Robert Lucas
In response to my the wall street journal op/ed on the accomplishments of the late Robert E. Lucas, John Tamny wrote a response in Forbes that criticizes much of what I wrote. His article is titled “When did market intervention become chic for “free market” economists?“That’s my pretty comprehensive answer.
Start with its title. Notice that Free Market is in quotes, the implication being, presumably, that neither Bob Lucas nor I was/are a free market economist. He never says why, though. Of course, it’s possible that Tamny didn’t choose the title. But the title is certainly consistent with the content and tone of his article.
Tamny’s first paragraph:
“The only use of money is to circulate consumable goods.” These are the words of Adam Smith in The Wealth of Nations. What’s remarkable about what Smith wrote is that it’s a throwaway line in the book, it was so obvious. It’s still obvious. Money simply has no purpose in the absence of production.
In fact, Tamny’s last sentence is wrong. The reason we use money is to exchange. If people didn’t produce but there were a lot of goods they had (what we sometimes call in economics “an endowment”), there would be money.
When he gets to the heart of the matter with his criticism of me and by implication. Bob Lucas, Tamny writes:
With apparent excitement, Henderson wrote of how Lucas argued that “if the Federal Reserve increased the growth rate of the money supply to achieve a temporary reduction in unemployment, the policy would only work if the actual growth rate was better than people expected.” It is implied here that market intervention by non-market actors is positive as long as the intervention is properly executed. And that’s not the only reason Henderson’s bow is so confusing.
Tamny fails to make one of the most fundamental distinctions we have in economics: the distinction between the positive (what is) and the normative (what should be). money supply? This is separate from the normative question of whether the government should increase money supply growth.
Tamny then writes:
Why, given the global nature of money and credit, would the central bank need to increase the so-called “money supply” as it is? This rate asks with the dollar in mind. At present, it is the currency of business in Tehran and Pyongyang, among countless other countries, not to mention that it is better to have dollars if you want to buy a house in Argentina. The underlying point of all of this is that the money is not the instigator as Henderson suggests, but rather a consequence of the production. In other words, the dollar is in Iran not because the Fed “supplied” those dollars to the Iranians, but because the producers want roughly equal value for what they bring to market. Translated, a rial that has been devalued more than 3,000 times since 1971 is not fit to facilitate trade, but the dollar is. Markets work. Not to economists, it seems.
When he writes “The underlying point of all this is that the money is not the instigator as Henderson suggests, it is rather a consequence of the production.” It seems to say that increases in the money supply have no effects (“money does not induce”). I have no idea why he thinks that. He does not tell us why. Indeed, I wonder if it occurred to him to ask if the number of rials printed by the Iranian central bank had an effect on the value of the rial. Hasn’t this money “caused” substantial inflation?
And what is the “work of the markets.” Not to economists, it seems”? Where in my WSJ op/ed can he find even a hint that I think the markets aren’t working? The most charitable thing I can say about Tamny is that he is profoundly ignorant.
Tamny then writes:
To this day, it is accepted among Keynesians and monetarists that, according to Milton Friedman, monetary “tightening” by the Fed was widely considered a cause of the “Great Depression”. Which is for him an impossibility implying that there are closed economies within the “closed economy” that is the global economy. There are not any.
I don’t know if Tamny is correct in claiming that this is the accepted wisdom among Keynesians. I think that is true for some Keynesians and not for others. He should be accepted wisdom. But Tamny not only denies causation, he also goes further saying that it is impossible for a sharp decline in the money supply to have been a major factor in the cause of the Great Depression. Unfortunately, Tamny does not tell us why or how he arrived at his impossibility result.
Tamny writes:
Lucas apparently also discovered that “the same tools, such as fiscal policy, used to achieve economic growth in rich countries could be used to generate growth in poor countries”. You think? Economies are individuals, and individuals are better off when they are taxed less. Yet even here, Henderson seems engrossed in what government can do to ensure growth.
In his first sentence of the paragraph above, Tamny seems to at least admit that Lucas is right. He sarcastically asks “You think?” And he has a point. Peter Bauer, many years before Lucas, thought that the same factors that cause growth in rich countries were also important for poor countries. It took Lucas, however, to drive the point home.
But his last sentence is just plain weird. “Henderson seems engrossed in what government can do to ensure growth.” Yes, and the main things it can do are deregulate and reduce taxes. Isn’t Tamny engrossed in understanding the often harmful effects of government? And if he isn’t, is he saying government policy doesn’t matter?
What would Tamny readers think if he told them that one of the main points I made in my WSJ op-ed was that Lucas had concluded that capital taxes would be zero and that if we moved to a zero taxation, the capital would increase by approximately 35%? I bet they would be surprised. He doesn’t seem to want his readers to know what Lucas or I actually said.
Tamny ends thus:
Really, why all this thinking? Why all the Commanding Heights politics? Free people thrive because they are free, not because of supposedly wise central bankers, skilled tax writers, or brilliant “economists.” To read Adam Smith is to know that he was not an economist. He just had common sense.
I will answer one by one.
Why all this thinking?
Because thinking is good; it’s much better than the other way around.
Why all the Commanding Heights politics?
Eh? Much of Lucas’ writing, and even more of mine, is about how government should come down from the Commanding Heights, deregulate, cut public spending, and cut taxes. Doesn’t Tamny realize that?
Free people prosper because they are free.
Exactly. At least Tamny and I are on the same page here.
not thanks to supposedly wise central bankers.
Exactly, and did Tamny notice that I never praised central bankers?
qualified tax writers
Here it seems to say that the tax code doesn’t matter. But he should return to his idea that people prosper because they are free. The tax code takes away a lot of our freedom. So, qualified tax writers can help recoup some of it.
or brilliant “economists”.
Why the quotes? Does Tamny even now deny that Lucas was, and I am, an economist? And does he think that economic policy has never been steered in the right direction by economists? Doesn’t John Tamny know that one of the reasons he never had to deal with a military project is that Milton Friedman played an important role in ending it and the economists Walter Oi and William Meckling used the economy to oppose it?
Somewhere in his mind, Tamny is probably thinking, “Oops, I just attacked some brilliant economists; I better find a way to save Adam Smith. So how does he do it?
With that:
“To read Adam Smith is to know that he was not an economist.”
So he takes one of the leading economists of the 18th century and defines him outside of economics. Bright!