This Forum is Closed
November 28, 2021, 03:31:23 pm
Welcome, Guest. Please login or register.

Login with username, password and session length
News: GGF now has a permanent home:
  Home Help Search Links Staff List Login Register  

"Left-vs.-Right" is not the only false paradigm!

Pages: [1]   Go Down
Author Topic: "Left-vs.-Right" is not the only false paradigm!  (Read 4886 times)
Global Moderator
Sr. Member
Offline Offline

Posts: 455


View Profile
« on: August 25, 2010, 06:19:27 pm »

Although I strongly disagree with him on several key issues -- e.g., gun control, compulsory schooling, the rose-colored glasses through which he views Keynesian economics and debt-based money, etc. -- I nevertheless generally agree with much (though far from all) of what Steve Kangas has to say in critique of the Austrian School.

Below are two criticisms I particularly agree with:


Myth: The gold standard is a better monetary system.

Fact: The gold standard causes deflation and depressions.

. . . .Gold bugs argue that we don't need to adjust the size of the money supply to match the level of economic activity -- the value of money will automatically adjust itself to the level of economic activity. Here's how it works. Suppose three people live in a village, and they have 100 gold coins among them. And suppose this covers 100 units of work. A loaf of bread may require five units of work, and therefore cost five gold coins. Now suppose that their economy grows to 120 units of work. There are two ways for the money supply to adjust to this new activity. The villagers could simply add 20 more coins to their money supply, so they now have 120 coins. Or they could let the value of the coins increase.

How would that work? Well, suppose the extra 20 units of work is being produced by just one of the three villagers. Obviously, he is eager to sell his product, just as the other two are eager to buy it. But no one can afford the sale, because there is insufficient money. So they artificially "create" money by lowering their prices for all their other goods, to increase their savings so they can buy it. For example, a loaf of bread still requires five units of work, but they may lower its price from five to four gold coins. The extra gold coin can now be used towards the purchase of the new product. This process is called deflation.

Prices do indeed inflate and deflate in this way. The problem is that this process is terribly inefficient. In real economies, prices tend to be "sticky" -- that is, enormously resistant to change. (At least in a downward direction. In an upward direction, they climb easily. This is good if you want to fight inflation, bad if you want to fight unemployment and recessions.)

There are several reasons for price stickiness. One is psychological -- people hate to cut their prices and wages. Another is that salaries and wages are often locked into contracts, the average of which is three years. And for many, raising prices incurs certain costs (reprinting, recalculating, reprogramming, etc., not to mention a dip in business) that may not make the price change seem worth it. Even if they do decide to change prices, it takes many companies quite some time to put them into effect. Sears, for example, has to reprint and remail all its catalogues. But perhaps the most important reason is that in a big and complex economy, people just don't realize at first when goods start becoming excessive on the market, and the glut may have to reach severe proportions before people notice it and take action.

Price stickiness means that the value of money is slow to adapt to changing economic conditions. Economists have found it much faster and simpler just to expand the money supply and cut the recession short. The Great Depression, for example, dragged on for ten years, with the natural deflation of money proceeding at a glacial pace. It wasn't until World War II that the government was forced to conduct a massive monetary expansion (to fund its defense spending). The result was such explosive economic growth that the U.S. economy doubled in size between 1940 and 1945, the fastest period of growth in U.S. history. Another example is Japan in the 1990s. Its economy has stagnated for five years now, and many economists have criticized its government for not doing enough to expand the money supply. But whatever the solution, the important point is that Japan's government has done very little, and its economy has not deflated or adjusted itself -- Japan's economic pain continues five years later. . . .

Bitter controversy over the gold standard was a hallmark of the Gilded Age. It was widely regarded as a tool of the rich. Democratic presidential candidate William Jennings Bryan spoke for the poor when he charged, famously, that "You shall not crucify mankind upon a cross of gold." The U.S. suffered three depressions during the Gilded Age, and the gold standard and its bank panics were often held to blame.

Throughout this era, the value of gold was fixed at a certain price. One U.S. dollar, for example, was defined as 23.22 grains of pure gold. A British pound sterling was defined as 113.00 grains of pure gold. This meant that the total value of a nation's money supply was determined by the size of its gold reserves. Furthermore, fixed rates meant that international exchange rates were also fixed. In other words, the world operated under a single, unified monetary system. One British pound always equaled 4.8665 U.S. dollars (113.00/23.22), at least according to the official rate. The actual rates might fluctuate, due to the shifting supply and demand of international trade, but the nations set up a system to make sure that they never fluctuated too far from the official rate. This system was rather complex, but basically it kept exchange rates stable and close to the official rate by making sure that nations with trade deficits paid their bills quickly and directly in gold.

