Archive

Tag Archives: Greed

By George P. Brockway, originally published October 31, 1988

1988-10-31 The Fear of Full Employment title

The other day a friend sent me a clipping from the morning paper. My friend is a poet, whom I occasionally charge with deliberate obfuscation, and she was, she said, getting some of her own back. “What gives?” she asked, showing she can use ordinary speech when she wants to. “Who’s obfuscating now?”

The clipping she sent me read as follows: “Economists have become more pessimistic in recent days because the most recent batch of economic statistics, including yesterday’s strong employment report, suggests that the economy may be picking up steam and may overheat.” This was, of course, a run-of-the-mill news note of the sort we have all read many times, and I wondered why it was bothering my friend. I gave her a ring. “Surely your Webster or OED has all the words,” I remarked cuttingly, and only a couple of them have more than three syllables.”

“Yes,” she replied, “and many of my poems are made up of even shorter words. What I’d like to know is, what kinds of idiots are made pessimistic by an economy’s picking up steam? If it’s in danger of overheating, why not put more water in the boiler? I know you economists are even more devoted to metaphors than we poets are, but I thought you were all enamored of the one about a rising tide lifting all boats.”

“Don’t look at me,” I objected. “I’m not one of ‘you economists’. The pessimists of your clipping know that if business gets really good the Federal Reserve Board will get nervous about inflation and raise the interest rate, and that lowers the capitalized value of all stocks and bonds.”

“You mean, if I invest my royalties in a hundred-dollar bond that pays five dollars a year, and if the interest rate goes up to 10 percent, then my bond will be worth only fifty dollars?”

“I don’t know how a poet gets a hundred dollars in royalties,” I said, “but you’re absolutely right.”

“Eureka!” she cried. “I’ve outdone Archimedes! There’s no way the stock market can go up.”

“Keep your shirt on,” I advised.

But she paid no attention. “If business is bad,” she said, “poor earnings will send stock prices down. And if business is good, higher interest rates will send the market down. Why hasn’t anyone discovered this before? If you sell short, you can’t lose. Please give me the name of a good discount broker. I sincerely want to be rich.”

It’s a shame that my friend is merely one of the unacknowledged legislators of the world. We could use some of her guileful questioning in high places, and particularly in regard to the received doctrine that high employment makes for high inflation. Practically all economists, businessmen, bankers, politicians, and journalists are united in endorsement of this doctrine. Their unanimity is very curious – first, because few, if any, other economics propositions command such universal assent; second, because it is among the most unequivocally dismal notions in all this dismal science; and third, because there is no evidence whatever to support it. I don’t mean that no evidence is offered; I mean that the evidence offered is false or irrelevant or both.

If the proposition weren’t so dismal, it wouldn’t be worth troubling about. But look at what it means: It assumes that inflation is the worst economic misfortune that could befall us, and it asserts that in order to avoid – or simply to control – inflation, we must prevent several million people from having jobs. Even if all these millions were fully qualified and fully motivated, given the inexorable working of the system, they would still be unemployable.

Let’s think about that for a minute. It is the practically unanimous opinion of everyone who talks about the subject that our system, of which we are told to be so proud, must condemn upwards of seven million people to lives of undeserved squalor, uselessness, and hopelessness. Of course, that adds up to fifteen or twenty million men, women, and children when you count their dependents.

If I believed that our system were inevitably, necessarily, and indeed systematically that cruel, I’d be on the barricades in a minute – and I like to think I would be joined by you and by most of those who thoughtlessly repeat the dismal doctrine. My God, they’re talking about fellow human beings!

I don’t believe our system has to be that cruel. It is that cruel, but it doesn’t have to be. We’re given to understand that right now, with inflation running at about 3-5 percent and unemployment at about 6-5 percent, things are perhaps actually a little better than can be expected. Certainly our leaders consider them so good that they seem able to congratulate themselves without embarrassment.

Well, consulting Economic Report of the President[1] I find that since World War II there have been thirty-four years in which unemployment was at a lower rate, twenty-one years with lower inflation, and no fewer than twenty years where both inflation and unemployment were lower. Not only that, but in the year of lowest unemployment, inflation was lower than in all except four of the forty-odd years in question. In the year of highest inflation, unemployment was higher than in seven of the years. These figures certainly do not support the doctrine.

That may be said to be the small picture. A bigger picture is presented by the runaway inflations of our time that are regularly flashed on the screen to scare us into doing something drastic about inflation now, before we all have to get wheelbarrows to carry our worthless money to market to buy a loaf of black bread.

Besides the Weimar Republic runaway, the prime examples are Hungary after World War II and Brazil recently. If the doctrine were sound, those countries would have had full employment and overheated economies to start their runaways. Exactly the contrary, though, was the case. Each one suffered from appalling unemployment, and Brazil still does, without in any way impeding or controlling the inflation. These examples do not support the doctrine, either.

