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Steve Baker MP on the absurdity of monetary kremlinology

I, and I am sure many other readers of and writers of Samizdata, have been following the career of Steve Baker MP, ever since he was elected MP for Wycombe in 2010. However, the last posting I did here about Baker elicited understandable scepticism from commenters about whether Baker would stick to his free market principles long enough to make any difference. Yeah, sure, he is now on the Treasury Select Committee. Big deal. Baker, like all the others, said doubters, would soon go native.

Well maybe he will, but he hasn’t yet. Not if this City A.M. report by Peter Spence about Baker’s latest sayings and doings is anything to go by:

In almost every area of economics we’ve accepted that markets do it best, he says. Few could imagine a committee of nine wise men deciding how we produce food, clothes, cars, or mobile phones.

But when it comes to producing money, we’ve accepted just such an arrangement. And for Baker it’s crazy that this has led to an obsession with what men like Carney have to say. That we’re trying to decipher from after dinner comments the trajectory of monetary policy is illustrative of the mess we’re in. “The truth is this is like kremlinology, have we worked out what the politburo thinks? It’s mad.”

We see the same thing across the Atlantic, where former Federal Reserve chairmen Alan Greenspan and Ben Bernanke have both given speeches to investors shortly after leaving the office. What investors think about US monetary policy has knock-on effects around the world, evident after last summer’s “taper tantrum”, as the Fed stumbled towards scaling back QE.

“It’s amazing we tolerate this,” says Baker, as words from both men have had the power to move markets, such is the extent of the “kremlinology” investors are hooked on. “I want the people doing this kreminology, making their living doing it, to question whether this is actually a free market,” he says.

“I think we operate a kind of monetary socialism, and it’s the single biggest institutional problem with our economic system.”

That bit about wanting people to “question whether this is actually a free market” is the bit that really matters here, I think. Clearly, Baker wants all such questioners to realise that the answer is: “No”.

Much of the problem with the world’s financial system these days is the most observers of it don’t even seem to think of it as a nationalised, government dominated system in the same way that tractor production was a nationalised, government dominated system in the old USSR. It is simply inconceivable to them that “money” could, by its very nature, be anything but a nationalised industry, so much so that to think of it as a “nationalised industry” is beyond them, because even to use such a phrase is to allude at least to the possibility – the thinkability – of a non-nationalised, free market version of the same industry. This is not a debate about how the nationalised industry of money should be managed, so much as a debate about the fact that it is a nationalised industry. Or, it would be such a debate, if only people like Steve Baker MP can manage to get such a debate started.

No doubt many Soviet tractor-makers felt similarly about what they did. That too, they were sure, just had to be run by the government, or else tractor making would descend into a black hole of chaos and impossibility and absurdity. The idea of a “free market in tractors” was, for such people, literally unthinkable. And millions in the West mocked all this nonsense. So, why do the descendants of such mockers – literal and intellectual – not mock their own Central Bankers now, just as Central Tractorers were mocked back then?

People may respond to Baker’s challenge by saying: “Yes, it is a nationalised industry, and a good thing too.” But for people even to talk like that would be a huge shift in thinking, because the fact of monetary nationalisation would have been accepted, even as it is being defending.

Until the metacontext (to use a favourite word here) of this debate is changed, free market capitalism will go on getting the blame for all that is wrong about the world’s financial system. And the “solution” will continue to be to restrict free markets in financial matters ever more ferociously.

Keep it up Mr Baker. You have not gone native yet. And you have an admiring fan club out here that continues to notice and continues to applaud.

30 comments to Steve Baker MP on the absurdity of monetary kremlinology

  • So, seven and a half weeks is a long time in politics?

  • Might Baker actually be “the real deal”? If so, then Baker for PM please :-D

  • Michael Brazier

    Fiat money has to be a government-dominated industry, because it’s backed by a government’s power to tax. Money that wasn’t controlled by a government would have to be backed by a commodity which has non-monetary value; that is, some actual use beyond being passed around as a token of exchange.

    This is why Bitcoin is, so far, not a viable currency, just a technology that could be incorporated into a currency. A bitcoin is useless, except as a token of exchange – in itself it’s nothing but the result of a lengthy computation.

