When Reactionary Goldbug Austrian Plumber-Economists Attack!!

Matthew Yglesias asks why oh why can't we have a better press corps--why are the gentlebeings of the press so eager to be played by Republican spinmasters?

Matthew Yglesias: Strange Swing: Joe The Plumber has a list of recommended books and the only non-plumbing volume is written by Ludwig von Mises? How is it, exactly, that we were supposed to believe this guy was a swing voter?

Tyler Cowen speculates that perhaps the Ron Paul Conspiracy has gotten to Joe Wuerzelbacher:

Marginal Revolution: Joe the Plumber and his favorite books: Joe reads economics:

The Theory of Money and Credit (Ludwig von Mises): "It brought monetary theory into the mainstream of economic analysis. It is important reading for these troubled times."

My theory is that someone in Ron Paul's camp told him to say that...

And Tyler goes on to (weakly) defend von Mises:

Scrolling through it a bit, it is more readable than my recollection and it remains one of the better 20th century books on monetary theory...

It is hard to read Tyler here.

What does "more readable than my recollection" mean? Is that a statement about the book, or about his recollection? Similary, what does "one of the better 20th century books on monetary theory" mean? Is that a statement about von Mises's Money and Credit, or about 20th century monetary theory?

My view is that Money and Credit is very readable--compulsively readable, in fact: I have just spent two and a half hours telling myself "it's OK; I will just read one more page...". But it is only readable in a rhetorical-excess-train-wreck mode, for it is also totally bats--- insane.

I recommend starting at page 416: read through the defenses of the gold standard as the only monetary system consistent with representative government, the attacks on Keynes, the attacks on the New Deal, the attacks on the United Nations, the blaming of all unemployment on labor unions--or on governments--the attacks on private-sector fractional-reserve banking, and stop with the attacks on all other believers in the gold standard not named "von Mises", not dedicated to the root-and-branch elimination of all forms of private fractional-reserve banking, and infected by the errors of the nineteenth-century British Banking School:

Ludwig von Mises, Money and Credit: p. 416 ff: [T]he gold standard appears as an indispensible element of the body of constitutional guarantees that make the system of representative government function.... What the foes of the gold standard are asking for is... to intensify very considerably the already-prevailing upward trend of prices and wages.... Such a policy of radical inflationism is, of course, extremely popular.... How pale is the art of sorcerers, witches, and conjurors when compared with that of the government's treasury department! The government, professors tell us, 'can raise all the money it needs by printing it'[1]. Taxes for revenue, announced a chairman of the Federal Reserve Bank of New York, are 'obsolete'[2]. How wonderful!... Eventually... the cleverly-concocted plans of inflation collapse. Whatever compliant government economists may have said, inflationism is not a monetary policy that can be considered as an alternative to a sound-money policy....

[T]he gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion--policemen, customs guards, penal courts, prisons, in some countries even executioners--had to put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And hosts of servile writers praised what the governments had done.... The most remarkable thing about this allegedly new monetary policy, however, is its complete failure.... [I]t substituted fiat money in the domestic markets.... It contributed considerably to the disintegration of the international division of labor.... but the position of gold as the world's [monetary] standard is impregnable....

The expansionist doctrine does not realize that interest... is an originary category of human valuation, actual in any kind of human action and independent of any social institutions. The expansionists do not grasp the fact that there never were and there never can be human beings who attach to an apple available in a year or in a hundred years the same value they attach to an apple available now.... These absurd doctrines greatly impressed ignorant politicians and demagogues.... The inevitable eventual failure of any attempt at credit expansion... impossible to substitute fiat money and a bank's circulation credit for non-existing capital goods. Credit expansion initially can produce a boom... bound to end in a slump, in a depression... the recurrence of periods of economic crises... [caused by] the reiterated attempts of governments and banks supervised by them to expand credit....

This spurious grocer philosophy was once and for all exploded by Adam Smith and Jean-Baptist Say. In our day it has been revived by Lord Keynes.... Keynes was at a loss to advance a tenable argument against Say's law. Nor have his disciples or the hosts of economists, pseudo and otherwise, in the offices of the various governments, the United Nations, and divers other national or international bureaux done any better....

Wage rates are a market phenomenon.... If the government or labour unions fix wage rates at a higher point than the potential rate of the unhampered labour market and if they enforce their minimum-price decree by compulsion and coercion, a part of those who want to find jobs remain unemployed. Such institutional unemployment is the inevitable result of the methods applied by present-day self-styled progressive governments. It is the real outcome of measures falsely labeled as pro-labour.... [T]he reputation and prestige of the men now ruling the countries... and of their professional and journalistic allies are so inseparably tied up with the 'progressive' doctrine that they must cling to it. If they do not want to forsake their political ambitions, they must stubbornly deny that their own policy tends to make mass unemployment a permanent phenomenon....

[...]

