Thursday, July 14, 2011

Murphy Defends the Dark Side

My charge that Bob Murphy has moved over to the dark side sure has lit a firecracker under the old boy. He has responded with a comment at my original post and in a separate post at his blog, and has declared victory more times than Thomas Dewey did in 1948.

He does seem to have one defender. Gene Callahan wrote in a comment to my post:
Bob Murphy wrote: "'I'm amused at how many people are high-fiving Wenzel here"

As it became clear to me as soon as I made any comments that were "off the plantation," that is because they don't care at all about understanding the issue. They care about "their" side crushing the "other" side.

I do have to give it to Callahan. He does know about getting crushed:

Gene Callahan after a walk in a London park.

And, although, the word "period" does suggest some ending to the debate, Callahan does, 120 seconds later, make a second comment:
"I agree with Robert Wenzel completely on his point that savings in a couch are different than savings in a CD."

Uh, yeah, as would Murphy and Keynes!
This is a comment that helps bury Murphy.

Here's what I mean. Let us begin the examination of Murphy's "defense". He writes in the comments:
I was going to make a Darth Vader joke, but this is actually an important issue and I'm amused at how many people are high-fiving Wenzel here, when he is the one who is clearly using a weird, non-layman's definition of "saving."

15-year-old Johnny mows my lawn every week, and I pay him $20 each time. Every week, he spends $15 of it going to the movies with his friends, but he puts $5 in a piggy jar on his bureau.

After a year, he has accumulated $5x52 = $260 which he uses to buy a nice watch. Johnny says, "I'm sure glad I consumed less than my income all year, saving $5 per week. Then I used my accumulated savings to buy a watch. I deferred consumption all year in order to buy a nice good later on."

Wenzel says, "What the heck are you talking about? Are you a Keynesian Johnny? You haven't saved at all."

Are you guys all comfortable with that? You don't think Johnny was saving $5 per week?
What is Murphy doing here but simply bringing in another definition of the word savings? And none other than Gene Callahan backs me up on this point. It's obvious to Callhan, to me and Callahan suggests to Murphy that is is a different kind of use of the word savings. My debate with Murphy was over the definitions that Keynes used for savings, bringing in another definition that has nothing to do with Keynes discussion is an act of a desperate man who feels on the inside exactly how Callahan looked after that infamous walk in the park.

In his post, Murphy also gets hung up on this other definition of savings. This, it should be noted, is a minor point in my overall argument. This is what I wrote:
Bottom line, by stepping away from the way the term savings is normally thought of (You don't think that the money in you wallet is part of your savings, but you do think your bank CD is part of your savings) and the way it is used by other economists, Keynes creates mass confusion and little else.

Murphy may think that this is a weird definition of savings, I don't, but for the sake of this argument, let's go along with this and say I am wrong in my view with how the word savings is normally used, how does this have any bearing on the main theme of my argument that Keynes uses the term savings simulataneously in two different senses? Answer: It has no bearing. In desperation, Murphy is attempting to swat at flies, when a bazooka has blown the main part of his argument away.

Murphy never ever addresses the fact that Keynes confusion exists because he uses the word  savings in two different senses. This is the heart of the matter. Instead, he tries to bring in the yield curve as his defense on some bogus difference between "liquidity" and "time preference". He writes:
Austrians argue that market interest rates are fundamentally about time preference, not about liquidity. Yet how then does the Austrian explain the yield curve? If I want to defer $1,000 in potential consumption today, to a point ten years from now, then time preference explains why I have to earn a positive interest rate. Fine.

But why should it matter how I save that money? For example, if I roll it over in 12 different one-year bonds, then I expect to earn less total interest than if I dump it into a 10-year bond at the outset. (I’m assuming an upward-sloping yield curve.) So why should that be the case? You can’t say, “Because other things equal, people prefer to consume today rather than 10 years from now.” That doesn’t explain why the series of 10 one-year bonds should give me (in expectation today) a lower rate of return over the next decade, than the single 10-year bond.
The standard (and obvious) explanation for the yield curve invokes the desire for liquidity.
In my original post, I made clear that Murphy is really just playing a semantic game here. I wrote:

Let's continue. Keynes introduces the word, "liquidity", which he states is the "reward" for not holding cash as a cash balances, but lending it out.
..the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period.

