â€œthey argue that the current system of state money means that the money supply is entirely exogenous, and under the control of the state authoritiesâ€ (p.447)
If the monetary supply is completely â€œendogenousâ€ as the Post Keynesians like to hold, the current monetary easing should not be expected to be able increase prices at all, as deleveraging and deflation is the goal either way. If the Austrians are right the monetary expansion that has taken place if continued will again lead either to higher price-inflation or credit growth.
Furthermore this presumes that Austrians hold that monetary growth under the current system can only take place via an increase in base money, or reserves. This is far from the case, but the ability, willingness and in fact expansion of base money of the central bank encourages the commercial banks to extend further credit with their legal granted monopolies and guarantees of being saved by the central bank should they find themselves in need of money. This is then a false accusation and indicates yet again that Keen seems to be unaware or unlearned of the position he is critiquing.
â€œâ€¦private banks and other credit-generating institutions largely force the state`s hand. Thus the money supply is largely endogenously determined by the market economy, rather than imposed upon it exogenously by the state.â€(p. 447)
â€œempiricalâ€¦supports post-Keynesians rather than Austrians on this point. Statistical evidence about the leads and lags between state-determined component of money supply and broad credit shows that the latter â€œleadsâ€ the formerâ€Â (p. 447)
â€œIf the Austrians were correct, state money creation would instead precede private credit creation.â€ (p. 447)
There is also the strange notion of statistically â€œprovingâ€ this by appealing to what follows of the these two aggregates, focusing on these two aggregates misses the whole institutional set up and ignores the fundamental aggression against private property and its natural restrictions on bank credit expansion that have been detailed in the works of Austrian economists since Mises and by classical authors before him.
None of these elements are discussed, thus leaving an important economic and legal aspect of banking practices out of the analysis. To claim that private banks â€œforceâ€ the state hands is simply presuming his conclusion and assuming away any guilt on the central bank for constantly expanding the supply of money. Lobbying, demanding and appealing for the monetary policy which benefits them the banks certainly do. But that does not warrant Keens label of it â€œforcing the state handsâ€. A follow-up question to that statement then is, what would the banks do if the state did not have a monopoly over money? There would be no hands to force, and they would have to go bankrupt as they should. And they would also be aware of this.
Furthermore if all banks are compelled by government edict to be a member of the state bank, and all deposits with them insured to what extent are they private?
This would at least not meet the definition of private in any other field and this seems to mere rhetoric by followers of the socialistic “Post-Keynesian” school.
If it has any importance at all, it seems to be more of the debate between the various current mainstream schools of thought and not the Austrian theory of money and banking. Austrians do not claim that all expansion of money is actively engineered by the central bank, as I have stated it can simply backstop their members and leave it to them, the problem is of course the only way any trust is placed in that backstopping is because of the monopoly over the supply of cash or “base money”.
This claim is seems even more ridiculous and thinly based once one recognises the fact that in the financial crisis of 2007-08, if the government edict interest rates were removed and market rates were allowed to form or by simply keeping the interest rates up the market participants would have deflated severely the broad money and credit aggregates thar Keen focuses on. It was in fact the actions of the central bank in the US and around the world which kept this from happening and thus illustrates the erroneous nature of his claims.
â€œmonetarism also provides an evocative counter-example.â€ (p. 447)
To envoke monetarism as a counter-example also seems to be completely missing the point and misleading. No Austrian hasÂ onlyÂ fought against an expansion of base money, but an expansion of broad money. The fact that Austrians all are against an expansion of the supply of base money, does not equate them to monetarists who also want to limit the supply of base money. Secondly, the fact that the current central banking system failed to keep credit growth from growing is no surprise.
It is precisely the reason why Austrians focuses on getting rid of central banking, and advocate 100 % market commodity money. The classical Austrian position that Keen completely ignores in his argument against them and the only true form of endogenous market money would be the money chosen under freedom of contract.
Some last comments
â€œa non evolutionary attitude towards both the existence of the stateâ€¦the state was simply imposed from outside as an alien artifactâ€
â€œThis is certainly one way to consider to the growth of the welfare stateâ€¦.an equally tenable argumentâ€¦evolved as a response to theÂ failureÂ of theÂ pure marketÂ system during the Great Depressionâ€
These comments appear as a weakness of the Austrians, but it is more of a weakness and misleading description by Steve Keen. The existence of the state is seen as evolutionary by rothbardians, as state rulers and the nature of their justifications and the choice of state leaders, and the peoples convictions and interactions has changed. But if by evolutionary it means that the state will or must naturally arise, then this is of course an anathema to the Rothbardian view of the state.
Secondly, it is weak because it confuses the state as an institution with the welfare state. As if the growth of state argued against is only in the form of the welfare state.
Thirdly, it is downright dishonest to label the period before or during the Great Depression as a pure market economy. Especially to a group of scholars who locate the problem of business cycles with fractional-reserve banking, government meddling with money and credit, in its worse form central banking and fiat money. As central banking in America was established in late 1913, the history of events is more fitting with the Austrian detest of central planning in money, banking and finance simply broadening out the business cycle and exacerbating it. It is in fact the Post-Keynesians and in general the economic professions admiration for central planning in this arena which is an anathema both in the historical examples and the basic theory of a dynamic/equilibrium market economy. To say that they are equally tenable is just a statement, and in contradiction with the historical facts around government intervention in the early 20thÂ century.
I get the sense that Steve Keen has simply attempted to fill his â€œAlternative schools of thoughtâ€-chapter on the Austrians with something, while actually not investigating the literature. Anyhow, the above comments are only certain observations and a more general critique of the Minsky approach to business cycles and other concepts in Keens â€œKeynesianâ€ economics will be investigated and discussed in the future.