But there were economic consequences to such a system. Suppose Britain ran up a trade deficit with the U.S., and promptly paid in gold. The U.S. money supply would expand, and its economy would experience a mixture of inflation and growth. Conversely, the British money supply would shrink. Theoretically, this should have resulted in deflation, but in practice it resulted in widespread unemployment, due to price stickiness. Therefore, outflows of gold from a country were often very painful to its economy. And when people learned that gold was leaving the country, they often conducted bank runs, trying to withdraw their gold before it ran out. Thus, the Gilded Age was replete with bank panics and failures.

The Gilded Age was brief, lasting from the 1870s to 1914, when World War I broke out. During the war, nearly all nations either placed restrictions on gold convertibility or issued non-convertible paper money. But one of their top priorities after the war was the recreation of the full gold standard. It took several years before they succeeded. Britain restored its gold standard in 1925, but in an act of folly, made the pound worth $4.86 again in U.S. dollars -- its old, pre-war parity. Unfortunately, the pound was overvalued at this price now, due to changes in the price of gold, and Britain subsequently experienced a drastic outflow of gold. Again, severe unemployment was the result, not the expected deflation. Britain would struggle with unemployment for the rest of the decade.

By 1928, all the major currencies and most of the minor ones had returned to the gold standard. But the coming Great Depression would lay bare all its disadvantages. A unified monetary system meant that no nation could protect itself from a disaster that occurred in another nation. When the depression struck in the U.S., it quickly ricocheted across the Atlantic. In the U.S., two gigantic bank runs caused over 10,000 bank failures. So many people were left holding worthless banknotes that the money supply shrank by about a third -- a catastrophic reduction.

When Roosevelt took office in 1933, unemployment had soared to nearly 25 percent. His inauguration took place literally in the middle of a third bank panic. Roosevelt stopped it in its tracks by doing something novel: he intervened. He declared a "banking holiday" that closed banks to the public for eight days, to prevent further withdrawals. During that time, the banking system was reorganized. When banks finally reopened, banks deposits actually exceeded bank withdrawals. It was a tremendous political success for Roosevelt, and America's last bank run. Later under the New Deal, bank deposits would become insured by the federal government.

After the Great Depression struck, the world wasted little time severing its ties to gold. Britain left the gold standard in 1931, as did the U.S. in 1933. By 1937, not a single country remained on the gold standard. After World War II, the U.S. partially restored the gold standard for international trade. And to prevent citizens from bank panics, it made its currency inconvertible at home. In 1971, a diminishing gold supply and growing deficits caused the U.S. to suspend the gold standard even for international trade. Ever since, international trade has been based solely on the dollar and other paper currencies. Today, there are no mainstream economists who call for a return to the gold standard; it is widely regarded as a fringe idea of the radical right.



Austrians believe that the government destroys the market process for several reasons. Rockwell writes:

    "One obvious example… takes place at the Justice Department's antitrust division. There the bureaucrats pretend to know the proper structure of industry, what kind of mergers and acquisitions harm the economy, who has too much market share or too little, and what the relevant market is. This represents what Hayek called the pretense of knowledge.

    "The correct relationship between competitors can only be worked out through buying and selling, not bureaucratic fiat. Austrian economists, in particular Rothbard, argue that the only real monopolies are created by government. Markets are too competitive to allow any monopolies to be sustained."

The claim that governments cause monopolies defies the historical evidence. History actually shows the opposite: the more unregulated the market is, the worse the problem of monopolies.

However, the Austrian claim is not wholly without merit. Utilities are examples of monopolies run or regulated by the government (although they are natural monopolies, and privatizing them doesn't work, as Britain found out in the 80s). Often companies persuade governments to erect barriers of market entry to potential competitors. Sometimes government subsidies allow one company to overpower its competitors. But such cases are usually the result of money-based lobbying, which is a corruption of the system. Corruption in the public sector no more "refutes" its central principle than does corruption in the private sector. The solution to corruption is to eliminate it by enforcing better laws. European democracies offer broad practical evidence that this sort of corruption can be greatly reduced.

But this Austrian critique completely ignores another, more common type of monopoly: that which forms naturally on the unregulated market. There are many reasons for this tendency, ranging from "it takes money to make money" to the greater efficiency of large corporations. Without antitrust laws or some other countervailing market force, growing companies will not stop until they become monopolies or oligopolies.

