You Cannot Be Serious

David Frum, a political commentator with no economics background whatsoever, chides Ron Paul for being self-taught on economics and claims that Paul has taught himself the opposite of what has been serious science from Alfred Marshall to Milton Friedman.

Paul is an advocate of the Gold Standard, and a critic of central banking.  But let the record be clear --- Milton Friedman was a critic of discretionary monetary policy, he advocated a monetary rule, and in later life became increasingly concerned with public choice problems in following the monetary rule.  He suggested that a computer run monetary policy at one point to take the human element out of it, and he also had favorable things to say about alternative banking regimes.  In addition, his critique of the gold standard was not as vociferous as some would have you believe.  He argued that the costs of the gold standard were too great. (see Roger Garrison's piece on this)  However, he did admit that the gold standard had served as a useful check on inflation for many years.  See Friedman's Monetary Mischief.  He did not, it must be stressed, advocate a return to a gold standard for a variety of reasons.  In his last interview on the subject that I am aware of --- a podcast with my colleague Russ Roberts --- Friedman advocates the central bank practice of "inflation targeting" and singles out Don Brash for his exemplary performance as central banker in NZ.

Friedman and the gold standard advocates share a fundamental bond ---- inflation is destructive to an economy and ultimately to a civilization.  Good policy must fight inflation.

Friedman stated the facts on inflation as follows:

1. Inflation is everywhere and always a monetary phenomena.  Its cause is a more rapid an increase in the quantity of money than in output;

2. Governments determine the quantity of money;

3. There is only one cure for inflation, a slower increase in the quantity of money;

4. It takes time for inflation to develop; it takes time for inflation to be cured (measured in years not months);

5. Unpleasant side effects are unavoidable.

Pundits like Frum believe that economic policy can be designed to avoid the unpleasant side effects of previous policy errors.  But there isn't any silver bullet here to provide a quick and easy fix to decades of monetary irresponsibility.  As I said before, we don't need government intervention, we need market correction.  Market forces, if allowed to operate freely, will work quickly to reallocate labor and capital and shift resources to higher valued uses.  Furthermore, if allowed to operate unencumbered by restrictions and controls, the lure of the gains from trade and the gains from innovation will ameliorate many (not all) of the side-effects.  As Milton Friedman said, we have been misled by false teaching in economics to believe that there is a trade-off between inflation and unemployment.  This dichotomy is false.  The choice is not between inflation and unemployment, but between high unemployment as a result of inflation, or unemployment as a temporary side-effect of the cure for inflation.  Playing the policy game of always pushing off market corrections through easy money, is as Hayek warned like holding a 'tiger by the tail'.

Right at the time that David Frum is ridiculing Ron Paul's for holding economic ideas that have been rejected from the time of Marshall to Friedman, we learn that the European Central Bank is injecting $500 billion into the banking system to ease the market corrections that must result from the previous credit expansion.  That tiger is getting awful hard to hang on to!!!

And, Mr. Frum should look up the various Nobel Prize winners in economics, starting with Hayek, who have been concerned with government monetary policy and looked to a commodity backed money as a viable alternative.  The 'self-taught' economics of Ron Paul (whatever other problems I might have with him and his presentation of these ideas) is grounded in sound scientific economics.  An understanding of the logic of human action, the coordinating capacity of the market economy, the problems with bureaucracy, the special pleading of interest groups, and the destructive capacity of inflation are fundamental to his economic policy message.  I hope my students learn those lessons from reading Adam Smith, David Hume, J. B. Say, F. A. Hayek, and James Buchanan.  None of these names are on the 'crackpot' list of economists.  Some might want to call Mises a crackpot, but the reality is that his work, more than any other 20th century economist, has all those arguments integrated into it and presented in a coherent and comprehensive manner.  Mises was not a crackpot, but perhaps the most insightful economic thinker in the world at a time when the world itself was upside down.  He was an anti-socialist when the world looked upon socialism with hope, and he was an anti-Keynesian when the discipline of economics all moved in the Keynesian direction.  Subsequently we learned that socialism led not to hope but to political tyranny and economic deprivation, and Keynesianism was logically flawed in lacking microfoundations, and practically flawed in leading to world-wide inflation and economic stagnation.  In other words, Mises was right!  In fact, I think one could make a reasonable argument that Mises was right on every single controversial position he held --- from methodology to public policy.

