Here's the theory: first, hike #InterestRates, which makes borrowing more expensive and reduces the supply of money in circulation. With less borrowing, there's less expansion, which leads to layoffs that lower the spending power of workers, which means that there are fewer dollars chasing the same goods, which means that prices go down. Q.E.D.
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If you'd like an essay-formatted version of this thread to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:
https://pluralistic.net/2023/02/04/if-i-was-a-horse/#friedman-was-a-dolt
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This orthodoxy comes to us from #MiltonFriedman, the father of #neoliberal #economics, who believed that every economic problem was down to a mismanagement of the #MoneySupply. As economist Robert Solow quipped: "Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper."
https://www.nybooks.com/articles/2007/02/15/who-was-milton-friedman/
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Friedman's orthodoxy - #monetarism - has reigned supreme for decades, which is ironic, given that Friedman and his colleagues at the #ChicagoSchool of Economics claimed that they had elevated economics into an empirical, quantitative science, a kind of physics of human action, not like those squishy, #SocialSciences.
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You'd think that a self-styled physicist of human behavior would avail themselves of the underlying methodology of the "hard" sciences, which is to say, forming falsifiable hypotheses and then checking to see whether they were borne out by real-world outcomes.
But that's not how the #neoclassicals roll - they function like the caricature of the physicist whose every inquiry begins with "imagine a perfectly spherical cow of uniform density on a frictionless plane."
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Or, as Ely Devons famously quipped, "If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, 'What would I do if I were a horse?'"
https://pluralistic.net/2022/10/27/economism/#what-would-i-do-if-i-were-a-horse
(This is why the most heralded revolution in economics for generations is #BehavioralEconomics, which is a fancy way of saying, "Doing economics but checking to see if our assumptions about human behavior are actually right.")
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The evidence for monetarism and its interest-rate prescription for reducing the monetary supply and taming inflation is...not good. In a post called "Do High Interest Rates Reduce Inflation? A Test of Monetary Faith," @blair_fix brings out some empirical big guns to test the Friedman method, and finds it sorely in want of a practical basis:
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Fix pulls data from the #WorldBank to investigate the link between interest rates, monetary supply and inflation. He finds that even extremely high interest rates (e.g. Nicaragua's 1992 interest rates of 450%) correlate with an *increase* in the monetary supply - this is likewise true for single- and double-digit interest rates.
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Fix measures this in several ways to validate his conclusion, and finds it robust. A few countries have sometimes experienced a modest contraction in monetary supply when interest rates rose, but they are outliers: most of the time, rises in interest rates correspond with increases in the monetary supply.
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OK, so hiking rates doesn't reduce the monetary supply. But does it tame inflation? Once again, our uniform spherical cow on a frictionless surface nevertheless skids to a painful halt: "As interest rates grow, it seem that inflation responds by … increasing."
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This is another robust finding, one that persists whether we measure inflation between countries or within a single country over time: "For the vast majority of countries — about 82% — the interest-rate-inflation correlation is positive. In other words, when interest rates get hiked, the norm is for inflation to *increase*."
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So what's going on here? Fix turns to a 2022 paper by Tim Di Muzio called "Do Interest Rate Hikes Worsen Inflation?" in which Di Muzio injects some much-needed #PoliticalEconomy realism into the thought-experiment dreamland of the Friedmanites:
https://strangematters.coop/interest-rate-hikes-worsen-inflation-volcker-shock/
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Di Muzio observes that when interest rates go up, businesses *don't* reduce their borrowing, as the neoclassicals would predict. Why not? Because businesses in our real world enjoy pricing power, which means that when their costs of borrowing go up, they pass those increases on to their customers (economists call this "#CostPlus pricing").
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Which is to say that because interest rates increase the costs for businesses who enjoy #monopolistic #MarketPower, interest rate increases also cause *price* increases. And not to put too fine a point on it, the economists' term of art for "a sustained rise in the price level" is...*inflation*.
Fix says that at best, monetary policy - raising interest rates - simply fails to cause inflation. But at worst, it actually *increases* inflation.
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Here he echoes Joseph Stiglitz and Regmi Ira, who compare interest rate hikes to bloodletting. If the patient gets worse, you're not bleeding them enough. If they get better, the bloodletting clearly saved them. If they die, well, some diseases are simply incurable:
For Stiglitz and Ira, interest rate hikes don't address inflation because inflation isn't caused by too much money.
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Rather, it's caused by things like wars and pandemics (which reduce the supply of key inputs and goods), mass deaths (which reduce the workforce), lack of daycare and other policies (which reduce it further), and more:
https://pluralistic.net/2022/12/14/medieval-bloodletters/#its-the-stupid-economy
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For Fix, the interest rate/inflation superstition is a tragicomedy: tragic because it worsens the problem it seeks to solve, and comic, because of the absurd #MotivatedReasoning that Friedman-pilled economists indulge in when they are confronted with the overwhelming evidence against their ideological certainty.
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Fix describes how, if a neoclassical is argued into a corner by empirical evidence that disconfirms their hypothesis, they will turn, at last, to the idea of #distortion: the economy *should* work the way my model predicts, and if it doesn't, it's because the gubmint has "distorted" the economy by "intervening."
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This #MagicalThinking insists that we just need to bleed the patient a *little* more, remove a few more guardrails and give a little more control to shareholder-worshipping financiers and a little less to democratically accountable regulators, the map will become the territory.
"Hurry, bring more leeches, the patient is dying!"
eof/
@pluralistic
I 95% agree, but the problem with neoclassical economics isn't that it doesn't make rigorous falsifiable predictions—it does.
The problem is that those predictions are routinely falsified, but none of the neoclassical economists seem to care.
It's not a pseudoscientific theory, it's just a false scientific theory
@oblomov @pluralistic I mean you could've just said they try to model circles as if they're cubes. But that wouldn't be true as circles, cubes, non-newtonian fluids, Euclidean space, etc. are all abstract entities.
Neoclassical econ fails because its abstract entities don't reflect the facts.
@pluralistic Not to take away from your point, but this might surprise you: https://www.uhhospitals.org/blog/articles/2020/03/how-leeches-can-save-lives-and-limbs-for-some-patients
Disinfected maggots are also used clinically in some cases, as they can clean up dead tissue and promote healing.
@simonwheatley @pluralistic @ivory
You probably want the long version mentioned here:
If you'd like an essay-formatted version of this thread to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog: https://pluralistic.net/2023/02/04/if-i-was-a-horse/#friedman-was-a-dolt 2/
@simonwheatley @ivory
Here's a bookmarklet to open all CW posts in a thread with a single click.
https://mamot.fr/@proximacentauri@mstdn.social/109446641864950446
Attached: 3 images @[email protected] Sorry, you sound like someone has complained about this before. I made an bookmarklet, that opens all the CWs with single click: javascript:document.querySelectorAll(".status__content__spoiler-link--show-more").forEach(el => el.click()); 1. Add it to Bookmark bar 2. Thread before 3. Thread after Maybe you can give this to someone who next complains about this.
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