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As Brian Micklethwait informed us ahead of time, Detlev Schlichter appeared on the BBC Radio 4 programme Start The Week on Monday. A podcast of the programme can be downloaded. Remember that all of this is being talked about on the BBC, on Radio 4, which I imagine is listened to by lots of Guardian and Independent readers. Austrian economics is now Being Talked About, as Brian might point out.
The programme opens with Economist columnist Philip Coggan talking about the supposed conflict between money as a store of value and money as a medium of exchange. Creditors will always want a fixed supply of money and debtors will want an expanding supply of money, and this seems true enough, up to a point. Coggan goes on to point out that the biggest debtor is government and governments have always been very keen on expanding the money supply. He also explains how banks’ interests are aligned with the governments because the expanding money supply props up asset prices. There is no way out except by defaulting or inflation.
Angela Knight of the British Bankers Association is worried about more immediate matters like tomorrow and the Eurozone crisis.
Detlev Schlichter is up next. He says that paper money systems have been tried throughout history and have always failed; have always been implemented to fund the state. The failure mode is either a return to commodity money or hyperinflation. He clarifies Coggan’s point about conflict between debtors and creditors by pointing out that in a voluntary contract both expect to benefit. They would both like a means to honour that contract with money that they can trust. This makes sense because if debtors routinely get the expanding money supply they want, this ultimately will get factored into the price of the loan.
Coggan says that the trouble with the gold standard is that it imposes more austerity on governments than the voters will stand. I think Schlichter agrees, which is why he is predicting hyperinflation.
Maurice Glasman says that capitalism requires ‘exploitation’ of humans and their environment and short term returns. Detlev is ignoring the imbalance of power between the debtor and creditor. After that I couldn’t follow what he was on about.
Schlichter responds to Marr’s questions by saying that expanding money supply is right now being done to stimulate the economy rather than just to fund governments. Furthermore he is not suggesting that we walk around with little sacks of gold; payment technologies do not depend on state fiat currency. The BBC listeners are reminded that money is not backed by gold and that it’s just an invention of the state. Schlichter advocates removing the state entirely from money. Consumers should control what is produced in the economy by sending price signals, but this does not work because of the expanding money supply. If we went back to gold, as has been done before in Britain, markets would correct. Andrew Marr is incredulous: interest rates shooting up!? In this day and age? Yes, says Schlichter, calmly, it is essential that savings and investments are coordinated by interest rates.
Philip Coggan says going back to gold is possible but very unlikely, but could arise from complete collapse of the system, Zimbabwe-style, but this is not imminent in the next two or three years. Schlichter agrees that politicians are unlikely to take that decision. Over the last 40 years, since the whole world has been on paper money, we have had unprecedented money expansion and, surprise surprise, the whole world is in a mess. If we suddenly went back to hard money now it would cause a sharp correction and a recession. So Politicians will avoid this and in so doing cause a worse outcome.
Angela Knight is asked whether bankers are failing savers by getting into league with the government and she avoids the question, but agrees that banks should not be protected and should be allowed to fail. But there are a lot of Buts that I didn’t follow.
Philip Coggan says bankers have become so important because of the credit money expansion of the last 40 years. For some reason he brings international trade into the conversation. Knight starts waffling about ATM machines and the disruption to people’s lives that a move to gold would entail. Schlichter says that gold works fine in an international economy (after all, gold is gold wherever you are). When he talks about disruption he is talking about the correction of the accumulated imbalances in the economy. It’s clear he doesn’t know what Knight is on about, either.
Maurice Glasman makes a distinction between… oh I give up. The man is completely incomprehensible.
Coggan and Knight dignify him far too much by conversing on his terms, which wastes most of the last 15 minutes of the programme. Schlichter disagrees with him completely and gets in a point about how Germany’s success after WWII is a result of its relatively hard currency which encourages savings and avoids asset bubbles.