To complete the empirical record, we may note that today, of all industrialized nations, Japan has the second lowest unemployment and the lowest inflation. In short, there is no relevant evidence reliably connecting high inflation and full employment. We have not, after all, ever had full employment except in wartime, when inflation of civilian prices is to be expected because civilian production is necessarily curtailed. On the other hand, we have many times had inflation in peacetime, and we have perversely tried to control it by raising the interest rate in order to curtail production.

My poet friend asked me why, if the unemployed had jobs, they couldn’t produce goods at least equal in value to their wages. I couldn’t think why. “Then there wouldn’t be more money chasing fewer goods, would there?” she asked. “So why isn’t full employment the cure for inflation?”

Well, why isn’t it?

The New Leader


[1] The basis for this post is the re-print in the book “Economics Can Be Bad For Your Health” and the author updated the data to use the 1994 Economic Report.  The original was written in 1988. The points still hold.

Advertisements

By George P. Brockway, originally published July 11, 1988

1988-7-11 Taking Stock of the Stock Markets title

1988-7-11 Taking Stock of the Stock Markets Greenspan

IT LOOKS as though they’re going to try putting “circuit breakers” on the securities and futures markets. I’m not sure it will make much difference. The question, after all, is not whether stopping trading for an hour or so after a fall of 250 points would stop or accelerate the plunge. (It might very well do one thing one day and the opposite the next; there are plausible reasons either way.) No, the question is: What is the use of a market that can crash and lose 30 per cent of its value in a single hectic day, and that can routinely lose or gain 2-3 per cent in a couple of hours? What do we have securities markets for anyhow?

The reasons ordinarily advanced are two: (1) to provide financing for productive business and industry, and (2) to encourage people with a little money (or a lot) to participate in the financing. As to the first point, the New York Stock Exchange won’t even bother answering your letter if you ask them how much of their trading is in new securities issued to finance growing business. Probably they don’t know, and certainly they don’t care. As to the second point, today’s lament on Wall Street is that the small individual investor (that is, anyone having less than, say, $10 million to play with) has stayed, as the current metaphor has it, on the sidelines since the 1987 Crash. They’ve stayed out of the game, not for lack of coaches eager to send them in, but because of a prudent aversion to a playing field that sometimes resembles a mud slide.

In short, the pretended justification of the New York Stock Exchange is a sham – and the same goes for all the others, foreign and domestic. They do not in fact provide much financing for new enterprise; they do not in fact significantly facilitate individuals’ participation in such financing; and whatever they do could be easily and far less expensively organized otherwise. If there is no justification for the stock exchanges, there is certainly none for the futures exchanges that are based on them. Federal Reserve Board Chairman Alan Greenspan thinks these things are justified because people use them; the same argument can be made (and I’ve heard of some who have made it) in support of astrology.

Ironically, the exchanges’ own supporters make an air-tight case against them. Look, they say, the Crash didn’t hurt anyone, except for a few foolish widows and orphans. Milton Friedman understands us when he says, “Easy come, easy go.” Six months after the Crash, they say, the markets were about where they had been six months before it. The Great Reagan Recovery is jogging along as if nothing happened: GNP up about the same, inflation about the same, the deficit about the same. Lots of banks may be in trouble, but not because they were involved, directly or indirectly, in the market. A trillion dollars, more or less, disappeared overnight, they say, yet it was only paper profits anyhow. Now that the hysteria has subsided, you can see that the whole uproar didn’t make any real difference.

Since it didn’t make any real difference, they say, there’s no need to do anything. I say that since it didn’t make any difference, there would be no harm in trying to prevent a plunge from happening again, if only to protect the widows and orphans.

The Crash (the biggest ever) had no substantial effect on the producing economy because the damage had already been done. The trillion dollars was really lost and it is a lot of money almost as much as the Reagan increase in the public debt (or, to put it another way, almost as much as the Reagan tax cuts). The enormous loss didn’t matter to the producing economy only because the producing economy never had the use of it. The money went directly from the happy beneficiaries of the Kemp-Roth tax bill into Wall Street and then down the drain.

Of course, some of the tax cuts went into consumption, and some into government investment (bonds to pay for the deficit), and even some into private enterprise. On balance, though, it was the long bull market that started in 1982 that was created by the tax cuts. To be sure, there were other unfortunate things going on simultaneously (mainly former Fed Chairman Paul A. Volcker‘s love affair with double-digit interest rates); but if there had been no tax cuts, there would have been no bull market.