So where does that leave us?  Well, we have monetary injections on top of an already precarious financial situation.  Market adjustments are required, not interventions of easy money.

I can think of no better response to Mr. Frum's claims about economic teachings than John McEnroe's now famous line at Wimbledon --- "You CANNOT be serious."

ADDITION: See Richard Ebeling's discussion of Friedman and the Gold Standard.

Comments

[G]

I think its a great shame that Paul is championing the gold standard instead of free-market money. I know his approach would legalize free-market money, but he rarely mentions that in his speeches, generally focusing on gold and silver.

But as you've pointed out before, Paul is very bad at PR. He doesn't try very hard to distance himself from many fringe groups, including "goldbugs".

Why do so many Austrians focus on gold, instead of simply the denationalization of money?

[Steven Horwitz]

I think there are two answers:

1. There are Austrians who genuinely believe that the more traditional gold standard is the only acceptable "free market" money and that "free banking" is/would be inflationary, if not fraudulent for permitting fractional reserve banking. I think they are wrong in this view, but it's a view they hold sincerely and has a pedigree among Austrians.

2. I do think it's also true that, as you put it, "focusing" on gold has a different value for the Paul campaign: there is much more likely to be real support money out there from "goldbugs" than from "free bankers." By emphasizing the gold part of his position, Paul can appeal to them and probably not totally alienate those who believe in free banking, precisely because he would legalize it. So on one hand, it's bad PR to be perceived as a "goldbug," but on the other, it might make sense from a resource/support perspective.

[John V]

Thanks! Great Article.

I included large parts of it in a piece I just did about the Frum article.

Apparently, I can't put the link in because I get flagged as potential spam.

[John V]

but it's at Swords Crossed. See front page.

[G]

Steven,

Interesting. When introducing people I know to Ron Paul, I've had much more success using the free banking "why shouldn't you be able to use what you want as currency?" route.

I'm always a bit confused as to why most people assume that free-market money must be commodity-backed, like Friedman did. If any of the bloggers here get the chance to check out the Ripple Project, I'd be interested to hear their thoughts on it:
http://ripple.sourceforge.net/
I feeling is that fiat money is a form of trust, and can therefore be replicated by private entities (such as Ripple networks).

[adam ricketson]

Hi Prof. Boettke,

Ebling's discussion of the gold standard mentioned that there is the problem that a commodity-based currency results in the hoarding of that commodity.

Do you think this is true for all possible commodity currencies. In particular, I'm wondering about commodities that are produced and consumed quickly (such as grain, whiskey, or electricity). It seems that futures on these commodities could act as the basis for the currency, such that there would be no need to stockpile the commodity over what we would keep in storage anyway.

Any thoughts? Thanks.

[TGGP]

G, Ron Paul doesn't actually advocate legislating a gold standard back into existence. He says he wants to legalize currency competition. You can read his plan for doing that at http://www.ronpaullibrary.org/document.php?id=624

[jomama]

Thanks for straightening that out TGGP.

That url just about covers everything wrong
with hierarchically managed money.

[jblosser]

Ron gets soundbited as a goldbug more than he actually is one. He does this himself because he often has 2 seconds to answer a question, and he gets it done to him because people like to bash goldbugs. But any time he gets to give his "real" answer, it is entirely about denationalizing the currency (usually referenced as "decriminalizing gold", "allowing competing currencies", etc.).

[Steven Horwitz]

A comment from Dee Williams:

"Pete,

What I dislike most about the post is that it’s arguments too slippery. You seem to go to great pains to imply that Milton Friedman (MF) wasn't that far away from the gold-standard advocates and Austrians in general without actually coming out and saying it in those words. I would argue that nothing can be farther from the truth.

First, you correctly note that MF did not support a return to the gold standard, but you immediately move on to say that Friedman “shared a bond” with people like Ron Paul because he believed inflation can be destructive. Huh? That’s it??? If that’s all it takes, then I would argue that every single prominent economist in the US “shares a bond” with gold bugs. That includes everyone from Ben Bernanke to Paul Krugman. Maybe Frum was talking about something besides the dangers of inflation in his article?

