Brian P. Simpson's response to Chris Leithner

7/18/2019 Brian P. Simpson's response to Chris Leithner

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e Journa

Peace, Prosperity and Freedom

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esponse to C ris Leit ners review o

Money, Ban ing, an t e Business Cyc e

AUTHOR: Brian P. Simpson is Chair of the Department of Finance and Economics in the

School of Business and Management at National University (United States of America).

In his review of my boo Money, Banking, and the Business Cycle, Chris Leithner

states t at my major conc usions are soun ut my met o s are not. 77 He spen s

much of his review illustrating the differences between my epistemological meth-

ods and those of the Austrian school of economics. I agree with him that there are

major epistemological differences between the Austrian school and me. However,

is review doesn’t illustrate my errors—as he thin s— t reveals the errors of the

ustrian sc oo .

Before discussing the more fundamental errors, I must reveal Leithner’s fac-

ual errors regarding the claims he ma es about the content of my boo . For ex-

amp e, e c aims t at I on t e ine money mar et mutua un MMMF an

money mar et deposit account (MMDA). However, in the same paragraph fromwhich he quotes a statement that I ma e about MMDAs and MMMFs being a part

of the money supply (volume 1, page 11), I define those terms. I provide further

explanatory matter on the nature of MMMFs on page 18.

e secon error occurs w en Leit ner says I neit er provi e nor cite esti-

mates for the portion of MMMFs that have chec -writing capabilities on them.

He says this while quoting me from page 11. On page 13, in the discussion where

77 Chris Leithner, ‘Book Review – Money, Banking and the Business Cycle’ (2014) 3 Journal of

Peace, Prosperity and Freedom.



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I provi e estimates or i erent measures o t e money supp y, are t e very esti-

mates Leithner claims I don’t provide. Note 6 on that page directs the reader to the

citation (on page 247).e ast error o t is in occurs w en e says t at I retreat rom my c aim t at

MMMFs and MMDAs are a part of the money supply, after I had already claimed

hat they were. He says this because on page 11 I say they are a part of the mon-

ey supply, with some qualifications.” However, there was no retreat. Apparently

Leithner missed the statement on page —where I first introduce MMMFs and

MMDAs an mention t ey are a part o t e money supp y— at says I discuss

qualifications . . . below”.

There are more significant errors that Leithner commits that do not pertain to

is rea ing compre ension a i ities. ese errors pertain to t e met o o ogy ohe Austrian school.

The difference in methodology between the Austrian school and me begins

o be revealed when Leithner states that my identification of the monetary com-

onents in the economy is not validly reasoned from the definition of money.

Leit ers imp icit view ere appears to e: e ine t e concept irst an t en see w at

referents are subsumed by the definition. However, this has it bac wards. Valid

definitions are based on the essential characteristic(s) of a concept: the one(s) that

ma e it t e in o t ing it is an est istinguis es it rom ot er concepts. We

identify these characteristic(s) through observation.

How does one arrive at a proper definition without reference to the character-

istics of the referents of that concept? What facts are used to ground the defini-

ion and concept in reality? Is one supposed to define the concept arbitrarily? If

so, t en money cou e e ine as a recreationa ve ic e wit our w ee s. I one

applied this method consistently, one could define concepts in any manner what-

soever. This would lead to intellectual chaos.

Base on is escription o w at is to e one, one cou not esta is a va i

definition. The fact that Austrians have established some valid definitions is be-cause, at least implicitly, they are using the proper method of defining concepts

hat I mention here.

Where I share common ground with Leithner is on the issue of applying the def-

inition to i enti y new re erents t at are su sume y t e concept. is is one a ter

one has defined the concept by identifying its essential characteristics. This is how

one determines the components of the money supply, and this is precisely what I do.