So there we have it. Coggan and Schlichter have their differences but would have appeared very close to each other to the BBC listeners. Knight didn’t really say anything, and Glasman was the token lefty who only other committed lefties would have been cheering along with. All in all not a bad day for the spreading of Austrian ideas.
“Certainly there is a need for free-market economics to be rescued from those who distort and discredit it, but that is the argument that must be made: that this system has delivered mass prosperity (and the self-determination that comes with it) on a scale unprecedented in human history, and that it deserves to be saved from the spoilers.”
Janet Daley, writing with justified scorn about those people who have been bashing Mitt Romney for his career in venture capital at Bain. To be honest, his background in this area is one of the few things going for him. It would be quite refreshing to have a president of the United States who can actually read a balance sheet.
For those who have not come across the “creative destruction” line before and how it applies to sometimes wrenching change in business, check out the great Joseph Schumpeter.
As a caveat, I should add that some – but no means most – private equity buyouts of firms have been made possible by cheap credit, and therefore might not have occurred in the way they did had interest rates not been how they were in the past decade or so. On a related point, here is what I wrote in defence of private equity at Samizdata several years ago. Excerpt:
“In the main, what these firms do is target cash-rich firms that are run by often lazy executives who have presided over crappy business decisions. Take the meltdown of Marconi a few years ago, one of Britain’s most famous companies. That was a listed company. The destruction of value and jobs in that company remains, in my mind, one of the most disgraceful episodes in British corporate history and who knows, it might have been saved from making big errors had a private equity fund been in charge, rather than deluded executives. Private equity firms helped stymie Deutsche Börse’s foolish bid for the London Stock Exchange 2 years ago, and have turned around businesses. They typically buy and hold a firm for 5 years or more, take a hands-on approach to running firms before spinning them off to another buyer or floating them in an IPO. So Will Hutton should spare us sentimental guff about how limited liability firms floated on the stock exchange represent the perfect model of doing business or something that Adam Smith or Voltaire would exalt. They are merely one of the many ways in which economic activity manifests itself. As interest rates rise and the economic cycle turns, some of the excesses of leveraged buyouts will fade and private equity transactions will decline.”
Austrian economic theory describes how purposive action by fallible human beings unintentionally generates a grand, complex, and orderly market process. An additional ethical step is required to pronounce the market process good. Economic theory per se cannot recommend but only explain markets. This is what Ludwig von Mises meant when he insisted that Austrian economics is value-free. Anyone of any persuasion ought to be able to acknowledge that economic logic indicates that imposing a price ceiling on milk will, other things equal, create a shortage of milk. But that in itself is not an argument against the policy. Mises assumed the policymaker would have thought that result bad, but the economist qua economist cannot declare it such. As Israel Kirzner likes to say, the economist’s job in the policy realm is merely to point out that you cannot catch a northbound train from the southbound platform.
– Sheldon Richman writes about How Liberals Distort Austrian Economics
Incoming from Detlev Schlichter:
Just a heads-up in case you are interested, I will be one of four guests on Andrew Marr’s show Start the Week on BBC Radio Four on Monday, 16th January. The program starts at 9 am but there are various ‘listen again’ facilities, and it will also be published as a podcast. The topic is the financial crisis, and the other guests are The Economist’s Philip Coggan (author recently of Paper Promises), Angela Knight, chief executive of the British Bankers’ Association, and the Labour life peer Maurice Glasman.
I am interested.
If we immerse ourselves wholly in day-to-day affairs, we cease making fundamental distinctions, or asking the really basic questions. Soon, basic issues are forgotten, and aimless drift is substituted for firm adherence to principle. Often we need to gain perspective, to stand aside from our everyday affairs in order to understand them more fully. This is particularly true in our economy, where interrelations are so intricate that we must isolate a few important factors, analyze them, and then trace their operations in the complex world.
– from the Introduction of What Has Government Done To Our Money? by Murray Rothbard. To read the whole thing, go here.
