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Posts Tagged ‘Austrian School’

GOLD STANDARDS III

Wednesday, June 5th, 2013

By Mark Rogers

I have discussed in Gold is Money, and the previous Gold Standards I and II the advantages of understanding that gold is not a commodity, that it is money that serves the usual purposes of money, as a store of value and a means of exchange, but with the vital difference that it also serves as a standard unit of measurement. The latter function is owed to its intrinsic qualities.

However, in Paper Money Collapse, Detlev Schlichter expounds Carl Menger’s view that gold, like all other things that people have found a use-value for, can indeed be considered a commodity, at least in historical terms. (I have looked at this book twice before in Gold Money A Currency of the Past and What Are Banks For?)

How does this argument work? Menger, says Schlichter, that “money could only have come into existence as a commodity”. It was not the creation of the State, there were no issuing authorities; money arose from mutual trading activities in which all commodities had a use-value. Without that use-value, no commodity was worth anything. Schlichter explains:

“For something to be used, for the very first time, as a medium of exchange, a point of reference is needed as to what its value in exchange for other goods and services is at that moment. It must have already acquired some value before it is used as money for the first time. That value can only be its use-value as a commodity, as a useful good in its own right. But once a commodity has become an established medium of exchange, its value will no longer be determined by its use-value as a commodity alone but also, and ultimately predominantly, by the demand for its services as money. But only something that has already established a market value as a commodity can make the transition to being a medium of exchange.”

Gold the Supreme Embodiment of Value

This anthropological-historical understanding of the emergence of money puts the market, trading, at the heart of the valuation process. Which, in turn, reminds us that the ultimate source of value, what something is worth, is its value to the parties, few or numerous, who engage in the transaction. So what in turn is required of a monetary medium, a currency, is a value that as far as possible stands outside that arbitrary subjectivity. Money itself, whatever its currency embodiment, is an attempt to render value objective in that the currency can be used in any exchanges, unlike bartering.

So in turn, the more objective the currency can become, the more it can become a standard (and this is where it is easy to see why it therefore becomes a unit of measurement), the more reliable, the more valuable that currency unit becomes.

And again, in turn, it is easy to see why gold quickly established itself as the supreme embodiment of exchange value: “it is no surprise that throughout the ages and through all cultures, whenever people were left to their own devices and free to choose which good should be used as money, they most always came to use precious metals.”

Gold is Money

Historically then we can enlarge Turk’s and Rubino’s contention that gold is not a commodity, not at least a commodity like oil or eggs, by allowing that the currency standard will have had a life as an object with use-value until other properties lead people to realise that it may have a value above its use-value. People have become familiar with these properties until it is singled out in use as being dominated by these properties and becomes money.

And the dominant characteristic of gold is its stability: soon all other characteristics were subordinated to this one, thereby changing not its nature but its purpose.

Of course, gold can be re-commodified as jewellery or ornament, as Jocelyn Burton, gold– and silversmith, demonstrates in her extraordinary work. People will always have these uses for gold, which are not intrinsically opposed to its properties as money: jewellery after all carries a premium and can, somewhat philistinely perhaps, be regarded as a form of storage, but then this form of storage shares with gold coins the property of portability.

And money can be re-subjectivised, in the past by mutilating it, clipping and shaving gold and silver coinage; and in the present of course the rolling of the printing presses with paper money has made money supremely subjective, its value becoming volatile and it storage properties destroyed.

It may be objected that we have little ancient anthropological evidence for this process, but we do not need to rely upon this as merely an explanation of what “must have happened”, we need only look at how those living in a territory with a devalued currency deal with the depredations of their government: in the twentieth century they have singled out dollars. When I asked an acquaintance from Zimbabwe how Zimbabweans coped with all those noughts, he laughed and said: “We just use dollars.”

The idea that money, and gold as money, emerged from the free trades of people going about their ordinary business also helps explain the deep disdain for gold in today’s political establishment: the idea that people are incapable of looking after themselves has become rooted in modern political thinking.

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

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 MONEY: A CURRENCY OF THE PAST… AND THE FUTURE?

Tuesday, May 7th, 2013

By Mark Rogers

When buying numismatic rare gold coins, it is well to remember that many of them were minted for use, as currency. For example, one of the perennially popular collector’s coins, the South African Krugerrand is minted in two kinds. The South African Mint strikes proof Krugers, while bullion Krugers are struck at the Rand Refinery. Proof coins are issued in smaller quantities for the collectors’ market. They are important to collectors who are interested in “a perfect uncirculated” coin; when the Krugerrand was first struck the bullion coins were intended to circulate as currency.

While currency wars and devaluations are very much a thing of today, it is worthwhile taking a look at the origins of one of the first real currencies… and who knows, one that may take its place once more as a trusted, true exchange of value.

Money, a concept born out of necessity

Before money existed, goods were traded in the form of exchange and bartering. There were obvious difficulties because in the long term it is perhaps impossible to equate the value of items in terms of each other, oxen for example in proportion to wheat or potatoes.

A popular and plausible hypothesis by H. Hauser (Gold, Vuibert & Nony, Paris, p.307) is that as gold was also being traded against various goods, its weight was ultimately agreed upon as the unit of exchange. It cannot have been longer before people realised that gold was easily divisible into a variety of weights which equated to multiples of its value and therefore the value of other commodities. This led to the concept that of weights of gold were indeed useful “units of value” and quickly prices for oxen, sacks of wheat etc became equivalent to a certain weight of gold.

