International Money: Big-Government Solution or Trust and Honesty?

Robert Zoellick is back in the news with advice about international monetary policy. His Financial Times commentary starts out with the admission that "[n]ew agreements may be in short supply when finance ministers of the Group of 20 heading economies meet this weekend in Paris."

Paradoxically, he ends up his commentary recommending that the G7 should "issue a statement to reflect" ... the "agreement" "establishing an important norm: to maintain flexible exchange rates, without intervention, unless the group agrees special circumstances warrant action." I guess he thinks agreement is more easily reached among seven than among twenty.

As to be expected from someone who is the acting President of the World Bank Group, he recommends that an international agency, specifically the IMF, should act as a "referee, able to blow the whistle on the appropriateness of external policies" of nations, with the IMF having no power to "impose penalties." Right. That should work, just like it has in the past ... Oh, that's right, it hasn't.

But that doesn't prevent Zoellick from advising us to expand the IMF's responsibilities even more. They should also "sharpen the multilateral review" of certain policies, which review should "compare national policies with international information indicators, including commodity prices such as gold." At least he got that right.

He goes on to list a few more ideas of how a world agency such as the IMF and the WTO could, by working together, offer incentives or disincentives to world governments. I suppose two international agencies is better than one. I say, Good luck.

Much more reasonable, and much more in line with human nature, would be something more resembling what historically had worked pretty well for many decades in the free markets of 19th and 20th century Western civilization. Take, for example, the ideas offered up by Rep. Ron Paul and Lewis Lehrman in their book The Case for Gold. This book was written after the 1982 Gold Commission, which, according to some who were present, was something akin to a sham. (I'm referring to comments made by Anna J. Schwartz in 2004, set forth in the AIER book entitled Prospects for a Resumption of the Gold Standard referenced at the end of this post.)


[Thanks to Google, Creative Commons, for the image.]

The Case for Gold is now being re-released by Mark Calabria, Director of Financial Regulation Studies at Cato Institute. Download it for free here.

Here are a few poignant quotes from Calabria's description of the book:

"Its authors argued that while persistent and high inflation, a weak economy, and high unemployment were the direct result of misguided Keynesian policies, the answer was not monetarism. For the basis of monetarism is still allowing a government monopoly on the issue of money. We have again found ourselves in an environment where both Keynesian and monetarist policies have failed us. The necessity for alternate options is pressing."

"Paul and Lehrman remind us that when government has the ability to abuse our trust, as in the case of purchasing its own debt or debasing its currency, it will inevitably betray that trust.... The Case for Gold is the case for limited government, a case for applying the rule of law to our monetary arrangements, as opposed to the highly discretionary rule of man which now governs our monetary system. With the public's renewed interest in constitutional government, it is only fitting that such an interest extends to money."

"Paul and Lehrman remind us that the ultimate purpose of a monetary standard is not price stability, but 'trust and honesty.'"

The American Institute for Economic Research held a symposium in May of 2004 on the very subject of resumption of something resembling the gold standard. The results are set forth in one of their booklets, available here. Contributing to the conference were Lawrence H. White, Anna J. Schwartz, Gerald P. O'Driscoll, Jr., H. David Willey, Hugo Salinas Price, John C. Hathaway, Michael T. Darda, Richard Sylla, Michael W. Crook, Robert E. Wright, and John H. Wood.

Both works are an excellent read.

Skidelsky: The Economic Pendulum Has Swung Again

In his commentary in today's Financial Times about the economic policy of government stimulus of the economy, Robert Skidelsky, the noted British author and authority on John Maynard Keynes, declares:

"What is fascinating is that it is an almost exact rerun of the debate between Keynes and the British Treasury in 1929-1930."


[Thanks to Thefoucaultproject.co.uk for the image.]

I have already posted about this earlier. He is right, we are right back where we started. In the 1930s Keynes argued against then-current classical economic theory, holding that government spending would put people back to work. At the time, few economists dared to refute his pronouncements. (One notable exception: Edward C. Harwood.)

