Ms. McArdle PLEASE meet Mr. White and Mr. Selgin

Megan McArdle asks again "why not competing commodity currencies?"

She has raised a similar question in the past about free banking and alternative monetary regimes. And in the past I suggested an internet "date" between Ms. McArdle and Mr. Selgin. To the best of my knowledge this meeting has not taken place.

Ron Paul's monetary policy discussions seem "off beat" to many unless they step back and reconsider the economic arguments about the costs of inflation. The problems with inflation are not limited to 'menu costs', but go much deeper in terms of misallocation of scarce resources and intertemporal malcoordination. In addition, there is the breaking of social bonds of trust that inflation represents as pointed out by S. Herbert Frankel, Two Philosophies of Money --- where he contrasts the understanding of the social function of money in the work of Georg Simmel and in that of John Maynard Keynes. Keynesian economics was completely oblivious to the question of the social bonds of trust that are reflected in the monetary regime. The Simmel argument was that the monetary system was the glue of social order. Frankel argued that the easy monetary policy advocated by Keynesians destroyed those bonds of trust. Inflation distorts economic coordination and it breds distrust between the government and citizenry. Unfortunately, the intellectual victory of Keynes in mid-century has had lasting negative consequences on economists and public intellectuals that have still not be shaken, and as a result many remain oblivious to the deeper costs of inflation.

The destructive legacy of Lord Keynes on the economy and society was a theme of the work of F. A. Hayek and James Buchanan. Hayek worried about monetary policy, while Buchanan worried about fiscal policy. But under the Keynesian hegemony the natural proclivity of democratic governments was to run budget deficits leading to public debt and then monetizing that debt. Fiscial irresponsibility leads to monetary irresponsibility. How does one fix that problem?

Buchanan advocated constitutional rules on fiscal policy, while Hayek looked to the denationalization of money as a solution.

The empirical record on deficits and debts, and government attempts to monetize the debt certainly fits the story of Hayek and Buchanan. And, the policy solutions they propose seem to logically follow. If the natural proclivity of democratic governments is to concentrate benefits on the well-organized and well informed in the short-run, and disperse the costs on the unorganized and ill-informed in the long-run, then budgetary deficits and public debt do appear to be the most politically popular. Government can only raise revenue in 1 of 3 ways: borrow, tax, inflate. Taxation whle the most transparent, is also the most politically unpopular. Better to borrow now, and then pay back debt with cheaper dolloars later via inflation. So how do you stop this policy cycle? Take away governments ability to inflate is what I would argue (and have) through abolishing the current Central Banking regime and instead instituting one of a variety of alternative monetary regimes. I tend to favor a free banking regime -- but a classic gold standard would work better than our current arrangement to curb the inflationary tendencies.

Thus, enters Ron Paul in the political discourse over Central Banking and Megan McArdle's question. Ms. McArdle is very astute observer of the economic scene, but she has a blind spot on the issue of the costs of inflation, and the workability of alternative monetary regimes. She reverts to a "market efficiency" argument to critique free banking alternatives --- if it is so efficient why doesn't it exist. For everyone who wants to promote the idea of "efficiency" outside the standard market setting, I recommend they read Daron Acemoglu's "Why Not A Political Coase Theorem?" and give their position a second-thought. The world is neither hopeless nor ideal, and while there are strong forces in markets toward efficiency, even in that world there are $20 bills lying on sidewalks for profit-seeking entrepreneurs to pick up. However, in some settings the $20 bills persist on sidewalks because either the incentive to pick them up, or the ability to perceive their existence is not there. Instead of gains from cooperation, we revert to conflict and inefficiency. So rather than insisting that whatever is, is efficient --- we have to realize that inefficiencies abound and improvements can, and must be, conintually made. However, we face constraints (both internal and external) in making those changes.

Our current monetary regime is in fact one of the areas in need of reform. Milton Friedman argued, as I pointed out yesterday, that the choice is not between painful unemployment and 'menu cost' inflation, but between high unemployment caused by inflation, or short-term unemployment as a side-effect of curing previous inflation. We should not confuse the disease and the cure. Time for us to work the cure --- and that might require a change in the monetary system.

So Ms. McArdle I propose that you meet Mr. White and Mr. Selgin. I would have thought Tyler Cowen could have been the "match maker" on this, but alas he hasn't chosen to fill that role.