  • bloke in spain

    ” A bitcoin is useless, except as a token of exchange”
    That would be precisely the advantage of a Bitcoin type money unit. It would be backed by precisely what value of goods could be expected to be exchanged for it. No more, no less. It would be what is required. A token of exchange. Not a tool for economic manipulation.

  • Regional

    A history Lesson for yous Seppos. Do you know why you drink Burbon, George Washington, who introduced a tax on wheat, ironic hey? and
    Just to lighten the moment, The First President Of the United States Was A Black Man, John Hanson.

  • Regional

    Wonder if Kwasi Kwarteng will be the first black Prime Minister of Britain?

  • Rich Rostrom

    This essay is a classic example of why libertarianism puts off most people.

    Mr. Micklethwaite has a good point, but he buries it in a mass of false analogy,

    The creation of money is not and never was an industry like making tractors. Money is not a good in itself, like tractors, only a medius of exchange. It has always been established by governments (with a handful of trivial exceptions like bitcoin).

    The manufacturing of tractors requires the coordinated activity of tens of thousands of people – pershaps millions, when all the raw materials production is included – doing thousands of kinds of work. As the Soviets discovered, it is impossible for a central authority to manage all that. And even the most devout Communists never claimed that tractor production could only be done by the state; only that state production would be more efficient and just.

    The creation of money requires at most the work of a few hundred coiners or printers, and today only a few clerks.

  • Fraser Orr

    That might be Rick, but it is kind of like saying that the production of a novel requires only a few people to run the presses and binders. The kremlinology is in determining how much money to print, not the actual manufacture of it.

    It is also not true that money has always been established by governments. What governments until recently did was to certify the money was what it said it was, that is to say, the government stamp was “this is 98% gold and weight 1 ounce.” It was not the money they established, it was the weights and measures they established, which is why it is part of the weights and measures clause of the US Constitution and why the pound is called the pound. Of course they were happy to fiddle with the money in their own way, in fact in a way that were a private citizen to do it he would have been hung drawn and quartered.

    Having said that I don’t think gold is good money at all. Money is a challenge because, on the one hand, it is an extremely useful, arguably essential, tool for facilitating commerce but it requires the growing production of the right amount. This growth is necessary because money is supposed to represent the value of the traded economy and a healthy economy grows, so consequently the amount of money should grow to represent that increased value. But how much? Too little and you get deflation, too much and you get inflation, both concepts that have their own pros and cons. And as a consequence you need some regulated mechanism to grow the supply of money.

    The control for gold is digging it out of the ground. Higher demand for money (represented by an excess of traded economic value over established money supply) causes more demand for digging in the dirt, and lower demand the opposite. However, it is an extremely high transaction cost process, and has a huge inertia to respond to the demand.

    This leaves the conclusion that Alan Greenspan tinkering is the solution with the veil of pretense that the central banks are politically independent, and simply response mechanisms to the changing demand for money. Commercial money makes that whole thing much more complicated as it amplifies the whole problem and enables political manipulation of the commercial and retail banking industry.

    For me I think the money problem can actually be solved pretty easily. This is an idea I think first proposed by Milton Friedman. The idea would be simply to grow the money supply by a fixed amount annually, probably about 4%. This number could not be varied except by extreme legislative effort. In some years this growth rate would be deflationary, sometimes inflationary. However, it would have one fabulous benefit. It would be entirely predictable and free of political meddling. Economies need one thing above all else to prosper, predictable stability.

    Side note…. as a side note, one of the most hated people in the US among the right wingers is George Soros. Particularly galling is the way he made his money off currency speculation. However, few seem to realize that he got rich doing Britain a favor by utterly overwhelming the hubris of the politicians and forcing a reality check on them. That hubris cost the British taxpayer billions of pounds, pounds that George was very happy to put in his pocket. However, people somehow only remember the evil capitalist rather that the vain politician who was almost willing to flush the British economy down the toilet rather than accept his Utopian vision of Europe was a fraud.

