Coordination Problem

The Road to Serfdom -- Radio Broadcast 5/15/45

|Peter Boettke|

Solomon Stein, who just returned from a program at Stanford University dealing with archival research in intellectual history, dug up this link to the NBC radio program during WWII -- Words at War -- the 80th episode running 30:18 is a presentation of the ideas in Hayek's The Road to Serfdom.

Happy Birthday to the Duncan Black Professor of Economics and Law --- Peter Leeson

|Peter Boettke|

Today -- July 29th -- is Peter Leeson's birthday, he is 35.  Happy Birthday Pete.

 

Pete was recently named the Duncan Black Professor of Economics and Law at George Mason University, so besides wishinng him a happy birthday, please offer him a hearty congratulations for this honor.

Pete also recently published his 3rd book --  Anarchy Unbound (Cambridge, 2014) -- and the book has received high praise.  Consider the following from the backcover of the book:

"In the best tradition of Coase, Peter Leeson shows how, in most surprising times and places, individuals managed to organize their lives and affairs cooperatively without any help from government. The history in this book is fascinating; the economics is powerful; and the writing is beautiful."
Andrei Shleifer, Harvard University

"With compelling arguments and examples from many different times and societies, Leeson shows how bottom-up institutions of governance work and why their results are often better than what governments achieve. The book is fascinating reading for all economists, and will be an eye-opener to many."
Avinash Dixit, Princeton University, author of Lawlessness and Economics

"A lively, insightful, and masterly work. In taking aim at Thomas Hobbes’ view that governments are invariably essential, Leeson invokes historical examples such as the institution of Caribbean pirates and sociological concepts such as social distance. It is rare for an economist to offer riches to social scientists of every stripe."
Robert C. Ellickson, Meyer Professor of Property Law, Yale Law School

His other two books are The Invisible Hook (Princeton, 2009) and Media, Development and Institutional Change, with Chris Coyne (Elgar, 2009).  In addition to his books, Pete has published over 100 journals articles, and has edited several scholarly volumes.  He has also served for the past several years as the North American Editor of Public Choice.

 

 

 

And at 35, his career is really just beginning.  He truly is a gifted mind and a gifted writer --- a great combination to have in building a career as an economists with impact.

James Buchanan described Gordon Tullock as a "natural economist", for those of us who have had the privilege of teaching and working with Pete Leeson --- from Larry Reed at the Mackinac Center when Pete was a HS teenager, to Richard Ebeling at Hillsdale while Pete was an undergraduate, to myself as his graduate teacher and thesis supervisor at George Mason, to Chris Coyne, Ben Powell, Ed Stringham, Virgil Storr, Bob Subrick and others who were fellow graduate students with Pete, to Russ Sobel and Bill Trumbull who worked with Pete at WVU, to Andrei Shleifer who worked with Pete at Harvard, to Gary Becker, Kevin Murphy, Steve Levitt and Jesse Shapiro who worked with Pete at Chicago, and finally to Tyler Cowen and all of us back at GMU who were able to attract Pete back to join the faculty at GMU (and the students he has worked with at WVU and GMU over the years) --- we would say the same thing about him.  Not only is he in possession of a creative and penetrating intellect, who has a gift with words -- spoken as well as written -- but he thinks quickly and consistently and persistently as an economist.  Pete is a natural economist.

I cannot wait to see what he will produce over the next 35 years!

Happy Birthday to Pete Leeson -- outstanding economic thinker, but also a cherished colleague at GMU, and a dear personal friend to so many of us.

 

If a tree falls in the woods and no one is there, does it still make a sound?

|Peter Boettke|

This is an old philosphical thought experiment testing our ideas about observation and reality, but I'd like to ask that question about economic scholarship.

I have been intrigued lately by Frank Knight's ideas about how to integrate neoclassical and institutional economics. See the work of Ross Emmett for some context regarding Knight's project, both in his research and his organizational efforts at Chicago.  James Buchanan, Knight's student, would in his work in the 1960s refer to a "genuine instiutional economics" that would be an imporant part of "fundamental economic theory."  Knight's ideas about this would eventually shape the work of Alchian, Buchanan, Coase, Demsetz, etc., but the citation record is not obviously there to be seen unless someone does a lot more historical contextualizing than merely doing a quick ssci search or even google scholar search on your computer.

