The Power of the Word

Julian Sanchez | July 30, 2005

Merriam-Webster's word of the day today is: laissez-faire.

Comments

Warren|7.30.05 @ 10:10AM|#

Hey thanks for the link, super cool. I'll raise a glass in honor of good ol' Silent Cal today. I didn't know about the Physiocrats. But apparently they believed "that all wealth originates in agriculture; wealth is then distributed from farmers to other groups." Oh well, c'est la vie.

John|7.30.05 @ 11:59AM|#

One of my friends in college had a dark blue shirt with white letters that said "laissez-faire."

We, of course, nicknamed him the Lazy Fairy. He was simulaneously bemused and annoyed.

|7.30.05 @ 12:29PM|#

I asked this question in an earlier thread and am too lazy to check and see if there was an answer:
Does anybody know whatever happened to Laissez-Faire City down in San Jose, Costa Rica?

|7.30.05 @ 12:32PM|#

kwais,
Google Smoot-Hawley City, District of Columbia.

|7.30.05 @ 1:55PM|#

I was lucky. In high school I asked a favorite teacher (who also happened to be the head football coach) to explain how the depression happened. He gave me a detailed, but understandable explanation that as I recall mostly boiled down to government mishandling of the economy.
Then I got to college where I was simply told that it was the fault of Hoover and his laissez-faire policies. So much for higher education...

|7.30.05 @ 2:04PM|#

Ruthless,
I googles Smoot-Hawley, and I got 1 result (think that there is a term for that). Anyhow the site of the 1 result was acting squirley.

So I googled 'Causes of the great depression' and got a bunch of answers. Most of them say what I posted above was taught to me. 1 Government failed to regulate investing, 2 Cutting taxes. They also mention cutting taxes and heavy borrowing.

I understand how borrowing can bankrupt a person but not an economy, at least a free economy.

Joe,
Something to the effect of what you mention is also talked about. So if you would please go more into detail.

|7.30.05 @ 2:06PM|#

"Under mercantilism and industrial capitalism, extremely powerful individuals or groups can exert so much distortionary influence on the economy as to produce bad outcomes comprable to those seen under central planning."

Must we continually remind joe that mercantilism IS central planning and IS NOT laissez-faire.

As for "industrial capitalism", I'm going to have to ask what that means, but I'm willing to bet that government intervention and corporate welfare play a prominent roles.

|7.30.05 @ 3:26PM|#

I remember way back in the day when I was in school that I was taught that a Laisez Fair president was responsible for the great depression and that it was cured by Roosvelt and the new deal, and the war.

You needn't have been in school long ago, as I was taught the same dogma. Luckily, in this case, most students are so ignorant and oblivious toward history that they probably came away thinking Liz Phair caused the Great Depression. ;-)

|7.30.05 @ 6:51PM|#

kwais,
Funny. I Googled it myself... after I'd recommended doing so, and found an excellent article by Thomas Sowell.
See if you can Google that.

|7.30.05 @ 7:20PM|#

I thought there was minor natural business cycling, and that in the alleged "laissez-faire" days of yore, it was the governments job to fuck shit up as badly as possible in reaction (see smoot-howley).

|7.30.05 @ 8:24PM|#

Captain Awesome,
I think you're on the trail. There is also the contraction of the money supply Milton Friedman loves to expound upon.
But before going on, I'm old, but not old enough to have witnessed this first-hand, but there was a world of difference between the philosophies of Herbert Hoover and Calvin Coolidge.
Silent Cal was Mr. Lassez-Faire. Herbert was like joe, but nowhere near as funny.
Come to think of it, Herbert was sort of like that fool of the GWB adminstration who toured Africa with Bono.

|7.30.05 @ 8:49PM|#

extremely powerful individuals or groups can exert so much distortionary influence on the economy as to produce bad outcomes

If this statement includes the Federal Reserve's policies in the 20's, I can agree.

|7.30.05 @ 10:55PM|#

I'm embarrased to say that I always pronounced it "lay-SAZE fair."

Oops.

|7.31.05 @ 12:00AM|#

In the late 19th century, there were boom-and-bust cycles in the economy. Every now and then people would panic and there would be runs on banks, and that kind of thing. So the government had this "wonderful" idea of creating a central bank, The Federal Reserve, which would help regulate the economy and end the boom-and-bust cycle.
The Fed was created in 1913. Their policies helpd create the biggest boom (the Roaring 20s) and biggest bust (the Great Depression) in the history of America. Various people, including Milton Friedman and Murray Rothbard, have analyzed the various decisions and mistakes made by the Fed and the federal administration, so I won't try to cover that. But Herbert Hoover just happened to be the one in office when the boom went bust. As a moderate Republican, he tried moderate measures, but was in no position to claim that the Fed was a significant cause of the downturn, or to push for true laissez-faire policies.
Of course, after that, the Fed got better about controlling the economy, and certainly Greenspan has been a master at it, but I remain unconvinced that a central bank can do better than the market.
What we are usually taught in school, and what remains the popular perceptions of the public, are not necessarily the truth, although they often contain elements of the truth.

