I recently debated with an Austrian friend about the causes of macroeconomic cycles. He argued that all macroeconomic distortions result from our unwillingness to let prices (including wages) adjust freely. According to this view, the Great Depression occurred simply because deflation was not allowed to work its way through the system.
Of course, I completely disagree with his position, but that’s not why I’m writing this blog. I’m writing because what stood out most from our conversation was the conversation itself — how almost ninety years after the fact we’re still fiercely debating what happened or didn’t happen or should’ve happened in the 1930s. It made me aware of just how divided the camps are in the economic world, and how unlikely it is that we will ever agree on the correct cause of action. We see these violent disagreements playing out in Europe, where conflicting economic beliefs have left a country on the verge of utter devastation.
And then (after my momentary despair) I thought of neutral money. Neutral money, in its own way, is a debate stopper. Not because everyone likes it. But because few economists, if any, can disagree with its overriding principle: that demand cannot fall. Demand under neutral is mechanically set to the level necessary for full employment. So even someone who doesn’t believe in demand fluctuations, as my Austrian friend did, will have an impossible time trying to prove that it doesn’t work.
By introducing a system of neutral money we will completely remove demand from the equation. Whatever economists theorize or politicians preach, demand will never change. Employment will always be full. This doesn’t mean that economic utopia is upon us. Supply side issues will still remain, and the Austrians may well be correct on some of these points. But what it does mean is that we can remove one of the key theoretical sticking points that leads to policy paralysis and, in turn, to economic suffering.
If demand can never change, then politicians can never change it. And in light of recent events, that is something we should all desire.