Leit ner a so t in s I ave i icu ty esta is ing a measure o money ecause

I don’t reason validly from the definition of money. However, it’s not difficult for



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me to esta is a measure o money ecause I m not proper y app ying t e e ini-

ion. It’s difficult because sometimes it’s not easy to determine how many people

use certain accounts as money (i.e., to write chec s on) and how many do not.Furt ermore, sometimes t e ata are not reporte . ere ore, it s i icu t to o -

ain the data one needs to measure the money supply. It’s made more difficult

in a heavily regulated, fractional-reserve chec ing system in which the lines are

lurred between accounts used as money and accounts used for saving and invest-

ing. However, even in a free mar et data on money may be difficult to obtain to

e extent t e ata arent wi e y co ecte an reporte .

Leithner’s complaint about my inability to provide a precise measure of the

money supply is essentially a complaint that it’s sometimes difficult to collect data

an measure accurate va ues. is isn t a egitimate comp aint. It s easier to co ectdata if one has a massive budget to do so, which is what government data collection

agencies have. So if one is using standard data in one’s research that is collected

y the government, it’s more li ely that one will be able to obtain accurate data.

However, if one wants to use non-standard data and has a budget of zero (li e me),

it s muc more i icu t to o tain precise measures.

Leithner also rejects the claim that MMMFs are money. In his analysis of why

MMMFs are not money, he becomes confused by the use of the term securities” to

categorize MMMFs an y t e e ie o some Austrian economists t at money can

only include the means of final payment” for goods. Because MMMFs are securi-

ies that provide a claim to ownership in short- erm credit instruments, he thin s

hey are not money. Nonetheless, as I state in the boo (volume 1, page 18), there

is no fundamental difference (in terms of their influence on the money supply)

etween s ares o owners ip in s ort erm cre it instruments an eing a cre i-

or to a ban where the majority of the account at the ban to which the creditor

as a claim is bac ed by credit instruments (i.e., is a fractional reserve chec ing

account .

When the MMMF manager receives money, he purchases short- erm creditinstruments and maintains a chec ing account at a ban to transfer funds. When

one deposits money in a chec ing account at a ban , the ban will use some of the

reserves to ma e loans and purchase short- erm credit instruments. The result

is essentia y t e same: one as an account on w ic one can write c ec s t at is

only partially bac ed by reserves. In both cases, ultimately, credit instruments are

urned into reserves to pay recipients of chec s.

e in irect process use y MMMFs to trans er un s oes not eny t at

hey are money. In other words, it doesn’t matter that the MMMF is not the final



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means o payment. Being a ina means o payment is not an essentia c aracter-

istic of money. As proof of this, note that chec ing deposit funds are not the final

means of payment when the payee is an MMMF account holder. They must beconverte to t e asset t e MMMF account o er receives as payment.

In another attempt to prove that MMMFs aren’t money, Leithner uses the fact

hat at a grocery store, for instance, units of an MMMF wouldn’t be accepted in

ayment without the use of a chec drawn on the MMMF. However, units of a

chec ing deposit would not be accepted either. I challenge Leithner to pay for gro-

ceries wit c ec ing account un s wit out writing a c ec .

MMMFs become a part of the money supply through the pyramiding of re-

serves. The pyramiding of reserves occurs when gold reserves are held by the cen-

ra an to ac reserves at commercia an s in excess o t e go .The commercial ban s then create chec ing deposits that exceed the paper-money

reserves. Reserves of rural ban s may also be held at city ban s and used to bac

chec ing deposits at the rural ban s that exceed the reserves at the city ban s.

Since they have chec ing deposits at ban s, MMMFs are essentially in the same

osition as t e rura an s.

Toward the end of his review, the fundamental philosophical disagreements

etween the Austrian school and my own epistemological views are made sharper.

Leit ner says I am an anti priorist. He is rig t to say t is. ere is no now -

edge independent of experience. Where does this nowledge come from? Leithner

states that the fundamental nowledge is inscribed in our minds. He ma es refer-

ence to the Bible and says it is li e nowledge being written into our hearts by our

Creator.

