Thursday, July 28, 2011

George Selgin's Sandbox

I think I am recovered enough from the shock to offer my first comments on George Selgin's view that Murray Rothbard was a "bad to mediocre" monetary economist, who held a naive version of Austrian business cycle theory.

In my view, Rothbard's early chapters in his book, America's Great Depression, offer the best explanation of the business cycle and best critique of opposing theories. What can you say about someone such as Selgin, who charges that Rothbard was bad to mediocre, after an examination of some of Selgin's own economic thinking?

A quick glance at some of Selgin's work and one realizes he travels in the confused world of theory that is  never linked with the real world, he speaks of the dubious measurement of a price-index, but attempts to get himself off the hook by telling us he is only discussing theory "and not the problems of implementing various price level policies." Well, please excuse Murray Rothbard for dealing in the real world and not the world of impossible to measure indexes upon which policy is to be designed.

But despite these problems, Selgin marches on and at one point writes:
Admittedly, arguments such as those made here concerning the burden of price adjustments under various price-level policies are distressingly dependent upon artificial assumptions. One must admit that, in reality, any single price adjustment can be expected to have secondary effects.
Selgin goes on to argue for a "productivity norm adjustment" but never explains why the  "secondary effects" will eventually dovetail into the price-level he desires. This is especially important given that it is difficult, if not impossible, to measure productivity gains in an ever changing world, and measures of productivity are the key to Selgin's "productivity norm adjustment." It should never be forgotten that Alan Greenspan in his memoir, The Age of Turbulence, reported that the Bureau of Labor Statistics and the Commerce Department missed the productivity gains of the personal computer!

So aside from the debate over why you would want to adjust prices from the market rate in the first place, Selgin is dealing in the never, never land where accurate price indexes and productivity levels can apparently be determined with the snap of a finger. In other words, Selgin's monetary policy prescription can't be executed in the real world. It is fairy tale stuff. And he calls, Rothbard naive for not wanting to play in his sandbox with imaginary friends who instantly and accurately calculate real world price levels and productivity. Amazing.

38 comments:

  1. Sorry, but you fell into a ditch again Wenzel.
    1. Anyone who as read BOTH Rothbard as well as the preceding works of Mises and Hayek have seen that He did not actually make original contributions to business cycle theory but rather culled the Misesian/Hayekian insights into AGD.
    2. Selgin would actually agree with you on this point. That is why he does not advocate a central bank. He realizes that it would have no way of implementing this optimal monetary policy. Ever heard of free banking?

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  2. Anyone who rides such a cool road bike can not be all that bad.

    http://www.terry.uga.edu/~selgin/riding.html

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  3. @Anonymous 12:11

    1. I didn't say Rothbard didn't use the Mises-Hayekian framework. I said he explained ABCT best. Show me any work by Hayek or Mises on ABCT that is as thorough, and precise as the early chapters of America's Great Depression, where Rothbard readily footnotes his relaince on Mises and Hayek.

    2.Selgin realizes there is no way to implement a make believe "optimal" monetary policy?

    Precisely my point. He's the one doing the sandbox play by writing papers about non-real monetary policy. That's bizarre.

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  4. Wenzel is absolutely right about the "optimal" monetary policy issue. I hope that doesn't make me a Wenzel cult member!

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  5. @Wenzel

    1. Rothbard didn't just use the framework of Mises/Hayek. He used their language nearly word by word. There was no new contribution to ABCT in AGD. All he did was to boil down the essential that had been developed before him.

    2. Didn't understand my point. He realizes there is no way to implement it THROUGH A CENTRAL BANK. His claim is that the policy espoused in his paper will be implemented in a free banking regime by the market.

    To try to make my point differently:
    Imagine if somebody writes a paper on optimal price. Aah, but then he puts in a caveat about implementation. He recognizes that there are a lot of problems that could arise from a superficial setting of prices. It does not mean that he is working in a "sandbox" because he recognizes that centrally setting prices does not work. He is merely describing the ideal as he believes would occur in a market settiong while at the same time seeing the difficulty in a planner making the optimal price.

