About this episode
In the last few years, I have started to teach myself monetary policy. While I always had opinions on other related issues like the fundamental causes of growth and labor policy, I had never done a deep dive into topics such as the money supply and how exactly the Fed shapes the economy. Almost a year ago, I heard Scott Sumner discuss these issues on Conversations with Tyler, and it finally motivated me to start looking into them. Part of that process has been reading Scott’s two books: The Money Illusion and The Midas Paradox. I had known Scott mostly for his excellent Substack, which everyone should subscribe to. I’ve found him to have a sharp mind, whether he is talking about politics, culture, economics, or movies. As the podcast with Tyler reminded me, however, his field of expertise is monetary policy, and I thought after reading his books I would invite him on for an in-person discussion. He just wrote an article that summarizes the arguments about the Great Depression from The Midas Paradox, which you can read as preparation for this conversation. We begin with a question I’ve always had, which is how free market economists – like Milton Friedman and Scott himself – square their other views with the idea that the monetary system needs to be centrally planned. Scott makes a convincing case for government solving a coordination problem. Then we get to the business cycle, which is another issue I’ve always had questions about. I felt dumb asking, but I wanted to know how exactly a society with a set amount of human capital and other fundamental factors temporarily produces more. Do people just work more hours? Yes, in fact, that is to a large extent the answer!I harp a bit on how much sticky wages and sticky prices are doing to hold up the entire theory of the business cycle. It seems odd to me that so much can rest on a psychological quirk. But again, Scott explained it in a way that made sense by bringing up an analogy to plate tectonics. I also like the thought experiment of what the world would look like if everything was priced according to apples. This shows that demand for money is a real thing that must be accounted for in any economic model. I had r