To give another example of this absence of attention, Warren Samuel's wrote a very important paper on the correspondence between Knight and Ayers, but it seems to have been read by nobody, and understood by even only a few of those who may have read it.  Or consider the fact that Knight published Intelligence in Democratic Action (Harvard, 1960), but the reviews of it in the professional journals are very few, none by any of the really prominient professional players, and they almost all reveal significant misunderstandings of the basic message that Knight is trying to communicate.  There is, however, a strong desire to pigeon hole Knight in the free market conservative camp, against the enlightend liberal interventionist camp of the day (even though he is in so many ways incapable of being pigeon holed in such a way).

So I ask, if a scholar writes up a profound point and publishes it in a well-known outlet, and yet nobody is prepared to listen, does he still make a contribution?*

 

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*Besides my reading of Knight and this project of  neoclassical institutionalism, I was also inspired to write this by what I considered rather puzzled reactions recently among some historians of economics to the awarding of the John Bates Clark Medal to Kenneth Boudling in 1949.  In this conversation, there seems to be a general reluctance to contextualize Boulding in those days before Samuelson and Friedman came to dominate post-WWII economics, and the old guard of pre-Keynes economists such as Knight (and even Hayek and Mises) were still considered significant contributors to economic knowledge.  Boulding would become a lone-wolf after The Reconstruciton of Economics (1950), but prior to that he clearly had a legitimate claim to being one of the top dogs in the new pack of economic thinkers.  I am very fond of pointing folks to his JPE review of Samuelson's Foundations, which was written with great confidence, wit, and in my opinion brilliant and prescient insight.  It was very bad for the science of economics that the warnings contained in that review were not heeded.  But the fact that nobody paid attention those warnings is part of the reason Boulding became a lone wolf.  What other thinkers suffered a similar fate?  And again I ask, just because the audience is unprepared to listen for any variety of reasons, does that mean what you have to say makes no sound?

The Opportunity Cost of Ideologically Silliness -- UVa and the Thomas Jefferson Center

|Peter Boettke|

This is the cover from Vol. 2 (October 1959) edition of the Journal of Law and Economics and as you will notice 3 University of Virginia economics faculty are in this issue --- Coase, Buchanan and Nutter.  Coase and Buchanan would go on to win the Nobel Prize, and Nutter's work on the Soviet economic system would prove to be the most penetrating of his generation.  All 3 were members of the Thomas Jefferson Center for Studies in Political Economy.

A year earlier in the University of Virginia Newsletter, Buchanan explained the work of the Thomas Jefferson Center as follows:

The Thomas Jefferson Center strives to carry on the honorable tradition of "political economy" - the study of what makes for a "good society." Political economists stress the technical economic principles that one must understand in order to assess alternative arrangements for promoting peaceful cooperation and productive specialization among free men. Yet political economists go further and frankly try to bring out into the open the philosophical issues that necessarily underlie all discus ions of the appropriate functions of government and all proposed economic policy measures. ...

A society is guided by its ruling philosophy - the prevailing conception of the "good" social order. Some political-economic philosophy must be the basis for intelligent social policy. Forthright and continuing discussion is necessary if this conception is to serve as a clear and coherent guide on numerous particular issues. Otherwise, statesmen and citizens will continue to lose their bearings amid the economic and social complexities of the mid-Twentieth Century.

Study of political-economic philosophy is the basic content of political economy. Political economists try to stimulate open and lively discussion of how a free society should be organized and preserved. And they go further. They examine and discuss the whole set of current policy issue in the light of some conception of the "good" society. ...

Out of ideas such as these, the Thomas Jefferson Center for Studies in Political Economy was born. The Center represents the institutional embodiment of an effort deliberately made to bring about a rebirth of Political Economy. ...

Many years ago, while I was still on the faculty at NYU, I wrote a paper on James Buchanan and the Rebirth of Political Economy.  Since the time of that publication, my appreciation for Buchanan's contributions has grown at least ten-fold. 

The archives being established at the Buchanan House are going to be a treasure trove for any scholar interested in the reintegration of philosophy, politics and economics in the second half of the 20th century.  Scholars of public finance and public choice are obvioius draws as Buchanan was at the epicenter of these discussions. But Buchanan was more than a technical public finance economist, he was a political economist and social philosopher as discussed above.  And he also was a man who had no only the courage of his convictions, but the courage to withstand the critique of those convictions and continue to fight on.  This "institutional embodiment of an effort deliberately made to bring about a rebirth of Political Economy" was Buchanan's mission, and it has become the mission of many of us at GMU, and in particular those associated with our F. A. Hayek Program for Advanced Study in Phillosophy, Politics and Economics.