Austrian economists (including Mises) would call this "parting with liquidity for a specific time period", a demonstration of time preference. Keynes is simply using different terminology for the same concept. (Note: Keynes uses the term "liquidity" in different senses through out The General Theory, so I am only discussing the manner he uses it in this paragraph). Austrians would also use the word "cash balance" for what Keynes calls liquidity here. When all is said and done, what Keynes is just saying here is that interest IS a payment for time preference. Give up the use of your money temporarily and you will get paid for it.
Murphy never addresses this charge, he simply rants on as though there is a difference between liquidity, and the desire to hold cash balances and "parting with liquidity for a specific time period", i.e. savings as a result of time preference.

Bottom line: Murphy uses semantics to develop what he thinks is a "Keynesian theory" of interest which is separate and distinct from Austrian theory of interest. Murphy writes:
Let me reassure libertarian readers that even if it turns out that “liquidity preference” has a lot to do with the money rate of interest, we aren’t forced to therefore support fiscal stimulus. “Keynesian” policy prescriptions do not at all follow from a “Keynesian” theory of interest by itself.
In fact, Keynesian interest rate theory is simply a complex, convoluted time preference theory that because of its many confused twists an turns leads to bad policy decisions. For some  reason Murphy wants to use this convoluted Keynesian interest rate theory but escape its equally convoluted policy prescriptions.


As I finished the above part of this post, I see that Murphy has responded to my question on the use of the word savings, and has, apparently, tossed his piggy bank defense.

He has found a quote by Mises, where Mises uses the term savings to mean both a cash hoard and investment. In this quote, Murphy attempts to turn Mises against me, but the exact opposite takes place. Mises recognizes that there is a difference between investment and hoarding, even if they are both called savings. Here is the quote from Mises.

In recent years economists have paid special attention to the role cash holding plays in the process of saving and capital accumulation. Many fallacious conclusions have been advanced about this role.
If an individual employs a sum of money not for consumption but for the purchase of factors of production, saving is directly turned into capital accumulation. If the individual saver employs his addi- tionai savings for increasing his cash holding because this is in his eyes the most advantageous mode of using them, he brings about a tendency toward a fall in commodity prices and a rise in the mone- tary unit’s purchasing power. If we assume that the supply of money in the market system does not change, this conduct on the part of the saver will not directly influence the accumulation of capital and its employment for an expansion of production.18 The effect of our saver’s saving, i.e., the surplus of goods produced over goods con- sumed, does not disappear on account of his hoarding. The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings. If nobody employs the goods-the nonconsumption of which brought about thc additional saving-for an expansion of his consumptive spending, they remain as an incre- ment in the amount of capital goods available, whatever their prices may be. The two processes-increased cash holding and increased capital accumulation-take place side by side. [Human Action, pp. 518-519]
Note the end of this quote, Mises calls them "two processes", Mises is thus not confused that two different things are going on, whereas Keynes puts the "two processes" together and argues as if they were the same. The exact opposite of what Keynes is doing. This is the Keynes (and apparently Murphy confusion), Mises knows two separate things are going on. Keynes and Murphy are muddling it all together in a manner which create nothing but madness and havoc.


  1. You part with liquidity by exchanging money for an asset. You don't get paid interest at the point of reselling that asset to regain liquidity.

  2. Boys, boys- you are all 3 pretty (well, maybe Gene has seen better days)

    I hope this little inter-austiran squabble is in good fun, because it seems sort of...petty. It's definitely beneath you- you are well respected economists.

    Kiss and make up, drop it, and agree to disagree ON A VERY MINOR POINT!

    Geez, there are bigger fish to fry!

  3. I think this conflict is partly a "heap paradox." How many grains does it take to make a heap? If we try to define a point as the difference, then we should sensibly acknowledge that +/- 1 grain at that cusp is nevertheless a meaningless difference. This is a continuum problem.

    Yes, they are the two processes by degrees, but they approach each other and an exact point of difference is not meaningful.