    Back to the monetary policy plan: this needs to be coupled by the elimination of all laws that prevent the use of alternative currencies, so that the nationally produced currency would have to do a fairly decent job to survive.

    OK I could ramble on for a while long enough, but that is enough for now.

  • Paul Marks

    What Mr Barker says could be better – but it is vastly better than what the establishment says.

    It could be better because he has not made it clear (at least not in these comments) that people can NOT have all the “cheap money” “low interest rates” they want.

    It does not matter if the government creates the credit bubble or if private enterprise does it (any more than it matters if the government steals your wallet or whether a private mugger does it), reality is reality.

    People can not have everything they want – not without nasty consequences from trying to get more loans out of a system than they put REAL SAVINGS (i.e. sacrifice of consumption) into that system.

  • This essay is a classic example of why libertarianism puts off most people.

    I usually stop reading at this point on the assumption nothing worth processing will follow, but this was an exception… but at least it did reinforce the wisdom of why I usually stop reading after someone starts a comment with “This essay is a classic example of why libertarianism puts off most people” or words to that effect… particular when the article being commented on is not even about ‘libertarianism’ ;-)

  • Laird

    I agree with most of Fraser Orr’s comment above, with the exception of the third paragraph:

    Money is a challenge because, on the one hand, it is an extremely useful, arguably essential, tool for facilitating commerce but it requires the growing production of the right amount. This growth is necessary because money is supposed to represent the value of the traded economy and a healthy economy grows, so consequently the amount of money should grow to represent that increased value. But how much? Too little and you get deflation, too much and you get inflation, both concepts that have their own pros and cons. And as a consequence you need some regulated mechanism to grow the supply of money.

    That is certainly orthodox thinking, but it is completely wrong. A growing economy does not require an expanding monetary base. A fixed amount of money simply means that as the economy expands, prices overall decline proportionately. This gradual “secular deflation” (in Detlev Schlichter’s terminology) is beneficial to a society, because almost everyone (not just the bankers) benefits from the growing economy. The only exception is those with long-term debt (since the debt is ultimately repaid in more valuable currency), but this is not a bad thing. Minimizing debt in general is a worthy goal, and the knowledge that modest secular deflation will occur will tend to ensure that only the most meritorious projects are financed by debt (as opposed to savings, or accumulated capital). It will also result in naturally low nominal interest rates, rather than artificially forced low rates as we’re seeing today.

    This isn’t the place for a long discussion about deflation, but I would refer anyone interested in truly understanding why systemic inflation (as Mr. Orr advocates) is not only bad but unnecessary to Schlichter’s book “Paper Money Collapse”.

  • Fraser Orr

    @Laird, FWIW I do not disagree with you at all. Some of the greatest industries in the world have been highly deflationary. For example, the whole computer revolution was a massive deflationary event with respect to the price of computing power and quality. As I said there are both pros and cons to both deflation and inflation.

    Nonetheless, my comment was in respect of the commonly held idea that prices should remain relatively stable, or mildly inflationary, for a whole variety of reasons. And achieving that in light of a growing economy does require a growing money supply.

  • Paul Marks

    Quite correct Laird.

    A growing economy does NOT require a growing money supply – gradually falling prices (NOT a sudden crash from a credit bubble boom going bust) are not a bad thing.

  • Laird

    Fraser, this may be picking at a nit, but an industry isn’t “deflationary”; its prices merely go down. Describing the computer industry as “highly deflationary” betrays a fundamental misunderstanding of what deflation really is. It’s not simple price declines, any more than inflation is simple price increases. “Deflation” is always and only a monetary phenomenon, and refers to a general increase in value of the currency (“inflation” being its opposite). The prices of specific products within an economy can go up or down due to a variety of factors wholly unrelated to inflation or deflation (computers are an excellent example of this; the prices have come down mostly due to technological advances).

    You are correct that there is a commonly held belief that prices should remain relatively stable. This implies a steadily expanding monetary supply, which in turn implies a central authority (government) responsible for the issuance of money. The fact that this is a common belief (even among professional economists) doesn’t make it any less a delusion. A look at price levels and economic growth prior to the widespread use of fiat currencies clearly shows that mild secular deflation has absolutely no adverse effects.

