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Alan Greenspan Admits Ron Paul Was Right About Gold – Article by Ryan McMaken

Alan Greenspan Admits Ron Paul Was Right About Gold – Article by Ryan McMaken

The New Renaissance Hat
Ryan McMaken
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In the next issue of The Austrian, David Gordon reviews Sebatian Mallaby’s new book, The Man Who Knew, about the career of Alan Greenspan. Mallaby points out that prior to his career at the Fed, Greenspan exhibited a keen understanding of the gold standard and how free markets work. In spite of this contradiction, Mallaby takes a rather benign view toward Greenspan.

However, in his review, Gordon asks the obvious question: If Greenspan knew all this so well, isn’t it all the more worthy of condemnation that Greenspan then abandoned these ideas so readily to advance his career?

Perhaps not surprisingly, now that his career at the Fed has ended, Old Greenspan — the one who defends free markets — has now returned.

This reversion to his former self has been going on for several years, and Greenspan reiterates this fact yet again in a recent interview with Gold Investor magazine. Greenspan is now a fount of sound historical information about the historical gold standard:

I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.

The gold standard was operating at its peak in the late 19th and early 20th centuries, a period of extraordinary global prosperity, characterised by firming productivity growth and very little inflation.

But today, there is a widespread view that the 19th century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics. World War I disabled the fixed exchange rate parities and no country wanted to be exposed to the humiliation of having a lesser exchange rate against the US dollar than itenjoyed in 1913.

Britain, for example, chose to return to the gold standard in 1925 at the same exchange rate it had in 1913 relative to the US dollar (US$4.86 per pound sterling). That was a monumental error by Winston Churchill, then Chancellor of the Exchequer. It induced a severe deflation for Britain in the late 1920s, and the Bank of England had to default in 1931. It wasn’t the gold standard that wasn’t functioning; it was these pre-war parities that didn’t work. All wanted to return to pre-war exchange rate parities, which, given the different degree of war and economic destruction from country to country, rendered this desire, in general, wholly unrealistic.

Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today we would not have reached the situation in which we now find ourselves.

Greenspan then says nice things about Paul Volcker’s high-interest-rate policy:

Paul Volcker was brought in as chairman of the Federal Reserve, and he raised the Federal Fund rate to 20% to stem the erosion [of the dollar’s value during the inflationary 1970s]. It was a very destabilising period and by far the most effective monetary policy in the history of the Federal Reserve. I hope that we don’t have to repeat that exercise to stabilise the system. But it remains an open question.

Ultimately, though, Greenspan claims that central-bank policy can be employed to largely imitate a gold standard:

When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions. I told him that US monetary policy tried to follow signals that a gold standard would have created. That is sound monetary policy even with a fiat currency. In that regard, I told him that even if we had gone back to the gold standard, policy would not have changed all that much.

This is a rather strange claim, however. It is impossible to know what signals a gold standard “would have” created in the absence of the current system of fiat currencies. It is, of course, impossible to recreate the global economy under a gold standard in an economy and guess how the system might be imitated in real life. This final explanation appears to be more the sort of thing that Greenspan tells himself so he can reconcile his behavior at the fed with what he knows about gold and markets.

Nor does this really address Ron Paul’s concerns, expressed for years, toward Greenspan and his successors. Even if monetary policymakers were attempting to somehow replicate a gold-standard environment, Paul’s criticism was always that the outcome of the current monetary regime can be shown to be dangerous for a variety of reasons. Among these problems are enormous debt loads and stagnating real incomes due to inflation. Moreover, thanks to Cantillon effects, monetarily-induced inflation has the worst impact on lower-income households.

Even Greenspan admits this is the case with debt: “We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.”

Certainly, debt loads have taken off since Nixon closed the gold window in 1971, breaking the last link with gold:

Ryan W. McMaken is the editor of Mises Daily and The Free Market. He has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. 

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Is Greater Productivity a Danger? – Article by David Gordon

Is Greater Productivity a Danger? – Article by David Gordon

The New Renaissance Hat
David Gordon
July 4, 2012
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It is bad enough that opponents of the free market wrongly blame capitalism for environmental pollution, depressions, and wars. Whatever the failings of their causal theories, at least they are focused on undoubtedly bad things. We have really gone beyond the pale, though, when the market is blamed for something good.

Tim Jackson, a professor of sustainable development at the University of Surrey, does just that in his article. “Let’s Be Less Productive,” which appeared in the New York Times, May 26, 2012.

Jackson suggests that greater productivity may have reached its “natural limits.” By productivity, he means “the amount of output delivered per hour of work in the economy.” He acknowledges that as work has become more efficient, substantial benefits have resulted: “our ability to generate more output with fewer people has lifted our lives out of drudgery and delivered us a cornucopia of material wealth.”

Despite these benefits, danger lies ahead:

Ever-increasing productivity means that if our economies don’t continue to expand, we risk putting people out of work. If more is possible each passing year with each working hour, then either output has to increase or else there is less work to go around. Like it or not, we find ourselves hooked on growth.

If financial crisis, high prices of resources like oil, or damage to the environment make continued growth unattainable, we risk unemployment. “Increasing productivity threatens full employment.”

What then is to be done? Jackson has an ingenious remedy. We should concentrate on jobs in low-productivity areas. “Certain kinds of tasks rely inherently on the allocation of people’s time and attention. The caring professions are a good example: medicine, social work, education. Expanding our economies in these directions has all sorts of advantages.” A cynic might wonder whether it is altogether a coincidence that Jackson is himself employed in one of these professions.

Jackson has in mind other reforms besides greater emphasis on the “caring professions.” (One wonders, by the way, whether by this name Jackson intends to suggest that those engaged in high productivity occupations do not care about human beings. To say the least, that would be a rather bold suggestion.) We should also devote more resources to crafted goods that require substantial time to make and to the “cultural sector” as well.

Jackson’s program raises a question: how can these changes be achieved? He stands ready with an answer. Of course, a transition to a low-productivity economy won’t happen by wishful thinking. “It demands careful attention to incentive structures — lower taxes on labor and higher taxes on resource consumption and pollution, for example.”

Jackson is certainly right that if labor becomes more efficient, workers must find other uses for the time they now have available. But why is this a problem? Human beings have unlimited wants, and there are always new uses for human labor.

As Murray Rothbard notes,

Labor needs to be “saved” because it is the pre-eminently scarce good and because man’s wants for exchangeable goods are far from satisfied.… The more labor is “saved,” the better, for then labor is using more and better capital goods to satisfy more of its wants in a shorter amount of time.…

A technological improvement in an industry will tend to increase employment in that industry if the demand for that product is elastic downward, so that the greater supply of goods induces greater consumer spending. On the other hand, an innovation in an industry with inelastic demand downward will cause consumers to spend less on the more abundant products, contracting employment in that industry. In short, the process of technological innovation shifts work from the inelastic-demand to the elastic-demand industries. [1]

Financial crises may interrupt growth, but given the unlimited character of human wants, they cannot permanently supplant it. Jackson has offered us a cure, but he has failed to show that a disease exists that requires his remedy.

[1] Murray Rothbard, Man, Economy, and State, Scholar’s Edition, pp. 587–88, emphasis omitted.

David Gordon covers new books in economics, politics, philosophy, and law for The Mises Review, the quarterly review of literature in the social sciences, published since 1995 by the Mises Institute. He is author of The Essential Rothbard, available in the Mises Store. Send him mail. See David Gordon’s article archives.

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Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.