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THE GOLD SPOT: GOLD THE REFERENCE POINT

Tuesday, May 14th, 2013

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from CURRENCY WARS: THE MAKING OF THE NEXT GLOBAL CRISIS by James Rickards, Portfolio/Penguin, New York, 2011

The continuation of the trend toward a diminished role for the dollar in international trade and the reserve balances begs the question of what happens when the dollar is no longer dominant but is just another reserve currency among several others? What is the tipping point for the dollar? […]

Barry Eichengreen is the preeminent scholar on this topic and a leading proponent of the view that a world of multiple reserve currencies awaits […] the plausible and benign conclusion that a world of multiple reserve currencies with no single dominant currency […] this time with the dollar and the euro sharing the spotlight instead of the dollar and sterling. This view also opens the door to further changes over time, with the Chinese yuan eventually joining the dollar and the euro in a coleading role.

What is missing in Eichengreen’s optimistic interpretation is the role of a systemic anchor, such as the dollar or gold. As the dollar and sterling were trading places in the 1920s and 1930s, there was never a time when at least one was not anchored to gold. In effect, the dollar and sterling were substitutable because of their simultaneous equivalence to gold. Devaluations did occur, but after each devaluation the anchor was reset. After Bretton Woods, the anchor consisted of the dollar and gold, and since 1971 the anchor has consisted of the dollar as the leading reserve currency. Yet in the post-war world there has always been a reference point. Never before have multiple paper reserve currencies been used with no single anchor. Consequently, the world […] is a world of reserve currencies adrift. Instead of a single central bank like the Fed abusing its privileges, it will be open season with several central banks invited to do the same at once. In that scenario, there would be no safe harbour reserve currency and markets would be more volatile and unstable.

Comment: It is hard to fathom such an unrealistic expectation of lead currencies, swilling about supporting each other and every other currency, as being somehow optimistic and benign; Rickards is not saying that he thinks they would be by using these terms, he is pointing up the authors of these expectations as hailing them as benign: what could go wrong, we’re all good chaps…aren’t we?

Rickards’s view is of a piece with Gustav Cassel’s point (quoted in Gold on the Outbreak of the Great War), that “the responsibility for the value of the currency, in cases where the gold standard has been abandoned, must exclusively lie with those in whose hands rests this provision of the means of payment.” The point being that this is an astonishing level of trust to put into the institutions of government, not just moral trust, but a trust that the necessary calculations, observations and measurements can be made consistently and continuously to keep things afloat and stable. The euro is a very good object lesson that both these sorts of trust are misplaced, which is putting it mildly…

From an Austrian School point of view, the goodness of the humans in charge is irrelevant: it is the utterly impossible nature of the task that is the stumbling block. But it is just there, of course, that the immoral temptation to swing things to the state’s advantage comes to the fore – again as shown up by the euro.

Where there is no reference point, no anchor, no solution is feasible… which is why we keep getting  more of the failed nostrums. Which leads on to a very interesting observation: why taxes must go up in an economic world divorced from the gold standard.

Politicians are incapable of managing monetary affairs (see the article linked to below on The Mess We’re In: Why Politicians Can’t Fix Financial Crises). The gold standard prevented them by and large from acting on economic hubris. Unconstrained by gold, bewildered by their failures, corrupted by their power, they turn to the one nostrum that lies unfailingly to their hand: taxation. That is why it is found important at times of high and progressive taxation to denounce “avoiders” as selfish cheats who won’t do their bit for their fellow citizens (see my The Moral Dilemma at the Heart of Taxation). So the gold standard not only prevented printing money, it also held down taxation. Another reason to vote for gold!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD THE ANCHOR

Tuesday, April 23rd, 2013

By Mark Rogers

I looked here at the recent drop in the price of gold, and suggested that the problem lay not so much in the price itself as in the perception of the value of gold. This is always a problem with prices; as James Rickards has accurately noted, market transactions (in context, he is discussing financial markets, but the observation applies to all types of market) consist of price discovery between bid and offer. (I first reviewed his exceptionally informative book, Currency Wars, Portfolio/Penguin, New York, 2011 here.) There is an important sense, therefore, in which prices as such are never stable except on the transfer of the asset at the eventually agreed price. This is one of  the senses in which Hayek refers to prices as information.