Sound money still means today what it meant in the nineteenth century: the gold standard.... The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of [private bank-provided] cheque-book money not fully--i.e. 100 per cent--covered by deposits paid in by the public. No backdoor must be left open where inflation can slip in.... It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves....

[M]ost supporters of sound money do not want to go beyond the elimination of inflation for fiscal purposes.... [T]hey do not want to prevent... [private-sector] credit expansion for the sake of lending to business.... Their idea of sound money is... with all the errors of the British Banking School.... They still cling to the schemes whose application brought about the collapse of the European banking systems... discredited the market economy by generating the almost regular recurrence of periods of economic depression. There is no need to add anything to the treatment of these problems as provided in Part Three of this volume and also in my book Human Action.... [T]he characteristic duplicity of the [central] bank policy.... [Private-sector] credit expansion... obscure[s] the fact that there prevails a nature-given scarcity of the material things on which the satisfaction of human wants depends...

Two further notes:

[1] This citation to Abba Lerner's Economics of Control omits the second half of Lerner's sentence, which reads: "if the raising of the money is the only consideration." Since the raising of the money is never the only consideration in designing a tax system, the meaning of Lerner's sentence is not the meaning that von Mises wants his readers to ascribe to it.

[2] Again, this citation to Beardsley Ruml's "Taxes for Revenue Are Obsolete" is a gross and illegitimate distortion.

Ruml writes that while state and local governments must ultimately raise all the money to finance their spending through taxation, the federal government has extra freedom of action because of "the elimination, for domestic purposes, of the convertibility of the currency into gold." How should the government use this freedom of action? The first of the policy considerations it should have in mind, Beardsley Ruml says, is: "Do we want a dollar with reasonably stable purchasing power over the years?... [T]he most important single purpose ot be served by the imposition of federal taxes is the maintenance of a dollar which has stable purchasing power.... [W]ithout the use of federal taxation all other means of [price] stabilization... monetary policy... price controls... subsidies, are unavailing..." That is the opposite of what von Mises wants his readers to think Ruml's meaning is.

Comments

[Ken Houghton]

"[1] This citation to Abba Lerner's Economics of Control omits the second half of Lerner's sentence, which reads: "if the raising of the money is the only consideration." Since the raising of the money is never the only consideration in designing a tax system, the meaning of Lerner's sentence is not the meaning that von Mises wants his readers to ascribe to it.

[2] Again, this citation to Beardsley Ruml's "Taxes for Revenue Are Obsolete" is a gross and illegitimate distortion."

It's good to see that the defenders of the Gold Standard as the only legitimate way to h/a/m/s/t/r/i/n/g/ a/ s/o/c/i/e/t/y/ conduct monetary policy are actual honoring the tradition of their founder, and not just engaging in willfull distortion as an audition for Brookings or Heritage or, especially, CFR.

[Doctor Science]

But does he discuss the work of L. Frank Baum, my favorite monetary theorist?

[mickslam]

Taxes create the initial demand for money. You can't have stable purchasing power without an exogenous demand for the money. This demand is provided by taxes.

[Colin Danby]

Even an Austrian might wonder about a list in which _Theory of Money and Credit_ follows three books about shit.

[Dan'l]

A favorite fun fact: the von Mises Institute is a non-profit organization. Apparently, Austrian economics cannot compete in the commercial free market.

[Jukka M.]

"A favorite fun fact: the von Mises Institute is a non-profit organization. Apparently, Austrian economics cannot compete in the commercial free market."

Quote from Mises Institute FAQ, How are we funded?:

"We are funded by the private donations of individuals, businesses, and foundations. We accept no government funds (yes, the funds have been offered) and we tend to be eschewed by large foundations and corporations (we accept no contract work)."

...Now how many Think Tanks can say that they are 100% funded by the free markets?

[john]

1) Actually, when one is proposing a "law" (rhetorical or legal), one really ought to be put in the position of having to advance tenable arguments FOR it, otherwise he with the best imagination wins.

2) Say's Law has been discredited so many times in so many different ways, including empirically, that it was held up as an example of a mistake when I was studying econ back in the mid 1970s.

3) All right, Mr. Smarty Pants. I have an investment opportunity for you - a factory that makes widgets that nobody wants to buy because there's already a surplus of widgets on the market. How about it? Supply creates its own demand, right?

And that is the fundamental problem with Say's Law - if everybody invests and hires, and is willing to take losses until the economy grows enough to buy all the products that are being made, and the resultant demands for the individual goods align neatly with the supply of same, it works. But we aren't a beehive here; who is willing to build a new factory and hire new workers to make products that aren't being demanded in the hope that in a couple of years the Market Fairy will shape the (larger) economy in just such a way that just those products your factory is making will be demanded in such a quantity, at such a price, that you can make a profit? (What happens to your investment in the widget factory if two years from now the growth in demand is going to iPod mini-Nanos instead? It disappears, that's what.) Far more rational for a risk-averse person to keep their money liquid, wait two years, and see what the economy is actually demanding before building that factory - especially considering that the economy will be the essentially the same size either way, since your investment really isn't likely to be large enough to boost the U.S. economy significantly all by itself.