On the Thomas Jefferson Center controversy at UVA, see the ongoing work of David Levy and Sandra Peart.

How Bad Are We Economists?

|Peter Boettke|

Consider the findings of Dr. Sarah Necker, she finds that there is a considerable amount of naughtiness among economist when it comes to their scholarly publishing practices.  Her results are interesting in a number of ways, but more so for anyone who never really bought the pure truth seeking model of scholarship hook, line and sinker in the first place.  From this perspective, the economics profession is much less corrupt and confused than perhaps we would have expected -- though of course there is some corrpution and confusion exposed in her study.

If the objective function of the scholar (even an economist) is multifaceted, then truth seeking is but one possible goal among many others associated with career advancement and the seeking of fame and fortune as an economist.  Following the work of Gordon Tullock's The Organization of Inquiry, though, the critical issue is not to be found in the behavioral assumptions one makes about the economists scientists, but the institutional environment within which those various behaviors are played out in the scientific community.  Science, like the market, law, politics, dating and marriage, religion, etc., is a human endeavor.  In order to get better science, we don't need more morally self-aware scientists, we need instead institutions of science that are constructed so that they balance the quest for truth, creativity, novelty, cleverness, relevance, persuasion, and prestige is established clearly, and where fraud, sytematic bias, politicization, and abuse of power are exposed and penalized.  In the human endeavor of science and scholarship, as in all other human endeavors, we cannot merely rely on individuals being better and smarter people to solve all potential "bad behaviors", but we must have institutions that guide even the worst of us to behave better than we otherwise would in our quest to better ourselves.  Inquiry requires institutions and organizations to make it work, and those organizations help shape objective functions and those institutions structure incentives, determine the flow and quality of information, and provide the feedback that is required for continually learning, adaptation and adjustment.

Kyle O'Donnell and I make this argument in our paper on the social responsibility of economists.

 

HT: Peter Klein

John Blundell (1952-2014)

|Peter Boettke|

I received the sad news yesterday that John Blundell passed away.  I have known John and Christine from the moment I decided to get serious about a career as an academic and scholarship within the classical liberal tradition of political and social thought.  My wife Rosemary worked for John at IHS for a couple of years taking a break from her own career as an educator and prior to raising our two children.

We have nothing but the fondest memories of John, and our thoughts today are with Christine and their boys.

Why Does Government Fail?

|Peter Boettke|

One of the books I have been reading this summer is Peter Schuck's Why Government Fails So Often? (Princeton, 2014).  So far, it is excellent.  Here is David Henderson's reaction to his work, which I basically share.

 

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My own view of how to approach this question takes its cue from Ronald Coase's 1959 paper on the FCC published in the Journal of Law and Economics.  As Coase walks through his argument, he states clearly on p. 18 the following:

This "novel theory" (novel with Adam Smith) is, of course, that the allocation of resources should be determined by the forces of the market rather than a result of government decisions.  Quite apart from the misallocations which are the result of political pressures, an administrative agency which attempts to perform this function normally carried out by the pricing mechanism operates under two handicaps.  First of all, it lacks the precise monetary measure of benefit and cost provides by the market. Second, it cannot, by the nature of things, be in possession of all the relevant information possessed by the managers of every business which uses or might use radio frequencies, to say nothing of the preferences of consumers for the various goods and services in the production of which radio frequencies could be used.

In this short passage, Coase highlights the incentive problems that government faces in making decisions about resource utilization, the problems of bureaucracy and interest groups, the problem of monetary calculation (or the absence thereof), and the discovery and use of dispersed information/knowledge in the economic system.  And, of course, he is right to link the identification of these problems with governmental decision making back to Adam Smith.  Economists have known about these problems for a long time -- though of course in the course of the history of economic thought different individuals have given particularly crisp explanations of the respective problems -- most notably the work of Mises-Hayek and Buchanan-Tullock.  But Coase gets this right, and from what I have read so far of Peter Schuck's book -- so does he.