Gold is ideal for this purpose because it is easily divisible and impossible to fake and is a store of real value being a precious and rare metal.

The birth of gold coins

In Egypt, gold was exchanged against goods in the form of rings which had fixed weights and therefore different multiples of value could be used for pricing goods. Elsewhere however, gold stayed in the form of ingots for a long time but their weights were often variable, that is, there was no standard size of bar, so bars would naturally be of different weights depending on how much gold was in them. Trading was difficult and tedious because of these discrepancies. Weight variations meant that trades were seldom a direct equivalent to the goods being traded and so much haggling ensued.

In search of something more convenient, reliable and safe, small gold discs of a fixed weight were made and each one had a value struck on it. They were easier to carry around and allowed trade to be more flexible, retail as well as wholesale. Thus the first gold coins were born and indeed the first recognisable currency. This took place around 700 BC according to Erik Chanel.

Whilst gold was not the only metal used for coins – silver has been widely used as well- gold, however, was the ideal metal because of its unique combination of properties such as: it is stainless, rustproof, divisible, malleable, ductile and of course rare, which made it from the outset a symbol of riches.

Is Money as good as Gold?

The Gold Specie Standard was a system that associated units of money to gold coins in circulation or when lesser metal coins drew their reference of monetary value from a circulating gold coin.

The Gold Exchange Standard was when circulating coins made of various metals such as silver and copper drew their reference monetary value from a fixed value of gold independent of their own metal value.

The Gold Bullion Standard did not involve circulating coins. This was when governments had agreed to sell gold bullion at a fixed price in exchange for a quantity of circulating currency. In other words, each unit of currency effectively had a value related to gold. This allowed the mass introduction of paper currency, which was easily transportable and practical for payments.

So far so good; but more and more governments after 1914 disassociated themselves from gold standards of any kind, seeing how easy it was, from their point of view, to inflate their “wealth” by simply printing more and more pieces of paper, which led to the credit creation system, fractional reserve banking, loans and mortgages.

Without Gold, Money is Debt

The Gold Bullion Standard ended in 1971 when Nixon decided to deal with the economic strain of expenditure on the Vietnam War and so untied the value of the dollar from gold. This therefore effectively untied all the other currencies which had been part of the Bretton Woods Agreement to form the IMF (International Monetary Fund) in 1944.

Thereafter currencies were and are not covered by a relationship to gold or any other fixed unit of reference so they can become extremely volatile, easily devalued and printed at infinitum. The problem is that today’s money is based on pieces of paper that are printed with a nominal value. What this means is that currency value is nowadays derived from economic confidence. When there is none the currency becomes worthless and it is not because the central bank has printed a number on a piece of paper that it becomes meaningful. While it is true that Human Action is the ultimate source of value, human confidence is a much more precarious matter, easily swayed, easily duped.

As Detlev Schlichter argues in his immensely important book (Paper Money Collapse, John Wiley & Sons, Inc., New Jersey, 2011):

“Large sections of the public today embrace a strong and interventionist state. They consider the government a magic cure-all and the answer to everything. Given […] the consistently devastating historical record of state paper money, it is remarkable that those who advocate commodity money today are either marginalized as slightly eccentric or made to extensively explain their strange and atavistic-sounding proposals while the public readily accepts a system of book entry money in which the state can create money without limit. […] The result has been and will continue to be yet more money printing, more debt, more privileged treatment of banks and more government intervention in the economy. Given the interests of the political establishment, the views of the mainstream media, the vested interests of the financial industry, and the state zeitgeist, a timely return to hard money can almost be ruled out.”

Note that Schlichter says “timely”. Earlier in his book, he had noted that the “Achilles heel of this system may then be seen, more accurately, not in a fickle public but instead a banking sector that issues uncovered claims against itself.” Such a system was bound to cause panics from time to time, or what politicians and bankers saw as panics, but which were rather “attempted shifts by the public out of uncovered fiduciary media issued by the banks and previously accepted by the public, into money proper.”

That is, people looking for ways to protect their wealth outside of paper money.

Gold as a future currency?

Gold as a currency of the future may seem far-fetched but given the state of paper money and the increasing interest in gold who knows, it is already being planned as an alternative stable money in certain places. Even if gold coins do not re-enter circulation they are being used as a more certain tangible investment, thus protecting and covering other forms of wealth.

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

JOHN MAYNARD KEYNES: A SELF-INDICTMENT

Friday, February 1st, 2013

By Mark Rogers

Keynes described his working assumptions thus:

“We take as given the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, and disutility of different intensities of labour and of the activities of supervision and organization, as well as the social structure.”

Lord Bauer says of this passage:

“This drastic simplification is doubtfully appropriate even for the analysis of short-term growth in an advanced economy. It is altogether inappropriate to discussion of the long-term progress of less developed countries.” (Reality and Rhetoric, first quoted here.)

It is a sizeable package one is being asked to take for granted; indeed, once all these things have been taken as given, what is there left to explain?!

As a young man, first entering onto the study of development economics, of which he was to become a master and for many years the leading critic of the orthodoxies that prevailed in the academy, Peter Bauer spent many years in West Africa and Malaya (as it then was). His detailed field work made him realise how inadequate the prevailing attitudes were, lacking as they did any substance in actual knowledge of the less developed economies as they actually were. He says:

“I came to this general area through two studies, one of the rubber industry in South-East Asia and the other of the organization of trade in the former British West Africa. I spent more than ten years on these studies during the 1940s and fifties, when I was for substantial periods in each of the two regions. What I saw was starkly at variance with the components of the emerging consensus of mainstream development economics.”

