In a recent column for Seeking Alpha, investor-turned-analyst Lance Roberts defends Milton Friedman’s view of inflation against what he calls inflation “doomers” and Austrians. By the former, he means those who approvingly lean on the Friedman quote that, “Inflation is always and everywhere a monetary phenomenon. . .” but fail to include the tail end of the quote: that “. . .it is and can be produced only by a more rapid increase in the quantity of money than in output.” As Roberts puts it, the part “‘than in output’ is where the real economics is.”
By Austrians, he means me and, in particular, this recent column for The Daily Economy on how economic statistical measures take on new meaning when they are adopted in policymaking.
It is important to shed light on Roberts’s adopted perspective. As one might expect from finance insiders, he takes the full-on technocratic view and fails to address the economics of finance and inflation. So distorted and addicted to cheap credit is this industry that its players cannot conceive of finance (or investing) beyond the Federal Reserve System. Or, as Roberts puts it in the penultimate paragraph of his column, “the relevant question for investors isn’t whether the Fed will tighten policy. The relevant question is whether the fiscal setup will leave the Fed any room to tighten in the first place.”
Certainly, players in the finance sector make loads of money speculating on and arbitraging the Fed’s meddling with the economy. One can hardly blame them for following the path of least resistance and striving for profit within the system as it exists. They carry out an economic function even though it takes place within a framework of repeated economic distortions through monetary policy.
However, whether one can make money is a terrible basis for analysis of the system itself, which is Roberts’s stated aim. If “Friedman was right” (about inflation), as the title of the Seeking Alpha column claims, then he must have been right as an economist (in his economic analysis). After all, Roberts himself points to the part in Friedman’s quote “where the real economics is.”
Yet the economics is only referenced, but never actually addressed—the column discusses issues of economic relevance but actually lacks economic analysis. Why is it “the real economics” to claim that inflation is a monetary phenomenon only if credit is expanded at a faster rate than output? The answer is that it is not. But to account for a measured rise in prices—the statistic inflation—one cannot only look at how much more currency is produced but must also consider how it relates to other, especially countervailing, changes in the economy.
This is in fact why economics relies on ceteris paribus: economic causality is well understood, but the quantified outcome of any specific change is subject also to (many) other factors. We know that credit expansion—“dilution of the money stock” (as Roberts puts it) through an artificial increase of its supply—raises prices. But which ones, when, and by how much is impossible to predict without also knowing all the other changes that take place. To estimate such effects, we must leave the realm of true economics and instead engage in speculation.
Roberts appears to think economics is the statistics rather than the theory. As he summarizes his critique of Austrians:
But here’s where the critique runs into a wall. Bylund attacks the measures without proposing how policymakers, central banks, investors, or ordinary readers should actually operate without them. ‘Just understand the underlying concept better’ isn’t operational. The Fed has to make decisions, allocators have to deploy capital, and investors have to make portfolio choices. You can’t run a $27 trillion economy on Austrian methodological purity.
I certainly grant Roberts’s point that policymakers and others would find it difficult to “operate” (or operate in) the market without metrics of some kind. But this rather obvious claim is a far cry from a critique of economics, which aims to explain how the economic system works by uncovering economic phenomena’s true causalities.
The economics of money is quite clear. Comparing one economy with an economy that is identical in all respects except that the latter has more money in circulation, we know the former will have lower money prices. Similarly, if we increase the quantity of money in an economy, then prices will increase ceteris paribus. This is the basis for the Austrian conception of inflation: an increase of the money in circulation raises prices compared to if that increase had not happened. Whether output increases is beside the point because economics deals with the causal relationships in the economy (and output is a separate cause of price changes).
Note “in the economy.” The problem with statistical measures of economic concepts is that they, even if they are well constructed and not tampered with, can never tell the complete story. The measure of something is not that something itself, but merely a measure of it. And, in economics, concepts are well defined but often lack direct measures, are unobservable, or difficult to distinguish from other phenomena empirically. Measuring may be important but is always imperfect. In other words, the measure cannot take the concept’s place in analysis without distorting our understanding, which was discussed in my column linked above.
Ironically, Friedman’s quote on inflation makes a great illustration of this very problem—and the confusion that both economists and economic actors suffer from. Friedman was indeed right that, “Inflation is always and everywhere a monetary phenomenon.” That claim is true to the extent it refers to the economic concept: inflation is defined (by Austrians and economists originally) as the dilution of money in circulation, a cause of distortions. But the rest of the quote refers to the statistical measure of an outcome (rising prices), not the concept itself. Much like Roberts’s article, in other words, it purports to be economics but, when considered more carefully, ends up only discussing statistics.