Next (in the third paragraph), you discuss how monetary interventions only push off necessary market corrections. However, in the middle of this discussion, you approvingly quote MF on a different subject (the Philips curve). Why? If I didn't know better, it would seem like you were trying to leave the impression that MF agreed with you on the issue of monetary injections delaying corrections. If that isn’t the case, then why didn’t you also mention that Friedman thought the Austrian notion of letting a recession "cure itself" only “made things worse” (his words, link at bottom)? It seems much more relevant to your points about MF, Ron Paul, and the Gold Standard than his views on the trade-off between unemployment and inflation in the long-run.

Laslty, you advise Frum to look up the other Nobel Prize winners that were concerned with “government monetary policy and looked to a commodity backed money as a viable alternative” starting with Hayek. Apparently this is meant to imply that many Nobel Prize winners think commodity backed moneys can be a viable alternative to government monetary policy. But I only count two. Hayek and Mundell. And I’m giving you Mundell despite the fact he 1) does not actually advocate a “commodity backed money” (he advocates using a “gold price rule” for monetary policy) and 2) he has not spent much time elaborating his ideas in front of academic audiences. Who am I missing? And how many won thier Nobel for thier contributions to monetary economics?

I do not mean to offend anyone with this comment contribution. If you did not mean for your post to leave this impression, I understand (blogging is a fun hobby and no one expects every post to be perfect). I only hope to clear up any misconceptions that may be left with some readers.

Have a happy holiday!
--DW

[Peter Boettke]

Dee,

The link you give to Friedman dismissing the Austrian Business Cycle Theory is from an interview and it doesn't really have an argument in it as far as I can see.

I think if we get more serious about the argument, then we can talk about self-correction versus government led corrections. See my textbook The Economic Way of Thinking and in particular the section on the Great Depression where we talk about Friedman and the Austrians on that particular episode and how they can be reconciled one with the other.

But in this particular passage of an interview, what exactly would you infer would be Friedman's policy view on the Great Depression?

[andy]

I would add to the economists who don't object to gold standard Alan Greenspan. In the recent iterview he said, that it is often being forgotten that the USA did quite well under the gold standard in the end of 19th century. In his responses to Ron Paul he said that he is convinced that the Fed can achieve same efficiency as gold standard/free market would. Thus, I would add Alan Greenspan to the group of people who accept gold standard as a perfectly viable option.

[Tyler Watts]

Professor Boettke,

Thank you for the nice rebuttal of yet another attempt at smearing Ron Paul.

G,

Keep in mind that Ron Paul's platform is, essentially, the US Constitution, or the return thereto. The Constitution gives Congress authority to "coin" money (implying a commodity standard), and declares that "no state shall make any thing but gold and silver coin a tender in payment of debts." So, while Paul does argue for free competition in currency, he is Constitutionally focused and so naturally refers to Gold as a proper money. Also keep in mind that gold circulated at its original, legally-defined monetary value (1/20 oz = $1) until 1933, and in international exchange at a debased value of 1/35 oz = $1 until 1971. Silver circulated at its legally defined value, approx. .77 oz = $1, with only very minor adjustments, from 1794 to 1964. Thus someone of Dr. Paul's age can actually remember when "Constitutional" money was to some extent still in circulation in the US.

Merry Christmas,
Tyler Watts

[Danny]

So while I agree with the competing currencies
argument and think that, economically, competing currencies is the correct path, I think you all are forgetting his main reason for gold backed government currency. That is, to limit the spending of the government. So while he would allow competing currencies, I assume he would place the US government under the gold standard, more for political reasons than economics ones.

Your thoughts?

[Speedmaster]

Wow, well-said, Prof. Boettke!

[Tesla921]

The ultimate "currency" in freedom will be a persons credit standing. In other words a persons good word devoid of force or fraud.

That being said, in the world of today, using a commodity backed trade such as gold or pork bellies is much better than trusting a politician's word backed by paper.

[rhys]

Of course Paul is for free-market money. He pushes toward gold and silver, not only because these are authorized by the Constitution, but also because, in a practical way, the government must denote a legal tender. That is, the government must limit the forms of payment that it will receive. Without any legal tender laws, the government might be forced to accept revenue in the form of wheat or beer or oranges. In this respect, the government must delineate the forms of payment that are acceptable, and I see no better choice than gold or silver. That is not to say, that you shouldn't be allowed to trade with whatever you want, just that the government must have a standard and a legal tender. And Paul, as a Constitutionalist, supports money that is deemed Constitutional. To change this, we only need Amend the Constitution.

[zxevil160]

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[coach outlet stores]

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