And he explicitly points the finger of blame at Keynes as having, through the “givens” listed above, infected the academic understanding of these matters. What need even to go into the field to study the farmers and traders and politicians and social structures of the ldcs when Keynes so conveniently lets you off the hook of the need for evidence.

Hunter Lewis (first drawn on here and here) points out in his book Where Keynes Went Wrong that Keynes quite explicitly, as it were, provides no evidence for his economic musings and theorizings. What Peter Bauer encountered in the field was the living refutation of the Keynesian approach to economics.

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

And 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

P. T. BAUER ON PEOPLE, GOVERNMENTS AND MARKETS

Thursday, January 31st, 2013

Some commonly encountered criticisms of the market system ignore the simple fact that market participants are people. Human beings and their arrangements cannot be faultless. It is therefore not surprising that objectionable phenomena are to be found in the market order, including the operation of pressure groups, the contrivance of scarcities, attempts at coercion, and well-authenticated instances of fraud. But even when they are numerous, such phenomena do not serve as a valid basis for replacing the market by a controlled economy. In recent years, detractors of the market order have made much of instances of political pressure, or of fraud by market participants. Would it make for a better society if more people with such habits were in the government sector and thus possessed the coercive power which goes with it?

From Reality and Rhetoric: Studies in the Economics of Development, Harvard University Press, Cambridge, Mass. 1984

“One of the most distinguished development economists in the world, and undoubtedly the foremost conservative one.” Prof. A. K. Sen, New York Review of Books

P. T. Bauer was ennobled as a life peer by Mrs Thatcher in 1982

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 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

BANKING FAILURES

Tuesday, January 29th, 2013

By Mark Rogers

 Banks are businesses like any other (in principle) but the regulatory frameworks constructed to “oversee” them in fact legislated banks out the consequences of operating in the private sector. The question inevitably arises therefore: what were the kickbacks?

They were obviously not such as obtained in the media, where for decades newspapers have espoused political causes and backed parties and politicians. Yes there were some ultimately certain relations that proved fairly poisonous for democracy – one thinks of Murdoch and Blair for example. The Browne/Balls-Banker axis was more fundamental, more insidious and more toxic than the media-politician axis, if only because the latter was transparent, in the sense that we could see some at least of what was going on and newspapers made no bones about their political stance.

Banks had traditionally been independent of the state (remember: the Bank of England was only nationalized in the late 1940s). The media-state “interface” had always been the more obvious and troublesome one: censorship versus boosterism – no surprise there. Journalists and politicians after all have a lot in common.

In other words, what the LIBOR arrangements, if guessed correctly by The Spectator, amounted to were not merely a conscription of the banks by the state, but the willingness of the former to be so co-opted. So where does that leave Barclay’s decision not the take the Queen’s shilling? And the subsequent vilification of Bob Diamond?

Are bankers inherently dishonest or do politicians persuade, even force, the at least more craven of the bankers to become so?

After all you don’t have much choice after you’ve been nationalized – and the legislation that exempted bankers from the commercial consequences of failure was effectively a form of nationalization.

Nazi-style socialism

It needs to be strongly emphasised that when Mr Anthony Blair persuaded the Labour Party to abandon Clause Four, the nationalization of the means of production, in favour of “market forces”, he actually was trading in the Communist version of Socialism for the Nazi version of Socialism which was to leave industrial and commercial productive forces in private hands but surround them with state interference and legislation. This is not market forces.

For a brilliant analysis of the banking problem as caused by the regulatory framework – not, it must be insisted upon, bad or lax regulation but the fact of the regulatory regime existing at all – please read the last of the three links below, and then go out and buy the book!

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

And 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

HUMAN ACTION AND HUMAN EFFORT

Tuesday, January 22nd, 2013

By Mark Rogers

We have seen how the Deutsche Bank analysts who wrote Gold: Adjusting for Zero made a central place in their discussion for the Misean concept of human effort, and how an inflationary, fiat currency economy naturally destroys the value of effort. While at first glance it might seem odd to find such a discussion in an analysis of the feasibility of a return to the gold standard, it is precisely gold’s potential to act as a restraint on, a chastener of political ambitions, that returns the question of human effort to centre stage.

That is, of course, if you have humans in the first place who make that effort. This is so in both an absolute and a relative sense: there must be living humans capable of effort, and those living humans must want to make that effort.

In his important book America Alone, Mark Steyn analyses the western world’s contemporary woes in terms of demographics and makes the sobering observation that only America is breeding at replacement level. Elsewhere, the Spaniards are amongst the lowest in western Europe and the Russians are on an irrecoverable downward trend.

He squarely puts the blame on the welfare state, that “cosseted consumerism”, as the Deutsche Bank report puts it, that has replaced the individualism of free markets. And more to the point he makes clear what the source of this malaise is:

“Unchecked, government social programs are a security threat because they weaken the ultimate line of defence: the free-born citizen whose responsibilities are not subcontracted to the government.”

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

And 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

MONEY AND CASH

Monday, January 14th, 2013

By Mark Rogers

If cash is properly regarded as (precious metal) specie – historically speaking, a recent innovation – then, when the Americans abandoned the gold standard in the early seventies, the entire world reverted to a non-cash culture. Given that the dollar was the reserve currency, relied on by other currencies because it was the sole remaining currency tied to gold, it is an important historical consequence of the abandonment of the gold standard that for the first time in history every currency in the world was no longer supported by tangible wealth.