M1EK|7.31.05 @ 10:47AM|#

"In the late 19th century, there were boom-and-bust cycles in the economy. Every now and then people would panic and there would be runs on banks, and that kind of thing."

does not compute with

"if we had had laissez-faire in the 1920s, the Great Depression wouldn't have happened"

Some of the depressions in the 19th century (pre-Smoot-Hawley) were arguably as bad as the GD.

|7.31.05 @ 11:52AM|#

If you aren't sure what "industrial capitalism" means, Russ R, you might want to just sit this one out, and lay off telling other people what they need to be reminded of.

So fellas, if the cause of the Great Depression was having a central bank, or counter-cyclical monetary policy, why haven't we had any depressions since then, during the decades when the central bank and the government's power to exert counter-cyclical pressure, have just gotten stronger?

Durr, I need to be reminded what "mercantile" means. Uh-huh-huh-hooooo-eeeee!

|7.31.05 @ 12:31PM|#

joe,
Just you wait.
It's gonna happen when the housing bubble bursts, and I'm gonna blame it on the mortgage interest expense deduction.

"Mercantile" to you too!

|7.31.05 @ 6:15PM|#

Wow, Joe's starting to make M. Gunnels look positively polite.

And, yes, we caused the Great Depression; it was all part of a fiendishly clever plan that went horribly, horribly wrong.

Maybe when we puncture the housing bubble, the next depression will work out better for us but I doubt it. Far too many of us have picked up "bad habits from you Goyim. We should have killed Keynes when we had the chance.

And, no, Jennifer, you still can't join.

|7.31.05 @ 11:03PM|#

why haven't we had any depressions since then

Well, just to nitpick, the first one was from 1929-33, so we did have one starting in '37 (which makes 3 the Fed didn't prevent).

Anyways, we don't have the gold standard, which played a part in 1893 and 1907. We don't have the onerous tariffs, like McKinley, Ford-McCumber, and Smoot-Hawley. Of course, Joe Kennedy isn't around to "watch" the markets. :)

We had bubbles with the advent of new technology, 1873-railroads, 1929-cars/radios, and 2000-Internet. It's hard to compare 1873 (no Fed), but in 1929, the Fed raised the rates.
Greenspan obviously didn't want to repeat 1929 by restricting money, but, it seems we're in uncharted waters now.

By not having a shake-out like previous bubbles, it appears we've just replaced the stock market with a real estate bubble. When that pops, what's next, tulips?

|7.31.05 @ 11:52PM|#

"why haven't we had any depressions since then, during the decades when the central bank and the government's power to exert counter-cyclical pressure, have just gotten stronger?"

We have. Recall the 1970's... it was just papered over with monetary inflation so that most people didn't notice the depression. Nonetheless, everyone's standard of living and purchasing power fell dramatically. We just renamed it "stag-flation".

The difference between the 30's and today is the Fed's ability to expand the monetary base at will and inflate their way out of problems.

|8.1.05 @ 3:09AM|#

Russ R,
By your assesment the fed is a good thing right? Because it would seem to me that stag-flation is better than mass hunger and unemployment.

Joe,
With out the force of government, how can a big company prevent poeple who are willing to work and crate companies from working, and from creating companies and products and work?

Ruthless,
If the housing buble breaks won't that merely mean that the mortgage companies are fucked, but everybody else is fine? I mean I will be fucked, because my house will have lost value, but I will continue to work and pay my bills and earn and spend money.

Apostate Jew,
When your people organize the next depression, can you tell me what to invest in? Is Ruthless on to something about the housing bubble? Or is he just wildly stabbing in the dark? Also you are right not to let Jen into the group, she is a phillistine, but you can hook me up, I am cool. I have no problem with what y'all did to Jesus, I didn't even like that movie.

|8.1.05 @ 3:14AM|#

By the way, just so I understand the arguments, correct me if I am wrong;

Joe says- The great depression was a result of Laisez Fair, and not having a fed control the market.

Others say- Great depressions will happen inevitably with or without a fed.

Correct?