The Federalism of Vincent and Lin Ostrom

|Peter Boettke|

The Federalism Scholarship of Elinor and Vincent Ostrom: Applications and Reflections

Special Issue Editor John Kincaid

Volume 44 Issue 2 Spring 2014

Robert L. Bish
Vincent Ostrom’s Contributions to Political Economy
Publius (Spring 2014) 44 (2): 227-248 doi:10.1093/publius/pjt041

Thomas D. Lancaster
“Political Monitoring” as an Analytical Concept: A Lasting Legacy?
Publius (Spring 2014) 44 (2): 249-274 doi:10.1093/publius/pju005

John Kincaid
The Federalist and V. Ostrom on Concurrent Taxation and Federalism
Publius (Spring 2014) 44 (2): 275-297 doi:10.1093/publius/pju006

Alexander Libman and Anastassia Obydenkova
Governance of Commons in a Large Nondemocratic Country: The Case of Forestry in the Russian Federation
Publius (Spring 2014) 44 (2): 298-323 doi:10.1093/publius/pjt065

Jennifer Brick Murtazashvili
Informal Federalism: Self-Governance and Power Sharing in Afghanistan
Publius (Spring 2014) 44 (2): 324-343 doi:10.1093/publius/pju004

Gwen Arnold and Robert Holahan
The Federalism of Fracking: How the Locus of Policy-Making Authority Affects Civic Engagement
Publius (Spring 2014) 44 (2): 344-368 doi:10.1093/publius/pjt064

 

 

A Thought Experiment in Political Theory Constrained By Knowledge of Political Economy

|Peter Boettke|

In the most recent issue of The Review of Political Economy, Andrew Farrant and Edward McPhail continue their scholarly examination of the historical record on Hayek and Pinochet.  The abstract from their article reads as follows:

Commenting on the Pinochet regime, Friedrich Hayek famously claimed in 1981 that he would prefer a ‘liberal’ dictator to ‘democratic government lacking liberalism.’ Hayek's defense of a transitional dictatorship in Chile was not an impromptu response. In late 1960, in a little known BBC radio broadcast, Hayek suggested that a dictatorial regime may be able to facilitate a transition to stable limited democracy. While Hayek's comments about Pinochet have generated much controversy, this paper neither provides a blanket condemnation of his views (he did not advocate dictatorship as a first-best ‘state of the world’) nor tries to excuse his failure to condemn the Pinochet junta's human rights abuses, but instead provides a critical assessment of Hayek's implicit model of transitional dictatorship.

A couple of things are important to stress here before I start.  Farrant and McPhail are not joining the bandwagon of irresponsible critics of neo-liberalism, but instead are critics of poor scholarship on any side of the ideological spectrum.  The reality is that Hayek went to Chile twice, he was there primarily in academic settings and abstract theorizing about the structure of government and the operation of a free market economy.*  He was called upon to talk about economic policy and in doing so he gave general advice about how to get out of the interventionist mess and toward a free market system that would generate long run economic growth and development.  In the process, he made errors of judgement about the situation around him and the biases in the reporting about that situation from those in the mainstream of intellectual life.  What he insisted on in this context was the primacy of liberalism as a philosophical guiding principle in the structure of government, not democratic procedures, and the necessity of free market economic policies for long run economic growth and development.

The question I think folks should be asking about Hayek is: "How could an individual who devoted his entire life to questions about constraining the coercive powers of government be blind to the abuse of that power in the hands of dicator?"  Farrant and McPhail suggest the answer might be found in Hayek's theory of the transitional dictator.  Now as a matter of empirical examination, I always thought of this position as similar to the pattern that Robert Barro identified in his paper on "Democracy and Growth".  But now I consider that not quite right on my part, and actually a facile reading of both Hayek and Barro.  It should be obvious, however, that serious analysis of non-democratic governments is an important area of study -- see, e.g., my review of Ronald Wintrobe's The Political Economy of Dictatorship in the JEL; also consider the more recent work of North, Wallis and Weingast, as well as Acemoglu and Robinson.  In short, more scholars need to be working on the analytics and the empirical examination of the political economy of non-democratic governments.

