Economics

Ron Paul and The Political Economy of Money

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You might have noticed journalist (and Giuliani foreign policy advisory team member–not too hard to guess what that advice mostly consists of–"end evil, boss!") David Frum accusing Ron Paul (and Huckabee, another opponent of his boy Rudy) of being an ignorant nimrod when it comes to monetary policy in the National Post. An excerpt:

Just a little lower down in the polls is a libertarian candidate named Ron Paul. Paul is best known for his vehemently isolationist foreign policy views. But his core supporters also thrill to his self-taught monetary views, which amount to a rejection of everything taught by modern economists from Alfred Marshall to Milton Friedman.

Huckabee and Paul have not the faintest idea of what they are talking about. The problem is not that their answers are wrong—that can happen to anyone. The problem is that they don't understand the questions, and are too lazy or too arrogant to learn. But say that aloud and their partisans will shout back: Elitism!

Actual economist Peter Boettke takes on Frum on this issue at the Austrian Economists blog. An excerpt:

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.
…………….

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………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.

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  1. Plop!

    What was that?

    Oh, it was Giuliani’s campaign sinking like a stone…

  2. … vehemently isolationist foreign policy views.

    Wanting to trade with a country rather than invade them makes one an isolationist nowadays?

  3. So did Rudy go back and secretly get an advanced economics degree? If he didn’t, isn’t he “self-taught” as well? That is, unless he’s using the “My law degree is a declaration of expertise in everything” thinking.

  4. I think isolationist means noninterventionist.

    I never thought it meant protectionist.

    But perhaps it sound that way to some people. I prefer the term “noninterventionist.”

  5. Here’s the lesson to learn: It’s always important to respect the values and principles of the voters. But politicians who want to deliver effective government and positive results have to care about more than values — and have to do more than check their guts. They need to study the problem, master the evidence, and face criticism.

    “But.” I.e. Screw what the people think.

    David Frum accusing Ron Paul (and Huckabee, another opponent of his boy Rudy) of being an ignorant nimrod

    How is being a mighty hunter and a king of Shinar relevant?

    Oh. Third (slang) meaning.

  6. This confirms what I’ve been thinking for years: Frum is a tool and a moron.

  7. Plop!

    What was that?

    Oh, it was Giuliani’s campaign sinking like a stone…

    Better flush twice

  8. How many books has Giuliani written on the economy? Or foreign policy?

    Ron Paul has been studying and writing books on our economy and forgein policy for 30 years. What was Giuliani doing during that time besides dressing in women’s clothes, cheating on his wives, and getting divorced and remarried time and time again?

    Oh yeah…he was there on 9/11, how could I forget? Guess that makes him an expert on everything, huh?

    Giuliani couldn’t tote Ron Paul’s jock strap in a debate on economics, foreign policy, or any other political issues for that matter.

    It’s time for the nation to wake up…

  9. LarryA,

    Like Nimrod, Ron Paul is a mighty hunter before the Lord.

    Thats one of the bible verses I actually know off the top of my head (for those unsure, the Ron Paul bit was added by me :))

  10. Here’s Tyler Cowen on RP’s monetary policy. Short version: it’s dumb.

    (disclaimer: I’m an RP supporter who thinks the gold standard is financial suicide)

  11. Bill Mill,

    I think I agree with you in a way, in that the gold standard should have been maintained, but trying to go back now would be financial suicide…

  12. Frum is like the Garfield cartoon: although I’m aware of him, I’ve always assiduously ignored him.
    Join me!

  13. Bill and Taxtil, Paul advocates allowing competing currencies like gold, silver, ect. He does not want to go back to the previous gold standard.

  14. I don’t agree 100% with Ron Paul, but I do fail to see the need for a price-setter in the short term credit markets. One idea that I’m sympathetic to is to let interest rates float on the market, with the Federal Reserve only stepping in when there’s an emergency situation.

  15. I don’t know how many times this has been mentioned, but it seems that it has to be said again:

    RP is proposing NOT a government mandated gold standard, but a Hayekian legalisation of competing currencies.

    In other words, giving you freedom to save and trade in the currency of your choice, not forcing you to do it in gold.

  16. oops, a few second too late!

