Still stuck in the Middle Ages

“We have Stone Age emotions. We have medieval institutions.. And we have god-like technology.” – Edward O. Wilson.

The BBC reported last week that researchers from IBM had created the world’s smallest motion picture after manipulating individual atoms with a scanning tunnelling microscope. They separately reported the proposals of two Dutch engineers to introduce self-lighting weather warnings on motorways, and a dedicated driving lane that could recharge electric cars as they passed over it. As artist Daan Roosegarde pointed out, auto manufacturers spend billions of dollars on car design, research and development,

but somehow the roads.. are completely immune to that process. They are still stuck in the Middle Ages, so to speak.

Another staggering gulf lies between what we as individuals are capable of doing – more or less anything to which we put our minds – and what our governments are capable of doing – more or less nothing, other than mindlessly to continue the dismal and seemingly inexorable cycle of tax, borrow and spend. At a recent City debate hosted by Marcus Ashworth of Espirito Santo Investment Bank, ‘Is monetary activism the answer?’, Steve Baker MP and Ewen Stewart of Walbrook Economics essentially revealed the paucity of government thinking through generations, and across the political spectrum, that gave rise to such a desperate question in the first place.

As the graph below makes clear, in duration – if not necessarily in scale – the current economic crisis is now worse than the Great Depression. There are realistically just two schools of thought as to how an economic depression should be tackled. The neo-Keynesians advocate deficit spending, on the basis that government stimulus is merely taking the other side of a retrenching private sector. As the facile mud-slinging over Reinhart & Rogoff’s recent debt research reveals, the idea that a state can simply have too much debt for its own good gets little traction in the neo- Keynesian camp, which effectively suspends respect for mathematics, logic or sound economics whenever it happens to suit. The Austrians, on the polar opposite side of the debate, advocate a policy of non-interference with the free market process of economic adjustment. Less euphemistically, the Austrian perspective favours what Depression-era US Treasury Secretary Andrew Mellon recommended as painful but ameliorative policy:

Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate.. it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people. [Emphasis ours.]

“Recovery”

Source: http://www.niesr.ac.uk/about-monthly-GDP-estimates; Steve Baker MP

As we wrote back in January 2012, we side with the Austrians, specifically Murray Rothbard, and his classic study, ‘America’s Great Depression’:

If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt ? The first and clearest injunction is: don’t interfere with the market’s adjustment process. The more the government intervenes to delay the market’s adjustment, the longer and more gruelling the depression will be, and the more difficult will be the road to complete recovery.

Thus far, on the basis alone of the recession chart above, Rothbard would appear to be winning the debate. There is no counter-factual, of course, from the 1930s – Roosevelt’s ‘New Deal’ intervened (in every sense). But it is both interesting and relevant to note Treasury Secretary Mellon’s earlier objective, namely to tackle the US’ vast federal debt load accumulated from World War One. This he did by taking an axe to income tax rates. The top marginal tax rate was cut

from 73% in 1922 to 24% by 1929. The overall public debt fell from $33 billion immediately after the war to approximately $16 billion by 1929. Note those quaint billions, with a ‘b’.

So, to return to the monetary activism debate, how did we get here ? Steve Baker lays it all out. In essence, the state has eaten itself. Before World War One, as the graph below reveals, UK government spending never accounted for much more than 10% of the economy. Now it accounts for almost half of it.

So we are not merely facing a financial crisis but in Steve Baker’s words, we are also beset by a profound crisis of political economy. Governments whose spending has spiralled out of control typically resort to three expedients: more taxation; more borrowing; and currency debauchery. As government spending crowded out the productive sector throughout the 20th Century, the extent of inflation over recent decades has been monstrous:

*January 1974 = 100 (linear scale)
Source: Consumer price inflation since 1750, O’Donoghue et al, Office for National Statistics, 10 March 2004

Since a substantial number of the advocates for yet more government borrowing are pressing for a narrowly Keynesian response, it is worth republishing what Keynes himself thought of the inflationary outcome:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth..

..There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

So the business of investing can no longer be conducted in a rational economic environment. Free market cleansing of malinvestments made during the boom years cannot occur because the free market itself has been suspended. Overmighty governments and their economic agents, notably the central banks, are once again showing the futility of a policy of supporting national champions – those champions today, ironically, being banks that would under any other environment be forced into insolvency. This is not a problem existentially limited to the UK. It afflicts most of the “developed” western economies – developed in the sense that a body riddled with cancer can be said to be “developed”.

So we do the best job we can under such extreme circumstances. We take shelter in credit of unimpeachable quality (not Gilts or US Treasuries) as an alternative to sitting idly in useless cash. We sail close to shore within attractively valued listed equity investments of businesses catering to a constituency of rising wealth (the Asian domestic consumer, for example) instead of one catering to the bombed-out, tapped-out, over-indebted and over-taxed western consumer. We diversify further into uncorrelated managed funds, and we diversify still further into currency that cannot simply be printed into exhaustion: the precious, monetary metals whose fundamental values are still so widely misunderstood in such a bleakly dishonest financial landscape. And we wait – and now actively agitate – for the sort of political radicals capable of understanding both how we got into this mess, and how we might shrink the overmighty state in order to get out of it. It may be a long wait. People, notably political zealots, have a tendency to cling to irrational beliefs rather than sound thinking. As Edward O. Wilson once said,

Men would rather believe than know.

