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Old but not stale news

An article by Orley Ashenfelter of Princeton University in the current issue of the Journal of Economic Literature mentions a survey published ten years ago that reported that only 13 of what were considered the top 62 graduate programs in economics at the time reported offering any course in the history of economic thought in the previous five years. As the current article mentions, it is likely that the numbers have shrunk rather than grown since the survey was conducted.

Ashenfelter goes on to offer some reasons for studying the history of economic thought, which he borrows from a recent book on the subject by Agnar Sandmo, Economics Evolving. They are that it can be fun; that it is part of a liberal education; and that it shows that economic analysis is not a static field but an evolving one. Ashenfelter and apparently Sandmo (whose book I have not read) omit the most important reason: sometimes the present has forgotten what the past knew.

Free banking is a case in point. Widely practiced until the early 20th century, a partial understanding of it was for a while part of the body of knowledge among economists. As the number of countries with free banking shrank, so did knowledge of free banking among economists. Thanks in particular to the interest sparked by Friedrich Hayek’s Denationalisation of Money (1976, 1978) and Lawrence H. White’s Free Banking in Britain (1984), much of the old knowledge has been recovered and new knowledge has been developed, but it is still not part of the corpus even among specialists in monetary economics.

Economics is in fact so neglectful of its past that its practitioners risk forgetting not only what past generations knew, but what they themselves once knew. A case in point is another article in the current issue of the Journal of Economic Literature, by Gary Gorton and Andrew Metrick. Writing on the global financial crisis of 2007-09, they term it “perhaps the most important economic event since the Great Depression.” Come on, fellows, even if you are not old enough to remember World War II and the great global inflation of the 1970s and 1980s (much worse in the Third World than in the United States, leading to a decade of lost growth in many poor countries), you are old enough to remember the collapse of socialism.

  • Excellent post.

    Here is a grand example. In the main, James and Jane Goodfellow have no concept of “restriction”. If memory serves, according to Friedman and Schwartz if “restriction” had been an available tool during 1929-1933, it would have at the very least been a tool vs. what the Federal Reserve was deploying as policy.

  • Paul Marks


    Sadly a lot of these people do not think in terms of the "collapse of socialism" in relation to events around 1989 in Eastern Europe. If they talk about these events at all, they talk in terms of greater "openess" and "democratic reforms" – led by nice people in Russia (and they point to G. – not to Boris Yeltsin).

    I am reminded of President Obama's latest comments in Korea – where he stated that the problem with North Korea was the lack of "40 or 50 years of progress", as if North Korea was "stuck in a timewarp".

    Of course this is nonsense – North Korea is not like 1972 or eve 1962 (it is not the world of Jack Kennedy and so on). The problem with North Korea is SOCIALISM. But for some reason the President of the United States of America could not bring himself to attack "socialism" or the doctrine that all income and wealth rightly belong to the collective ("the people") and should be "distributed" according to some political rule – i.e. the inately totalitarian doctrine called "social justice".

    Of course to most graduate economists (learning endless mathematics – as if their subject was physics) all the above is "outside the subject".

    As for the history of economics itself. I feared that it was being taught in a highly biased manner. With an assumption of "progress" as if doctrines fashionable now, such as keeping up "demand" at any cost (a "modern" doctrine firmly believed in by Herbert Hoover), must be correct – and any contrary ideas ruled "old fashioned".

    However, you reveal that the history of economic thought is not being offered (let alone taught) to most graduate economists. So much for the universities that such publications as the Economist magazine endlessly say are wonderful. In reality the universities are a government backed TRILLION Dollar debt scam – that do not even teach (not even in a biased fashion) the background of a subject to students who are sepecializing in (are choosing to spend their lives in) that subject.

    What do the "mainstream" academics fear? Do they fear that if they even offer the history of economic thought, young economists might pick up a copy of (for example) Murry Rothbard's history of economic thought – and have some doubts about economic doctrines that are now taught as the "scientific truth"? I can read Rothbard's writings on general history without agreeing with him. Are graduate economists so weak minded that they will automatically agree with him on the history of economic thought? Or are modern doctrines so weak (once one removes the cover of magical mathematical incantations) that they can withstand any contact with the "dead white males" of economics?

    Or are modern academics so ignorant they do not understand the importance of the history of ideas at all? Not even the history of the ideas of their own subject?

    Ironic as the people who gained control of much of economics teaching in the United States and started to pull economics teaching away from supporting the free market (such as Richard Ely – the founder of the American Economics Association) were originally inspired by the German "Historical School" – although the "history" of the these German "economists" was made up of studing the government interventions of past and present and ASSUMING that such interventions must have been a good thing for various social problems.

    I am reminded of "Critical Theory" (although this is more inspired by Karl Marx than by Hegel) – which is "critical" of everthing, everything apart from collectivism (which is just ASSUMED to be the answer to all the supposed crimes of Western Civilization).

    At this point modern "economists" are saying "what paranoid nonsense – this has got nothing to do with us, we are teaching scientfic truth".