  17. Anyway, being against central planning of the economy but advocating central planning of banking and the money supply makes no sense whatsoever.

  18. I don’t think the question is whether the gold standard is dumb.

    The question is whether it’s a populist and anti-intellectual position.

    It is absolutely a minority position in economics as a discipline, but that is dramatically different from being populist or anti-intellectual.

    Paul is an autodidact on economics and political philosophy, and like all autodidacts his views are highly personal and idiosyncratic. But that doesn’t make him a populist, or anti-intellectual. On the contrary – in my experience it is precisely autodidacts who have a tendency to elevate theoretical, ideological, and literary concerns [depending on the flavor of their particular interest] above everything else. They are passionately involved in intellectual debate as an overriding personal interest, and expect everyone else to be the same.

    For Frum to link Paul and Huckabee as “anti-intellectuals”, when Huckabee has not demonstrated that he knows any book other than the Bible even exists, and Paul is…well…Paul, is absurd.

  19. Jackson,

    I should have clarified that I am in no way representing or debunking Paul’s views on this issue, but merely responding to Bill.

    I felt that I should say this because I certainly don’t want to perpetuate the myth that Paul supports going to the gold standard.

    I am Taktix? and I approve this message…

  20. One idea that I’m sympathetic to is to let interest rates float on the market, with the Federal Reserve only stepping in when there’s an emergency situation.

    But its always an emergency. If its not market correction “emergency”, its mortgage market “emergency”, or an inflation “emergency”, or an unemployment “emergency”, or . . . .

  21. Alan Greenspan, a highly educated professional economist, has been (prior to his retirement, at which point he turned the job over to Bernanke) frantically shoveling money into the firebox of the runaway locomotive which is our economy. Obviously, some people will be dislodged from their seats when the train arrives at the end of the line.

    So much for highly educated professional economists…

  22. Why do we need the Federal Reserve at all? Any manipulation of the market is an artificial “corrective” measure, forgetting that if the market were left alone it would correct itself and probably in not too long a time as to be destructive. Having the Federal Reserve correct market fluctuations leads to the Depression and other recessions because they over correct and it backfires. Another example of blowback, or unintended consequences.

    Next question should be, since we strayed so far from the gold standard, how could we get back there relatively smoothly? I agree it would be a financial problem to go back to it in a matter of minutes, but does anyone have transition suggestions or problems with transitions?

    If we allow competing currencies, it is my estimation that will be the end of paper money. If gold and silver are allowed, people would put them into banks in exchange for bank cards to use in commerce. No more paper money. All transactions with the bank card. Gold is worth X credits on the card per ounce, while turning in Fed Reserve notes would be worth Y per dollar. I think we’d operate solely on plastic and the government’s only role would be to monitor the banks to prevent fraud. We can’t allow the banks to add a zero whenever they please as that would be more inflation or artificial wealth. They can get out of the interest rate management altogether and let the banks sell their products and compete for business.

    Other ideas how it would work?

  23. RC Dean,

    More likely, it’s a CRISIS!!!!! or EPIDEMIC!!!!

  24. Wasn’t it the Scourge of Chile who advocated using a mathematical formula, or computer program, to provide for an orderly and apolitical regulation of the money supply?

  25. I’m not saying people couldn’t use actual gold, or reserve notes, or paper clips or whatever, but that just like today, its easier to use bank cards when you shop or checks when you pay your mortgage. I just want the only government role to be to make sure no one is adding false numbers to anyone’s account. That, to me, is fraud. The Fed creates this money out of thin air and it causes harm and the government should stop it, rather than be complicit in it.

    How does it help to insert money into the economy when someone forecloses on their house? Shouldn’t the bank just take the house and resell it? I am pissed that they are let off the hook for not properly evaluating the risk in their product (the adjustable rate they offered) and their assessment of the ability of their customer to pay. They should take responsibility as should the buyer. These hard lessons should be learned so they don’t happen again. Letting them off the hook only makes it possible for them to do it again. Someone should be spanked.

  26. “Whenever the Austrian in the room starts talking, everyone else rolls their eyes and sighs…they’re just nuts.”

  27. Factions aside, the general differences between Austrian and mainstream economics can be summarized as follows:

    * Mainstream economists use the scientific method; Austrians reject it, at least for the study of the economy. Instead, they use a pre-scientific method which deduces truths from a priori knowledge.