Rickards goes on to point out, in the context of gold, that the massive gains in stocks and gold in both 1933 and 2010 (85% in the latter year) were just “the flip side of trashing the dollar. The assets weren’t worth more intrinsically – it just took more dollars to buy them because the dollar had been devalued.” That is, consider the price of gold not as a price but as information indicating the present worth of the currency; not what gold is worth but what gold is telling us about the price of the dollar.

His book is an examination of the ways in which governments wage currency wars in order, they think, to increase domestic prosperity, by deliberately devaluing their own currencies. Short-term gains, if any, are rapidly exhausted, and the ill effects for the long term soon emerge. And yet, politicians and central bankers remain oblivious to these effects – and the recent quantitative easing is, once again, the result of that purblindness.

The German Inflation

At the time of the German depression, when the Reichsbank engaged in the biggest currency devaluation in history to date by attacking the value of the Reichsmark, the German people saw prices going up but did not equate that with the realisation that the currency was collapsing; similarly, we see prices increasing without realising that the paper money we hold in our hands is depreciating in value all the time: we moan about “capitalist exploitation”, “wicked bankers” and “supermarket greed”, or we talk knowingly about “inflation” as if the latter was like the weather. Seldom or never do we stop to consider that what is actually happening is that our governments are of set purpose devaluing the currency: the mutilation of our money is hidden from us (see here, here and here).

The Gold Price

One result of currency depreciation is capital flight, and the recent drop in the price of gold could be looked at in this light. Just as paper money is suddenly recognised as worthless, causing the flight of capital, so the sudden flight from ETFs in gold, another form of ultimately worthless paper, is in the same order of events. In fact, the gold price can be seen as operating both ways: the purchases of gold which pushed the price up over the last two years were a capital flight caused by quantitative easing as that devalued the pound and the dollar. And now, the plunge in the price of gold is also a capital flight because, whatever else may be going on, it is a flight from the ETF paper gold (the source in more ways than one of the market manipulation that may have been the immediate cause of the price drop) into physical gold, in this instance into gold coins.

Thus, one way of looking at the price of gold in a volatile paper money system is as an indicator of the current levels of volatility and a measure of what at any given moment should be done about.

As noted at the beginning of this article, prices are never stable and in terms of market transactions and international trade are in need of an anchor to make it easier for bidders and offerers to discover the prices at which they are willing to settle. The classical gold standard was just such an anchor. In the absence of a return to that standard, gold nevertheless still performs as a bellwether.

NOTE: “volatile paper money” is of course a tautology!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

AN OBITUARY FOR THE LEFT

Wednesday, December 19th, 2012

By Mark Rogers

Perry Anderson, editor of The New Left Review, wrote an editorial for the January-February 2000 issue, in which he looked at all that had happened over the previous twenty years, and what it meant for the Left: the collapse of the Soviet Union, the resurgence and resilience of capitalist market economies and the emergence of “New” Labour. The piece contains a remarkable acknowledgement of two of the strengths of the market idea as they had emerged in that time:

“The only starting-point for a realistic Left today is a lucid registration of historical defeat. Capital has comprehensively beaten back all threats to its rule, the bases of whose power – above all, the pressures of competition – were persistently under-estimated by the socialist movement. The doctrines of the Right that have theorized capitalism as a systemic order retain their tough-minded strength; current attempts by a self-styled radical Centre to dress up its realities are by comparison little more than weak public relations. Those who always believed in the over-riding value of free markets and private ownership of the means of production include many figures of intellectual substance. The recent crop of bowdlerizers and beauticians, who only yesterday deplored the ugliness of the system they primp today, do not.”

The first of those strengths he identifies percipiently as the pressure of competition, that creative pressure that stimulates prosperity by weeding out bad, corrupt, or ineffectual ideas and practices. His recognition that the machine-like description of capitalism that pervades socialist writings from Marx onwards was an inadequate base from which to understand just what drives markets is a welcome change from denunciations of markets in terms of conspiracy theories, which is often the revolutionist’s bolt-hole when confronted with matters he cannot comprehend or which have actually defeated him. Anderson’s realism is based on an actual understanding of what had been happening.