So this now brings me to my thought experiment inspired by the discussion in Farrant and McPhail and reflecting on Hayek's writings from The Road to Serfdom to Law, Legislation and Liberty.  First, I think it is important to stress important categories from Hayek's writings.  Hayek is a "rule of law" theorist.  As he puts it in The Constitution of Liberty (1960, 206): "The rule of law is therefore not a rule of the law, but a rule conerning what the law ought to be, a meta-legal doctrine or a political ideal.  It will be effective only in so far as the legislator feels bound by it.  In a democracy this means it will not prevail unless it forms part of the moral tradition of the community, a common ideal shared and unquestioningly accepted by the majority."  

The achievement of a social order characterized by freedom under the law -- a system which restrains coercion to the maximum extent possible -- is only possible under Liberalism.  "Liberalism," Hayek writes, "is concerned mainly with limiting the coercive powers of all government, whether democratic or not, whereas the dogmatic democrat knows only one limit to government -- current majority opinion.  The difference between the two ideals stands out most clearly if we name their opposites: for democracy it is authoritarian government; for liberalism it is totalitarianism." (1960, 103)  It is the condition of equality before the law, and the generality norm -- e.g., a political system that exhibits neither discrimination nor dominion -- where the liberal and democratic traditions align.  But, Hayek stressed, it is important to remember that: "Liberalism is a doctrine about what the law ought to be, democracy a doctrine about the manner of determining what will be law."

So in Hayek's rendering we have four permutations, and I am going to rank them as I believe he would:

1. Liberal/Democratic

2. Liberal/Authoritarian

3. Totalitarian/Democratic

4. Totalitarian/Authoritarian

It is #2 that is getting Hayek in trouble in the context of the current discussion.  Keep in mind that this is a conceptual category, not any real-world one.  To any reader of Hayek, however, the clear superiority of #1 should be obvious.  But lets walk through how we gets to opening up the door for the possiblity of a transitional dictator.

I think it is important to remember that in his debate with market socialist in England -- so thinkers such as H. D. Dickinson -- the claim was made that they were socialists in their economics because they were individualists in their political philosophy.  Part of Hayek's agenda in writing, was to disabuse them of this notion.  The high ideals of democracy and the rule of law, Hayek argued in The Road to Serfdom, were incompatible with the organizational logic of socialist economic planning.  This is why, in his intellectual framework, #3 is not a sustainable option, but collapses overtime into #4 -- the outcome that must be avoided.  This is why The Road to Serfdom is a warning about a tragic tale of high ideals and aspirations being crushed by the logic of the economics and political economy of socialism.

Hayek wants to salvage the ideals of democracy, but that can only be accomplished within Liberalism. As he argues in Law, Legislation and Liberty, Vol. 3 -- The Political Order of a Free People -- democracy was meant to describe the ideal of equal law for all.  However, Hayek argues, if we are to preserve this ideal for our time, we must re-examine existing political arrangements and the abuse of the term democracy.  In the modern age, rather than democracy meaning equal law for all, it has been employed to designate political systems that "lead to the creation of new priviliges by coalitions or organizing interest." (p. 40)  In other words, current democratic governments world wide violate the generality norm and thus have produced systems where the rule of law is part of mythology, but not a governing principle. This transformation has dire consequences not just for economic freedom, but ultimately our political freedoms.

The question then turns to how do you break this log-jam in the political order and estable a regime of freedom, peace and prosperity.  First, the population must become disillusioned with the current system. But in their disillusionment they need to correctly identify the source of their frustration.  Second, a new "constitution of liberty" must be established and freedom under the law must be embedded in the very structure of government.  Only in that establishment of the "machinery" can a free society be cultivated and maintained.

Social change to Hayek is primarily a by-product of intellectual activity, but it does also entail constitutional craftsmanship and the establishment of binding constraints on the coercive powers of government such that principle may prevail against the constant threat of expediency.  The debilitating consequences of special interest group politics is not something uniquely Hayek -- all classical liberal economists recognize the problem from Mises to Tullock (with Buchanan, Coase, Friedman, Olson, etc. in-between).  One of my favorite books in political theory and policy that is relevant for this point is Vincent Ostrom's The Meaning of Democracy and the Vulnerabilities of Democracies, and if you haven't read it -- I cannot recommend it highly enough.