By saying that we are now in a non-cash culture I mean that what is in circulation is merely promissory notes with the distinguishing feature that they cannot be redeemed, merely exchanged….

The worthlessness of such a system (if “system” adequately denotes the present lunacy) is of course underlined by quantitative easing. Q.E. is usually defended on the grounds that it buys time, that it keeps those ATMs whirring. Yet it is well known that Q.E. merely stores up trouble for the future, that it plays havoc with savings and pensions – so for some the future is already here. And indeed, insofar as it plays havoc with savings, it therefore plays havoc with investment.

Given these features of Q.E., far from it being a rational response to financial crisis, one of the causes of any present crisis is in fact the solution to the previous crisis; that is, crises multiply. Is the true Keynesian multiplier effect?

The Anthropology of Money

David Graeber, in Debt: The First 5,000 Years (Melville House, New York 2011) suggests that credit/debt systems are the ancient and persistent form of “money”. But is this really the case? In the absence of money as we now are beginning to understand it [link what is money], is what Graeber describes merely a primitive “pricing system”? But in the absence of money, how does a pricing system work, and does one maintained along the lines suggested eventually collapse? And any form of credit/debt system has to cope with the problem of trust, which matters less in a cash culture, but only one which involves specie and therefore genuine promissory notes.

The questions raised here will be some of the major ones to be explored on this site over the course of the coming year.

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

And 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

PAUL SAMUELSON ON SELF-INTEREST

Friday, December 14th, 2012

By Mark Rogers

In Paul Samuelson on the Trouble with Economies, I suggested that Samuelson’s understanding of self-interest was bizarre; this is what he said:

“The self-interest that the early economists counted on as a balance leads, in a modern economy, to collusion among the self-interested groups.”

It is a little difficult to fathom quite what Samuelson understands either by self-interest or what he thought the “early economists” meant by it on the basis of this assertion. After all, Adam Smith’s description is unambiguous – that it is not from any eleemosynary impulse that the baker and the butcher put bread and meat on our tables, but the pursuit of their self-interest. That self-interest is coterminous with providing customers with what they want, just as the self-interest in appeasing our and our families’ hunger leads us to pay the baker’s and the butcher’s prices: mutual benefit naturally flows from the self-interest on both sides.

And nor was Smith blind to the fact that those in business enter into collusions that may not be in the public interest; he was quite clear that whenever two or three are met together, they conspire, for example, to force prices up. This was the basis of his criticism of the medieval guild system. But such conspiracies in a free economy are by their nature limited; in such an unchecked economy they may cancel each other out. It is precisely in an economic system based on Keynesian arrangements, with the government being a central and distorting player in and above the market, that “collusion among the self-interested groups” becomes more widespread and entrenched, and therefore morally and economically damaging.

The extremes of this entrenchment are discussed in Hunter Lewis’s Where Keynes Went Wrong (discussed here and here), where he points out that when an industry or service is top-heavy with regulation, those who are regulated gradually subsume the regulators and co-opt the regulations to suit their own purposes, which is what happened with the banking crisis, and in an earlier epoch with the Trade Unions – indeed, in the latter case, the politicians simply threw in the towel. In The Mess We’re In this problem of banking regulation is dealt with in an illuminating way, as discussed in my review. It is almost inevitable that this should happen as businessmen actually understand economic realities in ways that most academics and civil servants are incapable of, an elementary point that ought to have sounded the alarm over regulation.

Calvin Coolidge in his Autobiography affirmed that nine-tenths of those who called on the President at the White House “want something they ought not to have. If you keep dead still they will run out in three or four minutes.” (Quoted in Paul Johnson, A History of the Modern World from 1917 to the 1980s.) Would that the political classes on both sides of the Atlantic study the Coolidge presidential style, to our profit…

Perhaps Samuelson’s puzzlement is that a Keynesian system was meant to sweep away the habits of the period in which the early economists wrote, self-interest, collusion and all. But how on earth is it possible to believe that, with the government being courted on all sides, collusion should somehow fade away? This is just one of the many ways in which a Keynesian lens distorts the observation of what is actually taking place, in both an unregulated economy as well as a Keynesian one; the latter distorts information in such a manner that even the Keynesians themselves cannot read it!

Artistic Integrity?

A useful way of looking at Keynesian economics is as a branch of aesthetics, a subject to which I shall return. It was aesthetic distaste, after all, that inspired Keynes against the “early economists”, as I pointed out here. He inveighed against them thus: “When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years.”

During the Thatcher years this disapproval of “self-interest” induced a very peculiar species of posturing amongst the aesthetes. In his book The Strange Death of Tory England (Penguin Books, London, 2005), Geoffrey Wheatcroft dissects this disdain.

“The novelist John Fowles complained about ‘the self-centred notions of the new conservatism’. He was shocked by ‘this rightward and selfward tendency in most of the electorate since the 1950s’, a cult of personal advantage made worse now by ‘the ethos of the grocer’s daughter’.” These sentiments were generally echoed and endorsed by the artistic elite throughout the 1980s; for the novelist and playwright Michael Frayn the free trade Tories were “barbarians”; the philosopher A. J. Ayer voted for the SDP on the grounds that they were not “philistines”, and the novelist Julian Barnes echoed Fowles in thinking that Thatcher’s achievement had been “the legitimization of self-interest as a public and private virtue”.