  • Fraser Orr

    @Laird, my point about “deflation” regardless of the technical meaning of the word the concerns with deflation in the general economy are writ in the experience with computers. I for one remember clearly when friends would ask me to recommend a computer for them that I told them I would be happy to help, on the promise that they would not look at computer adverts for six months, because the day after the bought my recommendation something better cheaper came out.
    This was the common experience of how long to hold out before buying that is the concern for an excessively delayed gratification economy. Which is to say, I think the concerns over deflation are indeed greatly overblown, but it certainly has an effect.
    FWIW, I am not an opponent of commercial money, which is to say growing an economy on debt. It certainly has its disadvantages, but it is a leverage that can be a powerful accelerator of growth. The problem is not fractional banking per se, it is fractional banking insured by a promise to squeeze tax payers should the risks be taken be excessive.
    Which is to say the problem is not commercial money, it is that we can countenance such an asinine idea as “too big to fail.”
    And needless to say, even though I oppose phony baloney FDIC deposit insurance, I think privately funded deposit insurance is a darned good idea.

  • Richard Thomas

    This growth is necessary because money is supposed to represent the value of the traded economy

    Who says? To either part.

    Money itself could represent a small fraction of the economy. If you look around, you can see many examples of faux money that do this. Amazon gift cards for example.

    But even for a “national” form of money, even if it does represent the value of the traded economy, growth in that economy does not imply a need to grow the money supply. That’s just an excuse given by those who want to be in control of handing out that growth.

    Look at it this way, say you invested in 20% of a company. At the end of the financial year, the CEO steps up and says, “We’ve had a great year and we’ve grown the company 30%. As such, I’m going to print up 30% more shares and give them to my wife”. Seem fair to you?

  • Laird
    July 3, 2014 at 2:13 pm

    Economics is not just sums. It is also human psychology. In a deflationary economy consumption is put off as much as possible because the price will be lower in the future. In an inflationary economy consumption will be advanced because it will be more expensive in the future.

    The stated goals of the monetary authorities is a mildly growing money supply – on the order of 2% a year IIRC for the USA. Which is not a bad policy – if they stuck to it. So how do you counteract the loss of value when saving for the future? Invest in the economy.

    The #1 problem for all of this is that taxes are not inflation indexed.

    Well – nothing is perfect. Which is why the universe is made of so much of it.

  • M. Simon, that is all markets are about: psychology. It is hardly the place of government to meddle with the psychology of the citizens – including markets.

  • Julie near Chicago

    Alisa, very good point!

  • bloke in spain

    @Fraser Orr
    “This was the common experience of how long to hold out before buying that is the concern for an excessively delayed gratification economy.”
    This typifies the argument over managed money supplies.
    Delayed gratification is an entirely virtuous action. It seeks to maximise value in a transaction. That it is seen as undesirable reverses Adam Smith’s “the sole purpose of production is consumption.” It seeks to make the consumer poorer, to favour the producer & reduces overall wealth.

  • PeterT

    This isn’t the place for a long discussion about deflation, but I would refer anyone interested in truly understanding why systemic inflation (as Mr. Orr advocates) is not only bad but unnecessary to Schlichter’s book “Paper Money Collapse”.

    No need. Just read this instead. Shorter and free.

  • Laird

    PeterT, I’ll take a look at that; thanks. (But I’ve already made the investment of money and time in acquiring and reading Schlichter’s book, so that’s a sunk cost!)

    M. Simon, that old argument is really only applicable in very limited circumstances. Most consumption cannot be deferred for long (you’ll get very hungry). And are you really going to defer replacing your $25 toaster if you know that it will cost you only $24.50 next year? It’s a straw argument. Anyway, if it were really true no one would be buying smart phones or computers, yet they’re flying off the shelves. Massive deflation is destructive, yes; no one argues otherwise. But the mild, relatively stable secular deflation resulting from a healthy, expanding economy benefits everyone except debtors (the government itself being the principal one of those, of course, which is the real reason governments like inflation).