I link a lot to the sayings and doings of Steve Baker MP (that being the last time I mentioned him here), so this time I will be brief, and only say that I like the phrase “new money being loaned into existence”. The piece this phrase appears in is entitled Could this be a second crisis of state socialism? If you are already saying to yourself something along the lines of: “yes I rather think it could be”, you will, you will be unamazed to learn, find yourself in agreement with Mr Baker.
“American economist Scott Sumner has recently argued that the Fed cannot be blamed for the inflation that led to the Wall Street Crash because the money supply measures that reveal the inflation were not publicly available at the time. As Robert Murphy has responded, the fact that doctors of the time didn’t understand bacteria does not affect the cause of deaths during the bubonic plague. Whether we “blame” central bankers or not is really a secondary consideration to our attempts to understand what happened and why. By assigning blame we suggest that the Fed should have done better. It encourages us to think “if only it did X everything would be ok”. But the problem isn’t that individuals focused on the wrong targets, and the solution isn’t to work out how they can improve. The lesson should be that the nature of central banking – the attempt to centrally plan the monetary system – imposes an epistemic burden on policymakers that they cannot possibly ever fulfil. The Fed wasn’t to blame for the crisis, because any argument for what it “should” have done is insincere. We should absolve it from culpability, and remove the shackles of expectation that we place upon it. It did the best it could be expected to do. And that wasn’t enough.”
– Antony J Evans, economist and what I would call a “sensible-shoes Austrian”.
“One of the more unexpected things I discovered as CEO of a pharmaceutical company was that I had to think as much or more about the federal government than I did about our competition. I had known on an intellectual level that government was involved in the private sector in a great many ways, but it was only when I was actually in business that I felt the full impact.”
Donald Rumsfeld, Known and Unknown, page 253. He is describing his time in the private sector during the late 70s and 80s, and emerges as quite a firebrand for supply-side economics (he got to know Arthur Laffer).
Whatever you think of Rummy as a defense secretary (under the Ford and George W. Bush administrations), he comes across as a formidable man of US public and commercial life.
Here is something that I wrote about the FDA and associated drug regulation issues a while ago here.
“Open-source intelligence has always been crucial, but for most of the cold war it was neglected by western intelligence agencies,” says Calder Walton, a research associate at Cambridge University and author of the book Empire of Secrets, to be published in 2013. “That was the archetypal intelligence war: intelligence necessarily involved information that couldn’t be gained from any other source — human agents or telephone tapping.” That doesn’t mean covert intelligence was more effective, though: Daniel Moynihan, a former US senator, compared CIA reports gathered from secret sources with Soviet documents recovered after the fall of the Berlin Wall and found they significantly overestimated Soviet capabilities. But he discovered that western think tanks using publicly available material, such as the RAND Corporation, were much more accurate. US diplomat George Kennan estimated in 1997 that “95 per cent of what we need to know about foreign countries could very well be obtained by the careful and competent study of perfectly legitimate sources of information open and available to us”.
Excerpt from an article in Wired, the tech and futurism magazine, about a Swedish investment firm, Recorded Future, that is taking the use of social networks and other systems to new heights in its attempt to get a jump on the market. In the process, it sheds new light on how the intelligence-gathering process works.
Here’s another couple of paragraphs:
The 20 employees of Recorded Future aren’t foreign-policy experts. They aren’t traders either, but if you’d started using Recorded Future’s predictions to buy US stocks on January 1, 2009, you would have made an annual return of 56.69 per cent. (The S&P 500 had an annualised return of 17.22 per cent over the same period.) Between May 13 and August 5 this year, as markets behaved with vertiginous abandon, their strategy returned 10.4 per cent; in contrast, the S&P 500 lost 9.9 per cent of its value. They’re data experts: computer scientists, statisticians and experts in linguistics. And in the data, they think, lies the future.