But the classical school of economics wasn't dead yet. Spearheaded by Milton Friedman, it girded up its loins and made a comeback, using new geeky esoteric mathematical formulas that were effective in shooing the Keynesians. Today, we see the latter group charging forth again to reclaim their territory.

This swinging back and forth says nothing good about economics as a science, and more particularly macroeconomics. There have been no decisive victories in this field since its inception. This is a scary thought when you think that economists are running the show right now.

This unscientific outcome is typical of a number of the social sciences. As Skidelsky points out:

"It is characteristic of the social sciences that their battles are interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault."

I agree, with a nuance. He seems to be saying that the social sciences are ... well, just different kinds of science. He implies that the natural sciences are like a man: logical, Darwinian, forward-looking; and that the social sciences are more like a woman: emotional, spiteful, revengeful.

I think an endeavor is either a science, or it is not. Skidelsky errs in his designation as science the quixotic behavior of certain persons he calls "economists." They may be generally recognized as economists, but they are not scientists.

The debate then becomes: Is the term "economic science" an oxymoron?

This is a very good question, and perhaps THE fundamental question. There are two possible answers.

1. Either it is an oxymoron and economists should re-designate the field of inquiry as an art form; or

2. Economics can be a science, in which case the methodology has gone awry, given the "interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault", i.e. no progress is being made, the pendulum is merely swinging back and forth. In this case, optimists would hold that the methodology can be fixed.

In the early 1950s, a group of scientists formed a group called the Behavioral Research Council to study this very phenomenon in the social sciences. To make a long story short, they premised their foundation upon the hypothesis that the social sciences did have the potential to be just that, i.e. real sciences in the true meaning of the word; but that much gobbledygook must be lifted off the real science that did exist, in order for the various fields of endeavor to make any real progress.

They published two books:

- Useful Procedures of Inquiry, by E.C. Harwood and Rollo Handy, based upon specific dialogue on methodology between two fellows named Dewey and Bentley; and

- A Current Appraisal of the Behavioral Sciences, edited by the above two gentlemen and authored by various social scientists whose work the group respected.

The first is still pertinent to our discussion, pointing out the very flaws in the methods of research in fields like economics, to which Skidelsky makes oblique reference. Apparently, nothing has improved--a scary thought when you think that our economic future depends upon the work of good-intentioned people like Bernanke and his ilk, who believe in policy research that is unscientific in the judgment of a good portion of their own fellow economists.

The second is out of date but still of interest, because it gives the status of each social science as of the last printing. An update of this text would be useful someday.

I'll conclude this post by stating that my observations of human nature, and specifically of those who would call themselves economic scientists and those who would call themselves political scientists, point toward the conclusion that we have a long, long way to go before they start thinking of us and of their science, and not of themselves. Meantime, look what we have allowed them to do to us all.

PS: Keynes had the potential to be a true economic scientist, but I believe he was too enamored of his own glib persona to limit his mutterings to the truly useful, in the scientific sense of the word. Lawrence H. White, on the other hand, is one of the modern economists who counters this new policy swing back to Keynesianism. Read his latest piece over at Cato to learn a scientific economist's analysis of the Great Depression of 2007 and why the Keynesian stimulus idea can't and won't work in the long run.

Talk About A Gold Standard? Naaahhhh.....

Oh yes there is.


[Thanks to www.babycup.com for this photo of a 14 carat gold cup.]

My friend Walker Todd, former collaborator at the Federal Reserve Banks of New York and Cleveland and now a researcher at the American Institute for Economic Research is talking about it loud and clear.

Read his piece at the Christian Science Monitor.

I mentioned another gold standard proponent Larry H. White in the past, and I write a lot about the gold standard and also here, and you'll remember my mantra:

"You can take gold out of the standard, but you can't take the standard out of gold."

I really believe it.

Too bad there's little chance of it happening.