You can see why most people who lost money in the Crash (other than the few widows and orphans) have shrugged it off. What they lost was tax money. So they’re no worse off than they would have been if Ronald Reagan hadn’t been elected; and it sure was fun while it lasted. Yet these people are citizens, too.

They are not merely private atomistic profit maximizers and utility maximizers. As they complain to each other at bars and over bridge tables, they’re weighed down by their share of the public debt. Considering that upwards of 35 million people are living in poverty and that many millions more make so little they pay practically no income taxes, each family of the sort of citizens we’re talking about can actually claim liability for close to $100,000 of the public debt, and perhaps more. Besides, the pundits tell us the debt is to blame for all our troubles.

Thus if Milton Friedman was right when he said, “Easy come, easy go,” he was also right when he said, “There’s no such thing as a free lunch.” The excitement of the bull market and the titillation of the Crash were not free; they were paid for by doubling the public debt. If our tax system were fair, we might say that, in general, the people who had fun in the market are also the people who assume the debt burden, and therefore, again, the whole roller coaster didn’t make any difference.

Aside from fairness, the trouble with such a conclusion is that those tax dollars, like all dollars, come ultimately from the producing economy. No economy can run on securities alone, because stock certificates are not good to eat or wear; and while they’ve sometimes been used to paper walls, they don’t provide much shelter. Wealth is the result of the work of producing, for which people are paid in the form of wages, salaries, interest, rents or profit. The government, too, is a prolific and necessary producer, mainly of services, for which it is paid in the form of taxes.

The way conventional economics has it, as soon as people get paid for something, they buy something with their pay. The people they buy from do the same, and so on and on. Except for a little friction, this producing and buying and selling goes on steadily, to everyone’s benefit. The economic system is in perpetual motion, and also in perpetual equilibrium. There is really no way for anything to go seriously wrong.

Yes, so long as people are buying and selling goods and services- that is, trading in commodities. But when they are buying and selling claims on capital (in the stock markets), or money or options to buy or sell money or capital (in the futures markets), they are not dealing in commodities; they are speculating in the conditions that make commodities possible.

The money absorbed by the speculating economy is money earned by the producing economy that is no longer available to participate in the production of goods and services. The more money goes into speculating, the less is available for producing. Consequently fewer things are produced, and fewer people have jobs producing them. The conventional economists’ happy cycle of buying and selling is shrunk and bent out of shape and may be fractured. Since the speculating markets not only  fail to assist the producing economy but actually hurt it, you might think it would make sense to go beyond regulating them and shut them down altogether.

IN HIS MOST informative new book, Markets: Who Plays, Who Risks, Who Gains, Who Loses, Martin Mayer shows repeatedly how the exchanges have been able to make a mockery of the relatively innocuous rules we tend to think are in force. The Federal Reserve Board, for example, is said to set the margin rate (that is, the amount you can borrow to buy stock) at 50 per cent. If you ask me, it ought to be zero; but it doesn’t matter, because only the littlest millionaires are affected, and all the really big operators have easy ways to get around it.

Given the radically reactionary interests now ruling the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, there is no real possibility of rational control of the speculators for years-or until the next crash. So why not consider abolition?

Naturally, there would be a great debate, or at least, a lot of talk. One of the points that would be made is that shutting down the exchanges would simply send them scuttling abroad. (The same threat will be made whenever rational control is proposed.) New York City is sadly aware that even trying to get the exchanges to carry their share of the tax load is immediately smothered by threats to move to the New Jersey meadows. The wonders of the computer age being what they are, it would not be much harder to set the whole thing up on Grand Cayman Island or Singapore.

Beyond the damage to our pride (equivalent to losing the Winter Olympics), would not the flight of the exchanges be accompanied by a flight of capital, and would not that be our ruin? It is said that the flight could not be prevented. Complete prevention would no doubt be impossible, just as perfect income tax collections are impossible; but perfect flight wouldn’t be possible, either. In any case, the fleeing capital would merely be money. It wouldn’t be factories or warehouses of goods for sale or goods in the process of consumption. And since the money that would flee isn’t doing anything in our producing economy, its loss wouldn’t change anything that matters.

There is, however, a much simpler and fairer way to control the markets. As we’ve said here before, speculative binges occur only because some people have more money than they know what to do with. When we had steeply progressive income taxes, there were many fewer such people (as well as many fewer living in poverty). The markets then were too viscous for wheeler dealers but certainly liquid enough for ordinary purposes. We could do worse than learn from our past success.

The New Leader

By George P. Brockway, originally published May 2, 1988

 1988-5-2 How Good is Greed Title

                THE OTHER DAY, in talking about profit maximization and utility maximization, we refrained from referring to their common, everyday name, which is “greed.” Conventional economics says that producers are profit maximizers and consumers are utility maximizers. We let it go at that and examined some of the logical implications of those propositions (” Serving Two Maximizers,” NL, March 7). Today, we’ll look at a few more.