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  6. Wenzel is also right about Rothbard's book America's Great Depression -- it is simply the best explanation for what happened and why that I have ever read. If this makes Rothbard a mediocre monetary economist then I would hate to see a horrible one!

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  7. @ Anonymous

    Your first point is moot.

    Wenzels post: "In my view, Rothbard's early chapters in his book, America's Great Depression, offer the best explanation of the business cycle and best critique of opposing theories."

    Your first critique: "1. Anyone who as read BOTH Rothbard as well as the preceding works of Mises and Hayek have seen that He did not actually make original contributions to business cycle theory but rather culled the Misesian/Hayekian insights into AGD.Q

    Answer: "1. I didn't say Rothbard didn't use the Mises-Hayekian framework. I said he explained ABCT best. Show me any work by Hayek or Mises on ABCT that is as thorough, and precise as the early chapters of America's Great Depression, where Rothbard readily footnotes his relaince on Mises and Hayek."

    Second critique:"1. Rothbard didn't just use the framework of Mises/Hayek. He used their language nearly word by word. There was no new contribution to ABCT in AGD. All he did was to boil down the essential that had been developed before him."

    Anyone can see your just running in circles here.

    "All he did was to boil down the essential that had been developed before him." Yes, that is what Wenzel is praising him for.

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  8. I seriously can't believe Wenzel is critiquing Selgin for doing theoretical work that ignores empirical reality.

    A priori anyone?

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  9. Robert, as a daily reader of your blog and someone who has been spreading your posts around the internet since almost the beginning, I have to tell you that this was a big miss.

    Selgin is one of the best ascending austrian economists. I wont address your point since I think Anonymous has already answered it correctly.

    Im a big fan of Rothbard, but he is no god. He can be criticized.

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  10. I recently saw this excellent paper posted on the Mises blog refuting FRFB a la Seglin

    http://blog.mises.org/17727/bagus-howden-unanswered-quibbles-with-fractional-reserve-free-banking/

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  11. Check out that blog of Selgin's.
    Fractional Banking. IP-socialism. Attacks on LRC "cult". Attacks on Rothbard and Rockwell.
    Koch economists.

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  12. North has a good article on this subject: http://www.garynorth.com/public/8302.cfm

    Regarding Rothbard, he took the semi-inscrutable writings of Mises and Hayek on money and business cycles and made them clear and accessible (e.g., The Mystery of Banking and What has Government Done to Our Money). He also tightly related them to the real world, e.g., America's Great Depression.

    Rothbard clearly understood and explained that you don't need/want a lender of last resort if you don't have an inflator of first resort (FRB). You don't need centralized counter-cyclical intervention if you eliminate the pro-cyclical monetary distortions. Rothbard's brilliance was in his integration of economic theory, history, legal theory, and politics. There is good reason he is becoming increasingly relevant.

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  13. FRB, junk derivatives, junk bonds, cheap money, naked short-selling - all variations of the same thing:

    Dilution of value, theft of value.

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  14. Here is Selgins's "sophisticated" and "non-naive" version of the "Austrian" credit cycle theory:

    "many Keynesians might accept the framework of monetary equilibrium offered by me. Those who do not regard liquidity trap as important factual possibility would probably accept it as entirely adequate" (Theory of Free Banking, p. 59).

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  15. The theory part of America's Great Depression is in fact one of the things I had in mind when calling Rothbard a "bad" monetary economist. He devotes much of it to arguing that prices are in fact perfectly flexible downwards, so that monetarists and others are wrong in claiming that downward price rigidities tend to cause a collapse of spending to lead to a serious collapse of sales and employment. Then, when he turns to history, he assails Hoover's interventions for deepening the depression by...contributing to downward inflexibility of prices!

    Naturally when it comes to arguing the harmful consequences of monetary expansion Rothbard doesn't hesitate to take price rigidities for granted, rather than pretending that they were invented in 1930: you can't have the ABCT if prices adjust at once to their equilibrium levels. But who can seriously believe that prices (including wage rates) are less rigid downward than they are upward? Here again Friedman had the more plausible view, which was that downward rigidities were more rather than less important.