How amiable, then, of these people to claim to have political motives loftier than “the ethos of the grocer’s daughter”. Wheatcroft quotes the composer Sir Michael Tippett on his voting intentions: “As an artist I’m impelled to vote Labour, since it’s the only party committed to doubling the arts budget.” And actor Antony Sher: “As a member of the arts [sic] I am heartened by [Labour’s] pledge to double the arts budget.”

Perhaps artistic self-interest takes place on a more exalted plane than the base motives of those who merely wish to feed their children.

What these variously fatuous “members of the arts” fail to see, or perhaps wilfully ignore, is that state subsidy of the arts inevitably means a very obviously self-interested transfer of wealth from the poor to the rich, another of those moral grotesqueries of the Keynesian and welfare state.  (It should be remembered that Keynes was Chairman of the Arts Council, overseeing such transfers.) Not only are they driven by self-indulgence but also by self-interest – but then, as the “early economists” and the Austrian School understood, we are all driven by self-interest, it cannot be otherwise.

The plea is often made that human life is more than just survival, that we are cultural and intellectual beings with other than literal hungers to assuage. I agree – it is hardly difficult to do so, the facts being what they are – but not by taking the bread out of the mouths of our children.

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

ADAM SMITH’S ERROR (Part One)

Friday, November 23rd, 2012

By Mark Rogers

In my review of The Mess We’re In, amongst the many admirable qualities of the book I drew attention to is the way in which the author traces the evolution of the idea and meaning of value from Adam Smith to the Austrian School (see section headed “Value”). Rather than finding fault with Smith’s original conception, the author rightly contended that an idea of such complexity would go through several major evolutions before all the streams of thought that went into it would produce a meaningful and useful concept . Indeed, here I point out that there is growing realisation amongst some economic thinkers that we are only just beginning to come to an understanding of what money itself is.

In this spirit I offer some very interesting observations by Jane Jacobs in her book The Economy of Cities (I have already cited the work of Jane Jacobs here and here).

The Division of Labour

“Adam Smith, who identified the principle of the division of labour and explained its advantages, seems not to have recognized that new work arises upon older divisions of labour.” She analyses Smith’s famous description of the divided labour in a pin factory, and goes on to comment that Smith, having described the processes visible in the contemporary factory, drew a fundamentally inaccurate conclusion: he “assumes that this same principle also accounts for the existence of pin making itself. He called pin making simply a larger division of labour.”

However, the type of pins that Smith was observing had originally been manufactured as part of the task of making carding combs. The wire bristles for these combs were occasionally made in the same manufacturies as the frames, but often they were made in independent shops which sold them to the cardmakers. “Bristle makers, engaged in making a tool for the textile industry, were almost making pins. But when some of them actually did so, they were not further dividing the labour of making carding combs. Nor were they further dividing the labour of making bristles. They were not dividing at all. They were adding a new complexity, pin making, to an older simplicity, bristle making. From this addition came the rest of the divisions of labour in pin making” that Smith then went on to describe.

Smith’s Mistake

This unwarranted inference from observation she calls a mistake that was “subtle and casual”: “Smith gave to division of labour unwarranted credit for advances in economic life.”

Note that the mistake takes the form, not of misdescribing what he saw, nor of being inaccurate about what it could achieve, but rather of giving it an exaggerated influence in the rest of economic life. Yet, “[d]ivision of labour is a device for achieving operating efficiency, nothing more. Of itself, it has no power to promote further economic development.” She goes on to point out that this being so, it is even limited in its scope to improve this operating efficiency because further developments in efficiency, after extant work has been suitably divided into separate functions, “depend upon the addition of new activities”.

Another interesting observation is that division of labour is by no means a hallmark, as so many thinkers have assumed, notably Karl Marx, of an advanced economy. A moment’s reflection will show this to be true. But here one must defend Smith because it must be remembered that Smith was describing a developing economy in The Wealth of Nations, something new in economic life in the wake of the industrial revolution, which may explain why he made the incorrect inference: so much was new and unexpected as those in the extra-legal economies of the time were forcing the old medieval guilds onto the back foot.

How Jane Jacobs arrived at her conclusions in the light of her study of cities will be examined in Part Two. Suffice to say here that this work of hers is able to throw considerable light on the problem of the division of labour, and if in this instance we can say that Smith was mistaken, rather than simply incomplete, in the hands of Jane Jacobs the mistake turns out to be a fruitful one. It is also important to note that the complexity involved in the idea of value is of a different order from a mistaken assumption about how economic activity comes about: the latter is amenable to empirical observation, while value, though having intrinsic empirical implications, is also a complex philosophical issue.

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

THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

Sunday, September 9th, 2012

The Mess We’re In by Guy Fraser-Sampson, published by Elliott & Thompson, London 2012

Reviewed by Mark Rogers

Guy Fraser-Sampson has written a sustained account of our present woes through examining their roots in the past – and not merely the recent past. The financial crisis is not actually a single problem but a series of problems. Unless analysis takes account of this, then no attempt to explain the mess we’re in will produce any valuable insights let alone fixes.