Ivan Boesky was not so picky. He once told the graduating class of a California college that it’s good to be greedy. Most people shrink from such bravado, especially now that Boesky’s stock market activities have forced him to take early retirement. But economists are made of sterner stuff and will, if pressed, admit and even insist that economic agents are greedy. Since everyone is some kind of economic agent-a producer or a consumer or both-they are saying that everyone is greedy. I think that is manifestly untrue.

There are three possible resolutions of the issue. The most popular is to forget all about it. (This is the way ordinary people and ordinary economists handle hard questions.) The second is to claim that, whether or not people really are greedy, they act as if they were. (Even though this is the type of approach favored by Milton Friedman, it gets us nowhere because it raises the same questions of fact: Does Sister Teresa really act as if she were greedy”) The third way is what is known in mathematics and in economics as partial analysis.

Many years ago when I took Latin (it would be an exaggeration to say that I studied it), I was charmed by the grammatical construction with the silly-sounding name of “ablative absolute.” One of the most famous of these is ceteris paribusother things being equal. The phrase is invoked so frequently by economists that they often drop in its abbreviation ritualistically, as a Tibetan monk spins a prayer wheel. “Cet. par.,” they will say, and go about their business. What they are doing is holding unchanged all except one of the factors of a situation or equation, and then varying that one to see how it affects the outcome or solution.

To laymen it often looks as though economists were simply shadowboxing, because other things generally are not equal; but partial analysis is a perfectly legitimate procedure, and in the majority of economic problems the only procedure. It is used all the time in business, as a means of assigning costs to different parts of an operation, deciding which advertising pitch pulls best, and so on.

On the greed question partial analysis merely tells us that, other things being equal, people want more of whatever it is they want. Moreover, cet. par., people want more money because, cet. par., money is the means of getting whatever people want (even if the best things in life are free). Thus Mother Teresa,

who may be perfectly altruistic and scornful of anything for herself, may, other things being equal be eager for more money to support her charitable causes. She won’t compromise her beliefs to get that money, but cet. par.-that is, putting those beliefs aside-she’ll go for it. And I, holier than thou though I may be, am the same.

None of this is to say that Mother Teresa is greedy, or that I am or that you are. We may sometimes act out of self-interest, just as the most depraved miser may sometimes act altruistically. Other things being equal-all contrary considerations aside-the miser would be happy to be a benefactor of his fellow-men, or some of them.

The same sort of reasoning applies to every honorable or dishonorable activity you can name. Aside from things I will not or cannot do, I’d rather be rich than poor (I hear that rich is better). I’d also like to be an internationally respected philosopher and a better bird watcher, have a better second serve, and (in my less wary moments) be Vice President of the United States. All of these motives are true under the partial analysis rule, and they are no less true than the fact that I am greedy.

Unfortunately, we’ve proved too much. Greed can be established as a universal motive under the partial analysis rule, and only thus, but every sort of motive-including contrary motives -can likewise be established.

It would be a weak and erratic economics that would be based on my second serve; yet one based on greed is in principle no better. Both can show what people do on certain assumptions; the assumptions are valid, cet. par., and so are the showings.  It may be contended that some of the assumptions-the second-serve postulate, for example-have trivial consequences. But who knows? It was not until two millennia after Euclid that the implications of the parallel-line postulate began to be understood. Scientists properly insist that knowledge is good in itself, regardless of its apparent usefulness. The partial analysis rule seems to leave us in a world without form, a world where anything goes.

The first thing to notice about any motive is that it implies a value judgment. A motive is not like a physical force, which acts willy-nilly; a motive is diffuse and impotent without a value judgment. Rich is better; benefiting one’s fellow-men is better; a winning second serve is better. The value judgment is certainly personal. I opt for being rich; you may judge otherwise. But it does not stop there. I cannot become rich without enlisting your support or at least your forbearance. Nor can I benefit my fellow-men if they are unwilling (there are even people who don’t read this column). And my second serve is meaningless unless you are across the net lunging desperately as it slices abruptly away. I can’t even improve my golf game unless someone maintains the course[1]. Consequently, a motive including, of course, the economic motive- must be defined in the light of a value judgment that cannot be merely personal but has to be social as well. So we come to ethics and public policy.

Economic questions cannot be posed except in ethical terms. It can be said (other things being equal) that a reduction in the supply of oil will cause an increase in its price. The effects of the increase can similarly be traced throughout the economy; and on the basis of these studies policies can be proposed and analyzed-taxation, subsidization, nationalization, conservation, or perhaps laissez-faire. It may even be assumed that the economic agents involved will act, cet. par., to maximize their gains in the short run. But the choice among policies will not turn on the relative extent of these gains, either individually or in the aggregate. The choice will turn on the national purpose, which is an ethical question and a historical question.

