John Tamny's Confusions
In response to my Wall Street Journal op/ed on the accomplishments of the late Robert E. Lucas, John Tamny wrote a response in Forbes that finds fault with much of what I wrote. His article is titled “When Did Market Intervention Become Chic to ‘Free Market’ Economists?” This is my fairly comprehensive response.
Start with his title. Notice that Free Market is in quotation marks, the implication being, presumably, that neither Bob Lucas nor I was/is 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 sole use of money is to circulate consumable goods.” Those are the words of Adam Smith in The Wealth of Nations. Notable about what Smith wrote is that it’s a throwaway line in the book, so obvious was it. It’s still obvious. Money quite simply has no purpose absent production.
Actually, Tamny’s last sentence is wrong. The reason we use money is to exchange. If people did no production but there were many goods that they just had (what we sometimes call in economics “an endowment”), there would be money.
When he gets into the meat of his critique 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 get a temporary reduction in unemployment, the policy would work only if the actual growth rate was bigger than what people expected.” Implicit here is that market intervention by non-market actors is a positive so long as the intervention is properly executed. And that’s not the only reason Henderson’s reverence is so puzzling.
Tamny fails to make one of the most basic distinctions we have in economics: the distinction between the positive (what is) and the normative (what should be.) The positive issue is “What is the effect on unemployment of increasing the growth rate of the money supply?” That’s separate from the normative issue of whether the government should increase the growth of the money supply.
Tamny then writes:
Why, given the global nature of money and credit, would the central bank need to increase so-called “money supply” as is? This rates asking with the dollar top of mind. At present it’s the currency of business in Teheran and Pyongyang, among countless other countries, not to mention that you better have dollars if you want to buy a house in Argentina. The underlying point of all this is that money doesn’t instigate as Henderson alludes, rather it’s a consequence of production. In other words, the dollar isn’t in Iran because the Fed “supplied” those dollars to the Iranians, but because producers want roughly equal value for what they bring to market. Translated, a rial that’s been devalued 3,000+ times since 1971 is not fit as a facilitator of exchange, but the dollar is. Markets work. Not to economists, it seems.
When he writes “The underlying point of all this is that money doesn’t instigate as Henderson alludes, rather it’s a consequence of production.” He seems to be saying that increases in the money supply don’t have effects (“money doesn’t instigate.”) I have no idea why he thinks this. He doesn’t tell us why. Indeed I wonder if it occurred to him to ask whether the number of rials printed by Iran’s central bank had any effect on the value of the rial. Didn’t that money “instigate” substantial inflation?
And what’s with the “Markets work. Not to economists, it seems”? Where in my WSJ op/ed can he find even a hint that I think markets don’t work? The most charitable thing I can say about Tamny is that he is profoundly ignorant.
Tamny then writes:
To this day it’s accepted wisdom among Keynesians and Monetarists alike that per Milton Friedman, the Fed’s monetary “tightness” factored large as a cause of the “Great Depression.” Which is an impossibility for it implying that there are closed economies within the “closed economy” that is the world economy. There aren’t.
I’m not sure whether Tamny is right in claiming that this is accepted wisdom among Keynesians. I think that’s true for some Keynesians and not others. It should be accepted wisdom. But not only does Tamny deny the causation but also he goes further, saying that it’s impossible for a large decrease in the money supply to have been a major factor in causing the Great Depression. Unfortunately, Tamny doesn’t tell us why or how he has come up with his impossibility result.
Lucas apparently also discovered that the “same tools, such as tax 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 taxed less. Still, even here Henderson seems engrossed in what government can do to achieve growth.
In his first sentence in the above paragraph, Tamny at least seems to admit that Lucas has a point. 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 also were important for poor countries. It took Lucas, though, to drive the point home.
But then his last sentence is just odd. “Henderson seems engrossed in what government can do to achieve growth.” Yes, and the main things it can do are deregulate and cut taxes. Is Tamny not engrossed in understanding the often-bad effects of government? And if he’s not, is he saying that government policy doesn’t matter?
What would Tamny’s readers think if he told them that one of the main points I made in my WSJ op/ed was that Lucas concluded that taxes on capital should be zero and that if we moved to a zero tax rate, capital would increase by about 35 percent? I bet they would be surprised. He doesn’t seem to want his readers to know what Lucas or I actually said.
Tamny ends with this:
Really, why all the thought? Why all the policy from the Commanding Heights? Free people prosper because they’re free, not thanks to allegedly wise central bankers, skilled tax writers, or brilliant “economists.” To read Adam Smith is to know he wasn’t an economist. He just had common sense.