    I consider my 9mm ammo, silver coins, food stockpile to be both hoarding and investment.

  4. OK, RW, three points:

    1) "My charge that Bob Murphy has moved over to the dark side..."

    Is bizarre, because Bob is just agreeing with his own doctoral thesis, which he wrote, what, 8 years ago?

    2) "And none other than Gene Callahan backs me up on this point. It's obvious to Callhan, to me and Callahan suggests to Murphy that is is a different kind of use of the word savings."

    That's not what I said. Look, RW:
    GC: "A skunk is a different kind of mammal than is a raccoon."
    RW: "See, Gene agrees with me that "skunk" uses a different definition of "mammal" than does "raccoon"!

    I am saying these are different species of the same genus "savings." You are claiming that there are two entirely different genera. I don't agree with that at al. I agree with Murphy, and Keynes, and Mises, and most other economists, I expect.

    3) What kind of creep uses a photo of the aftermath of someone's near murder as a cause for lots of snickering?

  5. "I consider my 9mm ammo, silver coins, food stockpile to be both hoarding and investment."

    Excellent point, decentralist. I wholeheartedly agree, and raise you gold coins and 200 gallons of diesel fuel.

  6. Bob,

    I think there's a lot of quibbling among Austrians themselves over semantics and most of this quibbling don't lead to anything meaningful. Just arguments for the sake of arguing.

    I do agree on your point on Keynes confusing liquidity and time preference. Murphy's point on rolling the money over 10 1-year bonds to provide same interest as 1 10-yr bond makes no sense whatsoever. 10 1-year bond choice's time preference is not the same as 1 10-yr bond, hence the interest difference. Liquidity is just reduced time preference, full liquidity = time preference is zero, immediate cash.

  7. @Gene Callahan

    Rest assured I wouldn't have used the photo if you had died. My use was more a celebration that you are active and still blogging today, despite a brutal beating.

  8. "a celebration that you are active and still blogging today, despite a brutal beating. " - That's how I saw it too.

  9. @Gene Callahan

    Oh, here we go. It's a "near murder" now? A little melodramatic don't your think, Gene? Professional boxers sustain way more trauma. If the assault consisted of repeated blows to your face, or if the thugs had attempted to strangle you, then we could discuss "near murder", but they didn't, so relax.

    Mike Tyson's opponents know way more about "near murder" than you, Gene:

  10. Dale, this issue is actually far more important that you seem to realize. It has so many implications that it is capable of altering the course of human history. No, that's not an exaggeration.

    Wenzel's argument that Keynes treated two different conceptions of saving as if they were the same thing (hoarding and investing), has not been challenged at all by Murphy, and yet Murphy is claiming victory as if he refuted Wenzel. Murphy needs to realize that Keynes' conflating of the two is not only why Keynes was led into thinking that liquidity preference determines interest rates, when in reality Keynes is just using very sloppy wording to say that interest is due to time preference, but also that Wenzels' actual argument is that Keynes conflates the two.

    The Austrian knows that "parting with liquidity for a definite time period," when made more clear, is just another way of saying a higher time preference.

    "Parting with liquidity" to buy a consumer good is not increasing one's saving relative to not buying that consumer good and hoarding cash instead, but because of the Keynesian confusion, we are supposed to conclude that this action should be rewarded with money interest.

  11. I have a spare $100k lying around. I can leave the money in an on-demand bank deposit account earning 5% or I can invest it in a 2 year term deposit earning 6.5%. I choose to keep my money in the on-demand account as I want fast easy access to my cash at a moment's notice. I am prepared to accept the lower rate of return because I do not want my funds locked up for two years. My Investment decision is based on my personal time preference for my money (in this case resulting in me having greater liquidity at the cost of a lower rate of return).

  12. Gene, I'm hoping that RW used the photo as a gentle tease, and that you 2 are close enough that such a thing isn't crossing the line. I've always enjoyed your work, and I'm glad you survived with no brain damage. You look like I did after a near fatal bike accident in 2001.

    You're right, major, it could become a major schism, but the tone seems to have become rather sour. Just trying to inject some levity.

    Hell, I don't believe in absolute ownership of property (instead preferring a native American influenced view of stewardship over absolute ownership) but the practical result is nearly the same. I guess I would need to delve into the gory details of the Wenzel/Murphy "Rumble in the Blogosphere" to get a more nuanced view, but that's above my pay grade.

  13. While time preference is a good explanation of original interest, it's not for market interest rates. I think opportunity costs is better today.

    People keep cash for a reason, a big one being security. If you're going to persuade them to exchange cash for an asset you'll have to compensate them for the opportunity costs of the loss of security. That would take care of original interest and any risk free rate.

    At the same time, the future is uncertain and the investor may not get his money back, so you'll have to pay his opportunity costs for risk.

    Finally, if he decides to part with cash and buy an asset, he will compare substitutes and their rates of return.

    Opportunity costs explains time preference.

  14. Here's a great quote from Keynes on "savings":

    "―The best guess I can make is that whenever you save 5/- you put a man out of work for a day. Your saving that 5/- adds to unemployment to the extent of one man for one day; and so on in proportion." Essays in Persuasion, p. 152.

  15. Gene didn't sustain any brain damage? Just kidding, Gene!

  16. This comment has been removed by the author.

  17. I've written several posts on this controversy over at my blog. This is a good one summarizing things. In particular, it shows that Major Freedom is making up stuff on the fly, so let's hope he is more careful in the future, with the fate of Western civilization hanging in the balance.

    Also, Gene's analogy with mammals above is correct, and it's why I haven't been arguing with Wenzel anymore. Keynes is saying, "It is savings whether I defer consumption and allow my cash balances to grow, or whether I defer consumption and allow my holdings of T-Bills to grow. Yet I only earn interest on the latter, so clearly interest is not a return to 'saving' in general."

    To rebut this, Wenzel points out that cash and T-Bills are different things. Right, no one denies that.

    The point is, though, the if I defer consumption that is saving, and I can channel that saving by investing in larger cash balances. Mises and Rothbard agree, as I show in the above link.

  18. "Oh, here we go. It's a "near murder" now? A little melodramatic don't your think, Gene?"

    You were there, huh? The yobs stopped kicking me in the head because a train pulled in. They very likely would have kicked me into a coma had it not.

    Robert: OK.

  19. " If the assault consisted of repeated blows to your face..."

    Repeated kicks to the head, for several minutes. Two of my teeth had punctured my cheek and my nose was broken.

    What kind of idiot wrote this comment?

  20. "The point is, though, the if I defer consumption that is saving, and I can channel that saving by investing in larger cash balances. Mises and Rothbard agree, as I show in the above link."

    This is the definition used by every major school of economics except the "Wenzel-Major-Freedom" school.

  21. Gene, did you have a concussion? You better at least have had a concussion.

  22. I think Murphy has won this debate on content. I think he continues to win on civility. The use of embedding that photo of Dr. Callahan after he was assaulted in an argument over the definition of savings is bizarre at best, and really despicable at worst.

    I think the way you conduct yourself in debates says much about your character as well as the quality of your information. Put another way, if one is civil and open to the ideas of others, I put a much higher value on his knowledge, than the ideas of those whom rabidly attack all those who disagree with them.

    I definitely credit Dr. Murphy's style for helping me get out of the mindset that anyone who doesn't 100% adhere to every drop of Austrian Economics is an idiot and must be proven wrong. In fact, I have to credit Dr. Callahan to some degree for helping me in that area too. Not that he is necessary the most friendly partner in these exchanges, but rather that he is clearly quite intelligent and more often than not his criticisms of libertarianism have merit. I recognized that instead of focusing my efforts on attacking him for questioning the sanctity of the NAP or any other aspect of approved libertarian views, it is infinitely more beneficial to myself and libertarianism to instead address my energy on the holes within the theory and trying to understand both viewpoints.

    The Internet as a tool is mind-boggling in its capacity for change. If we could shift away from attacking others and defending existing viewpoints and instead put a higher emphasis on the desire to learn and exchange ideas (not attack and defend) I think it would be infinitely more beneficial for all.

  23. Interview with a zombie, indeed.