WE AMERICANS have a tendency – often a dominant tendency – to confuse national purpose with short-term profit maximization. Perhaps the frankest statement of that confusion was Calvin Coolidge’s “The business of America is business”; but a fat anthology could be made of similar statements, both earlier and later. It would make dispiriting reading. Happily, a larger anthology could be made of inspired documents that we all, including Coolidge and his admirers, recognize as the symbols of our democracy.

It is further true that there are some questions we will not submit to the market for answers. We will not buy our battle tanks from the Soviet Union, no matter how cost effective they are. We may import golf carts from Poland, but we will not buy howitzers from Czechoslovakia, even though the Skoda works has solid experience and an unexcelled reputation. We will not contract with China to supply us with Silkworm missiles made to our design and specifications, although we could thereby save half or more of the cost.

We are clear-headed enough on that level, but badly confused elsewhere, more confused now than we were a few years ago. We see that the procurement of battle tanks is not, fundamentally, a question of short-term profit maximization. How long before we see that the so-called social issues are not such questions, either? In this connection John Maynard Keynes wrote, “But, chiefly, do not let us overestimate the importance of the economic problem, or sacrifice to its supposed necessities other matters of greater and more permanent significance. It should be a matter for specialists-like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!”

Professor Frank Hahn of Cambridge replied by referring to the title of Keynes’ book and noting “the singular lack of dentists who have written ‘general theories.”” Every dentist I’ve known face to face has been full of general theories and has told me about them, but Hahn’s point is well taken, as Keynes surely would have agreed. Economics is concerned with more than the price of oil.

Partial analysis can do nothing with the big questions. It is all very well to say that, cet. par., everybody is greedy. But it is very bad to conclude that the encouragement of greed is the proper objective of public policy. The big questions are ethical and historical. Whether full employment, for example, is a proper objective of public policy is an ethical question. What full employment is – should children be counted, should women, should blacks, should braceros, should strikers-is a historical question, and one whose answer has changed mightily since World War II and is still changing. This is the way it is with what we say finally matters.

The New Leader


[1] Those who knew the author are aware that this is the least of the reasons he could not improve his golf game….

Originally published October 6, 1986

BERYL W. SPRINKEL has given up on monetarism, at least for now. He said as much in a speech recently and stirred some excitement because of who he is. Not only is he the possessor of the most striking public name since Orval Faubus ; he is the chairman of the Council of Economic Advisers and presumably talks things over with President Reagan, so what he says may foreshadow a shift in Administration policy.

Monetarism has had the great tactical advantage of massaging the egos of the wealthy, and especially of conservative bankers who serve the wealthy. It has as many definitions as it has definers, but all of them are based on the Quantity Theory of Money, a very old idea that treats money as simply another commodity. It then seems plausible to say that at any given moment a country has a certain quantity of money and a certain price level, at which, for example, a subscription to THE NEW LEADER costs $24 (and is a bargain).  Suppose that at midnight tonight President Reagan or Federal Reserve Chairman Paul A. Volcker or the Sugar Plum Fairy decreed that every dollar you have is hereafter worth two dollars. Would you now be able to buy two subscriptions, sending one to an intellectually needy friend?

Not likely. The first order of business at 275 Seventh Avenue tomorrow morning would be to raise the subscription price to $48. The same thing would happen throughout the economy, so that, subject to considerable slippage because of existing contracts, doubling the quantity of money would merely double the prices of goods and services.

The plausibility of the theory was great in the days when money appeared to be merely a physical object-gold, silver, seashells, or whatnot. But money never was merely a physical object (for reasons, I refer you to my book Economics: What Went Wrong and Why), and it certainly is not now. It is, as the late Professor John William Miller said in The Midworld, a functioning object. That is, it is an object, all right -a piece of metal, a piece of paper, a blip on a computer screen-but what matters is how it functions, not its physical composition. It is not simply another commodity; it is a standard or a control, as is, say, language or a yardstick. A language functions whether it is embodied in sound waves or marks on paper, and a yardstick functions whether it is made of maple or stainless steel. Of course, it doesn’t much matter what a hammer is made of, either, but a hammer is merely a useful tool (glue, or nuts and bolts, could do the job as well as nailing), while nothing can be built-space cannot be organized-without some measuring object.