I am trying to figure all this out so when I am president I can be a good libertarian president without having the whole country starve and discredit freedom for the next millenia.

|8.1.05 @ 3:56AM|#

Another take on the Great Depression currently popular with the History Channel crowd is that FDR helped the nation not so much with his New Deal programs (which were, in the words of another one of my old teachers, so much "alphabet soup"), but with his ability to "inspire" and give the economy a much-needed psychological boost.

Of course, even mainstream historians now largely admit that the single most important factor in the country's recovery was the Lend-Lease project leading up to that war thing in the forties...

|8.1.05 @ 9:43AM|#

Russ R, you can't possibly be suggesting that the lousy economy of the 70s was comparable to the Great Depression, or even to the other depressions of the 1800s, can you? There was no 30% unemployment in the 1970s.

"Joe says- The great depression was a result of Laisez Fair, and not having a fed control the market." That's a little reductionist. It's like saying a plane crash was caused by gravity. I think the Great Depression was caused by the bursting of a stock bubble, which was allowed to inflate irresposibly on leveraged investments.

"With out the force of government, how can a big company prevent poeple who are willing to work and crate companies from working, and from creating companies and products and work?" By using its clout to control the market. For example, the biggest manufacturer of a product threatens retailers with an embargo if they stock competitors' products. This artificial monopoly allows the big manufacturer to control the market without having to be efficient, thus reducing the total sales, jobs, and wages available to people willing to work.

|8.1.05 @ 10:15AM|#

Joe,
On your first point, reductionism is what it is all about, I am working with little time, lots of subjects, and a short attention span. I gotta know the basics.

On your second point. If a big company threatens to embargo my small retail outlet, I stop selling their product, and become the quaint yet very succesful vendor for alternative products. Very succesful, because other producers wanting to be in the market place will sell at a lower price, and will make a superior product. And succesful because the purchasing public will want some variety and will catch on to the price/quality difference. And even if there is not a price/quality issue, some people like different stuff.

|8.1.05 @ 10:29AM|#

"you can't possibly be suggesting that the lousy economy of the 70s was comparable to the Great Depression, or even to the other depressions of the 1800s, can you? There was no 30% unemployment in the 1970s."

You're right, joe. But I don't think you know why you're right.

Unemployment is surplus labour, more supply than demand, and implies only one thing: Wages need to fall for the labour market to clear.

In the 1970's inflation reduced real wages fast enough to keep the unemployment figures lower, but you can't assume that everyone was better off because unemployment was only 10% instead of 30%.

In the 30's, for the 70% of people who kept their jobs, life wasn't half bad... Same pay + lower prices = higher real wages.

In the 1970's, for the 90% of people who kept their jobs, life was certainly worse... Same pay + significantly higher prices = lower real wages.

The economic burden was spread over more people in the 1970's, since everyone suffered the effects of inflation.

|8.1.05 @ 11:09AM|#

"I think the Great Depression was caused by the bursting of a stock bubble, which was allowed to inflate irresposibly on leveraged investments."

This is a common misconception, and unfortunately, it's what's taught in schools.

The stock market Crash of 1929 - 1932 wasn't a cause of the Depression. The Crash and the Depression were both results of the credit bubble of the "Roaring 20's". People and companies took on too much debt, over-leveraged themselves, and too many found themselves unable to meet their debt servicing costs.

What caused otherwise intelligent people to start burying themselves in debt? Loose monetary policy; rates were set below their market equilibrium level. When money is abundant, and promises to be so in the future, investment opportunities appear to be more profitable than they really are in a neutral or fixed monetary regime. So rational, profit-seeking individuals borrow and invest. Less rational pleasure-seeking individuals borrow and consume. Since interest rates are set too low, rational individuals don't save because they aren't adequately compensated. What you end up with is too much debt supported by insufficient savings, ultimately exceeding everyones repayment capacity. AKA, a credit bubble.

This description sounds strikingly like the last 15 years...

M1EK|8.1.05 @ 11:34AM|#

Russ,

"In the 30's, for the 70% of people who kept their jobs, life wasn't half bad... Same pay + lower prices = higher real wages."

betrays a shocking lack of understanding of the era. 30% unemployment does not imply that anything like 70% of the population had jobs in 1935 which were anything like the ones that 70% of the population had in 1929.

When facts collide with libertarian ideology, you can always count on Reason for some good ol' cognitive dissonance.

|8.1.05 @ 11:59AM|#

"30% unemployment does not imply that anything like 70% of the population had jobs in 1935 which were anything like the ones that 70% of the population had in 1929."

No, that was an oversimplification for the purpose of showing the differences between an inflationary crisis and a deflationary crisis.

