By Michael Kendall Man on the Margin May 30, 2017
For the world to solve its economic problems, it needs to arrive at a consensus about what actually works in economics. More importantly, the economics profession needs to discard economic ideas that history has proven over and over do not work.
This is especially important today. There is an end limit to global central bank manipulation of money and interest rates and all the economic distortion that ensues. Anyone remotely in tune with the markets recognizes the palpable feeling that the current economic trend is not sustainable. Debt, negative interest rates, financilization, unemployment, inequality, currency devaluation, underfunded pensions, ponzi-like government entitlements, and bankrupt cities, states, and nations are flashing warning signs amid disconnected, perpetually rising market indices.
There are two possible outcomes. A return to policies that promote growth which self-corrects the unsustainable path, or the global financial system again implodes. While It is possible that another crisis is necessary for a return to growth policies, it is just as likely that even worse policies will emerge. Despots and nationalism tend to fill a vacuum. While the current economic environment and debt loads may seem beyond hope, they are easily correctable. All we are talking about is economics as a force for unleashing human ingenuity to achieve its unlimited potential.
Nathan Lewis has a website devoted to Classical economics, New World Economics. HIs archive is a treasure of economic thought. Recently, Nathan took on the task of examining where economics went wrong. In the late 1800s due to “physics envy”, economics turned toward a hard science, mathematical model. Previously, it had always been a philosophical, behavioral model. To achieve the mathematical model, economics had to discard the unquantifiable, behavioral aspects—taxes, regulation, government spending—and focus only on the mathematical ones—prices, interest, and money. This evolution of change in economic thought collided head-on with the Great Depression. For the last 80 years economics has floundered about seeking a definitive explanation for the cause of the GD. Our global monetary chaos today is a direct descendant of this confusion.
In a series of posts at NWE, Nathan has taken on every GD economic shibboleth. He defines them as:
- The “Austrian” Narrative – a monetary inflation
- The “Monetarist” Narrative – a monetary deflation
- The “Gold Exchange Standard” Narrative – A flawed gold standard system
- The “Blame France” Narrative – France swapped its foreign exchange for gold
- The “Giant Rise in the Value of Gold” Narrative – Gold’s value, that had been stable for five centuries, suddenly changed
What they all have in common—besides a lack of understanding of how a gold standard works—is that they blame the GD on monetary error while ignoring taxes, tariffs, regulations, and government fiscal policy in general—the mathematically unquantifiable economic aspects that affect behavior.
There was much global monetary confusion in the aftermath of WWI when many countries had abandoned their gold standards. The U.S. maintained its gold standard with gold defined at $20.67/oz until 1933 when FDR devalued the dollar to $35/oz. (It maintained $35/oz until 1971 when Bretton Woods collapsed.) Some countries attempted to return to gold standards prior to the onset of the GD with variable success. Other countries abandoned their gold standard in the economic turmoil after the onset of the GD. This confusion and the increasing lack of understanding of gold over the intervening decades provides the foundation for misinterpretation. This misinterpretation has real world costs today.
Nathan examines each of the monetary arguments. He looks at central bank data of the major gold standard countries during this period. By examining the five theories as they relate to central bank balance sheets, gold holdings, foreign exchange, interest rates, base money, Fed credit, gold flows, stock indices, GDP and any other relevant data, he systematically destroys each one of the arguments. What becomes clear is that the five theories require intellectual somersaults, inconsistent logic, and tortured data to fit preconceived conclusions. They cannot withstand intellectual scrutiny backed by data. The theories are as ephemeral as their real world results when applied in practice.
The only data-driven conclusion achievable is that the Fed’s maintenance of the U.S gold standard at $20.67/oz precludes a monetary cause. Monetarily, the Fed did all it could do during the GD. It maintained the value of the dollar. A dollar of defined, unchanging value is the Fed’s only real proper role. This leaves nonmonetary, fiscal policy as the cause of the crash. Specifically, the Smoot-Hawley tariff legislation instigated the market crash. SH was in effect a global tax hike that piled up goods behind a tariff wall. This resulted in an economic contraction that required liquidation of goods. Hoover followed the initial crash with a massive tax hike that sank the U.S. economy further. FDR enacted destructive socialist policy along with dollar devaluation. Legislation of a bad trade protectionist idea, that was easily correctable, and destructive fiscal policy resulted in a decade long depression followed by world war.
Now, the state of the economics profession is its own issue. Fed Up: An Insiders Take on Why the Federal Reserve is Bad for American by Danielle DiMartino Booth, details the incestuous PhD academia cabal that drives Fed policy. There is a symbiotic relationship between academia, economists, the economics profession, the financial media, and government. The economics profession with its monolithic, errant demand-side model justifies government’s natural, inherent desire to increase its power, size, and demand on resources through intrusion and regulation of the market. The expense is individual liberty. The GD and its economic misinterpretation is the government justification gift that keeps on giving.
Nathan’s work deserves widespread debate. I’m told that the opposite holds. The economics profession is well aware of Nathan’s website and work. It’s best defense is that Nathan’s work remains ignored and obscure. The odds seem massively stacked against Nathan’s work gaining the attention it deserves, but then there was Copernicus.
Here are the relevant links for the curious, interested, and a few brave economists.
An Introduction to an examination of the cause of the Great Depression
A series of posts that examine in detail the various theories. Despite their titles, these posts contain a wide variety of information on various theses with many additional links.
The Austrian Monetary Inflation Theory
Friedman/Bernanke Deflation Theory
The Gold-exchange Standard
The Giant Rise in the Value of Gold Theory
Nonmonetary Causes of the Great Depression