This article was previously published at The price of everything.

10 Comments

  • Paul Marks says:

    It should be pointed out that, contrary to the lies of Paul Krugman and others, Herbert “The Forgotten Progressive” Hoover REJECTED Andrew Mellon’s advice. A victim of the “demand” fallacy President Hoover desperatly tried to PREVENT prices and (especially) WAGES adjusting to the 1929 crash – thus turning the crash into the Great Depression.

  • The biologist Edmund O. Wilson is a very very unsound starting point here – of course the human frame has the emotions (and pretty much the body and mind, and artistic instinct) of Stone Age Man. Otherwise we would not be talking about Men or the same species at all. The fact that we have progressed in science should not give a mere biologist place to comment anymore than my plumber, who is just as a good an understander of human nature as Edmund O. Wilson, if not better.

    And as to our institutions, I am going to aver with all of my conviction that we would be better off with the more individualist and libertarian democracy of classical Athens than the travesty of democracy we suffer in the EUK today, and that the Middle Ages were in many ways more libertarian than today too.

    Having established that, I wholeheartedly concur with the exposé of Keynes as a cypto-communist, so marks out of ten = 10 for that, but 5 overall.

    Michael JR Jose
    UKIP policy adviser
    Brussels and Strasbourg

    • Gary says:

      However, your leader , Mr Farage, wants to print money until the pips squeak :

      http://www.newstatesman.com/economics-blog/2013/03/nigel-farage-monetary-dove

      If that is actually UKIP policy ,as it patently is Tory and Labour policy, then we are better off IN the EU. At least we will be (relatively)restrained from printing money by the German dominated ECB.

      All parties make a virtue out of a sovereign currency, yet von Mises(and many others) stated clearly that floating currencies are an abomination, and currently all sovereign currencies are floating currencies. We require fixed currencies so that govts cannot beggar-thy-neighbour ruinously. The Friedman monetarists made a fatal mistake promoting floating currencies. The consequence is the economic mess that we are living with today.

    • mrg says:

      “the Middle Ages were in many ways more libertarian than today too”

      I suppose it depends exactly when we’re talking about. I wouldn’t fancy serfdom.

  • Paul Marks says:

    The Middle Ages were a long period of time and (contrary to what is often thought) a time of vast change. So yes it depends on when we are talking about.

    Also things varried (wildly) from place to place.

    So if someone says that the Middle Ages were (or were not)more libertarian than now, the obvious questions are indeed – “when?” and “where?”

    • Perfectly put – very long and very variegated. Well my time is short and the answer long, but the rise of modern science came from medieval Christian Western Europe with a Catholic intellectual background (Copernicus, Galileo, etc), and the thoughts of Aquinas on the natural law as it applied the individual are influential today, even though they have mutated by the socialist virus into human rights. No other culture had anything like it althought the Jews and the Greeks of old contributed much which enriched the Middle Ages as their best thoughts were rediscovered when Islam kindly attacked Constantinople in the mid-15th century and drove the Greek scholars west with their Aristotle and Plato in their bags to the Universities of Paris, Oxford, and Cambridge, which had already existed for two centuries by then.

  • Paul Marks says:

    As for E.U. monetary policy – the ECB just cut interest rates to 0.5%, Does not seem very restrained to me.

    Sadly no political leaders (that I know of) undertand monetary policy.

    Yet another reason why money must not be the creature of the state.

    • Gary says:

      I agree Paul. It is only relatively restrained. That is why the EU is suffering relative austerity and unemployment with some restructuring. The UK and America is just the money spigot fully opened.

  • Paul Marks says:

    Mr Jose.

    What is especially noteworthy is (contrary to what is often thought) the application of TECHNOLOGY in the Middle Ages.

    The normal thing in the Classical period (normal – not always) was for intellectuals to be uninterested (indeed full of contempt) for WORK, and for technology (if invented at all) to be used as wonders or toys – after all there were plenty of slaves to do X,Y,Z.

    In the so called Middle Ages technological advances (and there were many) were eagerly grabbed – and applied pracitcally.

    The attitude to work and production was different – and slave labour was rare (not the norm). Especially in the towns.

    Gary – I think it is the distinction between “a louse and a flea”.

    I believe that the Euro is as doomed as the Dollar and the Pound.

  • Captain Skin says:

    Governments and their paper funny money are all doomed.

    Free markets can never be thwarted forever.

    The Austrian (and anarcho-capitalist) view will spread over the internet, as social democratic governments scramble to maintain the scam going just that little bit longer.

    We live in very interesting times…

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