    Reading such works as "Where Keynes Went Wrong" (by Hunter Lewis) would tell them that the Keynesian doctrines they are teaching are everything to do with the collectivist attitudes of Keynes and his friends – and nothing to do with "scientific truth".

    But then modern "economists" do not regard the study of the history of economic ideas as important.

  • The current crisis was brought about almost entirely by plain vanilla investments and loans to what was ex-ante deemed as absolutely not risky, by banks and bank regulators alike, and which turned sour ex-post. Nonetheless, the crisis is being categorized as a result of excessive risk-taking, instead of what it obviously was, excessive risk-aversion. And so, if this is how financial history is written, then allow me to express some skepticism about its importance.

    • You have a point. There was and still is a greater supply of credit seeking low risk than demand for credit at the same level of risk. Market forces alone lower the price of this credit, even lowering the effective interest rate below zero. If we had a "full reserve" gold standard, I would expect the price of gold to fall. These would be creditors might accumulate gold, but they wouldn't so easily exchange their gold for the produce of increasingly scarce borrowers.

      The corporative state responded first by creating deceptively "low risk" bonds that offered higher rates but were riskier than they appeared to be, and the state now substitutes entitlement to tax revenue for these bonds. The state's bonds offer negative real interest rates, and a "private" market for them apparently remains, though I've read that the market is almost entirely short term.

      Ten year Treasuries offering a two percent nominal rate find few buyers outside of the corporative state. Buyers more without the corporative state only buy these securities with repurchase agreements from sellers more within the corporative state, so the bonds might as well be short term.

      How long can the Fed can maintain a nominal interest rate near zero? Wrong question.

      Can the Congress raise taxes enough to deliver a real interest rate on its bonds anywhere near zero? That's the question. I can only hope that the answer is "no". Given no change in our monetary system, hoping for a "no" is hoping for inflation.

      • Correction: If we had a "full reserve" gold standard during the demographic transition, I would expect the market value of gold to fall relative to other goods (non-durable products of free labor), i.e. I would expect the price of these goods in gold to rise. Of course, the nominal price of gold does not change under a gold standard.

      • Martin you write: “The corporative state responded first by creating deceptively "low risk" bonds”

        No! The bank regulators first created an inflated demand for “low-risk” because those instruments could be held by the banks against ridicule low equity, and the markets, not being able to supply the banks with real triple-A risks did as market always do, they supplied Potemkin rated AAA risks.

        By the way ask yourself the question: What would the interest on public sovereign debt be if banks were required to hold the same capital/equity as they are required to hold when lending to an ordinary citizen?

        • The demographic transition must be increasing demand for "low risk" bonds, because the "baby boom" is now entirely within twenty years of the common retirement age, and a large chunk of it is within ten years. If these people (and their financial agents in pension funds and similar funds) follow conventional financial advice, they buy income at this point. Why wouldn't the transition have this effect?

          Libertarians understand the effect of the demographic transition on the Social Security system. Does an imbalance between suppliers and demanders of credit have no effect on the price of credit? Can creditors extend all of the low risk, high interest credit they like as long as the government doesn't interfere?

          Why did banks buy these deceptively "low risk" bonds rather than other, genuinely low risk bonds? The volume of genuinely low risk bonds was too low to meet the demand, and these Potemkin bonds filled the void. Financial regulators played a role, but they didn't create the demographic transition.

          The real, market interest rate on sovereign debt reflects the market's expectation of the state's willingness to tax its subjects enough to pay the interest and principal on its bonds, as well as competing interest rates. In the absence of any regulation, I don't expect banks ordinarily to treat sovereign debt like the debt of ordinary citizens, because states tax citizens to pay state debts, not the other way around.

          I don't want sovereign debt paying higher interest rates. Ideally, I don't want sovereign debt at all. I want market interest rates, but sovereign debt never pays a market rate in my way of thinking, because the state forces its subjects to pay the debt. I have three children just starting out in life, and I am definitely on their side in this debate.

  • Paul Marks

    It is true that special new banking and investment methods were NOT the cause of the current crises.

    The idea (so beloved by the "mainstream" media and the rest of the left) that bankers and investors suddenly became more "greedy" than normal, and or there was special "deregulation" that allowed their "animal spirits" to get out of control, is just nonsense.

    What actually happened is described in Thomas Woods' book "Meltdown" – a vast incease in the credit-money supply, backed every step of the way by Alan Greenspan's Federal Reserve. It is indeed the Greenspan bubble – just as the bubble of the late 1920s was the Ben Strong bubble (after the head of the New York Federal Resrve – who created it).

    The reason the credit-money went into the housing market was also government policy – as explained in Thomas Sowell's book "Housing: Boom and Bust".

    As for talk of "gold standard"….

    The term gold STANDARD has been used to cover such different (widly different) concepts that it is virtually useless.

    If buyers and sellers want to use gold-as-money that is fine. If buyers and sellers want to use something-else-as-money that is also fine.