This is reinforced by the second strength that he describes, that “tough-minded strength” of those “doctrines of the Right that have theorized capitalism as a systemic order”. This is the source of capitalism’s resilience, and his phrasing suggests that it is, amongst others, Hayek that he must have in mind, which in turn underpins his acknowledgement that those “who always believed in the over-riding value of free markets and private ownership of the means of production include many figures of intellectual substance.”

Anderson had looked defeat in the face and realized that it came about in part through treating arguments for the market as being merely those of vested interests, and in doing so failed to acknowledge the real strengths of what socialists thought they were opposing. While his pessimism is to be understood, his clarity in perceiving that there is integrity amongst his opponents and any future discussion is going to have start from there is a real measure of how comprehensive the Left’s defeat on these questions has been.

An adequate gloss on those pressures of competition and what they mean in practice, both politically as well as economically, is found in Martin Wolf’s Why Globalization Works (Yale Nota Bene, Yale University Press, New Haven and London, 2005).

In stating that a market economy is a necessary condition for a stable democracy, he goes on: “The market may not be a sufficient condition for such a democracy. But it was a necessary one, because the concentration of power inherent in a planned economy was incompatible with effective pressures from below.”

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

Hayek and Mrs Bunch: The Irregularity of Individuals

Thursday, November 29th, 2012

Marshalled by Mark Rogers

It is perhaps not surprising that the English Common Law presages so much of Hayek’s understanding of how law underpins economic life, particularly as it is so heavily concentrated on property. Common Law has another importance, however, in an Austrian, Misean sense in that it is founded in human action, not in abstractions – which tend to the fiat diktat sense of “law” – that is,  in the ordinary practicalities of everyday life. Judges are often to be found revelling in them, as in this glorious example from the late nineteenth century. The judgment is taken from Not In Feather Beds, a collection of essays and speeches by Lord Radcliffe (Hamish Hamilton, London 1968). The essay is entitled “How a Lawyer Thinks”, and Lord Radcliffe has chosen this particular judgment as being an apt specimen of that thinking. The opinion was delivered by Lord Macnaghten, “one of the greatest exponents of the legal art that this country has known,” in an appeal to the House of Lords.

“The period 1888; the setting a late-Victorian, foggy, lamplit Christmas Eve at Paddington; the subject a Gladstone bag lost at the station by a certain Mrs. Bunch. Mrs Bunch is now at grapples with the Great Western Railway as to which of them is to bear the burden of the loss. This is how Lord Macnaghten deals with the problem.” [I should add that it is beautiful specimen of English prose: and, not least, pay attention to the punctuation!]

Your Lordships are familiar with the evidence in this case, and I do not propose to repeat it. It is enough to say that on the 24th of December 1884, at 4.20 p.m. Mrs Bunch came to Paddington with a Gladstone bag and some other luggage, meaning to travel with her husband by the 5 p.m. train to Bath, that on her arrival at the station her luggage was received by a porter in the employment of the company, and taken by him to the platform for the purpose of the journey, and that the Gladstone bag was last seen on the platform with the same porter a few minutes afterwards. From that time all trace of the bag is lost. The porter and the bag both vanish from the scene. It was suggested by the learner counsel for the appellants, by way of explanation, that the porter was possibly one of a number of men picked up by the company for the day to meet the pressure of Christmas traffic. But I may observe, in passing, that so far as the public was concerned, there was apparently nothing to distinguish the casual helper of whom little, if anything, was known, from the regular and trusted servants of the company.

            On these bare facts standing alone it seems to me that there would be evidence upon which the County Court judge might reasonably find for the plaintiff, even if the company were not under the liability of common carriers as regard the lost bag.

            But then it was contended with much earnestness that it ought to have been inferred from the circumstances of the case and from Mrs. Bunch’s conduct that at the time of the loss the bag was not in the custody of the company for the purpose of the journey. It was said that Mrs. Bunch came to the station too soon – that she came before the train was drawn up – that she broke the journey, if the journey is taken as having begun – and left the bag in the charge of a porter who was then not acting as the servant of the company within the scope of his authority as such, but acting as her agent in his individual capacity, and that if this was not what she meant, it was an attempt on her part to saddle the company with a liability which they were not bound to undertake.