At the beginning of his book Mr Fraser-Sampson lists five problems that have intertwined to produce the mess. These are: the aftermath of the banking crisis of 2007-08, which appears to require governments to find a method of managing the banking sector in order to forestall the need to rescue banks in the future (something which later in the book he demonstrates will be impossible to do anyway, as the debt liabilities incurred through the bail-outs are so enormous that the money simply will not be there in the future). Second, the perpetual running of budget deficits producing ever higher levels of national debt – a problem that exists almost universally. Third, the threat of recession; fourth, (an immediate problem for the U.K.) pensions and the fact that most funds are in deficit, emphatically including civil service ones. And lastly, the functioning of the political system, particularly with regard to how economic decisions are made within it. This last will, he states, come as a surprise since it is not usually admitted as a problem in an economic context.

And that is where the whole interest of this book lies: for by insisting that ready-made assumptions and quick answers are neither helpful nor available, Mr Fraser-Sampson probes beyond the usual confines of the discussion, debunks conventional wisdom, and in doing so produces a thoroughly sobering analysis.

Politicians: Cause or Cure?

The theme which runs through the book is that a dispassionate look at the economic history of the twentieth century, and in particular at its most celebrated and influential economist Keynes, cannot avoid the conclusion that politicians are not in a position to fix the problems.

The idea that they are has come about because it is assumed that politicians have an inevitable, unavoidable, necessary function in economic planning and control, so that when problems arise their roots must, ipso facto, lie elsewhere; but whoever suggested this fulcrum of expedience and necessity? Why, the politicians themselves, egged on by those economists who advocated such a role for politicians (and for themselves as the necessary advisors).

However, says Mr Fraser-Sampson, this is not the case: politicians are the cause of financial crises. This accounts for his interest in the last of the five problems adumbrated above.

What led him to this insight? He says: “I had long been aware that post-war economics had featured two rival schools of economic thought: that of socialism, inspired initially by Karl Marx, and that of Keynesianism … I was also aware that British economic policy had featured an uncomfortable mix of these.” So far, so good; this points to an important feature of the problem especially in its public policy aspect. But then what happened? He goes on:

“What I had not previously known was that there was in fact an additional school of thought, to which we might refer loosely as the Austrian School, which was viewed as so deeply subversive that many economic textbooks entirely failed to mention it, preferring to pretend that it had never existed. … Going back to reread history from the perspective of the Austrian School was a revelation. Suddenly the real causes of our current difficulties, the fundamental causes with their roots deep in the past and their consequences glaringly obvious in the present, became clear.”

The author’s thesis is that “whatever approach has been taken in the past has failed.” He advocates first that a completely new approach is called for and second that politicians cannot be entrusted to implement it. His “central argument will be that it is politicians themselves who have caused our current problems, and that the time has come for them to be called to account.”

What needs to be said immediately, to avoid any confusion, is that this book is not in any way an introduction to the Austrian School. It does not claim to be. It was his going to school with the Austrians that enabled this approach.

Looking beyond the interventionist and Keynesian muddles and platitudes and their concomitant inability to properly define the problems and their inability to offer anything other than more of the same, a counsel of despair if ever there was one, the Austrian insights into money, prices, value, business cycles, and the interdependence of law and economics proved the key to the mess, and provided the author with the means to come up with proposals of real value, one of which, concerning the banking system – which I will deal with in due course – is far-reaching in its potential efficacy, especially in the light of the place-seekers’ and gubernatorial fawners’ mantra of “too big to fail”, a decidedly un-Austrian idea.

Crises and Confusions

After introducing the reader to his theme, the author proceeds to untangle the knot of the five problems which he has outlined in his brief introduction. He takes the opportunity to lay down a very trenchant marker of the viability and honesty of politicians as managers of financial affairs. In discussing the aftermath of the bank failures of 2007-2008, he notes that “many of the bank mergers that were pushed through almost overnight would have been outlawed by the competition authorities had they been attempted by the banks themselves.” He further points out that the bans introduced by France and Germany on short selling were not only illegal under EU regulations, but that “it is strongly arguable that such a ban must create a false market, something that if done by an individual would constitute a serious criminal offence.”

So, early on we are already alerted to the sheer untrustworthiness of politicians and this is reinforced by drawing attention to the fact that, in a free society, the ability of elected politicians to act beyond the law is deeply disturbing. And all in the name of the public good, as defined, of course, by the politicians themselves.

How has this come about? In short, modern politicians in creating welfarist economies have acquired too much power. It is not surprising therefore that in giving the people what they “want” or are supposed to want, politicians create large self-interest groups which the politicians then ingratiate themselves with by bribing them with their own and other people’s money.

A singular example of this he addresses in a later chapter where he describes how the Atlee government built the welfare state by purloining the Marshall Aid funds allocated to Britain for infrastructure renewal after the Second World War (readers familiar with the work of Corelli Barnett will recognise the debt which Mr Fraser-Sampson acknowledges): not only had Britain exhausted its finances to fight the war, but instead of gratefully using the American’s money to rebuild infrastructure and the industrial base (as was done in Germany and France), Atlee’s socialists used it to create two unwieldy and unnecessary structures in nationalising health and education, in the name of building a “home fit for heroes” – and what a squalid place that rapidly turned out to be.

Having untangled the five strands of the financial crisis, the author then fills in some background in looking at “Money and Inflation” and “Markets and Crashes”. In the first of these chapters, he looks predominantly at Keynes’s influential writings on the Versailles Treaty, and the reactions to the Wall Street Crash and the Great Depression. These reflections lead on to looking at markets and crashes mainly in the light of the theories of Adam Smith, where he makes the important qualification that “markets today are almost certainly more complex than the ones Smith had available for study” and notes that Smith did not envisage “a market that was no longer free as a result of government action”.

