Product Debasement -- A Forbes "Contributor" Exposes a Monetary Kook: Ludwig von Mises.
Reality Check
Nathan Lewis says that Ludwig von Mises was a kook on gold. He says that Mises was stupid on this issue. Mr. Lewis has offered these opinions in Forbes.
Two years ago, Forbes adopted a publishing policy of letting outside contributors publish on its site. They receive no salaries. They are paid in terms of "hits." Some are paid. Some are not. By 2011, it had recruited 440 contributors. It may have far more today. Anyone may apply.
This policy fills the site with articles. Its Google ranking rises. As long as a publisher does not worry about debasing his journal's credibility, this strategy can work very well. It offers unknown writers access to lots of readers. It also grants the original respectability of the journal's name, based on decades of high quality editing, to writers who would not otherwise be able to establish comparable followings. It also generates ad revenue from ads run on pages with articles on them.
The prophet Isaiah described this economic strategy sometime around 750 B.C. "Thy silver has become dross, thy wine mixed with water." The process is called debasement.
Who is Nathan Lewis, and how reliable is he? To give you some idea of his economic outlook, consider his view of the federal minimum wage law. This is a touchstone of basic economic theory. The minimum wage is a price control: a floor. Price floors always cause economic gluts: more sellers ("I'll work for that") than buyers ("I won't pay that much") at the artificial price. Deny this cause-and-effect relationship, and you thereby deny economic theory. The minimum wage always leads to more unemployed teenage black males.
MINIMUM WAGE LAWS ARE OK
He says he favors the free market. His version of the free market includes a federally mandated minimum wage. In February, he wrote an article, "Though Income Can't Be Legislated, Obama's Minimum Wage Hike Is Not A Bad Idea." He began with perhaps the most accurate observation in his career:
I suppose the true believers will be offended that I am not necessarily against minimum wage laws in principle, and specifically, the minimum wage increase to $9 recently mentioned in president Obama's State of the Union address.
We true believers in voluntary pricing were indeed offended. That is because we are offended by self-professed economists who cannot think straight economically, and who also refuse to honor a moral principle, either: the right of people to offer their services without the threat of government coercion.
He of course assures us that "it is true that you can't simply legislate yourself to wealth. Congress can't solve poverty simply by mandating a $30 minimum wage, for example." But, he hastened to add,
However, it is also true that laissez-faire capitalism of the late 19th century developed many unfortunate characteristics, that became so acute that several generations of intellectuals and national leaders sought ways to deal with them. The minimum wage is one such measure.
Ah, yes: the nineteenth century's defenders of liberty. We all know that they have been superseded. We all know that economic theory does not support their position. We all know that all modern studies that come to the same conclusion that they did, meaning almost all studies ever conducted, are really only outdated versions of those unfortunate nineteenth-century laissez faire economic conclusions. Such conclusions rested on the idea of voluntary bargaining and flexible pricing. This is terribly old fashioned.
Therefore, "If the minimum wage is kept to a reasonable level, it can be a good idea. A $9 minimum wage would be 54% of the median wage of $16.57 per hour as of May 2011. That was nearly two years ago, so call it 50% of the median wage. This level seems about right to me."
It seems right to him. This is a representative example of the rigors of Mr. Lewis' methodological presuppositions. The federally mandated minimum wage seems right to him. Congress, not the free market, has come up with the right price for everyone, wherever they live, wherever they work.
He spends pages explaining how prices might possibly be set these days, and why a minimum wage is positive. He does not refer to any actual case studies, however. He does not cite any economist on a theory of market pricing under federally mandated wage floors. None of this is required in Mr. Lewis' methodological universe. The important thing is this: the price seems right to Mr. Lewis. To see the rigor of his arguments, click here.
He does not like modern economists. He likes economists who wrote before 1850. "The study of economics is best done, I would say, in the tradition of the gentleman economists of the past, such as David Ricardo, Adam Smith and John Stuart Mill. This is the best way to avoid bias and to be able to discuss controversial ideas of the sort that might otherwise diminish one's marketability." He has this statement on all of his pages.
Conclusion: that fellow Mises should be avoided. He started writing in 1912 -- way too late. He was biased. He diminished his marketability. We should not trust economists who diminish their marketability.