W en one ma es re erence to t e Bi e an mystica eings in an attempt to

rove his case in matters regarding the nature of the world, it’s a sure sign of intel-

ectual ban ruptcy. The Bible was used at one time in such matters. It was the

stan ar scienti ic re erence manua o e re erre to as t e u timate ar iter in

scientific” disputes—during the medieval period. It’s no accident that this periodisn’t nown for the advancement of science and nowledge. Fortunately, Austrian

economists don’t generally ma e reference to mysticism when ma ing their argu-

ments. However, such references are consistent with a priorism”.

e mystica ana ogy use y Leit ner is apropos ecause it ig ig ts t e es-

sence of what an a priori belief in nowledge leads to: the arbitrary. If one believes

nowledge” is gained apart from observation, then anything goes. We can believe

in mystica eings even t oug t ere is no evi ence or suc e ie s an espite t e

fact that such beliefs contradict the evidence.



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In a positive sense, I m an O jectivist. is means I recognize t e va i ity o

he philosophy of Ayn Rand. This philosophy demonstrates that all nowledge

must be grounded in the facts of reality. That is, induction is the primary methodo gain now e ge.

Nonetheless, induction is not the only method that can be used to gain nowl-

edge. For example, economic analysis primarily involves the deductive applica-

ion of fundamental principles, which I discuss briefly in the boo as it pertains

o business cycle theory (see volume 1, pages -5). But note that the fundamental

rincip es are not nown a pr or . I t ey are not groun e in t e acts, t ey are

just mere arbitrary assertions: assertions without evidence. What ma es them in-

disputable first principles,” to use Leithner’s words, is that they are based in the

acts o rea ity, not mere y asserte ar itrari y.Even the axiom of human action is grounded in the facts of reality. For ex-

ample, valid concepts (which include the concept human action”) are formed

hrough integrations of perceptual data and thus are grounded in the facts. Also,

we understand human nature (a part of the facts of reality) through observation,

ot t roug introspection an o servations o ot ers. Human nature, o course,

includes the need to act to further our lives and well-being. In addition, we refer

o the facts to determine the effects our actions have on the world. While axioms

se evi ent, an t us require no proo to va i ate t em, t is oesn t mean t ey

aren’t grounded in the facts of reality.

One major error that contributes to Leithner’s acceptance of invalid views

about how nowledge is acquired is his belief that the senses are fallible. This isn’t

rue. The senses give us the raw data about existence. They are the base of all

now e ge an t e precon ition o a proo s. It s our conceptua interpretation o

sensory data that can be in error. One of the classic examples of the alleged fallibil-

ity of the senses is that of the stic that appears to be bent when placed partially in

water. e senses mere y respon to stimu i; t ey ont interpret t eir own reac-

ions. It’s up to the perceiver to determine at the conceptual level that the stic isnot, in fact, bent but only loo s so because of the different speeds at which light

ravels in different mediums.

Even sensory data from the eyes of a color- lind man are valid. There is no

contra iction etween t e o servation y a co or- in man t at somet ing is gray

and a man who perceives the same object as red. They are both observing an as-

ect of reality. The type of sensory mechanism one possesses (or the capabilities of

a given sensory mec anism c anges t e orm o t e ata one o tains, ut it s sti

data about reality. Again, it’s up to the perceiver to determine what the data mean.



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at t e senses are necessari y va i is an inescapa e trut . One as to ac-

cept their validity in any attempt to deny it. If one is going to show that they are

not valid, how else will one do it except by reference to evidence provided by thesenses? On t ese an t e ot er un amenta issues I ave iscusse , see Leonar

Pei off, Objectivism: The Philosophy of Ayn Rand , chapters - and his essay The

nalytic Synthetic Dichotomy” in the second edition of Ayn Rand’s Introduction

o Objectivist Epistemology .

Lastly, Leithner as s whether Austrian business cycle theory (ABCT) can exist

wit out Austrian met o o ogy. is is t e wrong question to as . It imp ies t at

he validity of ABCT hinges on the method that is used to validate it, regardless of

whether ABCT agrees with the facts of reality and can explain some aspect of the

wor . e proper question to as is: Is ABC va i ? at is, oes it ma e senseogically and explain and thus help us understand the world? The answer is: yes. It

is a theory that is proved through deduction and is grounded in the facts of reality,

as I state in the boo (volume 1, pages -5). All valid Austrian economic ideas—

and valid ideas in any other field—mus be grounded in the facts.

Brian P. Simpson's response to Chris Leithner

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