This may sound pretty metaphysical, and it is, but I’m afraid we must go a step further in that direction. The Quantity Theory will acknowledge that, as a practical matter, it is difficult-indeed impossible-to count the amount of money a nation has. The very existence of the different quantities – M-l, M-2, M-3, and the rest – underlines the point. On the other hand, it is also impossible, as a practical matter, to count the number of electrons in a burst of energy. With electrons, however, it is possible to say that there is a definite number (despite our not knowing precisely what it is), that the number stands in some definite relation (which may also be unknown) to something else, and that therefore we can construct equations capable of yielding reliable predictions.

The trouble with money is that there is not ever a definite amount of it, just as there is not ever a definite number of thoughts expressed in language. Like language, money doesn’t even exist except as it is functioning. “If the coin be lockt up in chests,” wrote David Hume, ‘” tis the same thing with regard to prices as if it were annihilated.” What is true of coin is surely true of credit, the fundamental form of money.

This truth reveals itself in two consequences, one theoretical and one practical. The theoretical consequence is that the attempt to state the Quantity Theory in an equation (MV = PY) results in a sterile tautology. In words, the equation says that the quantity of money (M) times the velocity of its circulation (V) is equal to the general price level (P) times the goods produced (Y). For a fuller explanation I must again refer you to my book; but for present purposes it is enough to see that MV’=PY essentially says that the amount of money paid for goods is equal to the sum of the prices charged for them – which is not much to say.

Practical trouble comes when the attempt is made to use MV =PY as a guide to public policy. If your purpose is to increase production, you look at the equation and decide that all you need to do is to increase the money supply or speed up its circulation, at the same time holding the price level down. On the basis of historical studies that made his reputation, Professor Milton Friedman concluded that the economy could not sustain a steady growth faster than 3-4 per cent a year, that therefore the money supply should be expanded at that rate, and that any faster rate would be inflationary.

From Jimmy Carter’s appointment of Federal Reserve Board Chairman Volcker in 1979 until Beryl Sprinkel’s speech this summer, Milton Friedman was the guru of American economic policy (he is still a guru in GreatiBritain). These seven years have not been an unruffled calm. At the start, the prime rate jumped from just under 10 per cent to 15 per cent, and continued upward until it hit 21.5 per cent after the 1980 election. The inflation rate followed (note the emphasis, which we may examine another day), reaching about 13.5 per cent at the end of Volcker’ s first year in office. Then we had the deliberate depression of 1981-83, driving unemployment from a little over 6 million in 1979 to almost 12 million in 1983. Since that time we’ve had something called “recovery,” punctuated by happenings called “growth corrections,” with unemployment still over 8 million, even counting part-time dishwashers as employed.

During these seven years Friedman has steadily complained that his religion was hardly being tried, and that Volcker was a false prophet. For though Volcker’s policy has been to stop worrying about the interest rate and instead to control the money supply, he never has come close to bringing the yearly increase of M-1 or M-2 down to 4 percent. Consequently, Friedman has been in the comfortable position of taking credit for whatever has turned out well, while disowning whatever has gone wrong.

IN FAIRNESS, Friedman’s gospel has been more modest than that of his followers – a not unusual situation in the history of religions. He argues that because government does not handle money as well as profit-seeking individuals, it should do the barest minimum and should be constitutionally required to balance its budget. His argument in favor of a fixed rate of expansion in the money supply is basically that discretionary control by the Federal Reserve Board has been so awful, almost anything would be an improvement.

Nevertheless, the reasoning behind a low fixed rate of expansion is based on MV = PY: If the money supply expands faster than production, the price level must rise. If, however, the price level remains constant, a monetary expansion would necessarily expand production. For a considerable period now the price level has remained constant, or as near as doesn’t matter, while the money supply has been increasing twice or three times as fast as Friedman recommends. If the professor had his theory right, we should be experiencing the biggest boom in history. It seems the boom isn’t happening or about to happen, so Sprinkel has given up on monetarism.

What went wrong? Well, I’ll tell you: The monetarists have their metaphysics wrong. Money is not a commodity, it is a functioning object. You can’t count it; you use it to do your counting. Since you can’t count it, you can’t fit it into an equation. Beryl Sprinkel is gradually waking up to this fact-and, presumably, his boss is too.

Now, that’s dandy; better late than never, and all that. Except the awakening comes after a night that has destroyed forever the livelihood of millions of older men and women, and has condemned millions of younger men and women to a lifetime of hanging around street corners. It has made a few rich people very rich, and many poor people poorer than ever. It has deliberately stagnated the economy, with the result that in five and a half years the actual GNP has run roughly a trillion dollars less than potential GNP. Simultaneously, another trillion dollars has been taken out of the civilian economy by heating up the arms race. Finally, as a third trillion dollars has flowed into the stock markets, the rate of investment in productive enterprise has fallen.

