March 1, 2010
At the Jekyll Island seminar held by the Mises Institute, Prof. Joe Salerno of Pace University presented a paper on macroeconomic theory. He argued that all varieties of macroeconomics today are dependent on ideas that, 100 years ago, the entire economics profession would have rejected as monetary crankery.
This is a serious accusation. He is taking a stand against virtually all Keynesian economists. If he were not beyond retirement age, and if he were not tenured, this paper would be a career death sentence. He would wind up in some community college.
I believe he is correct, of course. But I never sought tenure. By the time I could have received it, I was making too much money with Remnant Review.
Salerno goes back to John Law, the man who invented the South Sea bubble. He defended paper money as creative. The King of France believed him. There was a boom. Then the Parliament of Great Britain believed him, although he was a fugitive of the English courts. The result was a massive depression in the 1720's.
Law was a monetary crank. Economists universally believe this today, and have since 1730.
He identifies Keynes as such a crank. Keynes advocated the monetary theory of a crank named Silvio Gesell. He did so in The General Theory (1936). Gesell was a true crackpot who had been minister of Finance for the Bavarian Soviet, which lasted seven days.
What was the essence of his crankery? He wanted money to have a falling value. He wanted it to depreciate by law, week by week.
This theory rested on a truly nutty theory: goods depreciate rapidly, while gold coins do not. Thus, holder of gold coins have an advantage over sellers of commodities. To even the competition, gold must be banned and paper money substituted. Then the government will depreciate the money by one-52nd per week. This will force money holders to spend it. This will increase demand.
As I pointed out to Salerno after the speech, this was the essence of the wildly popular Townsend Plan of the mid-1930's.
He went on to quote another economist who favored this approach, but only in 1934, after he had lost his fortune and his reputation: Irving Fisher. This was the man praised by Milton Friedman as the greatest economist of all time. Friedman had in mind Fisher's theory as of 1911. Mises exposed Fisher's theory of aggregate demand in 1912, in his Theory of Money and Credit. Friedman did not believe Mises, whose theory of money and capital formation he rejected entirely.
How did anyone whose monetary theory was the best ever in 1911-1929 adopt a crank theory of money in 1934 -- a theory at odds with everything the profession profession believed in 1929? My answer: a bad theory that failed to explain the results of that bad theory forced then to adopt crankery after 1934.
The entire profession, except for the Austrians, adopted Keynesianism -- not the Keynesianism of 1930 in Keynes' Treatise on Money, which Hayek critiqued in detail, and which Keynes told him he had abandoned by 1935. No, the Keynesianism of 1936, which praised Gesell.
I told Salerno that the other crank Keynes praised in that section, Major Douglas, was not so nutty as Gesell, but still nutty. I wrote Salvation Through Inflation (1993) to refute Douglas.
The world of economic theory has returned to Keynesianism across the board ever since 2008. I think this will be to the advantage of Austrianism, as I will explain next month at the Austrian Scholars Conference at the Mises Institute. The shift has buried Friedman, not Mises.
These people are in charge. Nothing stands in their way now. This will not end well for them. They will take us through the meat grinder.
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