    Concerning "Koch" economists and such: contemptible ad-hominem arguments like that are another bad Rothbardian legacy. In any event, I teach at UGA, not GMU, and so can't be tarred with that particular brush. Nor have I ever attacked Lew Rockwell. My criticisms have all been aimed at Rothbard and those who thoughtlessly repeat his monetary economics fallacies. I make no apologies for them.

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  16. Anon @ 2:06,

    There are no "policies" in a free market. Readjust your premises.

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  17. So Selgin critiques some sacred cows... this circle-the-wagons response just seems rather childish or cultish. It reminds me of the poor analysis when BitCoin emerged recently. Taking tiny quotes and dismissing them out of hand rather than taking the time for reasoned analysis. I find the intertribal sniping distasteful on both sides. I am disappoint.

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  18. Here's my main issue with this whole exchange. Except for the few times where Selgin is actually critiquing Rothbard's monetary theory, and where Wenzel is actually critiquing Selgin's critique, most of the exchange is devoted to abusive ad hominems. Grow up you guys. Find some common ground instead of bitching, whining, and constant hero-worship! It would be much more helpful.

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  19. Wenzel, Selgin comes to the conclusion that the Fed should stabilize nominal GDP. No index needed. No more interventionist than having the Fed go back on the gold standard.

    Also, it's a strange reading you have of him when you think he's somehow in favor of of policy surrounding a price index. He's vehemently against that.

    And he's foremost a free banker. Stabilizing GDP is a pragmatic solution so that the Fed does the least damage as possible.

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  20. I no less than Rothbard have always insisted that the only reliable way to have money behave in a fashion consistent with avoiding business cycles is to abolish central banks and otherwise get governments' out of the business of supplying money. Those who characterize me as apologizing central banks and centrally managed money cannot even claim to have paid attention to the titles of my writings!

    I can't help adding that comments like those of Anonymous at 9:29AM are all too common among self-styled Rothbardians: my theory is here supposedly captured by a single sentence (which is in fact no part of the theory at all), and that sentence misrepresented as implying that, because I don't see why Keynesians should reject my framework, I must myself endorse Keynesian policy conclusions! The argument is all the more foolish considering that I just spent an evening in London debating Keynesian ideas most uncompromisingly in front of 1000 witnesses!

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  21. George Selgin,

    the fact that you reject Keynesian fiscal policies does not mean that you reject their monetary policy. On the contrary, both you and Milton Friedman accept that policy most wholeheartedly. The only difference between you and Friedman on the one hand, and the Keynesians on the other, is that you and Friedman think that printing money is a more efficient way of pulling an economy out of recession, while Keynesians think its government spending and borrowing. This is not a fundamental disagreement; both of you agree that printing money in a recession is a good thing, you are debating just whether inflation or spending is more efficient. None of you does deny that inflation is efficient (in other words none of you advocate the evil doctrine of “luquidationism” espoused by Mises, Hayek and Rothbard, because of which Friedman called “Prices and Production” a very bad and harmful book). So, if Keynesians are not too worried about the liquidity trap that makes monetary policy impotent, they could accept your “monetary equilibrium” framework. Just as you said in your book.

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  22. Selgin probably wouldn't have had as much ad hominems and blowback were it not for his own ad hominem comments about Rothbard fans being cultish, not to mention the general condescending and arrogant manner in which he is acting.

    The irony is he is guilty of behaving in the same way he accuses Rothbard and his "cultish" fans of acting with the personal attacks and lashing out at those who disagree with him. Unless someone has a massive ego or complex, I am not sure why that whole attack was deemed necessary. I also say this as someone who has read some of Selgin's work before and enjoyed it, so his behavior is disappointing to say the least.