            It seems to me that there is no substance in any of these objections. Mrs. Bunch, no doubt, came to the station somewhat early. But the one thing that railway companies try to impress on the public is to come in good time. And considering the crowd likely to be attracted by cheap fares during the Christmas holidays, and the special bustle and throng on Christmas Eve, it does not seem to me that Mrs. Bunch came so unreasonably early as to relieve the company who received the luggage from the ordinary obligations flowing from that receipt. It is impossible to define with the extreme limits on both sides the proper time for arrival. Everything must depend upon the circumstances of the particular case. But, among those circumstances, the least important, as it seems to me, is the time when the train is drawn up at the departure platform. That is, as everybody knows, a very variable time. And it is a matter over which the passenger has no control, and of which he can have no notice before he comes to the station.

            Then I think that there is nothing in the conversation which took place between Mrs. Bunch and the porter. Mrs. Bunch’s question was a very natural one. The answer which she received was just what might have been expected. Nine women out of ten parting with a travelling bag on which they set any store would have asked the same question. In ninety-nine times out of a hundred the same answer would be returned. I do not think that this conversation altered the relation between the parties in the least degree. It seems to me almost absurd to treat it as a solemn negotiation by which the lady abdicated such rights as she possessed against the Great Western Railway Company and constituted this ephemeral and evanescent porter in his individual capacity the sole custodian of her Gladstone bag.

            Nor can it, I think, be said that Mrs. Bunch broke the journey by leaving the platform to meet her husband and get her ticket. To take a ticket is a necessary incident of a railway journey. It is, at least, a very common incident in railway travelling for persons, who intend to travel in company, whether they be members of the same family or not, to meet by appointment in the railway station from which they mean to start, and it is certainly not unusual in such a case for the purchase of tickets to be deferred until the meeting takes place…

            It was said that if everybody acted as Mrs. Bunch acted in this case, railway companies would require an army of porters, and that it would be almost impossible for them to carry on their business. I quite agree, but I am not much impressed by that observation. I apprehend that if all travellers acted precisely alike, if everybody arrived at a station for a particular journey at precisely the same moment, though the time of arrival were the fittest that could be imagined, there would be no little confusion, and perhaps some consternation among the railways officials. Whatever may be the result of your Lordships’ judgment, there is no fear that it will have the effect of making everybody act alike. Things will go on just as usual. The fidgety and nervous will still come too soon; the unready and the unpunctual will still put off their chance of arrival till the last moment, and the prudent may have their calculations upset by the many accidents and hindrances that may be met with on the way to the station. And it is just because of the irregularity of individuals that the stream of traffic is regular and easily managed.

Lord Radcliffe justly comments: “the style is very nicely fitted to the subject. It is grave, without being portentous; it is admirably detailed, without being finicky; and at the same time there is, I think, at the back of it a gleam of decorous amusement that these sober legal propositions have to be marshalled and weighed to solve the problem of Mrs. Bunch and her Gladstone bag. Next, these paragraphs which seem to be no more than a recital of facts, or a rather quizzical glance at certain arguments, do in fact contain an exposition of legal principles – so much so that Mrs. Bunch’s case has become a leading case determining for good the kind of considerations that are to govern the loss of Gladstone and other bags at railway stations and the weight to be given to some of those considerations. But the legal principles are, as it were, built into the factual structure of the story itself, not imposed upon it, so that the story seems to arrange itself naturally around them and to take its form and order from their intrinsic logic… And, lastly, the whole passage, though the careful simplicity of it is to some extent delusive, is irradiated by a vivid common sense.”

It is the last paragraph of Lord Macnaghten’s opinion that sums up the whole problem of economic planning and direction; it is this quality of the Common Law that fits so neatly and substantively with the analysis of human affairs that distinguishes the work of Hayek and Mises.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS 

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

IRAN, CHICKENS AND VALUE

Thursday, October 25th, 2012

By Mark Rogers

While the world watches with an alarmed fascination the stasis over the euro; while we doubt our own governments’ predictions of “recovery”, Weimar-style levels of financial woe long ago engulfed Zimbabwe, and are currently engulfing Iran. The rial has lost 80% of its value, most of that loss occurring just in the last few weeks, with a catastrophic plunge at the beginning of this month.