All Recorded Future’s predictions, whatever the field, are based on publicly available information — news articles, government sites, financial reports, tweets — fed into the company’s own algorithms. The result, it claims, is a “new tool that allows you to visualise the future” — one that is changing how government intelligence agencies gather information and how giant hedge funds place bets. On its website, Recorded Future states: “We don’t grant interviews and we don’t issue press releases.” But behind closed doors, the company is developing the technology that has been described be one tech blog as an “information weapon”.
The businesses was founded by a chap called Christopher Ahlberg, a former member of Sweden’s special forces and a serious entrepreneur. In its own way, this article is just another example of how Sweden is not quite the socialist nation that it is sometimes said to be, either by its starry-eyed admirers or detractors. There is a lot of entrepreneurial zest up there in the frozen north, it seems.
When I heard Gordon Kerr speak in the House of Commons a week ago, I wished that he had done so with a microphone attached. Very early this morning he spoke in public again and this time he did have a microphone attached, because he was on Bloomberg Television. Turn up the volume on your computer and you’ll find it a lot easier to hear what he said this morning than I did last week.
Kerr confirmed my definite impression that the Austrianist team is now starting to win this argument. (By “this argument”, I mean, approximately speaking, this argument.)
Whereas regular academic economists talked about how this banking crisis was all over bar the recovery in 2008, the Austrianists have consistently predicted further disasters. As these disasters have duly occurred, the books and writers and ideas that the Austrianists keep referring to in their increasingly frequent public performances (Kerr mentions Hayek in this performance) are now breaking out of their academic-stroke-hobbyist ghetto and reaching the mainstream.
My favourite moment in this quiet little early morning Bloomberg TV conversation was when the man whom Kerr was arguing with said: “But if banks told the truth about the value of their assets, that would cause chaos.” His argument being that therefore making the banks tell the truth is a disastrous policy. Which it sort of is. But Kerr’s point, the point made by all Austrianists, is that disaster can’t now be avoided. The decisions that have made disaster inevitable have all now been made. By postponing the recognition of disaster, you only make it all the greater when it finally erupts.
Intellectual self-confidence is hugely important in a battle of ideas, such as we are witnessing now. The Keynesians, anti-capitalists, the more-of-the-samists, the borrowers-and-spenders and the rest of them, all want to believe that capitalism has to be managed by them if it is to work properly, in approximately the manner in which these people manage it now and have been managing it for the last few decades. Some of them still want to believe that capitalism itself ought to be smashed up, and entirely replaced by a planned economy. But how many people really think that this kind of thing would actually make the world more prosperous? The point is: the hatred of truly liberated, untramelled, uncontrolled, un-managed capitalism is all still there. But, the conviction that there is a superior statist alternative, not strong before this crisis became evident but briefly puffed up by the early stages of the crisis, is now fading away in front of our eyes.
Passionate and sincere belief in a viable, partly or wholly statist alternative to capitalism used to exist, in the early part of the twentieth century. Then, Marxists really believed that capitalism was colossally wasteful and inefficient, as well as colossally cruel and unjust and unfair, and that replacing it with a world run by small clumps of smart people with dictatorial powers, based in small but dictatorially powerful offices, would genuinely be a colossal improvement. They really and truly thought this. They believed it with the same certainty that naval tacticians, then and since, have believed (rightly) that vulnerable merchant ships are safer, during a merchant shipping war, if they all sail together in a convoy, rather than if every merchant ship sails alone. That being one of the arguments they used. This colossal Marxist and statist intellectual self-confidence was contagious and, when crisis hit Russia during World War 1 and the West at the end of the 1920s, it was hard to resist.
Now it is the Austrianists and only the Austrianists who have any genuine confidence in the correctness of their own ideas. Tiny in number but growing in number by the day, we Austrianists (I count myself a very junior member of this team – a fan rather than any sort of player) truly believe that we are right about how the world works, and about how it could eventually be made to work a lot better. This is why we are winning.
