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Volatility in the news

Larry Summers had op-eds in the Financial Times and the Washington Post this week with essentially the same message. (Well played, Larry: apparently the Post’s editors do not read the Financial Times. It would not hurt them to start.) In both, he used the line, “Government has no higher responsibility than ensuring that economies have an adequate level of demand.” So, that stuff about securing life, liberty, and the pursuit of happiness is all secondary to ensuring an adequate level of demand?

That brings me to another recent column, also in the Washington Post, by Robert Samuelson. Though not an economist by training, Samuelson’s curiosity, willingness to listen to different views, and frank admission of how much he (and we) do not know make him consistently interesting to read.  By combining those characteristics with diligence, he has become a better economist than most professional economists. He writes:

"There’s a paradox to economic policy. The more it succeeds at prolonging short-term prosperity, the more it inspires long-run destabilizing behavior by businesses, banks, consumers, investors and government. If they think basic stability is assured, they will assume greater risks — loosen credit standards, borrow more, engage in more speculation, relax wage and price behavior — that ultimately make the economy less stable. Long booms threaten deep busts."

Samuelson expresses a view that the Austrian school of economics is somewhat comfortable with but that most other schools are not. Cross Ludwig von Mises on the drawbacks of interventionism and Joseph Schumpeter on the “creative destruction” of capitalism, and you get the conclusion that an unhindered market economy may in fact seem quite unstable in some ways, but that it is in fact less so than an economy that government is continuously trying to stabilize. It’s a “pay me now or pay me later” view that a market economy contains an irreducible minimum volatility. If you want to stabilize it permanently you have to suppress its dynamism.

I said the Austrians are somewhat comfortable with this view because it is in partial conflict with the idea that absent government intervention, many problems of scarcity would be greatly reduced, improving and even saving lives. I think the key is to understand that, as one of my economics professors, the late Don Lavoie, used to stress, we must ask “Compared to what?” That is, what is the workable alternative to an economy that experiences a shallow bust now and then: an economy that experiences no busts, or an economy that experiences deep busts? This is a topic that requires further development by Austrian economists.

Finally, I note a poll of 40 economists in which they unanimously disagreed that a gold standard would result in better price stability and employment outcomes for the average American. The poll taker remarks that “The panel members are all senior faculty at the most elite research universities in the United States.” That must account for the deadening uniformity of opinion; normally it’s hard to get 40 economists even to agree that the sky is blue. The economists who offer short answers for their votes say something along the lines of “the price of gold would be too volatile.” Compared, for instance, to the dollar, which was $35 per troy ounce about 40 years ago and is now around $1700? What would it take to pry open a few minds among these elite economists? First, evidently, a calamity; the near-calamity of 2008-09 was not enough. Second, they would have to know to distinguish among different types of gold standard, a topic I have discussed before and which I will soon return because it is still not sufficiently appreciated.

ADDENDUM: If the Austrians are somewhat comfortable with the idea of minimum volatility, some economists who work on "real business cycle" theory are completely comfortable. I thought when I wrote the post that after waiting awhile I might have something to say about them later, but I don't. They seem content to stick to their classrooms and their academic papers, and haven't made as much noise in newspapers or in blogs as other tendencies of thought.

  • When discussing different types of gold standards, distinguish a statutory standard from a voluntary standard.

    A statutory standard involves a legal tender law and/or a state collecting taxes in gold while selling entitlement to the tax revenue.

    When a gold standard is voluntary, gold as a standard of value for extending credit competes with other standards, like silver, and the state is neutral, i.e. a state taxing my income accepts whatever currency I receive and a state taxing sales accepts whatever currency a merchant receives, and the state spends only the currency it collects this way, and the state never sells entitlement to tax revenue in any form, i.e the state does not borrow.

    A statutory standard effectively imposes a monopoly, so when monetary gold becomes dear and people prefer a different standard, they can't easily switch. "Switching" means that people stop promising gold in long term credit agreements and begin promising something else instead (or promise less gold and promise more of something else). If people must deliver gold to the state, regardless of voluntary exchange, they will only accept promises of gold.

    This statutory monopoly is the source of instability, not the use of gold as a standard of value per se.

  • “Finally, I note a poll of 40 economists in which they unanimously disagreed that a gold standard would result in better price stability and employment outcomes for the average American. The poll taker remarks that “The panel members are all senior faculty at the most elite research universities in the United States.” That must account for the deadening uniformity of opinion…”. – Kurt Schuler


    “The thousand profound scholars may have failed, first, because they were scholars, secondly, because they were profound, and thirdly, because they were a thousand.”
    —Edgar Allan Poe, “The Rationale of Verse”

  • Paul Marks

    I can understand why the top people at the Washington Post do not read the Financial Times (and vice versa) – as when ever I have opened a copy of one of these statist, interventionist, newspapers I have felt physically sick (I opened a copy of the Financial Times only a couple of days ago – and, within seconds, deeply regreted that I had done so).

    As for a "gold STANDARD" sadly this does NOT prevent governments seeking short term "prosperity" at the cost of the longer term.

    The classic example is the United States in the late 1920s – which pacticed a gold STANDARD, yet this in no way prevented Ben Strong (of the New York Federal Reserve – with his friend M. Norman of the Bank of England, also supposedly under a gold "standard") encouraging the banks to expand credit-money and thus creating the great "boom" of the late 1920s and the (inevitable) BUST of 1929.

    Even without a Federal Reserve (i.e. prior to 1913) banks (under the National Banking Acts) were able to produce boom-bust events (although on a smaller scale).

    Gold, or some other commodity, as money is a good idea – a gold "standard" is of little use.

    If government can issue notes (such as Federal Reserve Notes) for which it does not have the gold then the "standard" is just an illusion (and that is putting politely – "deception" would be a better word), and if banks can issue loans for which they have no gold (i.e. they are lending out "money" that DOES NOT PHYSICALLY EXIST) then boom-bust events will NOT be prevented. So talk of a gold "standard" is (as regards to this) empty talk.

    After all it was a massive boom-bust event that led to the demands to create the Federal Reserve in the first place (although, of course, the creation of the Federal Reserve just made to basic problem vastly WORSE).