In the 1970's a lot of people got pay-raises as the cost of living rose, so nothing is ever so clean-cut-and-dried.

But, the point remains. Wage cuts happen, but not for everyone. In a depression, if you stay continuously employed at the same pay-scale, life isn't bad at all. The same was true if you had accumulated significant savings.

|8.1.05 @ 12:06PM|#

kwais:

"By your assesment the fed is a good thing right? Because it would seem to me that stag-flation is better than mass hunger and unemployment."

I believe that the Government and the Fed caused both crises through overspending, loose monetary policy, and excessive credit creation in the preceding years.

So, no, unless you're a banker, the Fed is not a good thing.

Bank runs, while chaotic and unfortunate, are what keeps banks honest, and maintains restraint in lending and risk-taking. Having a "lender of last resort" creates moral hazard, encouraging the banks to lend irresponsibly and over-leverage their asset base to bring in more profits. The risks get pooled, and when trouble brews, the banks get bailed out, while the population pays the inflationary penalty.

|8.1.05 @ 12:57PM|#

Russ, your argument has a gaping hole in the middle of it: "In the 30's, for the 70% of people who kept their jobs, life wasn't half bad... Same pay + lower prices = higher real wages."

"In a depression, if you stay continuously employed at the same pay-scale, life isn't bad at all."

The problem here is that the 70% did not receive the same pay. Foremen became janitors, middle managers became laborers.

And the 70% were not the same people year after year. A good portion of those people, and a good portion of the 30%, were cycling through periods of employment and unemployment.

|8.1.05 @ 1:02PM|#

Also, there's this: "So rational, profit-seeking individuals borrow and invest. Less rational pleasure-seeking individuals borrow and consume."

Somebody was fronting the money for all of that borrowing, and was doing so either irrationally, or rationally-but-with-bad-information. It was not wise for brokers to accept so many purchases on margin, even if they decided it was in their short-term best interest. It was not wise for the electric companies to sell set up a Ponzi scheme and so many bonds on the assumption that the growth of their product would always be sufficient to pay off the last group of investors.

There's some hairsplitting going on, Russ, for you to say that the Depression was caused by the debt, and not by the stock bubble, when it was the debt that caused the stock bubble, and that prevented the economy from being able to recover from the bubble bursting.

|8.1.05 @ 1:24PM|#

joe,

"70% did not receive the same pay. Foremen became janitors, middle managers became laborers."

I'm not disagreeing with you that wages adjust. However, they adjust over TIME. In inflationary periods, wages rise AFTER prices rise and real incomes fall. In deflationary periods, wages are cut AFTER prices fall and profits evaporate.

In the meantime, between cause and effect, gains or losses arise. If you lower prices now, and then cut my wages a year from now (or move me to a lower paying job), I've benefited. If you raise prices, but don't raise my wages for a year, I've suffered a loss.

Textbooks teach that inflation is a monetary non-event because if everyone's wages rise the same amount as prices rise, then nobody is worse off. This argument neglects the fact that inflation is neither instantaneous nor uniform. Additionally, it penalizes savings and subsidizes debt. Give me a gold standard any day.

|8.1.05 @ 1:32PM|#

Also joe,

"Somebody was fronting the money for all of that borrowing,"

Ultimately, that was the Fed, which allowed banks to exceed otherwise rational lending limits, by promising to cover them if they ever fell short of reserves. It's rational to take extra risk if somone else is going to pay for your losses. In this case, the banks earn the profits, while the Fed transfers the risk to taxpayers.

"There's some hairsplitting going on, Russ, for you to say that the Depression was caused by the debt, and not by the stock bubble, when it was the debt that caused the stock bubble, and that prevented the economy from being able to recover from the bubble bursting."

The stock bubble, crash and subsequent depression were all the visible results of the credit expansion and inevitable contraction.

Pointing to the Crash as the sole cause of the Depression ignores the larger, common cause for both events.

|8.1.05 @ 1:44PM|#

Anyone have any good arguments against the gold standard? The gold standard seems a good idea to me.

M1EK|8.1.05 @ 3:10PM|#

Russ,

"In deflationary periods, wages are cut AFTER prices fall and profits evaporate."

No, what happened during the GD was that your job evaporated, and you had to go get another one. IMMEDIATE pay cut. Like the one I took in 2001 when my job evaporated and I had to go get another one, except magnified 10x in scale and throughout the population.

'average' wages did in fact go down. To state from this that it was likely that 70% or so of people went through the GD at the same effective salary (and hence ended up ahead due to deflation) is one of the stupidest things I've ever read here, and I've read a lot of stupid things here.