    * Mainstream economists make heavy use of statistics; Austrians claim statistics have very little value, because of their extreme limitations.

    * Mainstream scientists believe in both objective and subjective truth (that is, absolute truth and personal truth); Austrians believe only in subjective.

    * Mainstream scientists seek to explain human behavior on many different levels: the gene, the individual, the group and the specie. Austrians believe that all explanations of human behavior can be traced back to the individual.

    * Mainstream economists often use models that use perfect starting assumptions; Austrians claim not to.

    * Mainstream economists believe that monopolies can arise from a number of causes; Austrians believe that only government causes monopolies.

    * Mainstream economists believe in fiat money; Austrians believe in the gold standard.

    * Mainstream economists assert that the mystery of the business cycle is deep and poorly understood; Austrians claim the government causes it…

    …So the mainstream approach is inductive, and the Austrian approach is deductive. The first draws generalizations from the data, the second applies preconceived generalizations to the data. A completely deductive approach is pre-scientific, however, which is why Austrians cannot legitimately claim to use a scientific method. Deduction does occur in science, but the generalizations are primarily based on other data, not a priori assumptions.

    This is not to say that Austrians do not refer to real-world events and data in their writings. They just don’t do it in the usual scientific way.

    http://www.huppi.com/kangaroo/L-ausintro.htm

  28. Those in the Austrian school are either geniuses who have figured out something the rest of the world hasn’t, or they’re insane. I’m still trying to figure out which is the case.

  29. Derrick Miller,

    Any reason it cant be both?

  30. The schizophrenic is tapping into an information stream unavailable to the average person. Their view of reality is enhanced rather than limited.

    Of course their views will be seen as insane by those without similar access to the truth.

  31. * Mainstream economists assert that the mystery of the business cycle is deep and poorly understood; Austrians claim the government causes it…

    This is not correct; Austrians assert that it is the natural outcome of fractional reserve banking. This form of banking does not require a government to exist. All too often, however, when the inevitable busts hit, the bankers try to get the government to bail them out via central banks and tax-payer bailouts. The latter, of course, makes boom and bust cycles far more intense.

    The wikipedia entry on the Austrian Business Cycle Theory is pretty good.

  32. Jacob:
    One idea that I’m sympathetic to is to let interest rates float on the market, with the Federal Reserve only stepping in when there’s an emergency situation.

    R C Dean covered, but it needs to be said twice. The Fed steps in all the time. The Fed steps in when the market goes down. The Fed steps in when the housing industry overbuilds. The Fed steps in when Jim Cramer has a public meltdown on TV.

    Of course, the Fed’s only tool in its arsenal is “lower interest rates”. It can’t do anything else. And every time the Fed does this it increases the money supply.

    For the anti-commodity currency folks, money has to be worth something. It does not work any other way. A dollar that floats is a dollar that can also sink. The banking crisis in the past that drove the creation of the Fed did not have at their core a problem with commodity currency. Many were problems inherit in the fractional reserve banking systems, which is why the Fed was created in the first place. “The lender of last resort.” They haven’t held that role in approximately 800 jillion years. Now they attempt to keep inflation down and prevent the world from wiping their asses with the dollar.

  33. This is not correct; Austrians assert that it is the natural outcome of fractional reserve banking. This form of banking does not require a government to exist. All too often, however, when the inevitable busts hit, the bankers try to get the government to bail them out via central banks and tax-payer bailouts. The latter, of course, makes boom and bust cycles far more intense.

    That part makes a great deal of sense to me. What I still can’t wrap my head around is the Austrian call for commodity-backed money.

    Under a true gold standard, the money supply would stay very stable, with only very slight growth due to mining of new gold. As the population (or economy) grows, however, the value of each unit of gold would rise. Aka a “contraction” of the money supply. (I’m purposely avoiding the term “deflation” because Austrians use it differently.)

    So, if prices are constantly falling due to a contraction in the money supply, doesn’t that cause all sorts of havoc? According to this, Austrians “take the position that there are no negative distortions in the economy due to a general fall in prices” in such a scenario. That’s the part where the Austrians lose me. I fail to see how there wouldn’t be consequences if the value of each dollar was constantly rising.