A COINLESS GOLD STANDARD
Mr. Lewis does not think a gold standard needs to be based on actual coins in circulation. He has recently written an article on the gold standard. It is not the gold standard of the pre-World War I era, when anyone could own gold coins, and they were commonly used in exchange. A person could exchange government-issued paper money for gold coins at a government-guaranteed fixed price of gold. No, Mr. Lewis means another gold standard, one run by the federal government. It has nothing to do with the right of holders of fiat money to force the hand of the government by cashing in fiat money for gold at a fixed price. Why, that would constitute a bank run on the government. No, no, no: he does not want something like that. He has a word for such a view: kooky.
The world is ready to consider a new gold standard, he says. Times have changed. The kooks have been left behind.
Also, the gold standard advocates of the 1980s and 1990s were a pretty kooky bunch, pounding the table for all kinds of "100% pure gold standard system" notions that were honestly rather laughable, and unusable in practice. What they called a "gold standard" did not resemble any actual gold standard system in use in the previous two centuries. Among a more sober and sophisticated crowd, these people got the attention they deserved, namely: zero.
You know who these kooks were, of course: Austrian School economists -- followers of that fellow Mises. They were not sober. They were not sophisticated.
Also, gold standard advocates these days seem to have outgrown some of their more imaginative (read: stupid) notions of past decades. I think more progress needs to be made here, but most proposals I see today are actually quite sensible at their core.
And who might these not-stupid people be? For one, Alan Greenspan. Not the 1966 Alan Greenspan, who came out for a kooky gold coin standard. No, the new, improved Alan Greenspan, who gave one brief 2011 Fox Business interview that was not widely quoted by the mainstream financial media, but which did get quoted by a ZeroHedge writer.
"We have at this particular stage a fiat money which is essentially money printed by a government and it's usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity… There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard."
Greenspan did not defend the idea of the gold standard when he controlled the majority of the Federal Reserve Board for 18 years. Then he blew bubbles. Now we have the powerless Greenspan, whose word carries no weight -- kind of like a gold standard without sanctions.
Lewis was a pro-FED guy before.
As a member of the "keep the Fed" camp in prior years, it seems to me now that we will most likely come to that point, in not too many years, where replacing the Fed will be the best and even the easiest path.
He then quotes an unnamed kook: "End the Fed."
You can read it here.
REPLACE THE FED
If Congress ends the FED, what should replace it? If not free banking, as recommended by Mises and those Austrian School kooks, then what? The gold standard.
But what kind of gold standard? This kind.
The easiest, simplest, fully-operational form of a gold standard system could be implemented in ten minutes. It doesn't cost anything, and doesn't require any gold bullion.
No gold bullion? That sounds unique.
The better classical economists have always known that gold bullion itself is not really necessary for a gold standard system. Gold is the "standard," in other words, the "standard of value." It is just something you compare against.
He cites David Ricardo (1817).
"It is on this principle that paper money circulates: the whole charge for paper money may be considered as seignorage. Though it has no intrinsic value, yet, by limiting its quantity, its value in exchange is as great as an equal denomination of [gold] coin, or of bullion in that coin. …
And who, pray tell, will do this "limiting" of paper money? Not the Bank of England, which had suspended gold convertability in 1797, and it did not restore redeemability until 1821. The government ran huge deficits to fight Napoleon, and the Bank of England inflated to buy these IOUs.
Lewis continues his quotation from Ricardo.
It will be seen that it is not necessary that the paper money should be payable in specie to secure its value; it is only necessary that its quantity should be regulated according to the value of the metal which is declared to be the standard."In other words, when the value of the currency is too high compared to the standard, you increase the supply. When the value of the currency is too low compared to the standard, you decrease the supply. It really is that simple.
Who, exactly, is "you"? The national government.
Lewis continues.
Here's John Stuart Mill, on the same topic in 1848:"If, therefore, the issue of inconvertible paper were subjected to strict rules, one rule being that whenever bullion rose above the Mint price, the issues should he contracted until the market price of bullion and the Mint price were again in accordance, such a currency would not be subject to any of the evils usually deemed inherent in an inconvertible paper."