So, if everybody behaves rationally, Say's Law doesn't work, because no-one is willing to risk the enormous hit to wealth needed to create the supply that will in turn create the demand, perhaps for someone else's products.

Investment goes where the demand is, if investors are rational. Demand doesn't go where the investment is, necessarily. Can you say "Edsel"? I knew you could.

[Captain Dan]

Matthew Yglesias's original premise was that "Joe's" politics was conservative Republican, or Libertarian Party, whether or not he understands what that means; but certainly not a swing voter.

[S]

Like flypaper for hilarious internet Austrians. I love posts like this.

[Grant]

john,

I think you've misinterpreted Say's law: It states there can be no demand without supply. It does not state that an increase in supply necessarily increases demand; e.g. it says nothing about an additional widget factory.

Keynes believed Say's law did not apply to money, because any increase in savings causes a fall in the demand for goods and services at the same time it increases the demand for money. I believe the Austrian criticism of this view is that saving is done with plans for future consumption (regardless of how certain the saver is of what he will consume), and so represents an increase in the demand for future goods and services. Another criticism I've heard is that this Keynesian viewpoint assumes there is only one currency, not the competing currencies which many Austrian free-banking theorists advocate (where an increase in the demand to hold one currency might be offset by a decrease in the demand to hold another).

Mises was undoubtedly very brilliant and undoubtedly very biased. The same could be said for Paul Krugman - it doesn't make one incorrect. That said, I have no idea why Mises was so fascinated by that inert, yellow metal.

[Mike Huben]

Ah, it's funny to see all the goldbugs and Austrians come out of the woodwork to defend their crackpot beliefs.

For those who'd like clear explanations of just why their ideas are so wrong, let me point you to:

(1) The late Steve Kangas' Myth: The gold standard is a better monetary system at http://www.huppi.com/kangaroo/L-gold.htm

(2) The Critiques Of Libertarianism: Austrian Economics index at http://world.std.com/~mhuben/austrian.html

[Byzantine]

"That said, I have no idea why Mises was so fascinated by that inert, yellow metal."

Because it met the historical criteria for the medium of exchange, being relatively portable, durable, divisible and valuable in its own right. Also, generally speaking, it cannot be expanded beyond the pool of real savings, i.e., it's not inflationary absent somebody unexpectedly stumbling on a huge vein of it or sending the conquistadors to steal somebody else's. Any commodity that satisfies these criteria may qualify as money. Historically, the market has settled on precious metals. In a pinch, vodka and cigarettes will do as well.

[Grant]

Byzantine, I understand that (as I've read Mises), but it always seems odd to hear Austrians arguing for anything but free banking. To be a libertarian and argue for a specific form of money - instead of the freedom to choose one's own money - seems a bit off to me. Most simply dismiss the possibility of a fiat money emerging in a free market, which I think is a mistake.

[Ron Paul Conspiracy]

What I want to know is, since printing money is supposed to be such a benign way to bolster a growing economy, then when are they going to just let us all start printing our own?

[piotr]

I guess the biggest problem with gold standard is that the grand total of gold supply and the grand total of supply of other goods can grow at a very different pace, causing inflation and deflation.

Second, historically gold standard was not used at all before 19th century. There was actually not enough gold before that, and silver was used to a larger extend than gold. "Pound" as an accounting unit originated as a pound of silver. "Dollar" was also a unit of silver. Then folks discovered how to extract silver from the trace amounts mined together with copper, and the ratio of prices of gold and silver started to diverge.

I guess most of people agree that gold is damn impractical as a transaction medium, so people have to use petty coins, paper, plastic and clicks. So the "circulation" in a gold system will be larger than the amount of gold (or the economy would be strangled). Thus speculative manias, heedless credit expansion etc. were possible under gold standard, and gold bugs really refer to some unspecified "gold Age" rather than any historical period.

[Grant]

Peter and Byzantine,

I am familiar with the regression theorem, where Mises showed how money could be created from a commodity. However, just because he showed one way money can come into being does not make it the only way.

Store credits and gift cards are an example of a voluntary fiat money. Some people have suggested that trust networks could create an emergent fiat currency (google the Ripple Project for more information).

[Publius]

Discovering austrian economic theories has literally changed my whole outlook on politics, government, and the economy.

My economics 101 class in college was a joke.

I believe it is the Paul Krugman's of the world that are the real crack pots.

The best I can make out of Keynes economic theory is that spending is what makes us richer.

[David Gordon]

All of the quotations from Mises are from the Appendix, "Planned Chaos", written in 1944. This isn't in the original edition.

[Brad DeLong]

OK. Time to cut this off and prune it down to something useful...

[Colin Danby]

could be a lot of pruning.