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  23. I agree with anonymous 4:41

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  24. George Selgin:

    The theory part of America's Great Depression is in fact one of the things I had in mind when calling Rothbard a "bad" monetary economist. He devotes much of it to arguing that prices are in fact perfectly flexible downwards, so that monetarists and others are wrong in claiming that downward price rigidities tend to cause a collapse of spending to lead to a serious collapse of sales and employment. Then, when he turns to history, he assails Hoover's interventions for deepening the depression by...contributing to downward inflexibility of prices!

    That's disingenuous. When Rothbard argued that prices can adjust downward, the context he made that argument is a laissez-faire market, not a government hampered market. If the government enacts regulations that make prices rigid, then of COURSE prices would not be flexible downward. Rothbard devoted a large section of MES to price controls. It would be silly to claim that Rothbard contradicted himself when he said that prices are flexible in a free market, and that price controls make prices rigid.

    Your criticism of Rothbard is desperate and reeks of nothing but mindless antagonism.

    Naturally when it comes to arguing the harmful consequences of monetary expansion Rothbard doesn't hesitate to take price rigidities for granted, rather than pretending that they were invented in 1930: you can't have the ABCT if prices adjust at once to their equilibrium levels.

    Not true. ABCT is not compromised by the existence of price flexibility. ABCT is a theory of how inflation distorts the real capital structure of the economy during a credit financed boom, which, you guessed it, changes relative prices. ABCT relies upon price flexibility. The inevitable bust is also accompanied by, you guessed it, changes in prices.

    But who can seriously believe that prices (including wage rates) are less rigid downward than they are upward? Here again Friedman had the more plausible view, which was that downward rigidities were more rather than less important.

    Friedman, and apparently you, are ignoring WHY wage earners and other economic actors would be resistant to falling wages. You have no tenable explanation, which is why you chalk it up to "resisting wage declines until starvation", but in reality, it is because of decades of Federal Reserve generated inflation, which has made prices gradually rise for decade after decade, and when people are born into such a system, and live through it, they come to adapt to price increases as a matter of course. Couple that with unemployment insurance, food stamps, and other government "safety nets", and resisting wage declines becomes yet another government creation.

    If we lived in a society with a commodity standard, and prices gradually fell over time for decades and decades, and if there were no government safety nets, then resistance to wage declines would no doubt be virtually absent. People would come to expect gradual wage rate declines as money became more and more valuable over time, and as the population increased over time.

    Concerning "Koch" economists and such: contemptible ad-hominem arguments like that are another bad Rothbardian legacy. In any event, I teach at UGA, not GMU, and so can't be tarred with that particular brush. Nor have I ever attacked Lew Rockwell. My criticisms have all been aimed at Rothbard and those who thoughtlessly repeat his monetary economics fallacies. I make no apologies for them.

    Oh please. Every time you post on Mises.org, you ad hominem all the "Rothbardians" who "have posters of Rothbard on their walls" etc. For you to complain about ad hominem reminds me of a certain kitchen item calling another kitchen item a specific shade.

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  25. I no less than Rothbard have always insisted that the only reliable way to have money behave in a fashion consistent with avoiding business cycles is to abolish central banks and otherwise get governments' out of the business of supplying money. Those who characterize me as apologizing central banks and centrally managed money cannot even claim to have paid attention to the titles of my writings!

    You have made specific arguments on what the Fed should do, what monetary policy should be, rules based central bank inflation targeting, and a host of other inflationist arguments.

    Claiming these are only ideas given the fact that the Fed has to exist, is like advising a murderer or thief on how to efficiently murder or steal, then telling others "well, if the murderer or thief has to exist, then I'm just helping them murder and steal so that they do it "efficiently."

    Not all of us have life sized posters of Milton Friedman in our bedrooms you know. Some of us have principles that will not be compromised.

    Unfortunately, by the time you self-styled Friedmanite cultists realize the errors of your ways (much like Friedman in his later life, when he came around to Rothbard's position) the damage will have already been done.

    Did you know that your name is constantly used as a straw man by anti-Austrian Keynesians and other statists who say things like "Even George Selgin agrees with me."? It's people like you who are hampering change for the better. You compromising fools perpetuate the very systems you claim to be against, and you don't even know it, because you're too busy worrying about tenure and being accepted by the establishment.