    But, please, no loose talk about a "gold STANDARD" – after all such a "standard" did not prevent Ben Strong's credit bubble antics in the late 1920s.

    And, even before the creation of the Federal Reserve, it did not prevent such credit expansion boom-bust events as that of 1907 – which led to widespread State supported CONTRACT BREAKING (the "suspension of cash payments").

    The only way to prevent such terrible boom-busts is for loans to be from REAL SAVINGS (not credit-money expansion).

    The doctrine of loans without savings, is similar to the "self esteem" taught in the schools.

    Children are taught that they should be proud of themselves – when they have done nothing to be worthy of any "esteem". They have not worked, they have not achieved – yet they are taught to "feel good about themselves". A doctrine that has produced generations of spoilt brats – filled with feelings of "entitlement".

    In the economy generally it is taught that people (and enterprises, and GOVERNMENT) can have loans (as much as they like) without corresponding real savings.

    This attitude (this "I want it all – and I want it NOW" attitude) is the real root of the current crises – rather than some special new mathematical spell casting by investors.

    It is a failure of understanding basic economics (i.e. that lending must be from real savings – i.e. from thrift, hardwork and self denial) for real economics has no longer taught in the universities (and the decline in economics teaching did not start with Keynes – in the United States it started with the rise to power of Richard Ely and his Comrades), but it is also a MORAL crises.

    People who are filled with a sense of entitlement (a false sense of "self esteem"), who "want it all – and want it NOW". Such people are not likely to listen to hard economic truth – such as that lending must be from real savings (that credit can not just be invented for them, via magic spells, – at least not without hard consequences).

    As for the current crises.

    As I (and very many other people) have often pointed out… it has hardly started yet.

    The folly of Alan Greenspan has been continued (indeed expanded) by B.B.

    The economy will collapse in 2013.

    There is no way to prevent that now (it is "baked in the cake" – the cake of the folly of government monetary and fiscal policy).

    How will the "spoilt brat" (sorry "self esteem") generation react to real hard times. To actual suffering and hunger?

    Most likely in exactly the way the left hope they will.

    By blaming "the rich" and "big business" for their suffering.

    So the collectivists will most likely win – but then they will lose.

    They will lose because their economic ideas will not work – not on a national level, and not on an international "world governance" level either. Their schemes will all collapse in the end.

    That is some comfort – even though (of course) I will be dead (and have died in rather nasty circumstances) by the time the schemes of the collectivists finally collapse.

  • Paul Marks

    On the "Corporate State" idea – the meaning of that has been changed (actually, in its orignial form, it is close to the truth).

    The "Corporate State" was an idea of Fascist Italy (although it borrowed from many sources – including German "War Socialism" from the First World War) – and Marxists claimed that big business ("the capitalists") controlled Mussolini.

    Actually Mussolini (although he had become a heretic in Marxist terms – having abandoned the orthodox Marxism he has served before the First World War)had certainly had NOT become a "tool of the capitalists". A "Corporate State" did NOT mean that big business ("the corporations") were in control.

    Nor was Barney Frank (Chairman of the House Banking Committee – and a man of great power long before he became Chairman) a "tool of the capitalists" (although the bankers had to pay him a lot of protection money – as they also did Senator Chris Dodd in the Senate, and a new powerful political figure one Senator Barack Obama).

    The lines of power ran very much the other way round.

    Which, after all, was the original idea of the "Corporate State".

    Or "stakeholder economy" or "third way" – or whatever other name is used.

    Of course none of the above should be used as a defense of credit bubble bankers.

    They were greedy fools (fools in terms of lack of wisdom – however high their IQ levels may be) and they played along.

    Sadly they remain much the same.

  • Paul Marks

    For those interested in the truth about state interventionism in Europe (especially Germany) in the period I would suggest the works of Ludwig Von Mises and F.A. Hayek.

    Not wildly out of context quotes (which is what the "libertarian left", as some Marxists call themselves these days, will give you) but the full works.

    Especially "Omnipotent Government" by Mises and "The Road to Serfdom" by Hayek.

    Businessmen (no matter how "big") were certainly not the masters.

    And they are not the masters now.

    Oh by the way…..

    Karl Marx himself was not a credit bubble man (indeed as Hunter Lewis points out in "Where Keynes Went Wrong", Karl Marx actually mocked credit bubble economics – for Keynes did not invent these "demand" fallacies).

    It was only much later (in the time of the Italian Straffa) that Marxists started to combine credit-money bubble ideas into their own theories.

    Although Marxists, such as "Lenin", made use of monetary expansion – to destroy civil society.

    Inflation (monetary expansionism) has terrible effects on civil society.

    Which is why some collectivists favour it.

    Other people (such as bankers – half remembering their university economics classes) favour the same policy for more innocent reasons.

    Because they are greedy (they think the monetary increase will first pass into their hands – and they are normally correct about that) and short sighted.

    Short sighted because they do not see the longer term effects.

    Sadly now the "long term" is only next year.