  34. Since when has any government shown any expertise whatsoever in managing economies?

    Politics is about attempting to override reality with force of arms. That’s what political government is all about.

    Mainstream economics, particularly Keynsian variety, has been about manipulating economic performance through control of the currency supply. Unfortunately, it’s akin to manipulating one’s mood with chemicals, they throw the body’s own chemical system out of whack.

    Austrian economics has been about understanding the why and how of markets.

  35. So the mainstream approach is inductive, and the Austrian approach is deductive.

    I never realized that my PhD courses were in Austrian economics.

    Where can I find these mainstream departments?

    Mainstream economists often use models that use perfect starting assumptions; Austrians claim not to.

    Now that sounds more like what I’m used to. Make a bunch of assumptions that have little relation to reality, and use those false assumptions to make conclusions, many of which are dependent on the false assumptions. Is this what you mean by “inductive”?

  36. Sorry about the italics.

  37. Ronald Reagan supported the gold standadd.

    Alan Greenspan supported a gold standard and questioned the need for a central bank.

    Plenty of economists have supported the gold standard and opposed a central bank.

    There are plenty who do so now.

    They are not all self-described “austrian economists.” As for self-described “austrian economists,” they do not all agree on things like fractional reserve banking, the gold standard, or the exact nature of the business cycle.

    Ron Paul’s actual reform proposal (eliminating the legal impedients to using gold, silver, or something else parellel to the status quo) is quite mild. As far as I am aware, there is no proposal to get rid of the Federal Reserve right away, but rather a long term goal. Once people voluntarily switch to gold or something, what role would the Fed play?

  38. I guess all those years that Ron Paul sat on the house finance committee and the international relations committee count for nothing. I guess all the times that Ron Paul has grilled the vultures that run the FED mean nothing either, nor the cheers of the financial community when he does so. I guess David Frum has made similar contributons so he must really be someone to listen to. Wait maybe he didn’t….

    I guess having foresight and historical perspective means nothing either. Maybe reading books is bad. Maybe writing books is bad too. Oh, and what about a voting record unmatched in history when it comes to protecting constitutional government.

    First they ignore you, then they laugh, then they attack, and then you win. Oh, is Rudy still laughing? I have been listening but the last time I heard him laugh he was trying to twist his way out of all of those expenses he charged to the taxpayer when he was out on the town with his girlfriend…

  39. So, if prices are constantly falling due to a contraction in the money supply, doesn’t that cause all sorts of havoc?

    Only if it’s sudden. See – the contractionary and prosperous post-civil war period

  40. I heard this Frum guy has advised on 8 or so presidential campaigns. They all lost. Does anyone actually take him seriously anymore? Why?

  41. “I don’t agree 100% with Ron Paul, but I do fail to see the need for a price-setter in the short term credit markets. One idea that I’m sympathetic to is to let interest rates float on the market, with the Federal Reserve only stepping in when there’s an emergency situation.”

    Jacob, when there is an emergency situation is the WORST possible time for the Fed to step in and do something about it. What’s gotten us into trouble most is when they open the money floodgates during emergencies creating bubble after bubble, turning minor emergencies into one giant one we’ve got coming.

  42. I heard this Frum guy has advised on 8 or so presidential campaigns. They all lost. Does anyone actually take him seriously anymore? Why?

    That is a question I have been asking since the gay 90’s. Ever since his college days, if articles I’ve read on him are correct, he has attempted to play the dubious role of gatekeeper between factions of the right the neocons hate (guess that’s everybody) and the mainstream. But with his lack of acumen it is like handing the job of tending the iron portcullis to a 90 pound weakling.

  43. According to this, Austrians “take the position that there are no negative distortions in the economy due to a general fall in prices” in such a scenario. That’s the part where the Austrians lose me.

    You mis-read it. In the line you quoted, the scenario was an increase in productivity (increase in supply of good or service), not a contraction of money supply.

    The very next line in your link: “However, in the second scenario where a general fall in prices is caused by deflation [of money supply], Austrians contend that this confers no benefit to society.”

  44. It’s funny how the Paul’s opponents keep talking about his nutty gold standard, when Ron Paul IS NOT advocating a gold standard! He is advocating the elimination of the monetary cartel.

