Tuesday, April 21, 2009

Market anarchism and monetary economics

Since I've been discussing monetary policy with others on the Mises forums lately, I thought this would be a great time to discuss Steve Kangas' widely linked article on the gold standard.

Full disclosure: I am not an economist or economic historian, nor am I an expert on the subject (though I strongly doubt Kangas was either). Nonetheless, his problematic arguments leap off the page. I should also add that I am not necessarily for gold (especially not a state-run gold standard), but an advocate of competing currencies. So let's go through Kangas' smug article and see where he goes astray.

The reason why the far right opposes the current money system is because it allows the government to control the size of the money supply. They argue that an unscrupulous government might pay its bills by printing more money, which would cause inflation...

And we know that's never happened in history before! Obviously a ridiculous idea.

Mainstream economists, however, have a powerful counter-argument.

Uh oh, whenever you see the word "mainstream" you know an appeal to authority or bandwagon fallacy is coming..

(BTW, most "mainstream" economists take stances on free trade, minimum wage, etc, that Kangas and his leftist ilk would never accept. So his appeal to "mainstream"--statist--economists is highly selective.)

Suppose that a village is using gold for money, but unfortunately there is only one gold nugget. Whoever possesses that nugget will be able to buy literally anything in the village -- but only once. After surrendering the nugget for an item, that person will then have to turn around and offer literally anything to get it back. Because the village has numerous people waiting in line to use the nugget for money, economic activity will slow down to a crawl, unemployment will rise, and the result is a recession. This example highlights another principle: money needs to be divisible. The village's economic activity would be doubled just by cutting the gold nugget in half. Of course, dividing money is the same thing as expanding the money supply.

This section is where Steve makes most of the errors that he discusses for the rest of the article.

Steve has a valid point about an economy not being able to function properly with an inadequate money supply. A shame it has already been addressed. In a nutshell, it is the market that decides which currency/currencies will be used. If a certain medium of exchange is far too scarce or abundant (which will send its purchasing power up or down), people will simply switch to something else.

When you really think about it, the money supply (in a market anarchist society) is basically unlimited. Everyone can choose to convert their gold or silver into rocks, plants, precious metals, abundant paper money or anything, and use that as a currency instead. Or a mix of them, or whatever. The difference is that the value is never robbed, as it is under central banking.

Kangas makes a completely fallacious claim: "Of course, dividing money is the same thing as expanding the money supply." Why he starts his sentence with "of course" is a mystery, because his statement is a complete non sequitur. There is a big difference between turning a dollar into ten dimes and printing more dollars. In the first case, I'm simply dividing the value I already have. In the second scenario, I'm creating more of it at the expense of others.

Kangas leaps from these faulty arguments to his conclusion that a secretive Federal Reserve, operated by and for the corporate elite, must constantly manipulate the money supply. Hardly a "progressive" stance, but progressivism has long been a philosophy for the rich and powerful.


David Z said...

I've said it before: Kangas is/was an ass.

I've been doing the monetary/economics thing lately, too. At issue: "Free Banking" and the legitimacy of non-centralized fractional reserve banks...

Cork said...

Thanks David! I'll check it out.

John said...

I think that second passage you quote, about the sole gold nugget, proves beyond a reasonable doubt that this nutjob is going out of his way to be dishonest, either because he's so desperate to promote totalitarian Statism that he gets himself into a blind frenzy and types whatever sounds as fascist/socialist as possible, or he's a libertarian in disguise who's trying to expose Statist arguments as absurd.

I think the latter is somewhat unlikely.