I’ll answer one by one.
Why all the thought?
Because thought is good; it’s much better than the opposite.
Why all the policy from the Commanding Heights?
Huh? Much of Lucas’s writing, and even more of mine, is on how government should climb down from the Commanding Heights, deregulate, cut government spending, and cut taxes. Does Tamny not realize this?
Free people prosper because they’re free.
Exactly. At least Tamny and I are on the same page here.
not thanks to allegedly wise central bankers.
Exactly, and did Tamny notice that I never praised central bankers?
skilled tax writers
Here he seems to be saying that the tax code doesn’t matter. But he should go back to his idea that people prosper because they’re free. The tax code takes away a lot of our freedom. So skilled tax writers can help get some of it back.
or brilliant “economists.”
Why the quotation marks? Is Tamny now even denying that Lucas was, and I am, an economist? And does he think that economic policy was never moved in good directions by economists? Does John Tamny not know that one reason he never had to face a military draft is that Milton Friedman had a large role in ending it and that economists Walter Oi and William Meckling used economics to argue against it?
Somewhere in his mind Tamny probably thinks, “Oops, I just attacked brilliant economists; I’d better figure out a way of salvaging Adam Smith.” So how does he do it?
“To read Adam Smith is to know he wasn’t an economist.”
So he takes one of the leading economists of the 18th century and defines him out of economics. Brilliant!
May 22 2023 at 12:14pm
“The most charitable thing I can say about Tamny is that he is profoundly ignorant.”
A few years back Tamny did a piece criticizing inflation targeting. Of course there are problems with inflation targeting, but Tamny didn’t even seem to understand the basic idea. He argued that under inflation targeting the government would be controlling prices, and thus the price of individual goods like TV sets could no longer decline with technological progress. He equated inflation targeting with price controls on individual goods.
It left me wondering why Forbes prints his stuff.
May 23 2023 at 10:06am
Very true and he seems not to understand what trade-offs are all about, instead he just seem to criticize this or that without laying out a coherent analysis of what he sees as better alternatives and just throws out bromides to appeal to what he views as his audience of anti gov free market believers. Again, where is the analysis of trade-offs from him?
May 22 2023 at 3:36pm
Money also serves as a store of value, which facilitates the coordination of economic activity over time.
I’m guessing that he means that dollars and other currencies circulate outside the U.S. and will naturally flow into the American economy to offset any shortages. But capital flows into an economy only if that economy offers viable investment opportunities.
Hoover’s policies – which FDR expanded – of working to keep prices and wages above market levels, discouraged both foreign and domestic investors. Further, as Robert Higgs observed, FDR’s stated policy of constant experimentation created an environment of “regime uncertainty” that was hostile to business investment.
Finally, the global trade war sparked by the Smoot-Hawley tariffs, served to foster more isolated, if not fully closed, economies within the world economy.
The quality and quantity of the money supply is important, but it’s not the only important factor.
May 23 2023 at 9:33am
Tamny is also the editor of Real Clear Markets. I saw a talk from him recently in which he argued that there is nothing states could do to affect their prosperity, except maybe hire a good college football coach for Flagship State U. That is not an exaggeration or a misinterpretation.
May 23 2023 at 6:49pm
May 23 2023 at 12:41pm
I haven’t read Tamny for years, but it seems ti me he follows the old banking school of money that Mises criticized. The banking school says that banks and the Fed can’t create new money or cause inflation. The early Fed and the pre-war German central banks followed that school.
May 23 2023 at 3:23pm
Tamny has a penchant for channeling Jude Wanninski. As a brought back to life tandem, they are strong supply-side suporters. Then they become inflationists and can’t stand orthodox economics. I also agree with Roger McKinney about some banking school flaws, but that error seems popular among many these days.
May 23 2023 at 6:52pm
I’m a strong supply-side supporter too. Notice, though, that if he is a strong supply-side supporter, he should have applauded Lucas’s call for a zero tax on capital. Instead, he said that we can’t attribute prosperity to “skilled tax writers.” He seems simply to want to differentiate himself even if it means becoming incoherent.
I remember Jude and I could talk to him. Tamny is a different kind of person and I say that as a criticism of Tamny.
May 24 2023 at 11:12am
Mention supply side to anyone old enough and they will recoil in to thinking that is just giving benefits to the rich. A marketing problem! Supply side needs to be replaced with a new name that does not engender a pejorative response . Maybe growth economic initiative, but some “branding” professionals might be of assistance.