  45. You mis-read it. In the line you quoted, the scenario was an increase in productivity (increase in supply of good or service), not a contraction of money supply.

    Thanks for pointing this out. I guess I got mixed up on which scenario was which.

    The very next line in your link: “However, in the second scenario where a general fall in prices is caused by deflation [of money supply], Austrians contend that this confers no benefit to society.”

    OK, I’ll buy that it doesn’t confer any benefits to society. But, wouldn’t it actually cause *harm* to society by screwing with loans and such? Or would lenders and borrowers simply write contracts which take into account the steady contraction of the money supply?

    I’m probably in a little bit over my head. But I’m damn curioous to understand all this.

  46. Another source of private “money” would be stock index funds, which is where almost all my money is parked. This, unlike gold, is a form of money that is at work building the economy and increasing the amount of real assets represented (an ounce of gold, OTOH, remains an ounce of gold no matter how long you hold it). Heinlein discussed a similar form of money in several of his novels. I’d like to be able to buy groceries with paper or coins representing shares of my Vanguard index funds.

  47. Ron Paul is the only one who understands the economy. Mitt Romney is a richy rich who inherited a fortune and knows nothing of the plight of the middle class. Why on earth would anyone support the warmongers running for president? Do you not understand that America has woken up and discovered that the THE GREAT DECIDER is really THE GREAT DECEIVER? Do you think we want to return to Bushville? No thanks! Ron Paul is the only Republican in the race the others are nothing more than corporate owned toadies.

  48. Hey, I don’t care if you believe in the mainstream or austrian economics, what matters is that at the root of either system if you have private bankers controlling it and raking in un-godly hoards of dividents off of our wealth it doesn’t take a brain surgeon to know that given enough time the private bankers are going to have confiscated the entire wealth their scheme has put on the mortgage block.

    I believe a fiat currency is actually superior to a gold backed currency. The argument in favor of fiat is that it is more flexible and more easy to manage and the benefit of the gold standard is that it theoretically makes the money supply more difficult to manipulate.

    My point here is that it all boils down to who is doing the manipulating and who benefits from the inflationary side of the swings. Our government should simply CREATE its own money and make the nation itself the benefactor instead of private bankers. Then, instead of us having to pay a tax on our income so that we can service the debt the private bankers hold (and got by loaning us money we allowed them to print from nothing) we could actually turn things around and pay all citizens who save and invest (instead of going into debt) a dividend from the interest that those foolish enough to use the power of leveraging pay for pushing things more in an inflationary direction.

    In other words, lets turn the current economic system on its head and empower the people and then this world will see prosperity, peace and beauty beyond what this world has ever seen.

    When you have a nation full of intelligent people willing to work and produce there is absolutely no reason we should ever face any kind of a major crisis as we are on the verge of.

    and is the level of discipline in place.

  49. But, wouldn’t it actually cause *harm* to society by screwing with loans and such? Or would lenders and borrowers simply write contracts which take into account the steady contraction of the money supply?

    Well, if the contraction were predictable, that would probably be the norm…you might even have no-interest loans!

  50. Jason Wharton is mistaken about the nature of the Federal Reserve. While there are elements of private ownership, they are pretty much an illusion hiding government control. Nearly all the profits generated by the Federal Reserve go to the U.S. treasury.

    Ron Paul’s statements that the Federal Reserve prints money and helps finance the government is correct. The idea that private bankers profit from issuing currency is more or less false.

  51. But, wouldn’t it actually cause *harm* to society by screwing with loans and such? Or would lenders and borrowers simply write contracts which take into account the steady contraction of the money supply?

    Yes, those contracts are called “adjustable rate”. Note that the exact same thing happens with a steady expansion of money supply.

  52. My point here is that it all boils down to who is doing the manipulating and who benefits from the inflationary side of the swings. Our government should simply CREATE its own money and make the nation itself the benefactor instead of private bankers. Then, instead of us having to pay a tax on our income so that we can service the debt the private bankers hold (and got by loaning us money we allowed them to print from nothing) we could actually turn things around and pay all citizens who save and invest (instead of going into debt) a dividend from the interest that those foolish enough to use the power of leveraging pay for pushing things more in an inflationary direction.

    The mind reels…

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