This does not of course mean that Smith’s insights are no longer valid – a point to which I shall return.

After this however, the author does something unexpected, in the light of the intellectual feast he had promised us at the beginning of the book, namely to look at the history of modern financial crises through the eyes of the Austrian School.

He devotes his next two chapters to Keynes. After an initial confusion, the reader suddenly realises the author’s intention: Keynes has to be dealt with at some length not only because he was the most influential economist of the twentieth century, but also because his faults and the financial and economic turmoil they created were the focus of the Austrian School’s unravelling of political economic management. Hayek in particular, though the two men remained on more or less friendly terms personally, was Keynes’s fiercest critic, and one of the most detailed.

The way in which the author lays the Keynesian trail in order to start back-pedalling over it with the Austrians as guides is particularly well-done: the reader is not put off guard for too long before realising what is being done.

This is a book rich in insights and discussion of all aspects of financial crises, and as the book now progresses it is replete with the lessons learned from the Austrians, in particular Menger, Wieser, Mises and Hayek. I will cease trying to give an overall account of the book, although I hope what I have said above gives a proper idea of its scope, and concentrate on a few very valuable insights that help fill out the far-too-much neglected contribution of the Austrians and the growing realisation of the inadequacy, not to say fatal wrong-headedness of Keynes.

Value

It is well known that Keynes despised and debunked the virtues of the Classical Economists, starting with Adam Smith. It is therefore highly instructive to turn to the manner in which the Austrians viewed the classical school.

 A very succinct but suggestive account is given of the way in which Smith’s conception of value was used as the foundation stone of a theory of value that ultimately became quite complex but at the same time illuminating and useful.

Smith “believed that you could value something by adding up the cost of everything that had gone into producing it, including of course the cost of labour.” This basic insight – not of course wrong, so much as incomplete – was developed by William Stanley Jevons, who established the theory of marginal utility. This was still not the end though; the Austrian Carl Menger in developing it, revealed another two aspects:  first, the idea that “no two individuals would value the utility of a product in the same way”, and second, that “the utility of each successive item decreases”.

It was Ludwig von Mises and Friedrich von Wieser who rounded off the task. Mises established that money is only valid “in terms of the utility of the goods it can buy”; while Wieser discovered the principle of the “opportunity cost” – that what happens when a value is put on utility (which perhaps should be viewed as a value external to the actual good itself, rather than the “intrinsic” value Smith sought to recover in his definition), is that a decision is being made on what not to spend on other goods.

A fruitful train of ideas, expanding and growing, each adding something to the previous assumptions. Perhaps Adam Smith’s ideas should rather be viewed as acorns, that were ultimately most fruitfully watered by the Austrians.

The author draws attention to Keynes’s sneer at Say’s Law, but if that Law were to be treated in the same way as the Austrians treated Smith, it too could grow and expand – something, perhaps, which the supply side theorists have attempted.

Thatcher and Monetarism

When Mr Fraser-Sampson comes to view the record of Mrs Thatcher, the only politician in the post-war period whom he thinks made a decent attempt to restrain political interference in finance and the economy, he is again illuminating, particularly in relation to monetarism (and the Falklands War).

In examining what options there were to deal with the chaos left behind by the Labour Government in 1979, one instrument on the table was monetarism. The most famous advocate of monetarism, Milton Friedman, was a thinker to be reckoned with: he was one of the early opponents of Keynes, in particular of his theory of full employment. Friedman proposed that, despite Keynes and the obvious attraction of the idea for politicians, full employment was a mirage: there is always a natural rate of unemployment (think: students; think: people leaving one job without having found another; just two possibilities with which to fill out this idea).

In spite of misgivings, Thatcher herself being more inclined to follow Hayek, it was decided to see what would happen with a monetarist policy – and what happened was one of two things, which to their credit the monetarists were to explicitly recognise (no indulging in that old utopian refrain: “it hasn’t been tried properly”).

What happened was that monetarism appeared not to work. Appeared not to, because the results of the Thatcher government’s implementation of it demonstrated one of two things: either monetarist policies would only work over a very much longer timeframe than its intellectual begetters had thought feasible, or the definitions of money on which the theory was based were wrong. A healthy dose of empiricism is always a virtue in a theorist and Friedman himself acknowledged the difficulties. In the circumstances of the eighties, there was not time to wait while the thinkers went back to their scribbling pads: monetarist controls were abandoned, to give way, it was hoped, to a more Austrian approach.

Central to this approach as it affects the possibility of political policy is the principle that economic information is simply too diverse and too diffuse to be amenable to centralised control. Taking Mises’s analysis of and strictures on socialist planning, Hayek developed a hugely important theory of markets as information networks, with prices being the chief vehicle of the information that they disperse. What is important in the context of this book, is that it follows from Hayek’s elaboration of his information theory that too little overall is capable of being known about this information – there are too many links in the chains of information for them all to be ravelled together in central planning bureaus, and even if the collection exercise were at all possible, the ability to process and analyse the information in the real-time that market transactions, even of the humblest kind, require would take too long and invariably spawn too many anomalies. Which is why basic food stuffs, for example, were permanently running out in the Soviet Union.

Hayek developed these insights into his theory of spontaneous orders, one of his most fruitful economic and anthropological ideas (his investigations into how this idea illuminates legal and constitutional history are a highly fertile branch of his thought).