So, all we need is a change of policy. This is easy.
To implement a gold standard system -- in ten minutes -- you simply have the Federal Reserve stop managing the base money supply according to an interest rate/quantitative easing framework, and start managing it according to a gold standard framework. All this means is that the base money supply is adjusted at different times, and in different quantities.
This is all "you" need to do. "You" can do it!
But this creates a problem.
Unfortunately, although this method is certainly quick and easy, it is also prone to eventual corruption and failure. This is not because the basic methods don't work -- they do -- but rather because it is all too easy for the managers of the system to deviate from what they are supposed to be doing.
No kidding! So, what should "you" do about this?
WHAT IS TO BE DONE?
He quotes a long extract from Mill. It comes down on the side of gold coin convertibility.
"There is therefore a great preponderance of reasons in favour of a convertible, in preference to even the best regulated inconvertible currency. The temptation to over-issue, in certain financial emergencies, is so strong, that nothing is admissible which can tend, in however slight a degree, to weaken the barriers that restrain it."
But if central banks cannot be trusted in the absence of gold coin convertibility, then how can a sober, respectable fellow avoid joining the forces of all those Austrian School kooks?
What is the solution to this dilemma? Mr. Lewis skips over this issue. He ends with these stirring words
Mastery of these concepts means understanding all the options. Ricardo understood them. Mill understood them. We need more people today with the kind of mastery that people had in the mid-nineteenth century. The gold standard system of the time -- the most perfect monetary system ever created -- was a reflection of their mastery.
If you are beginning to perceive that Mr. Lewis may not have his act together, then you are coming to my position.
In another article, he assures us of this.
When most people think of "gold-based currencies," they think of gold coins. But, actually, gold coins themselves are probably the least important part. In fact, they aren't necessary at all.
Still, it is OK to own gold coins.
The next step, after creating small-denomination notes and coins, is to establish banking functions denominated in the gold-based currency. This is not hard to do.
It isn't? Then why has no nation done it?
Why has no central bank done it?
How exactly would such a system work?
In principle it is no different than having banking functions in euros or British pounds.
Really? No different from the present fiat money system? I must admit, this is intriguing.
Maybe you are now ready for Mr. Lewis' description of the central bank-run, gold standard system without gold coins, unless there are gold coins, which are optional. I know I am.
Sadly, he does not offer any description. The article ends
And so it goes.
All those kooky fellows who follow Mises on a free banking system with no central bank, plus a gold coin standard, are just not sober and respectable. That is because they have written all those books and articles saying that central banking could not be trusted -- just as John Stuart Mill did.
Then Ron Paul wrote a book: End the Fed. Kooky.
But now it's OK to end the FED. It's respectable today. Ron Paul is gone.
As for a gold standard without gold coins, it's easy to get. Just re-read Mr. Lewis's articles to refresh your memory. We can get what he has called "The 1870-1914 Gold Standard: The Most Perfect One Ever Created." Why, it lasted a whopping 34 years! Forget the Byzantine gold coin standard. Admittedly, it lasted over 700 years without any debasement, and then for another 400 more years after that one debasement. It ended only when Byzantium fell to the Ottoman empire. But that coin-based system doesn't count. It did not have fractional reserve banking to produce economic growth.
Problem: the gold standard of 1870-1914 involved the widespread use of gold coins. It had a fixed price for gold vs. fiat currency. It allowed fiat money holders to demand gold coins. It allowed bank runs.
That gold standard was . . . I have to say it . . . "kooky."
CONCLUSION
Nathan Lewis thinks Mises was a kook. He thinks a gold standard is easy to get -- 10 minutes, max. He thinks gold coin usage is irrelevant to a gold standard. To defend this, he cited John Stuart Mill, who argued that a gold standard without redeemability would not work to restrain fiat money.
I am not sure why Forbes gives him access to its pages. I am sure of this: it has nothing to do with the cogency of Mr. Lewis' ramblings.
Whether he is a paid or an unpaid contributor, he is overpaid. When a writer makes a journal look silly, it should replace the writer.
I am sure that you can do a better job than Mr. Lewis. You can apply here.