There’s Nothing New Under the Sun


“The thing that hath been is that which shall be; and that which hath been done is that which shall be done; and there is no new thing under the sun.”

[Ecclesiastes 1.9]

Market Monetarists are fond of quoting Milton Friedman explaining that Japan’s low interest rates are a poor indicator of the stance of monetary policy, often indicating the exact opposite of the conventional idea:

As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

[…]

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

However, just like everything else in economics, he was beaten to this idea by (wildly underrated) interwar economist Ralph Hawtrey. Hawtrey, like Friedman, held a monetary view of what was then called “the trade cycle”. Here is Hawtrey reviewing Prices and Production in the February 1932 edition of Economica:

But though a rise in the rate of interest is not likely to cause the scrapping of plant, it may prevent the installation of new plant of the kind affected. Those who produce such plant would be thrown out of employment, and it is this effect which is, I think, the main part of Dr. Hayek’s explanation of trade depressions.

But what is the possible magnitude of the effect? The transition from activity to depression is accompanied by a rise in the rate of interest. But the rise in the long-term rate is very slight, and moreover, once depression has set in, the long-term rate is usually lower than ever.

Changes are in any case perpetually occurring in the character of the plant and instrumental goods produced for use in industry. Such changes are apt to throw out of employment any highly specialized capital and labour engaged in the production of plant which becomes obsolete. But among the causes of obsolescence a rise in the rate of interest is certainly one of the least important and over short periods it may safely be said to be quite negligible.

Indeed.

h/t David Glasner

P.S. Do follow that link to Glasner’s post, he is doing something of a hagiography of Hawtrey, and it is incredibly interesting.

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