By winning, I don’t just mean convincing of our rightness third parties with no stake in how things are being done now and no power to make any difference, although that also will happen, in the fullness of time. I mean making our now hugely powerful opponents (powerful in the sense of having the power to go on doing huge damage) realise that they themselves are entirely wrong, and that we Austrianists, who until recently they had never even heard of, are right. I mean especially them. The bewildered onlooker tendency, vastly more numerous than any of the intellectual teams directly involved in this debate, is likely to remain confused about all this for a much longer time. They’ll only hear about this argument after we have won it. But the powerful people who presided over this long catastrophe, and who made and continue to make it ever worse with their ever more panic-stricken decisions, are mostly going to emerge from the wreckage with no doubt in their minds that their Austrianist critics understood everything far better than they did. They may not admit it out loud, still less formally surrender, although there will probably be some very public changes of mind. But most of these people will know in the privacy of their own minds that they were utterly defeated, by events, and by those who proved with their prophecies, observations and post mortems, that they understood these events, as they did not begin to until it was far too late.
It was like this with that earlier collapse of statist power, the fall of the USSR. The people who presided over that collapse had no doubt concerning the inferiority of their own economic arrangements, which was a big part of why those arrangements collapsed. It wasn’t merely that Soviet communism collapsed because it was hopeless. It collapsed because the Soviet communists who ran Soviet communism themselves came to realise that Soviet communism was hopeless.
Perhaps this is why Gordon Kerr talks so quietly. He is right. He knows he is right. He feels no need to shout.
Allow me also to remind you about Jamie Whyte‘s recent radio performance. He also spoke with utter certainty in the rightness of what he was saying, and he never once felt the need to raise his voice either.
LATER: Steve Baker MP comments.
Immigrants are incoming assets … in a global economy, their labour is vital both to tackle severe skills shortages and to fill long-term vacancies. Immigrants are not taking jobs that British workers could fill, but jobs which British workers are unable or unwilling to do … the idea that immigration is an intolerable burden on the taxpayer and the welfare state is baloney. Immigrants give far more than they take. It is estimated that they make a net contribution to the economy of £2.5bn …
– House of Commons Speaker John Bercow in an article in the Independent in 2005, quoted by Henry Oliver today in Adam Smith Institute’s Pin Factory Blog.
Since Detlev Schlichter is discussed frequently around here, I thought it might be interesting to write a summary of some of the arguments from his book, Paper Money Collapse. Of course I am summarising my understanding of the arguments, so caveats about my fallibility apply; errors and omissions are mine.
He begins with a description of money. It is the medium of exchange. It needs to be something people agree on. Ideally there will be a fixed supply which is infinitely divisible. Precious metals fit the bill. Schlichter distinguishes between exchange value and use value. It is possible to use gold for jewelery and electronic components, so it has use value. But as soon as it is used as the medium of exchange it is the exchange value that dominates. Money has value because it can be exchanged for goods and services.
When people say they want more money, what they usually mean is that they want more goods and services. Nevertheless there is a demand for money as a store of readiness to exchange, in preparation for near-future purchases or unexpected needs. Within the limits of his means, a person can hold exactly the money he wants at any time. If he wants more money, he stops buying stuff and perhaps starts selling it. If he wants less money, he buys goods and services.
If demand for money falls, then more people want to buy goods and services, so prices go up and the purchasing power of a unit of money goes down. This continues until the reduced purchasing power of money causes people to want more money. If the demand for money increases, then more people want to sell goods and services, so prices go down and the purchasing power of a unit of money goes up. This continues until the demand for money is met. In this way, the purchasing power of money changes almost instantly, so the demand for money is met almost instantly. There is no need to create money to meet the demand for money.
Does this cause prices to be volatile? Perhaps, but Schlichter argues that it is impossible for a central authority to control the supply of money quickly enough to counter changes in demand for it. The only way they can measure these changes is by observing prices. By the time the price has changed so that it can be observed, it is too late. He also points to empirical evidence that suggests that prices are more volatile when central banks control the supply of money. → Continue reading: Summarising Schlichter
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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