So they goofed. So who’s perfect? The trouble is, none of this grief was necessary. As early as a speech Knut Wicksell made on April 14, 1898, it has been clear that banks don’t create money, business does. The textbooks continue to say banks create money by making loans, but Wicksell showed the initiative comes from businesses that want to borrow, not from banks that want to lend. Writers as various as Hayek and Keynes developed the idea, and businessmen have always known in their hearts that it is true. Only a fool or a knave borrows money simply because a bank wants to lend it[1]. The banking system can stifle an active economy with high interest rates, but it takes more than low rates to breathe life into a dormant economy.

What does it take? Good morale. Keynes talked of “animal spirits”; unfortunately the expression has the flavor of a biologically determined force that could be let loose if you changed your breakfast cereal. The neoclassical “Keynesians” (who try to press Keynes back into the mold of a classical economist) emphasize incentives to investment, like tax credits; regardless of the incentives, though, investment has languished.

Friedman has permitted himself the observation that rather than money, “The real wealth of a society depends much more on the kind of institutional structure it has, on the abilities, initiative, driving force of its people, on investment potentialities, on technology on all of these things.” Yet he would forbid corporations to concern themselves with the moral consequences of their business, to engage in unpaid public service, or to exercise charity. What is left? The naked bottom line. And what is the naked bottom line? Greed.

Morale is related to, but different from, morals. Greedy people are not necessarily immoral, just as self-sacrificing people are not necessarily moral. But the morale of greedy people is bad. Their universe is ungracious, ungenerous, constricted, pessimistic, often cynical.

As it happens, greedy people are in the ascendance in America today, and the fact of the matter is that the economy has gone just about as far as it can go on the greed standard. The economy is stagnant because its rewards are outrageously skewed in favor of those who already have more than they know what to do with[2].

According to the monetarist theory, these people should be putting their extra money into stepping up production, for the ultimate benefit of all. But they are not fools. Twenty-two per cent of the nation’s industrial capacity is already standing unused: What would be the sense of producing more things no one can buy? So the extra money goes into speculation, an activity that incidentally increases the cost of capital and further inhibits enterprise.

It would be pretty to think that, in giving up monetarism, the Administration will reverse itself and try to rationalize the distribution of income, thus incidentally increasing demand. But the probability is otherwise. Our morale has been so corrupted by the ideal of private greed that it will no doubt be decades before we enjoy again the eagerness with which we once faced the world.

The New Leader


[1] Editor’s note – or, based on the sub-prime lending bubble of the late 2000’s, an individual borrower as greedy as the Wall Street market makers intent on collateralizing fraudulent loans

[2] Editor’s italics…  sounds far too familiar in 2012

Originally published January 11, 1982

This is the FIRST article published in the series named “The Dismal Science”

THE REAGAN Administration has not managed the feat singlehandedly, and we may hope that it will not be completely successful, but in the very short time of a year it has gone a very long way toward destroying the morale of the American people. By morale I do not mean merely eagerness for life or sense of well being, though they are included. More fundamental than psychological tone are morale as mores and morale as morality. It is these that are being destroyed. For the first time in the history of the world, a society is being deliberately and cheerily based on the proposition that it’s good to be greedy. The world has certainly seen greedy people before, and many of these have been completely convinced of their right to their riches; but never before, I think, have the rich pretended that they benefit the poor by stealing from them.

For 35 years, since the end of World War II, we have been giving ourselves quite a beating. It is an argument for our strength that we have survived McCarthyism and Vietnam and Watergate. Yet these traumata were not comparable to Reaganomics. The junior Senator from Wisconsin notwithstanding, very few saw Red-baiting as more than a political ploy; tragic though Vietnam was, it cannot be seriously argued that we embarked on it to get anything for ourselves; Watergate was an ad hoc lunge for personal survival, not a way of life proposed for a society. But Reaganomics is earnestly hailed as a universal ethical system. There is nothing- well, almost nothing-cynical about it. There is a world of difference between, say, the thinly veiled threats of CREEP‘S fundraisers and the boyish candor of President Reagan. We will learn that boyish is not better.

Most of the discussion about the effects of Reaganomics has understandably focused on the harm it does to the poor, in whose safety net it has ripped gaping holes. Many lament this harm. Some expect it to result in an electoral reaction of the underprivileged that will sweep the Republicans from power. Cruel as the fact may be to contemplate, there is little in the political experience of mankind to encourage such an expectation. Unlike the rich and the pseudo rich, the poor don’t vote their pocketbooks; they just don’t vote. Even Marx expected little from the lumpenproletariat. It implies no indifference to the desperate plight of the poor to suggest that the special and original vice of Reaganomics lies elsewhere, nor did we really need David Stockman’s indiscretions to call it to our attention.