But I think Hayek had an intellectual failing of sorts in that he didn't apply the same logic of economics and political economy that he deployed to demonstrate by #3 would not be a sustainable system and would collapse overtime into #4, to why #2 would more likely result in #3-#4 than #1.  This is to a considerable extent what William Easterly has demonstrated in his work on autocracy and development, see my earlier discussion of this at CP.  Frank Knight had a great line in his work where he stated that when folks say: "I want power to achieve X, Y, and Z", he stops at "I want power" because that is the only thing he believes from them.  So just as it is conceptually possible to imagine "democratic socialism", it is possible to imagine a "liberal authoritarian" -- but when that thought experiement is constrained by the logic of economics and political economy, the conceptual must be re-thought.

The conceptual rethinking isn't all that radical to Hayek's thought in general, consider this signature discussion from "Individualism: True and False":

Since it has become fashionable to deride Smith and his contemporaries for their supposedly erroneous psychology, I may perhaps venture the opinion that for all practical purposes we can still learn more about the behavior of men from the Wealth of Nations than from most of the more pretentious modern treatises on "social psychology."

However that may be, the main point about which there can be little doubt is that Smith's chief conern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst.  It would scarcely be too much to claim that the main merits of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm.  It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid.  Their aim was a system under which it should be possible to grant freedom to all, instead of restricting it, as their French contemporaries wished, to "the good and the wise."

The chief concern of the great individualist writes was indeed to find a set of institutions by which man could be induced, by his own choice and from the motives which determined his ordinary conduct, to contribute as much as possible to the needs of all others; and their discovery was that the system of private property did provide such inducements to a much greater extent than had yet been understood..  They did not contend, however, that this system was incapable of further improvement, and still less, as another of the current distortions of their arguments will have it, that there existed a "natural harmony of interests" irrespective of the positive institutions.  They were more than merely aware of the conflicts of individual interests and stressed the necessity of "well-constructed institutions" where the "rules and principles of contending interests and compromised advantages" would reconcile conflicting interests without giving any one group power to make their views and interests always prevail over those of all others.

Hayek, Individualism and Economic Order, 1948, 11-13.

#1 is the ideal -- especially if we understand as Vincent Ostrom stressed that the meaning of democracy is about ways of relating to on another, not merely the act of political expression through voting.  #2 is untrustworthy, #3 is unsustainable, and #4 is horrific.  The unsustainability of #3 is tragic, but untrustworthiness of #2 is to be expected by anyone familiar with the logical analysis and historical experience with #3 and #4.

 

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*Bruce Caldwell and Leonidas Montes have a working paper that does an excellent job in my opinion of contextualizing Hayek's mind-set and the intellectual climate of the late 1970s early 1980s when Hayek made his trips to Chile.

 

Yglesias on the Gold Standard

Steve Horwitz

In a column at Vox yesterday morning, Matt Yglesias gave us 7 reasons to think a gold standard is a terrible idea.  They are not all completely wrong (a low bar, I suppose), but it’s worth exploring exactly what the problems are.

1) A gold standard wouldn’t stabilize inflation

His evidence for this is the gold-price of oil since the mid-80s.  Aside from the fact that looking at one price alone doesn’t tell us much about inflation (especially with a commodity like oil that has its own constant changes in supply and demand, which are part and parcel of a market economy), using fluctuations in the price of gold or the gold-price of other commodities under a fiat money standard as evidence of gold’s volatility misses the whole point. Gold is an inflation hedge, and to the degree that inflation is more likely under fiat money regimes, of course gold will vary in value a great deal (and therefore so will the gold prices of other commodities).  But that’s not a problem with gold, that’s a problem with central bank fiat money.  Under a proper gold standard, the inflation threat would be much lower, making fluctuations in the price of gold much less than they are right now.  The gold standard might have problems, but this is not a good argument against it.

2) A gold standard wouldn’t stabilize exchange rates

Yglesias points out that unless every country goes to a gold standard, you won’t get the benefits of stable exchange rates. And he does have a point here, but that’s all the more reason to convince those other countries to move to some sort of commodity standard as well!  Notice too that this is not a way in which gold makes things worse – it just doesn’t make something better.  So if gold has other advantages, this point is a wash with the status quo.

3) There’s no inflation problem to cure

Partial credit here. He’s correct that changes in the price level have been minimal in the last few years, but if we look instead at growth rates in the monetary base, there’s much to still be concerned about. Banks are still flush with reserves and how those are going to be removed or neutralized remains unclear. The Fed still does not appear to have credible exit strategy and, without one, inflation remains, if not a current problem, a serious threat.

