An explicit bet

By November 2012, the unemployment rate in United States was 7.7% and inflation, as measured through the Personal Consumer Expenditures Index (core), was 1.6%.

The Fed members seemed to agree that unemployment was to high and that they were ready to concede a slightly higher inflation in order to reduce the unemployment rate.

This is how on its December FOMC statement, the Fed decided to undertake a monetary policy which basically increases the quantity of money in the economy. The goal was that more money means more credit and more general activity and, at the end, more employment (less unemployment) and production, even if recognizing a cost through more inflation. But the Fed is more explicit: the statement asserts that a reduction on the unemployment rate is going to be pursued as long as inflation doesn't reach 2.5%

The Phillips curve is a supposed relation between unemployment and inflation. What is the shape of that curve at any point in time? What does it shift (changes the shift) of that curve? Those are empirical questions over which economists have debated for years.

With their very explicit, quantitatively measurable policy, what the Fed members are telling amounts to bet that the Phillips curve has a specific shape, a shape such that lays under the point {unemployment: 7.7, inflation 1.6}. This is so, because only such a curve (drawn as the green curve in the graph), allows to reach an unemployment rate of 6.5% or less before reaching an inflation of 2.5% or more.

However, if the Phillips curve lays over the point {unemployment: 7.7, inflation 1.6}, i. e. if the Phillips curve has a shape as that of the blue curve on the graph, then the Fed is going to reach the 2.5% inflation milestone before reducing unemployment under 6.5%, being therefore unable to reach the undartaken goal of having an unemployment of 6.5% or less with an inflation of 2.5% or less.

Next months and years are going to be really interesting in matching reality against the Fed view on the Phillips curve, is going to be a rarely good contribution to the empirical debate, and is going to give a very clear case study to economics teachers.

Green or blue? Make your bet!

Money proper versus money representatives

There's a distinction praxeologically very relevant to do: money proper and money representatives.

The distinctive feature of money proper, vis-à-vis a money representative, is that money proper absolutely cancels a debt.

The distinctive feature of a money representative, vis-à-vis money proper, is that a money representative serves merely as a sort of IOU. It doesn't matter whether or not the creditor sometime decides to claim debt cancellation. It doesn't matter if the debt is against a specific debtor or against whoever who happens to fulfill certain more or less predetermined requirements. What matters is that a money representative, unlike money proper, doesn't cancel a debt.

This classification doesn't exactly follows Mises's Appendix B to his outstanding The Theory of Money and Credit. I consider Mises's categories as innecesarily tainted by historic development rather than praxeologic relevance.

The rather materialistic distinction between commodity monies and fiat monies is a nothing but a rough approximation to the important distinction pointed out above.

Distinction between money proper and money representatives belongs to the (praxeologic) pure theory of posesion. As such, the institution of legal property plays a major role. This could result in problems to define concrete assets. For instance, I'm not pretty sure if the Costa Rican colones which I carry in my pocket are no liability to anyone or if I could go to court to demand that the Central Bank of Costa Rica give me something in exchange for colones. Currently, as the Central Bank is commited to free sale of dollars (receiving exclusively colones), my colones could somehow be seen as money representatives of dollars proper.

This sheds light on other important aspect of money representation. Effective substitutability requires a reasonable expectation of the price of the credit instrument (money representative) in exchange for the asset which cancels the debt (or alternatively for another money representative, not homogeneous with the original).

As money qua money (this is: without taking into account its use value, but exclussively its exchange value) requires the expectation of it being accepted in an eventual future exchange, it could be argued that money qua money is a representative of something else, that money money qua money is (praxeologically though not legally) nothing but a representative! Ironic as it sounds, this is precisely the core of Macleod's credit-theory of money. (1)

(1) On the difference between use value and exchange value, see Menger's Principles of Economics, chapter VI.

A recondite source of money supply

Not only coin minters or check issuers are money suppliers. Every single agent who is in disposition to sell the money he owns adds to the supply of money.

Cost-pushing and demand-pulling as monetary phenomena

So called cost-push inflation and demand-pull inflation don't have to be viewed as explanations contrary to the idea that inflation is a strictly monetary phenomenon. Increasing prices through cost-pushing and demand-pulling are indeed present in inflationary episodes and can validly be recognized from a monetary viewpoint. They have, however, to be viewed not only as manifestations or symptoms but as causes of inflation, via either money supply or money demand.

This is true even if you use the monetarist frame. For instance, remember of Friedman (1) setting down wages as a determinant of the velocity of money. According to this, a rise in wages (as in a policy of rising minimum wages) could not necessarily be reflected in unemployment but could rather put pressure on prices. In the extreme case, we would have:

(↑w)L+rK=
(↑v)M=
(↑P)Q

This is: we could have, following the necessary logic consequences of Friedman representation of v, a cost pushing on prices within the equation of exchange (or at least the Friedmanite version of it).

(1) Friedman, Milton. The Quantity Theory of Money−A Restatement. 1956 -University of Chicago Press, 1987-. Page 293. See particularly equation 13.

Science of money versus science of value

The essence of difference in such dichotomic terms as producer-consumer, income-expenditure, and the like has its very core in the use of (objetive) money. Such dichotomies cannot be valid in a science of (subjetive) value.

Maybe the most common and general false dichotomy in this sense is between "economic" and "non-economic". Assertions such as "Man has not just economic interests but he has social, politic, moral, sensual, and affectional ones." bluntly neglects the meaning of "economic" which the economist gives (or rather: should ideally give) to the term.

Given the particular realm of economics and its method, the qualificative "economic" can be validly given to any volitive action. The fact that you aren't choosing between an amount of money and a peach, but between saving your father from a fire or securing your life to watch over your baby son is beside the point from an economic point of view. The economist qua economist must acknowledge the same pattern of behavior in both phenomena and their susceptibility to be analized with economic theory.

Although there is a valid and huge domain of non-economic phenomena (including everything in which no volitive action is being analyzed), usually the qualificative "non-economic" is used for non-monetary, ultimately economic, phenomena.

Why doesn't economics limits itself to monetary phenomena? First of all: if you have a method (praxeology) which effectively allows you analyzing some sort of phenomena why should you reject ad portas such field of analysis? Second, and most important it's an argument due to the fact that much of the critique to free markets is based in the suposition that market only means fighting for exclusively and madly hoarding money in spite of love, peace of mind, etc. To reveal the inaccuracy of this critique, it's basic for economics to clearly explain that free markets are about better ways to pursue your goals, notwithstanding wheter they are more time with your family, enjoying the beauty of a dusk in the hills, or happiness for helping others.

It's a shame that even so prestigious (and deservedly so) as James Buchanan fall in the error of thinking that "economic motivation is not pervasive over all human behavior" (1). They don't seem to have understood Kirzner's essay (2) on what economics is about.

(1) Buchanan, James. What should Economists Do? 1979 -Liberty Press-. Page 66.
(2) Kirzner, Israel. The Economic Point of View. 1960 -Institute for Humane Studies, 1976-.