Et in Arcadia ego

Continued from Been there, done that, bought the T-shirt

Having broadly tried to demonstrate where we differ from our rivals and where we find their tenets most objectionable, you might be hoping that I will now be tempted to go into the details of what an Austrian might recommend by way of a remedy for our current ills even though this would exhibit a clear infraction of Hayek’s admonition that ‘the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design’!

So, rather than having me succumb to such a ‘fatal conceit’, let me instead sketch the outlines of what would, in an Austrian estimation, be a world in which we would be unlikely to repeat our present stupidities, certainly not on the Olympian scale on which we currently practise them.

Firstly, we should recognise that much of our success as a species comes from our adherence to that peculiar form of competitive co-operation which we Austrians term ‘catallactics’ – i.e., the business of exchange, of trading the fruits of our varying endowments, aptitudes, and accomplishments to the mutual benefit of both counterparties to what may well be a single-priced transaction but which is nonetheless never a zero-sum one (at least when it is undertaken voluntarily and in good faith).

As a direct consequence of this, we can assert in the strongest possible terms that we therefore tamper with the means by which we conduct such dealings – we meddle with our medium of exchange, our money – only at our peril. To us, dishonest money is the root of all evil, not ‘shadow banks’, ‘moral hazard’, ‘regulatory capture’ or any of the manifold offshoots of human cupidity in general, for the ability of such perennial failings to wreak widespread havoc in either financial markets or economies, per se, would be much more severely limited if money were not so easily corrupted alongside the men who use it.

A good deal of discussion has taken place at this gathering and many ideas have been thrown up  – many of them earnest, most of them shrewd, some of them even practicable – as to how to improve our present modus operandi. But unless banking and finance better reflect economic reality – and by this I mean of course Austrian reality! – all of them will be in vain: not so much shuffling the deckchairs on the Titanic as pruning the vines growing on the slopes of Mt Vesuvius, perhaps.

It should be further recognised that a vital subset of our economic interactions consists of that swap of jam today for jam, not just tomorrow, but for a long succession of tomorrows that we might more grandly term ‘intertemporal’ exchange. Indeed, it can be argued that this process is even more intrinsic to our humanity: that the move away from such hand-to-mouth activities as scavenging, foraging, and predation and towards the rational provision for the future by means of forward planning is very much what put the sapiens into the Homo, way back when Also sprach Zarathustra was first ringing out as the soundtrack to Mankind’s great Odyssey from the campfire to the Computer Age.

It is in this devotion of forethought and its associated deferral of immediate gratification where the concept of ‘capital’ first comes into our story and while this opens up before us a vista of riches bounded only by the interplay of our imagination and our willingness to make a short-term sacrifice in order to gain a longer term advantage, it is intrinsically fraught not only with estimable risk, but with unknowable uncertainty, as well as being subject to the further proviso that our own actions’ influence may well serve to increase the range of possible outcomes far beyond what we had first thought likely.

Keynes himself waxed lyrical about the ‘dark forces of time and ignorance’ – even if his own teachings have done more than most over the intervening years to enhance the occultation and obscurity against which his fellow men would have to contend – so it should not come as a surprise when we next insist that none of our man-made institutions can be said to be well-crafted if they aggravate these difficulties.

Economic institutions should thus allow information to percolate in as uncorrupted a manner as possible and should allow for feedback signals to be generated in as direct and unequivocal a fashion as they can. These should clearly flag where both success and failure has occurred so that useful adaptations can proliferate while the ineffective ones are abandoned as rapidly as can be. In essence this means that we must not pervert prices and, since every price is necessarily a money price, the unavoidable inference is that we should not mess with money.

A corollary to this is that there should be the least possible impediment to any and all such adaptations being attempted; indeed, much Austrian ink was spilled during that dark decade of the 1930s in arguing that the surest remedy for the many ills then afflicting the West was to sweep away the obstacles to change and to lubricate the working of the machinery – to practice a policy of Auflockerung, in the phrase of the day.

Following on from this, it should be evident that property should be inviolate and the wider rules of contract should be both transparent and consistent in their application. The law should be concerned principally with equity, the courts with providing a cost-effective and disinterested forum for the arbitration disputes arising from any violations of the first and of any failure to fulfil commitments freely made under the second. Aside from the many ethical considerations attaching to such a demand, we would argue for it additionally in terms of the need to reduce all the uncertainties under which men must act to their achievable minimum if we are to encourage the widest degree of peaceful association, the richest web of commercial relations, and the greatest degree of capital formation that we can.

What we do not want is to be inflicted with a shifting snowball of often retro-active regulation. We must avoid a diffusion or supersession of individual responsibility and desist from fuzzy, catch-all law-making – in fact, we should tolerate as little legal positivism as possible, especially of the kind enacted, often cynically, during periods of crisis. We must insist that the state offers neither explicit nor implicit guarantees, that no bail-outs, or back-door favours be extended to the privileged few at the expense of the disenfranchised many. Finally, it should be impressed upon our elective rulers that the politics of disallowing loss, however well-intentioned, is nothing more than a policy of disavowing gain.