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  26. Someone who manages to tell you in line one that he was debating "Lord xyz..." and in his concluding lines disses you and the blog with the condescension befitting one who banters with the British upper-crust, should maybe know the difference between elicit and illicit?

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  27. I'm unmoved by anonymous 4:41's disappointment, which clearly indicates (1) that he is unaware of the context (David Friedman's blog, not an unprovoked ego explosion) that brought forth my remarks comparing Friedman and Rothbard and who (2) needs to look up "ad hominem."

    The phrase, to save him the trouble, refers to irrelevant references to someone's character, e.g., offered instead of attacking substantive arguments about, say, monetary economics. Anonymous 4:41 is a good example, as anyone can see who compares it to my own comments on this blog and notes how it utterly fails to address those.

    As for me, I never argued, "Rothbard is a crummy monetary economist because he commands a cult." I said his monetary economics are crummy AND that he commands a cult, and I offered argument in defense of the former claim that make no reference to either Rothbard's character or that of his followers.

    Anonymous 2:30 is evidently one of those people who thinks one can accuse anyone of anything without having to offer the slightest grounds. In fact, in that talk I referred to, with those 1000 witnesses (which will air August 3), I took an expressly "liquidationist" position.

    Finally, though I had intended to led the point slide, a "productivity norm" is one in which one lets prices adjust to changes in productivity instead of trying to offset them with M expansion, which means that it makes it unnecessary to track productivity. Had Mr. Wenzel bothered to read the theory he imagines himself to have so easily refuted, he might have noted this. But reading what other people write before attacking it is apparently not something usual on this site.

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  28. I did in fact read the original source of your comments, which is why I thought they served no real purpose. What did your comments about the supposed cult surrounding Rothbard have to do with who was the better monetary economist?

    Friedman's own father losing popularity to Rothbard outside of academia was the subject, yet even he did not find the need to make remarks similar to yours about supposed "cultish" behavior, and he certainly lacked the condescending matter in which you have behaved towards opposing views.

    As for your position that you were not attacking Rothbard's monetary econ knowledge because of the cult claims, you are merely proving my point. Using a broad brush to describe Rothbardians as cultish types who attack those with rival views -- while doing the exact same thing yourself -- as NOT being an ad hominem is quite dishonest.

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  29. Major Freedom made some good points in response to Selgin that I noticed he has yet to address.

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  30. Do you really read what you write?

    In your comment above you write:

    "Finally, though I had intended to led (sic) the point slide, a 'productivity norm' is one in which one lets prices adjust to changes in productivity instead of trying to offset them with M expansion..."

    In your paper you list as a feature of the productivity norm (P.283):

    "The coincidence of the productivity norm with the optimum quantity of money norm..."

    Optimum quantity of money? Are you not talking about expansion and contraction of the money supply?

    Please allow me to provide you with an answer, since you don't seem to read your own paper. On page 272 you write:

    "IF however the demand for money is elastic with respect to changes in real income, then (other things being equal) an increase in productivity will require an increase in the nominal quantity of money..."

    That sure sounds like "M expansion" to me.

    On another point, don't try to get off by using nominal GDP as a crutch in getting to productivity for policy purposes. You blew that possibility up right at the start of your paper (p 266) when you wrote as I referenced above:

    "This paper is only incidentally concerned, however, with the problems of implementing various price level policies (index-number and time lag problems)."

    GDP reporting is as inaccuarte and face time-lag problems of their own.

    Bottom line: Whether you use the primary factors in your construct, price-indexes and productivity or a proxy, nominal GDP, you are playing in a sandbox. In fact, the BEA announced just today about its own calculations of GDP:

    "The Bureau emphasized that the second-quarter advance estimate released today is based on
    source data that are incomplete or subject to further revision by the source agency The 'second' estimate for the second quarter, based on more complete data, will be released on August 26, 2011."

