|
The study of economics is: the study of how people make a living.
We make a living today with a fantastically complex network of
specialization and trade – a network so complicated that nobody
actually understands what is going on. This network is not organized by
any sort of rational planning. Rather, it is organized by markets,
prices, profit and loss – expressed in terms of money.
As described in eloquent detail by George Gilder in The Scandal of Money
(2016), this system of money and prices is the information network that
allows millions and even billions of people to cooperate together
productively, and even, over time, with increasing productivity.
This information system is predicated on the idea that money is stable
in value; that, for example, a rise in the nominal price of copper or
Florida condos represents the supply-demand conditions of copper or
condos, and thus contains information relevant to copper or condos,
such as build more copper mines or build less condos. Profitability in
condo construction channels capital toward more construction; losses
result in a withdrawal of capital. As investment grows or shrinks,
millions of employees are hired or fired, and relocate in this or that
part of the country. The system has a natural tendency toward higher
productivity, which, in practical terms, means lower prices.
People have always had an understanding of this, and have long made
comparisons between money and unchanging measures such as meters,
kilograms, or minutes. A “floating fiat” length of the meter, weight of
the kilogram, or duration of the minute would introduce similar chaos
in human cooperation. Consequently, people have always sought to make
their “money” as stable in value as possible. In practice, for
thousands of years, this has meant money based on gold and silver; and
after 1870, gold alone. The system worked beautifully, for centuries.
The final decades of the worldwide gold standard, the 1950s and 1960s,
were the most prosperous decades of the past hundred years.
By distorting the money – changing its value – the information
contained in prices, interest rates, or profit and loss become
distorted. It is often possible to distort interest rates at the same
time, an important market price. With a little thought, it is easy to
see that you cannot improve the productivity of the system by
distorting the information system that allows it to function. However,
you can attempt to create fleeting short-term effects that might seem
beneficial. Investments are made that, in the absence of monetary
distortion, would not be made; people are hired that would not
otherwise be hired. An artificial boom may result, often followed by a
real bust. The result of this “malinvestment” is typically waste: too
many copper mines or condos, and perhaps not enough of something else,
which became artificially unprofitable due to the monetary distortion.
Depending on the situation, employment may increase; but this would be
offset by stagnant wages, which reflect stagnant or declining overall
productivity. A simple example is given by a currency devaluation. The
artificial “competitiveness” created by the devaluation might bring
higher employment, and investment in export-related industry; but wages
would be devalued along with the currency. People are poorer.
From this, you can see that simply pursuing a different path of
floating currency manipulation isn’t really going to solve the problem.
Every central banker seems to be unable to live up to their promises.
Legions claim that they could do a better job. Today, it is somewhat
fashionable to claim that some kind of “rules-based”
or automatic system might be better than seat-of-the-pants guessing
common among central bankers today. But, “rules-based” systems – such
as nominal GDP targeting,
Taylor Rule variants, or “inflation targeting” – will also be
problematic if they don’t make stability of currency value a goal. In
most cases, they are really just systematized variations on the
Keynesian macroeconomic management common today. In other words, they
function primarily via changes in currency value and interest rates.
These are the tools used to attempt to hit their “rules-based” targets.
The only kind of “rules-based” system with a centuries-long proven
track record is a gold standard system. Although nobody would claim
that gold is a perfect representation of stability of monetary value,
nevertheless, experience over many generations has shown that its
deviations from this perfect ideal are minor enough that they can
generally be ignored. Theoretically, one could invent some proposal
that might produce an even better standard of value than gold. But even
to this day, such proposals are vanishingly rare, and none have been
tested.
Thus, the choices are pretty simple. If you understand the importance
of Stable Money – to allow the emergent order and information system of
the market economy to function without distortion – then a gold
standard is the natural solution. If you don’t understand this point,
then you can amuse yourself for decades with this or that creative new
proposal, to fix the previous proposal that somehow didn’t quite work
as planned.
The Magic Formula is: Low Taxes and Stable Money.
By embracing Stable Money, you give up all ambitions to “manage the
economy” via monetary distortion. This creates anxiety among many; they
have no other tricks. Certainly we should not just “do nothing?” But
many economic problems are the result of high or rising taxes; and low
or falling tax rates can be an effective solution.
Economists have long had a blind spot
regarding nonmonetary problems and solutions. The exploding global
tariff war, and soaring domestic tax hikes, of 1930-1933 created a
Great Depression even while the money was linked to gold. “Do Nothing
and Stable Money,” the knee-jerk proposal of economists at the time,
failed to address this roiling disaster. The outcome was several
generations of people who believed that “Government Spending and
Currency Distortion” was the solution; or, among the Monetarists led by
Milton Friedman: “Do Nothing and Currency Distortion.”
We’ve been shuffling around among these failed alternatives for about a
hundred years now. When you see that currency distortion – whether
“discretionary” or “rules-based” — can only cause problems, you are ready to embrace Stable Money.
| |
