Pluralistic: Higher interest rates increase both the monetary supply and inflation (04 Feb 2023) – Pluralistic: Daily links from Cory Doctorow
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.” 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?'”
(This is why the most heralded revolution in economics for generations is “behavioral economics,” which is a fancy way of saying, “Doing economics but checking to see if our assumptions about human behavior are actually right.")
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:
Fix pulls data from the World Bank 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.
Good to know. Scary, too.