“Chicken has become so scarce that when scant supplies become available they prompt riots. On October 3rd police in Teheran fired tear-gas at people demonstrating over the rial’s collapse. The city’s main bazaar closed because of the impossibility of quoting accurate prices.” (The Economist, October 6th 2012)

Before I discuss what is wrong with that last sentence, here’s a front page headline with its subheading from The Times for today, 25th October 2012:

“Double-dip set Britons back £1,800 every year” and “Economy growing again, Cameron hints to MPs”

How do they know?

The trouble with the sort of hubristic statistics behind that headline is questions such as: by “Britons” do they mean all of us, or just households? If the former, is that just an average for the population, in which case does it exclude children? Those on benefits? The Scots? (In Scotland it was recently computed that 9 out of 10 households are receiving more in benefits than they submit in taxes…)

This is also supposed to be a figure for each year of the double-dip: does it take annual inflation into account? Why is the figure precisely the same for each year? It is not how households reckon their budgets – if they still do…

In other words: how do the authorities know? How is such an exact figure arrived at?

The fallacy lying behind its exactitude is that an averaged abstraction of this kind is impossible to compute by each individual alleged to compose the sample: I cannot look at my income and extrapolate such a figure in terms of how much I was better off over the past few years: I certainly know that I didn’t have £1,800 the year before last which I subsequently did not have the following year.

And why is the Prime Minister “hinting”?  It would be nice to think that this is an acknowledgement of the modesty that ought to be applied to this kind of prophecy, but I somehow doubt it. We live in a world of technical precision-making applied to what can only be generalities. How do they think they know?

Accurate prices?

And that is what is wrong with the sentence in The Economist’s report on Iran.

The bazaar was closed because disputes over prices threatened to spiral out of control: given the colossal collapse in the value of the rial in the previous three days, prices were impossible to assess and agree – remember this is a culture in which open bargaining is likely to take place in bazaars. This serves to throw into relief the whole problem of value (which we have looked at here and here).

There is no such thing as an “accurate” price – that is the scientistic approach of Keynesians and mathematical economists. In my own trade of bookselling, I long ago concluded that there are no such things as fixed prices, there are only sales (I began my career in the London book trade while a form of retail price maintenance, the Net Book Agreement, was still in force – which I never troubled to abide by). More generally, this can be adapted as: there are no prices, only sales – the value that vendor and customer put on an article is an agreement (a price simply encapsulates the terms of agreement), however circuitous the route to that agreement.

In a bazaar or market that route may be fairly direct: haggling. In more sophisticated retail environments the implicit bargain between vendor and customer may be more or less open, for example in the way supermarkets analyse their sales on a micro scale and keep adjusting their prices with price wars, reduced price sales, permanent price reductions, loyalty vouchers, and stocking up on items or withdrawing them, in a never-ending response to the goods that customers are willing to buy and the prices they are willing to pay.

At the extreme end of the conversation is the offer by the vendor – say, filling his window with the latest winning novel of some prize or other – and the simple unspoken refusal of the customer to buy. For example, I never buy the Man Booker prize winner, and, to extrapolate, I don’t smoke, and having recently bought a pint in a pub, something I haven’t done for a long time, I won’t be in a hurry to repeat that contemporary loss-making experience: £4.50 for a pint of lager!

Value not a formula

The vexed question of value, then, is never reducible to a formula, though it may look as if that is what is being done in benign markets with plenty of market flexibility. The formulaic approach leads to horrors such as Prices and Incomes Boards and Trade Unions, which both attempt to stamp their fixed notion of value on the rest of us.

This is one of the important reasons why Hayek’s analysis of price systems as information highways is so valuable: if goods and services never have intrinsic value, in spite of the attempt by the producer to quantify the materials or the time or the education that have gone into production, then value is only what it is agreed to be. Market domination, whether by cartels in the private sector or Trade Unions in the public sector, are attempts to rig or eliminate markets, suppress price information and make more out of the good or service than the customer is truly willing to pay.

The bazaar in Teheran was closed because when there is such a huge degree of uncertainty and widespread loss of confidence in the currency, deals are futile: when the sense of value is eroded, compromise is impossible, and without compromise markets cannot flourish.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

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"For a mountaineer, the important things are the effort, the posture and the muscles. The rope that holds him serves no purpose when everything works but it gives him a sense of security. In the same way, all gold does is ensure confidence; it's a safe haven."