This idea is also a moral one, and for reasons that go to the heart of Mr Fraser-Sampson’s concerns. For involved in the idea of markets as complex information systems, spontaneously evolved from the considered actions of many, many people, is that politicised economic systems and social fabrics cannot be built on them: it is simply impossible for politicians and civil servants to attain the omniscience required, and any attempt to try produces economic chaos and mismanagement (to put it mildly). Hence we see that in financial crises politicians wildly clutch at straws, some of them, as we have already noted, criminal.

And what has the Falkland’s War got to do with monetarism and spontaneous orders? Not only that monetarism lost, while in the Falklands the Argentineans did, but the victory over them ensured that Mrs Thatcher stayed in power. By the end of 1981, Thatcher was deeply unpopular; her policies were deemed not to be working, and at the next election it was widely assumed that the Labour Party would win. Victory in the Falklands produced a huge wave of patriotism that focused on the lady who was not for turning, and she was re-elected. Mr Fraser-Sampson points to this as being a remarkable lease of life to continue with the attempt to depoliticise the British economy.

Too Big To Fail?

It is in dealing with the banks that Mr Fraser-Sampson comes to the heart of his theme: that politicians with all their inevitable short-termism are the worst people to have in charge, micromanaging the financial detail while the walls come tumbling down around them.

He establishes this by his account of how banking regulation is at the heart of the crisis – and that we have a very long way to go before we are out of it. His essential point here is that we have run out of money, and that the more is borrowed/quantitatively eased, the bigger the bill for our great-grandchildren.

To put it bluntly, the regulation of the banking system, with all its bureaucratic exfoliation and micromanaging complexity, had one aim in view: to prevent banks collapsing. A reasonable goal, if perhaps unreasonably pursued, would be most people’s assumption confronted with such an argument. But it is precisely here that Mr Fraser-Sampson demonstrates lies the biggest danger of letting politicians have this kind of control: and he does so in a startlingly simple way.

We already have practitioners with knowledge accumulated and abilities honed over the centuries by their forebears; we already have laws, mainly established through precedence (case law) and capable judges to cope with banking failure – though banks, through specialist banking regulations and regulatory bodies, have been excluded from their scope.

What is being said here? To backtrack slightly, Mr Fraser-Sampson points out two fundamentally necessary reforms of the banking system. First, the payments system, which should be removed from within the banks: “it was the potential collapse of the payment system that seemed to frighten politicians most back in 2008. All sorts of arguments could be advanced about how it is illogical to treat the bond-holders and shareholders of banks differently from those of other commercial enterprises, but the thought of voters not being able to take cash out of ATMs swept all logic aside.” He goes on to point out that the two main forms of customer-to-customer bank transfers, BACS and CHAPS, are outside the banking system; they are operated by non-profit subsidiaries of the Bank of England – so a vehicle exists into which the rest of the payment systems could be removed.

He goes on to say that, once this is done, it will facilitate the other essential reform: the Bank could set up “another non-profit subsidiary that could act as a virtual shadow bank, with every commercial bank being obliged to back up their records to the shadow bank every evening. In the event of a bank failing, this would enable the Bank of England subsidiary, with both the payment systems and the current customer records under its control, to continue to operate customer accounts while making arrangements … to transfer the accounts of all affected customers to new banks.”

And the beauty – and simplicity, compared to what goes on now – of this is that: banks would then be allowed to fail safely.

Customers would have to pay for all this of course, but the really important consequence of these arrangements is that “there would be no need for any bank regulations at all [my emphasis].”

“If banks can fail safely, and in future will be allowed to do so, then both separation and capital adequacy become irrelevant. Banks can function just like any other commercial firm, with the directors being allowed to choose how much risk and reward they wish to target.”

And when anything serious goes wrong, those practitioners and laws I mentioned above would come into play, just as they do in the ordinary commercial world: administrators and liquidation would ensure that banks and their assets and their customers would go through the same insolvency procedures as all other businesses that go bust.

Without the possibility of bankruptcy hanging over their heads, bankers will continue to take unacceptable risks – unconstrained by their shareholders and sanctioned by the promise of bail-outs by politicians.

So in order to curry short-term favour, keep those ATMs whirring, and win the next election, the politicians created an unwieldy and ultimately unmanageable banking regulatory system that in the end caused the banks to crash. No wonder that bankers fancied they could do as they wished, operating as they were, by legislation and regulation, outside the law – an ironic state of affairs.

So Where Does This Leave Keynes?

While Mr Fraser-Sampson starts his investigations with a certain amount of respect for Keynes, by the time he has finished Keynes is ruefully relegated to the second rank of economists. Mr Fraser-Sampson draws attention to the fact that by now even the famous Multiplier Effect is seriously being called into question.

Mr Fraser-Sampson does his best to rescue something of Keynes, particularly in regard to his theories of deficit spending – that it is something that should only be done when there is a surplus to draw on and if it is truly necessary – and suggests that its fault lies not so much in the theory itself, but in politicians who, once given the “permission” to deficit-spend, found it too useful a habit of which to cure themselves.

Yet indeed even this limited rescue of Keynes doesn’t really work, because Keynes, unlike the Austrians, saw a very big role for politicians in transforming the world according to the Classical Economists, into one more to his liking; once having given the politicians their heads there was no drawing them back.

As this book so ably and comprehensively demonstrates, this is the long drawn out source of our present ills.

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 reviewer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

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Thoughts
"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."