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Why Economic Commentators Disagree
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The following is an example of a factually correct, totally logical argument, coming from a totally sound premise. Yet, the conclusion is completely false.
"Government intervention is bad. Market manipulation is evil. Price fixing is counterproductive. And the attempt to control markets is immoral and usually futile. True?
Well, here is a description of the 19th Century Gold Standard, considered by many as the most efficacious monetary standard in history. (See my article, The Gold Standard: A Standard For Freedom by clicking "other articles" on this page) First of all, under the Gold Standard, gold is a reserve currency. It is held mostly by one country such as The Central Bank of England during the 18th Century, and the Central Bank of the United States in the late 19th and 20th Century. But wait! We have been told by some that any country that administers a reserve currency amounts to a monopoly on money and receives an unfair advantage. And that a Central Banking system is inherently coercive.
The essence of the Gold Standard is that the Central Bank stands ready to intervene into the market and buy and sell gold at a fixed price. What? Price fixing? Market intervention? Isn't this manipulation, pure and simple? And by a Central Bank, yet? Isn't this a case of the "powers that be" imposing their values on the market? Isn't this a perfect example of the Fed trying to control expectations and perceptions?
Thus, the Gold Standard must be Keynesian in that it manipulates perceptions! Or It is Fascist in that it offers the illusion of owning property, but controls the value of it. Or it is Communist as it eliminates any market originated pricing method. It is totally arbitrary in that the Central Bank sets the value of gold by decree!
So, it must follow that those that advocate a Gold Standard are evil. They seek to prevent the free market from working. They believe in market intervention. They believe in price fixing. They are manipulators! The result of the Gold Standards' mandatory government intervention would ultimately bring the whole monetary and economic system down and eliminate free markets as we know them.
Now, this is why so many economists and economic commentators rarely agree on anything. They argue logically from valid premises and facts, their arguments are logical, and yet they come to totally different conclusions. The logic above is inescapable. The reason the conclusion is wrong however, is context. Economics is not a science as such. It is a social system. It is always contextual. It is made up of man made devices and institutions in order to bring stability to markets and rules to transactions. It is more about psychology than gravity. It is as much about art as it is metaphysics. It's about all of these things of course, yet it is ultimately "context" that connects the logic to the conclusion.
This does not mean that there are not axioms in economics. We know for instance, that an increase in the stock of money is a dilution of the value of all other monetary units within a nation. If the money supply was always and forever X, then the value of money would always be the same, in and of itself.
The problem comes when you ask in relation to what? If the stock of money is static and the production of goods increases dramatically, the value of money will rise and prices of goods will fall. Likewise if the supply of goods contract then the value of money will fall and prices will rise. Unless, of course individuals decide to save rather than spend. Or the government raises or lowers taxes. See what I mean? As you enter ever more factors, you end up with ever more possibilities which lead to more and different conclusions. Here, we have a stable money supply and could be facing either higher prices or lower prices in the future even though we have not inflated or deflated the money supply at all. Context!
The argument that concludes that those that advocate a Gold Standard are evil because the Gold Standard involves Government intervention, price fixing and the rest, is wrong because the Gold Standard is the exception. There are many, many exceptions in economics -- and that's where "context" comes in.
In the Case of The Gold Standard there was no harm done, and much stability brought on by, the imposition of the discipline provided by the Gold Standard. Where all the evils of Government intervention cause harm elsewhere, it does not always do so. The Gold Standard is a case in point. The Gold Standard worked well for over two centuries precisely because the value of money was fixed. Money is not the same as an economic good. It has a different nature and a different function. It does not respond the same as an economic good. There is economic theory and there is monetary theory. They are not the same.
There are a lot of commentators that are totally oblivious to this fact -- most in fact. Many view economics as almost a religion. They cite principles ( chapter and verse) but have no idea how to apply the principles. They have a little knowledge -- much of it correct -- but come to totally wrong conclusions because they do not understand the total context that surrounds the ideas and principles they are dealing with. In economics the phrase "a little bit of knowledge can be dangerous" goes double.
Today, we are in a debate as to whether we are in deflation or inflation, growth or recession, a bull market or a bear market; and whether and how government should intervene to protect the banking system and the financial system --or not. All of this debate is good and healthy, but at the end of the day, it will be those that integrate the facts within the proper context that will be the ones more likely to be right.
Paul Nathan
November, 2009
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Paul Nathan has specialized in gold and gold stocks and has written extensively on monetary and economic matters since 1968. He also writes a weekly blog and can be contacted at paulnathan2000@aol.com
© 2009 Paul Nathan All Rights Reserved
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