Though there are wider ramifications, the worlds of money and finance should, of course, be subject to all the above strictures. Here, we would again emphasize that to interfere wilfully with the substance of our money is to put oneself in breach of most of these guidelines; indeed, that this is perhaps the most heinous of all infractions, since it entails the most pervasive attack upon both property and the sanctity of contract that there can be since it involves a post hoc and highly arbitrary change in the dimensions of the very yardstick by which the terms of all such agreements are drawn up.

We would further contend that the paving stones on our road to the future, on the intertemporal highway whose praises we have already sung, are nothing more than our investments. These should be funded with scarce savings, not financed by the paltry fiction of banking book entries and hence the business of investment should be conducted only in accordance with the balance we can jointly negotiate between our current ends and our ends to come; that is, on a schedule which naturally emerges to reflect our societal degree of time preference and which does not emanate solely from the esoteric lucubrations of some central banking Oz.

Progress may be less spectacular this way, unpunctuated as it will be by the violent outbreaks of first mass delusion and later disillusion which comprise the alternations of Boom and Bust. But it will be, by that same measure, steadier and more self-sustaining. Absent such a condition, the fear I have already raised is that all the well-meaning calls for better financial regulation and more condign penalties for banking malfeasance are so many straws in the wind as far as a better functioning financial apparatus is concerned.

In passing, the very fact that we are all gathered here to bring so much effort and expertise to bear on the problems thrown up by our contemporary methods of finance shows just how far we have strayed from a true appreciation of its abiding scope as what is effectively little more than a glorified, if somewhat disembodied, form of logistics. Finance should be a record of the assignment of goods and property rights across time and space – a four-dimensional bill of lading, as it were. It would be better were it seen for what it is – a means and not an end; the flickering reflection of a deeper Reality on the wall of Plato’s cave, not a towering 3D IMAX rendition of a screenwriter’s imagining. It should once again be valued only as the carthorse and not as the cargo he pulls behind him.

This article is the fourth in a series. The final instalment will follow shortly.

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7 replies on “Et in Arcadia ego”
  1. says: Ivor

    Agreed to all, but the problem of proportional regulation and lobbying by incumbents is the ever-present Achilles Heel, no? What with our obsession with “equality” I’ve not seen anyone suggesting that we granulate regulatory interference on the basis of market power, but maybe it’s time to do so.

    So Big Bank A would be audited ever ten minutes by a bunch of people with baseball bats, and any new bank trying to get off the ground would get the lightest of touches by a helpful team of people focused on assisting them with satisfying the regs.

    Until such time as there are more than 25 participants in the market, at which point competition can take over and the regulators can pretty much walk away.

    We need a way to prevent incumbents from lobbying for more regulation while safe in the knowledge that while THEY can cope with it (and pass the costs along to the consumer!) their smaller competitors cannot.

    “Baseball bats and fairy cakes” I call it, but of course it would be a sliding scale.

  2. says: Bill Barnett

    It is long past time to face the fact that soi-disant democracy – the periodic election of rulers (NOT public servants) as a means to regulate the actions and interactions of large numbers of human beings – is a failure. It might work reasonably well – better than alternatives – for small populations that are relatively homogeneous (in terms of values, culture, and language). However, for a political entity encompassing, as the U.S. does, several hundreds of millions of heterogeneous individuals, even if lumped into a few, major, diverse groupings, it is a form of state as per Bastiat: “The State is the great fiction by which everyone endeavors to live at the expense of everyone else.” It appears that Hobbes got it exactly backwards – it is not the state of nature that results in the war of all against all; rather it is the state which fits that bill.

  3. says: John Spiers

    So Ivor, our problem all this time is we just have not had the right policy?

    And with your perfected policy, the criminals behind the big banks would not just open tiny banks and do more damage faster?

    No, not policy? We just need the right leader? Someone strong?

    John Spiers

    1. says: Ivor

      Hey John,

      I’d like the smallest state possible, but my point was that the Statists contend that free markets end in monopoly so must be regulated (corruptly and incompetently by the State, natch)

      But my contention is that free markets end in monopoly because large players lobby for excessive one-size-fits-all regulation that inhibits competition.

      Granulated regulation seems to address that.

      I’m not saying it’s good – I’m saying it’s the cleanest dirty shirt.

  4. says: Rich Osness

    Ivor, you miss the point of a free market. There is no government regulation of a free market and thus no regulatory advantage for which to lobby(or bribe). Monopolies are possible only in a state regulated or suppressed economy. If there were no regulatory barriers to entry a monopoly would exist only as long as its customers wanted it to exist.

  5. says: Dee Woo

    Nowadays, the market is dictated by unhinged greed as is shown in countless scandals such as LIBOR. Free-market to these vampire squids is like license to kill for all. I wonder how well ordinary citizenry can fare under the unchecked tyranny of greed.

  6. says: Ivor


    This is what gets the socialists going – you cannot have a truly free market with no regulation at all and expect lawful transactions to reliably take place. Without enforced property rights the biggest lad will soon own all the marbles.

    So putting aside anarchy in favour of minarchism, how do we regulate a free (ish) market.

    As I’ve outlined above, I reckon.

    A free market is an ideal that we cannot realise – it’s just a goal for us to aim for. If ideals could be realised, the socialists wouldn’t be so crazy, right?

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