What President Reagan is accomplishing is the corruption of the economic elite, that is to say the rich, who are assured that they will serve mankind better the richer they manage to become. This is not Adam Smith’s Invisible Hand guiding entrepreneurs-that is, doers-for the public good. Our new rich are expected to work their miracles merely by being rich, not by doing anything at all.

The doctrine is of course not without its recent forerunners, including the “maxi-tax” of 50 per cent on earned income that produced, in 1972 and after, a rank and gross efflorescence of six- (and even seven-) figure executive salaries(and now we’ll have a maxi-tax on all income). Then there is the flaccid side of consumerism, which, under the tutelage of television, presents living it up as the aim of life. And it says a great deal that for many years now men who think of themselves as honorable have used the term “tax shelter” without shame or even a trace of embarrassment.

For a parallel to our present debauch, one must go back to the Germany of World War I and its aftermath. The Junkers and industrialists made no pretense of uplifting their fellow-men, but their greediness provides a chilling example of how the morale of a society is destroyed from the top. It is often contended that the Weimar inflation of 1922-23-with its wheelbarrows of marks for a loaf of bread-ruined the middle class and so destroyed the society. Actually it was the other way around. The center did not hold because it had already been destroyed by wartime profiteering.

Hjalmar Schacht, no wild-eyed radical in spite of his middle names (Horace Greeley), wrote of “the bountiful flow of money [during the War] from the coffers of the Treasury into the pockets of the producers [industrialists and Junker agriculturalists],” and contrasted this with the relatively heavy wartime taxation in Great Britain and the United States. After the War there was “the impression made on the public by the spectacle continually paraded before their eyes of particular undertakings and firms expanding their concerns, acquiring new works or erecting new buildings, amid the general monetary collapse, all with the aid of paper mark credits which they were able to obtain at will and repay in currency which every day was worth less and less. The private banks, in giving such paper mark credits, did so at the expense of their depositors or at the expense of the Reichsbank …. ”

Change a few words and you might think you were reading today’s newspaper accounts of the oil companies, who insist that they need their windfall profits in order to drill for more oil yet instead use them to start an office machines company (Exxon), to buy Montgomery Ward (Mobil), and to try to gobble up “competitors” (Mobil again). Or you may be reminded of DuPont borrowing $4 billion to buy Conoco; or of U.S. Steel begging the government for protection against foreign competition while using its credit, not to update its obsolete plants, but to bid for Marathon Oil. In Germany, since the rich insisted on being rewarded rather than taxed, and since by 1922 the middle class had already been despoiled, resort was finally had to the printing press. Speculation, as Schacht tells us, “spread to the smallest circles of the population.”

I’MNOT SAYING that we are condemned in a Santayana-esque way to repeat that, or any other, history. I am saying that if you want to destroy an economy, the first thing to do is to corrupt the rich. The rot will spread very fast indeed, simply because the rich are the ones with the money.

Money is a sign of faith. The full faith and credit of some institution is behind it. Money is good if it is issued in good faith and credited-accepted-in good faith. The question of faith extends far beyond the relationship between the one who tenders the money and the one who accepts it. Although tenderer and acceptor must have faith in each other, they also must have faith in the relative stability of the economy and the relative equity of the society in which they participate. The acceptor must have faith that someone else will accept the money should he decide to spend it; and the tenderer must have faith that he will be able to enjoy what he bought with the money he tendered.

Money circulates only when these faiths are living. To the extent that they are compromised, the money is compromised. This is true even of so-called hard currencies. Gold is preferred to paper by the individual who wishes to opt out of the economy; but even he has to have faith that somewhere at some time there will be an end to whatever prompts his preference for gold, and that someone else will then accept the gold in the ordinary course of living. If no such use for gold can be foreseen, if the hand of every man is indeed against every man, only guns and butter are worth accumulating. The Inca’s hoard did him no good.

People fear that too much money will be issued unless it is tied to something tangible, like gold. But there is too much money in an economy only when a society’s morale is sagging: The government can exhibit bad faith by taxing inequitably. The banks can exhibit bad faith by creating money for speculative rather than productive purposes. And both of these exhibitions are very visible today. They are centerpieces of Reaganomics. Hard as the Federal Reserve Board may try to fine tune the economy, it has neither the strength nor the means to overcome the effects of the bad faith of Reaganomics, except by destroying faith in the economy altogether. This is the notorious trade-off between continuing inflation and deepening depression.

Every editorial writer in the land worries that if the Fed releases its brakes on the money supply, the economy will, as they say, overheat and inflation will, as they say, roar out of control. Those bitter alternatives are inexorable only where a people’s morale has been destroyed, where the rich are rewarded rather than taxed, where greed is held to be the height of virtue. We are not there yet, but boyish enthusiasm has already taken us a long way.

The New Leader

%d bloggers like this: