John Carney Replies

In the comments section, John Carney has replied to my earlier post with regard to his view on unemployment. I reproduce his response and then offer a rejoinder.

Bob,

I know [sic] see a a critical difference between your outlook and mine. You see market processes as a panacea for the economy, much the way statists see the government as a panacea. 

I don't think we have easy solutions to life's problems. Market processes may be the best we have available but that does not mean things like unemployment go away just because we do away with intervention.

There's nothing in Austrian economics that suggests otherwise. Unemployment can indeed arise, even at high levels, because of natural shocks, shifts in consumer behavior or technological innovation. 

For example, suppose all the lobsters of Maine die out. Or consumers suddenly decide that lobsters are disgusting. It doesn't really make a difference whether it is a supply or demand shock.

In any case, the lobstermen are now redundant. They have skills for which there is no market. They must now take jobs that demand no skills, perhaps leaving their homes in search of unskilled labor.

But note that nothing in this story means there is a demand for more unskilled labor anywhere. So these new workers must necessarily compete against the already in-place unskilled workers. 

This might have the effect of pushing wages down. On the margin it probably will. But employers face non-wage related costs of replacing experienced workers with new workers, including the cost of uncertainty about the ability of the new workers. 

What's more, wages can only go so low. They are greater than zero-bound. In fact, they are bound at the level of subsistence. Workers who cannot afford to eat will not work. This is not caused by government intervention but by human action.

Doesn't it strike you that unemployment can arise in this situation, without any government intervention? Or do you think this is somehow impossible? 

Do you not regard this as at least unfortunate? That the once proud lobstermen now reduced to poverty and most likely unemployment strikes me as a social evil. It may, perhaps, be a necessary evil if the solutions would inflict greater evil. But why not at least admit it is a bad result.

I think your view that no bad results can arise from market processes lets you off too easy. It is harder, nobler, and takes more courage to defend markets that are not perfect and do not always result in progress.

I think it is also better tactically. To most people, the claim that unemployment is not a social evil makes you seem cold-hearted. The claim that unemployment cannot arise but for government intervention makes you seem out of touch with reality. I understand that you are neither of these things, that you have good reasons for holding these positions and good intentions, but I am not the one you need to convince about the justice of market processes.

For those of you who don't know, I regard Bob as a friend and an ally. He's frequently promoted the writings of me and my brother, Tim Carney, on EPJ. I think EPJ makes a valuable contribution to our public debates about politics and economics. So I hope my comments here will be read in the friendly spirit in which they are offered.

As always,

John Carney

Hi John,


You mention that unemployment may rise to high levels, but then use the example of lobstermen who find themselves unemployed. This a case of specific unemployment and not broad-based unemployment, but allow me to discuss this situation for a moment.


I never intended to give the impression that unemployment can never exist. Under the circumstances you outline, the lobstermen would surely be unemployed while they searched for new jobs. Indeed, in my original post I made it clear I was talking about long-term unemployment:

 Long-term unemployment is the result of two factors: minimum wage laws and unemployment "insurance" payments... I see no other factor that can cause unemployment (outside of some very short-term unemployment when a person searches for a new job)

But, more important, I do not deny that at times unemployment can become massive: 

We see clusters of unemployment in economies at times when a central bank exists and manipulates the money supply, which results in the boom-bust business cycle. But this has nothing to do with "capitalist economies" and everything to do with central banks. During the bust phase, sizable unemployment occurs because the economy is going through a readjustment phase following the distortions caused by central bank money manipulation during the boom phase. But even this unemployment would clear up fairly quickly, if allowed to do so. The unemployment tends to linger only as a result of the minimum wage laws and unemployment "insurance" payments which hinder the readjustment process from taking place.

But back to the lobstermen, you write that lobstermen may not be able to find jobs. You start off first by writing:

 In any case, the lobstermen are now redundant. They have skills for which there is no market. They must now take jobs that demand no skills, perhaps leaving their homes in search of unskilled labor. 

But note that nothing in this story means there is a demand for more unskilled labor anywhere. So these new workers must necessarily compete against the already in-place unskilled workers.

But, you then write:

What's more, wages can only go so low. They are greater than zero-bound. In fact, they are bound at the level of subsistence. Workers who cannot afford to eat will not work. This is not caused by government intervention but by human action. 

Doesn't it strike you that unemployment can arise in this situation, without any government intervention? Or do you think this is somehow impossible?  

Do you not regard this as at least unfortunate? That the once proud lobstermen now reduced to poverty and most likely unemployment strikes me as a social evil. It may, perhaps, be a necessary evil if the solutions would inflict greater evil. But why not at least admit it is a bad result.

The first part of what you write has some truth. The basic supply and demand curve teaches us that as supply increases, the price falls, but it nowhere says that the demand curve would simply disappear for some workers. That would make no sense. If for example, there is an economy with 10 workers, each earning $100 per week, if nothing else, if another 10 workers appear on the scene then revenue for the 20 workers would be $50 per week. That's how supply and demand would adjust to an increase in the supply of workers. But, before you charge me with being harsh and not caring that the pay to workers has declined, please keep in mind that the consumers of lobsters now have more funds with which to increase their demand for other products, since they are no longer purchasing lobsters. You completely fail to consider this part of the equation.

Net, net, when demand shifts down in one area, it increases in another. As for your argument that there is a zero-bound to wages and that workers can't work who are starving. In one sense, I agree with you that this is a natural lower bound to wages. But, I think it has little to do with a plentiful country such as the United States, But further if anywhere, I see a bunch of men starving and I am an entrepreneur, I obtain land and put these men to work on the land and pay them a portion of what they are going to produce.

So I just don't get how market unemploymnet is a "social evil". If lobsters die off or people lose their appetite for lobsters, it is true that lobstermen will be out of a job as lobstermen, but entrepreneurs will be out attempting to find new work for these men immediately. Where is the evil?

In my view, the problem in the United States is not one of wages plunging to starvation levels, if we remove minimum wage laws. Rather that many now who can not find jobs, starvation or otherwise, will at last be able to join the job market. In other words, the removal of minimum wage laws, removes evil.

The highest level of unemployment is among black male teenagers. Because they are not employed, their income is indeed zero. If the minimum wage is lowered, they will finally get a job and learn basic jobs skills and certainly have more money in their pocket than they do now.

The government is who failed these youth in the first place by failing to give them a decent education, now the government is pricing them out of the jobs market as a result of minimum wages. That's evil!

Finally, John I would like to comment on your opening paragraph where you write:

  You see market processes as a panacea for the economy, much the way statists see the government as a panacea. 

I see a huge difference between the way I view the economy and the way statists do. 


My view of the great beneficial powers of free markets is based on understanding the deductive reasoning of the implications of how man acts, as outlined by the great economists, Ludwig von Mises, Friedrich Hayek and Murray Rothbard. I see the statist view as making significant errors in their thinking. 


If you are attempting to imply that my belief in the market process is somehow mystical, you are wrong. Starting from the premise that man acts, by deduction, I can prove out the superiority of free markets. I am not shouting out "free markets" without the ability to logically back up what I say.


John, we'll have to go over this more the next time we have a beer.

Oh Brother (John Carney-MMT Edition)

CNBC's John Carney tweets:

Just gave a plug for MMT on [CNBC's]Power Lunch!

A Rejoinder to John Carney on MMT and Austrian Economics

CNBC's John Carney has responded to my earlier comments on his favorable view of Modern Monetary Theory.

In his response, Carney writes:

The MMTers believe that the modern monetary system—sovereign fiat money, unlinked to any commodity and unpegged to any other currency—that exists in the United States, Canada, Japan, the UK and Australia allows governments to operate without revenue constraints. They can never run out of money because they create the money they spend.

Here is problem one with Carney's view of MMT. MMTers do not hold that all fiat money is the same. Although they object to Federal Reserve notes, they see no problem with a fiat currency being issued they call "US notes".

Here is MMTer  Bill Still, who is seeking to become the Libertarian Party presidential nominee:

A sovereign nation does not have to borrow, in fact, being debt-free is the very definition of sovereignty. Pay off the existing bonds -- which is our National Debt -- as they come due, but pay them off with debt free U.S. Notes (or their electronic equivalents) instead of Federal Reserve Notes, which are all borrowed into existence.

Here is MMTer Cullen Roche on fiat money:

Money is always created by the state and must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces.

Thus, when Carney tries to give the impression that MMTers and Austrians have a lot in common, he is just wrong. Austrians reject the idea that a fiat money of any sort is necessary in a highly industrialized economy (and any other type economy). A gold coin standard could function much better in the eyes of Austrians. A government couldn't inflate a gold standard at will, further the Austrians see no need to ever inflate a currency, unlike MMTers.

Here's Roche again:

The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary

An Austrian simply doesn't see the world this way, where "irrational participants" occur on such a scale that they must be counteracted by government. An Austrian would first ask, if there are so many "irrational participants" who is to say they aren't in government also? Remember, before the real estate crisis, it was Fed chairman Bernnake who said there was no problem with the real estate market.

Secondly, Austrians would argue that the "cluster of errors"s made because of fiat currency creation are what cause the boom-bust cycle and that without fiat money creation no such "cluster of errors" would occur. Thus, the Austrian position here is diametrically opposed to the MMT view that there are times when monetary inflation is called for.

Carney writes:

The MMTers think the financial system tends toward crisis. Wenzel writes that the financial system doesn’t tend toward crisis. But a moment later he admits that the actual financial system we have does tend toward crisis. All Austrians believe this, as far as I can tell.

What has happened here is that Wenzel is now the one confusing the world as it is with the world as he wishes it would be. Perhaps under some version of the Austrian-optimum financial system—no central bank, gold coin as money, free banking or no fractional reserve banking—we wouldn’t tend toward crisis. But that is not the system we have.

The MMTers aren’t engaged with arguing about the Austrian-optimum financial system. They are engaged in describing the actual financial system we have—which tends toward crisis.

They even agree that the tendency toward crisis is largely caused by the same thing, credit expansions leading to irresponsible lending.

If I say that automobiles don't tend to drive off cliffs, but if I am looking at a baby that is behind the driving wheel of a car that is about to go off a cliff and I say, "Hey, that car is about to go off a cliff." It doesn't in anyway mean that I am saying all cars will go off cliffs.

In the same way, the financial system, like a car, does not have a tendency to drive off a cliff. If the Fed prints money it may go off a cliff, just as a car may go off a cliff when driven by a baby. My solution for the cars being driven by babies is to stop the babies from driving cars, for the economy, it is to stop the Fed from driving the economy. To say that I should just deal with the reality of a baby driving a car and hop in the back seat, makes no sense. Anymore than it makes sense, when arguing monetary policy, to say hey just deal with the Fed's inflationary boom-bust ways.

Carney then writes:

The MMTers say that “capitalist economies are not self-regulating.” Again, Wenzel dissents. But if we read “capitalist economies” as “modern economies with central banking and interventionist governments” then the point of disagreement vanishes.

John, puhleeze. Of course, if you define capitalism to mean, well, the exact opposite of capitalism "the point of disagreement vanishes."

Carney writes:

Wenzel’s challenge to the idea of functional finance is untenable—and not particularly Austrian. He argues that the subjectivity of value means it is impossible for us to tell whether something is “good for the economy.” Humbug.

I should first note that I specifically state that I am referencing how "fiscal policy should be measured" Indeed, I further write:

Thus, it is extremely dangerous to go around talking about what is "good for the economy", especially when you are talking fiscal policy.

Far from this being "not particularly Austrian", it is at the heart of the Austrian view that subjective value can not be measured in the pubic sector ( as opposed to the private sector where exchange tales place voluntarily between two individuals). Indeed, the Austrian economist Murray Rothbard, even suggested that ALL government spending is a negative that should be subtracted from GDP:.

..most of the resources consumed by the maw of government have not even been seen, much less used, by the consumers, who were at least allowed to ride in their buggies. In the private sector, a firm's productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government's "productivity" is measured—mirabile dictum—by how much it spends! Early in their construction of national product statistics, the statisticians were confronted with the fact that the government, unique among individuals and firms, could not have its activities gauged by the voluntary payments of the public—because there were little or none of such payments. Assuming, without any proof, that government must be as productive as anything else, they then settled upon its expenditures as a gauge of its productivity. In this way, not only are government expenditures just as useful as private, but all the government need to do in order to increase its "productivity" is to add a large chunk to its bureaucracy. Hire more bureaucrats, and see the productivity of the public sector rise! Here, indeed, is an easy and happy form of social magic for our bemused citizens.

The truth is exactly the reverse of the common assumptions. Far from adding cozily to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy. But this means that the productive resources of society—far from satisfying the wants of consumers—are now directed, by compulsion, away from these wants and needs. The consumers are deliberately thwarted, and the resources of the economy diverted from them to those activities desired by the parasitic bureaucracy and politicians. In many cases, the private consumers obtain nothing at all, except perhaps propaganda beamed to them at their own expense. In other cases, the consumers receive something far down on their list of priorities—like the buggies of our example. In either case, it becomes evident that the "public sector" is actually antiproductive: that it subtracts from, rather than adds to, the private sector of the economy. For the public sector lives by continuous attack on the very criterion that is used to gauge productivity: the voluntary purchases of consumers.

We may gauge the fiscal impact of government on the private sector by subtracting government expenditures from the national product. For government payments to its own bureaucracy are hardly additions to production; and government absorption of economic resources takes them out of the productive sphere. This gauge, of course, is only fiscal; it does not begin to measure the anti-productive impact of various government regulations, which cripple production and exchange in other ways than absorbing resources. It also does not dispose of numerous other fallacies of the national product statistics.

Carney may, or may not, agree with this view, but he must agree that it is distinctly Austrian and not in line with MMT thinking.

Carney concludes by stating:

At the level of theory, Austrians and MMTers have a lot in common. Tactically, an alliance makes sense.

I just don't see where the Austrians and MMTers have much in common at all. And, a tactical alliance with a group that is in favor of creating a new fiat money, to replace the current fiat money, seems to be of little value to Austrians. More than anything, there is great educational value in pointing out the important differences between MMTers and Austrians.

The Goldman Octopus Grows

Goldman Sachs Group Inc.'s most senior financial-institutions banker, Ken Wilson, is temporarily leaving the firm to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis, according to people familiar with the matter, reports WSJ.

Wilson is expected to serve without pay, in a period through January. President George W. Bush made a personal call to Wilson in recent days, asking him to assist Paulson, according to WSJ.

Also, I just became aware this weekend via an NYT profile of CNBC's Erin Burnett that she worked for Goldman for a year.

Mmy full report on the incredible penetration of Goldman in government circles and the financial world is here.

CNBC’s Squawk Box to Host Debates on Economy

CNBC's morning show, Squawk Box, will host a series of debates on the economy featuring advisors to both the Obama and McCain campaigns.

The first debate will be Thursday, July 10, at 7:30 a.m. and they will continue, once a week, for five weeks.

First debate will be un job growth July 10 by Jason Furman, economic-policy director for the Obama campaign, and Douglas Holtz-Eakin, economic adviser to McCain.