Some of you libertarians really need to live through the aftermath of a couple of macroeconomic 'situations' to wipe this smugness out of you, I think.

M1EK|8.1.05 @ 3:13PM|#

Russ,

"Ultimately, that was the Fed, which allowed banks to exceed otherwise rational lending limits, by promising to cover them if they ever fell short of reserves. It's rational to take extra risk if somone else is going to pay for your losses. In this case, the banks earn the profits, while the Fed transfers the risk to taxpayers."

Man, it's just wacky libertarian 101 around here, ain't it. I can remember hearing the same bullshit arguments from Randroids in college.

Hint: history showed EVEN MORE bank failures before the advent of the Fed. Left alone, banks did EVEN DUMBER things than they did when the Fed started its small (pre-1930s) interventions.

Maybe the same guys doing those Hannity Heroes comic books can go back and create a version of history where the 1800s were an era of economic wonder compared to the horrible conditions we endured after WWII. That would be keen.

|8.1.05 @ 3:30PM|#

Anyone have any good arguments against the gold standard? The gold standard seems a good idea to me.

The gold standard is an inflexible monetary policy, vulnerable to deflation if gold mining doesn't expand sufficiently fast and inflation if there is a sharp increase in supply of gold. Furthermore, the "intrisic value" of gold that is supposedly its most appealing attribute seems hardly less arbitrary than that of fiat money.

Of course, anyone who disagrees is free to hold gold instead of cash...

|8.1.05 @ 4:02PM|#

I know an antigoverment type that is a lot more militant than all the dudes on this site. His main focus in life is to piss the IRS off.

Anyhow he went to the federal reserve bank and tried to get his golds worth. I think he was arrested, I can't remember the whole story.

|8.1.05 @ 4:23PM|#

"IMMEDIATE pay cut. Like the one I took in 2001 when my job evaporated and I had to go get another one,..."

Wow, great anecdotal argument M1EK. How's this for a rebuttal... "I didn't lose my job in 2001, and standard of living went up."

My argument remains that the relative timing of price decreases and income decreases is important.

If your income falls more slowly than your expenses, you come out ahead. This was the case for a lot of people in the 1930's. Definitely not everyone, maybe not even the majority, but don't go telling me that everyone was unemployed and miserable.

Some companies and their investors reaped huge gains. From 1929 to 1936, when the Dow Jones industrial average lost nearly two-thirds of its value, shares in Homestake--the only large, listed U.S. gold miner of its day--soared. A $10,000 Dow investment in 1929 would have dwindled to $3,600 in 1935, but the same amount of Homestake stock would have risen to $62,000--plus it paid roughly $16,000 in dividends. (Source: Forbes) I don't imagine that these folks were too miserable.

"history showed EVEN MORE bank failures before the advent of the Fed. Left alone, banks did EVEN DUMBER things than they did when the Fed started its small (pre-1930s) interventions."

That's exactly my point. Visible bank failures keep people prudent. When banks can no longer fail, nobody bothers to see how solvent they realy are.

Fractional Reserve Banking is a risky game. Bankers that did dumb things, went out of business, and the system policed itself, via bank failures.

|8.1.05 @ 4:43PM|#

Anyhow he went to the federal reserve bank and tried to get his golds worth. I think he was arrested, I can't remember the whole story.

Well, since US dollars aren't backed by gold reserves that's not terribly surprising. Gold trades on the open market, however, and there's always e-gold.com

|8.2.05 @ 9:56AM|#

Russ R,

There were, surely, some people who did very well in the 30s. There were a whole lot more people who did well in the 70s.

In addition, there were huge masses of people who did very, very poorly in the Depression. As in, children whose growth was permanently stunted because of manlnutrition. Even see any studies of the physical condition of recruits at the beginning of World War 2? Eek! There were far fewer people who experienced that level of poverty and hunger during any of the subsequent recessions. To me, that's the only metric that matters. What good is an economy that can't feed people?

As for the Fed causing the bubble - maybe. It would be logical to conclude that the absence of similar subsequent events is the result of a Fed that keeps banks on a shorter leash, and an SEC that keeps brokers on a shorter leash.

M1EK|8.2.05 @ 10:07AM|#

Russ,

""history showed EVEN MORE bank failures before the advent of the Fed. Left alone, banks did EVEN DUMBER things than they did when the Fed started its small (pre-1930s) interventions."

That's exactly my point. Visible bank failures keep people prudent."

Are you retarded? People in the 1880s weren't prudent; the depressions of the time ruined families all over the place. There was effectively no middle class during this Golden Age many of you pine for, and part of the reason was that it was impossible to tell what was legit and what was snake-oil.