    These revisions often go back years. Talk about time lags! So aside from the accuracy and meaning of GDP numbers, the revisions make these as absurd as productivity and price-index numbers for your "productivity norm" policy.

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  31. All this discussion, specially the tone, makes me sad.

    I consider myself a rothbardian, I learned austrian economics, economic history and libertarian philosophy mostly through Rothbard or rothbardians.

    But after reading more about monetary policy and discovering free banking I had to admit after a while that free banking is the best explanation. I suggest to anyone to read about free banking without preconceptions and they will see that free banking is the future of austrian economics.

    Also, I want to point out that while Selgin has policy suggestion on how to manage the Fed, its always as a way to tame the damage the Fed does, never promoting it. Selgin is an outspoken critic of central banking as a whole and always suggest getting rid of it. This conference at one Mises Institute circle about the performance of the Fed is brilliant: http://www.youtube.com/watch?v=yLynuQebyUM

    To professor Selgin, I would suggest a better aproach when dealing with us, rothbardians. When I first discovered free banking I was put off by the tone towards Rothbard and rothbardians. It took me a while to overcome that hostility towards my ideas and have a "as much objective as posible" read of free banking ideas. Then I was hooked. Free banking "just makes sense"(TM). So IMO a more diplomatic attitude towards Rothbard would pay, f.e.: "Rothbard was great in many arereas but he got some parts of monetary policy not quite right and that lead him to make some mistakes interpreting history that we are trying to correct". There will always be some fanatics everywhere, but in general rothbardians are not specially fanatics. Dont let the ones that shout more make you take an aggressive position. Someone has to take the high road for this to end.

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  32. I do appreciate your comment, Errores. But while I admit that I can't quite manage to disguise my impatience when dealing with people who flagrantly misrepresent my and others' arguments (e.g. through devices like Mr. Wenzel's resort to selective and out-of-context quotations to prove that a work subtitled "the case for a falling price level in a growing economy" is really arguing for monetary expansion in response to productivity gains), I have generally stuck to defending the substance of my original claims.

    Bear in mind also that I've been dealing with Wenzel-type Rothbardianism for many years now, so that my impatience reflects, not merely the misrepresentations of my beliefs on this forum, but my recognition of them as part of a well-established pattern among more fervent Rothbardians.

    Finally, I, too, was a Rothbard fan once, and as strident as any. And yes, one can learn plenty from his writings, especially on history but also from much of his economics. But the fact remains that, regarded not for his role in winning people over to the libertarian movement, but solely w.r.t. the distinct influence of his monetary economics on Austrian economics, he's done more harm than good.

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  33. Sounds like "productivity norm" is another version of "hedonics" type fudging....

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  34. I agree with Errores.

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  35. George Selgin, you still haven't addressed Major Freedom's comments but addressed some of the others. Are you answering comments by your subjective preference and you ranked Major Freedom's as the hardest to refute?

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  36. George has responded to less than zero of major freedom's points...

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  37. Major Freedom can't even distinguish between Friedmanite monetarism and monetary disequilibrium theorists. His post is one big straw man, why should a distinguished economist like Selgin waste his time?

    I mean, he makes claims like this:

    "Did you know that your name is constantly used as a straw man by anti-Austrian Keynesians and other statists who say things like "Even George Selgin agrees with me."? It's people like you who are hampering change for the better. You compromising fools perpetuate the very systems you claim to be against, and you don't even know it, because you're too busy worrying about tenure and being accepted by the establishment."

    But he provides no proof. He's compromising his principles for supporting the elimination of central banking and the implementation of private banking. OH THE HORROR!21@!!!111.

    I think it's particularly telling that everyone "critiquing" Selgin uses the writing of Rothbard (which doesn't ever deal with Selgin, at all really. He tried to disprove White's work on free banking in history, but that was easily handled by White) instead of actually providing a cogent argument.

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  38. Yet he chose to respond to other posts, while ignoring the econ arguments. If you want to say he constructed a straw man argument, then Selgin is just as guilty with his attacks on Rothbard, his cult fans, etc.

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