    You seem to think that 2% annual inflation is benign, even beneficial, but after 30 years you’ve lost nearly half of your purchasing power. And the solution is to “invest in the economy”? Just how is one supposed to do that? What’s your preference: a stock market subject to wild gyrations, systemic insider manipulation, and currently soaring to crazy, unsustainable heights solely on the basis of massive money printing; or bonds issued by governments which are insolvent by any rational measure yet which pay essentially zero yield? Anyone who favors neither Scylla or Charibdis is to be sacrificed to your desire for “benign” 2% inflation? Time to examine your premises.

  • Paul Marks

    I am wary (to put it mildly) of empirical evidence in economics – however, the idea that gradually falling prices prevent the betterment of the human condition is radically counter empirical.

    For example, prices were lower in Britain (indeed in the Western world) in 1914 than in 1814.

    Yet an utter transformation of living conditions (perhaps the most profound in human history) had taken place.

    In the early 1800s a person would most likely not survive childhood.

    Even a healthy adult could be killed by such risky things as drinking a cup of water (or going to toilet – not that most people actually had a toilet as such….).

    And so on.

    None of the transformation in human living conditions was prevented by falling prices.

  • Paul Marks

    Forget 2% “inflation” – even a so called “stable price level” is often fatal.

    For example, the Benjamin Strong “stable price level” of the late 1920s (actually a credit money “boom” that led to the Great Crash, or the Alan Greenspan (relatively) “stable price level” in the run up to the 2008 credit bubble crash.

    What must be prevented is the INCREASE IN THE MONEY SUPPLY (especially by government supported banker credit expansion – “broad money”).

    If the choice is between expanding the credit money supply and “falling prices” – then go for falling prices.

  • Paul Marks

    But make sure that the prices of various forms of labour (pay) is not rigged.

  • Rich Rostrom

    Fraser Orr July 3, 2014 at 4:48 am:It is also not true that money has always been established by governments. What governments until recently did was to certify the money was what it said it was, that is to say, the government stamp was “this is 98% gold and weight 1 ounce.”

    Ever heard of seigniorage? Money has always been a function of government. Coins are a very important way of tracking governments when recorded chronicles are missing. Governments produced coins like animals produced horns or feathers or shells.

    Whereas production of material goods like tractors was never a function of government until the rise of socialism, never exclusive to government, and now almost entirely removed from government.

  • Laird

    Incorrect, Rich. History is littered with private currencies; the US alone had hundreds during the 19th century. Yes, historically currencies (coins and bills) have mostly been issued by governments, but not “always” and not necessarily and (I would argue) not even optimally.

    “Seigniorage” is the government’s profit margin in producing currency. With precious metal coins it’s a small amount and not objectionable. With fiat currencies, however, it’s blatant theft on a grand scale. Which is one of the reasons I say that having governments produce currency is “not optimal”.

  • Paul Marks

    The key defeat for private currencies in the United States was when Congress banned the minting of gold and silver coins in the 1850s. There was no anti fraud reason for doing so as the private minters (who dominated the West) were not cheating their customers (they took in gold and silver kept a fraction as payment, and turned the rest into full weight coins of good purity) Congress just got into their heads that their right to mint gold and sliver coins gave them a MONOPOLY of doing so (the word “monopoly” is not mentioned in Article One, Section Eight – or anywhere else in the Constitution).

    As for private currencies that are not really commodities at all (either claiming to have a commodity that they do NOT have, or not even claiming to have a commodity – just trying to dazzle the punters with fast talk and fancy footwork), I do not think they are banned. Why should they be banned? After all they are a similar scam to what the modern state does.

    Government con artists (grifters or whatever you want to call them) may indeed feel some fellowship with “private sector” con artists (at least if the private con artists play ball with the government).

    Of course there is a difference between private fraudsters and government ones.

    If the punters (the “general public”) see through a private fraud, that is the end of it. If they see through a government fraud – then the government just gets out the clubs and firearms.

    By the way….

    Both the modern gold market and the modern silver market are scams – the big players do not really have the physical commodity they claim to have (they are playing a shell game). Why does the scam not collapse? Because, historically anyway, governments (and their Central Banks)have backed it.

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