.

The concept of argumentation ethics has been rejected by several libertarian scholars, for example the article in The Journal of Libertarian Studies (Spring 2006) by Robert Murphy and Gene Callahan. They point out that at most, argumention establishes self-ownership only to one’s mind and mouth, and only during the argument. A slave owner can argue with a slave while the slave is in chains, and then murder the slave. The superiority of the slave owner is not refuted by the owner’s asking the slave whether he prefers to be strangled or shot with a bullet.

As pointed out by Murphy and Callahan, a statist may believe that under particular conditions, the initiation of force is justified, even though when this is discussed, the parties are equally in their ability to argue.

Another refutation was made by Jason Brennan in “Hoppe’s Argumentation Ethics Argument Refuted in Under 60 Seconds.” Brennan first presents two definitions. “A liberty right is something that grants me permission to do something. A claim right is something that entails others have obligations, responsibilities, or duties toward me.”

He then writes:

“all I need to avoid a performative contradiction here is for me to have a liberty right to say, ‘I propose such and such.’ I need not presuppose I have a claim right to say ‘I propose such and such.’ Instead, at most, I presuppose that it’s permissible for me to say, ‘I propose such and such’. I also at most presuppose that you have a liberty right to believe what I say. I do not need to presuppose that you have a claim right to believe what I say. However, libertarian self-ownership theory consists of claim rights… Hoppe’s argument illicitly conflates a liberty right with a claim right, and so fails.”

Yet another refutation of argumentation is made in “Justopia” by Justin:

“That flaw is revealed by showing that intent matters. This flaw eliminates the performative contradiction aspect because one cannot, without further information, determine whether many of the statements that Hoppe would claim are performative contradictions actually are performative contradictions.”

The Lockean foundation for natural moral law does not suffer from such flaws. Based on its premises from human nature, the universal ethic has three basic rules:

Acts which are welcomed benefits are good.
All acts, and only those acts, which coercively harm others are evil.
All other acts are neutral.

It is curious why some natural-law libertarians have not accepted Locke’s libertarian ethic and have instead turned to German discourse philosophy. Perhaps the answer involves psychology and sociology rather than pure philosophy. At any rate, argumentation ethics is not the answer.

(This article also appears in http://www.progress.org )