But the bigger point is that if we think about the gold standard as an economic constraint on a central bank, it can help prevent the sort of  expansionary policy and artificially low interest rates that were major contributors to the housing boom , financial crisis, Great Recession, and Abysmal Recovery.  There may or may not be an inflation problem now, but expansionary monetary policy is a big part of what got us into this mess (and several others in the post-gold standard era) and one good argument for the gold standard is that it can reduce the likelihood of that happening again.

4) There’s nothing stopping you from writing gold contracts

This is true  - it’s no longer illegal. But again, the variation in the price of gold that results from the uncertainty around the value of the fiat dollar reduces the marginal benefit of a contract stipulated in gold.  And, again, that is not evidence against the gold standard, but evidence about the problems of fiat money for which investment in gold is a hedge. 

5) Gold recessions could last for years

Yglesias points to the length of recessions before the Fed and then, of all things, the length of the Great Depression as evidence against the gold standard and that “the Federal Reserve is a far-from-perfect manager of the economy, but it does a lot better than that.”

Well, where to begin?  First, while we did have a gold standard before the Fed, we certainly did not have the kind of gold standard that most folks are arguing for today, particularly not those of us who are arguing for a free banking system based on gold.  The various regulations that prevented banks from adjusting their currency supplies to the demand to hold it were the primary reason (along with the lack of interstate banking) for the long and painful recessions before the Fed. Yglesias has to explain why these were absent in Canada which also had a gold standard, and a more “pure” one than the US.  Absent such an answer, this is not evidence against the gold standard.

As for the Great Depression…. Really?  The Great Depression is evidence of how much better the Fed is than a gold standard?  Even if you don’t accept the Austrian argument that Fed expansion during the 20s (made possible by its monopoly status even under a gold standard), certainly the Friedman-Schwartz argument about its role in the early 30s in deflating the money supply demonstrates that the Fed was a huge problem and that “far from perfect” is the understatement of the monetary century.

And if one wants to count “gold recessions,” one should also count the numerous recession generated by post-1933 and post-1971 inflations here, as well as the inflations themselves.  Inflation was nearly absent in the 19^th century (whatever that system’s flaws) but has become a huge problem only after the gold standard was totally abandoned in 1971.

The history of the last 100 years of central banking is the best argument there is for getting away from central banking.  And the Canadian case shows that the gold standard isn’t the cause of the long US recessions before the Fed.

6) The gold standard wouldn’t eliminate political money

Here Yglesias has a point in two possible ways.  First, if by the gold standard one means central banking with a gold standard, then yes, by definition we still have political money.  If he means a gold standard without central banking, then he still has a point in claiming that Congress could always change its mind and end the gold standard again.  No argument here, but there are steps we could take to make that harder by constitutionalizing the gold standard or limits on government involvement in money.  It’s no guarantee, but it helps.

7) Gold-backed money reduces the supply of gold

Yglesias writes “That means forcing banks to hold their reserves in terms of giant piles of physical gold would impose a cost on the real economy. Gold held in bank vaults is gold that is not available for industrial or decorative uses.”  Several problems here.  First, the gold in bank vaults is not, therefore, useless.  To the degree that it serves as a check on central bank expansion, it plays a very useful economic role that is no less important than its other uses. Second, historical gold standards under free banking had very low reserve ratios, on the order of less than 3%, and not all of that was gold. In a modern economy, the amount of gold banks would have to have on hand in their vaults in a fractional reserve free banking system would be minimal. So Yglesias underestimates the benefits and overestimates the costs.

And to the degree that gold would gain a monetary use, the incentive for people to dig it up out of the ground would be greater not less and this would increase the supply of gold.  It’s not clear that Yglesias understands what economists mean by “supply.”

One final comment:  critics of the gold standard need to specify what they mean by “the gold standard.”  Do they mean a central bank whose liabilities are redeemable in gold?  Do they mean a 100% reserve private system?  Do they mean fractional reserve free banking on a gold standard?  These differences matter as these systems perform differently and if you want to criticize the gold standard, you need to be clear on what it is you think that means. That aside, Yglesias fails on most of his 7 objections here and the gold standard, at least in the form I’d like to see it as part of a free banking system, remains a very good idea.

 Cross posted at Bleeding Heart Libertarians and Free Banking