The height of monopoly growth and abuse in the U.S. coincided with its greatest period of laissez-faire, or government nonintervention in the market. Known as the Gilded Age (the period between the Civil War and World War I), this period saw the phenomenal rise of the Robber Barons and their great trusts (monopolies). John D. Rockefeller monopolized oil under his Standard Oil Company; J.P. Morgan dominated finance; Andrew Carnegie, steel; James Hill, railroads. Historians have well chronicled the ruthlessness of these men -- Morgan once remarked that "I don't know as I want a lawyer to tell me what I cannot do. I hire him to tell me how to do what I want to do." Rockefeller's father once boasted that "I cheat my boys every chance I get, I want to make 'em sharp." These men lived for market conquest, and plotted takeovers like military strategy.

In the late 19th century, trusts formed also in wheat, fruit, meat, salt, sugar refining, lumber, electrical power, rubber, nickel, paper, lead, gypsum, iron, cottonseed oil, linseed oil, whiskey distilling, cord manufacture -- and many others. Once a trust emerged, it would raise its prices and drop its quality of service, as well as engage in unfair trading practices that drove other firms out of business. The abuses of these monopolies became so great that they became a national scandal. So deep was antitrust sentiment that when both houses of Congress passed the Sherman Antitrust Act in 1890, there was only a single dissenting vote! But U.S. presidents did not bother to enforce it, and the monopoly problem continued to worsen.

The worst period of monopoly formation was between 1898 and 1902. Prior to this, there was an average of 46 major industrial mergers a year. But after 1898, this soared to 531 a year. By 1904, the top 4 percent of American businesses produced 57 percent of America's total industrial production, and a single firm would dominate at least 60 percent of production in 50 different industries. The power of these monopolies easily dwarfed the governments that oversaw them. As early as 1888, a Boston railroad company had gross receipts of $40 million, whereas the entire Commonwealth of Massachusetts had receipts of only $7 million. And when Rockefeller, Carnegie and Morgan united in 1901 to create U.S. Steel, the result was an international sensation. Cosmopolitan magazine wrote:

    "The world, on the 3rd day of March, 1901, ceased to be ruled by… so-called statesmen. True, there were marionettes still figuring in Congress and as kings. But they were in place simply to carry out the orders of the world's real rulers -- those who controlled the concentrated portion of the money supply."

The role of government in all this was to stand back and let this market process happen. It wasn't until Teddy Roosevelt launched his great "trust-busting" campaign in 1902 that this process was reversed. Actual enforcement of the Sherman Act reduced monopolies until the Roaring 20s, when laissez-faire policies again returned to Washington. Over that decade, about 1,200 mergers swallowed up more than 6,000 previously independent companies; by 1929, only 200 corporations controlled over half of all American industry. The New Deal era ushered in yet another era of antitrust policy, again reducing the percentage of monopolies. This was followed by the Reagan era, a period which saw both massive deregulation and another frenzy of mergers and takeovers. In 1988, Federal Trade Commissioner Andrew Strenio remarked:

    "Since Fiscal Year 1980, there has been a drop of more than 40 percent in the work years allocated to antitrust enforcement. In the same period, merger filings skyrocketed to more than 320 percent of their Fiscal Year 1980 level."

Two objections are possible here. The first is that these growing corporations may have captured government and then used it as a tool to capture the market. Those familiar with the Golden Age and Roaring 20s know, however, that governments were basically bribed to stand back and do nothing. They passed very little legislation that actively prevented any firms from entering the market and competing. The Reagan era was different, in that corporate lobbyists began using government as a proactive agent to discourage competition. Nonetheless, the periods of government trust-busting show the proper role of government, and its effectiveness in restoring market competition.

The second objection is that a wave of mergers may result in a more natural and efficient equilibrium of larger players, and this could be beneficial for the economy. The result doesn't have to be a monopoly -- perhaps just an oligopoly. The problem is that at the top end, mergers become increasingly harmful to the economy, with monopolies merely representing the worst result. Even oligopolies engage in price-gouging and collaboration. A natural equilibrium hardly represents the best equilibrium -- as recessions and depressions show.

How do Austrians deal with the historical correlation between laissez-faire and monopolies? By denying it, of course. The presence of any government at all proves that their conditions of a free market were not met, so the entire correlation is rejected. This is like someone attempting to argue that not watering a plant will result in the fastest growth. And when you point out to him that there is a correlation between the amount of water given to a plant and its rate of growth, he dismisses these experiments on the basis that they all used water.

« Last Edit: November 16, 2010, 01:40:15 pm by Geolibertarian » Report Spam   Logged

"For the first years of [Ludwig von] Mises’s life in the United States...he was almost totally dependent on annual research grants from the Rockefeller Foundation.” -- Richard M. Ebeling

Pages: [1]   Go Up
Jump to:  

Powered by EzPortal
Bookmark this site! | Upgrade This Forum
Free SMF Hosting - Create your own Forum

Powered by SMF | SMF © 2016, Simple Machines
Privacy Policy
Page created in 0.058 seconds with 17 queries.