Saturday, April 18, 2009

Gerard Jackson: It's NOT a Conspiracy

Gerard Jackson has opined that it is stupid to believe that recent financial shenanigans are the result of conspiracy:

Every economic bust demands scapegoats. And you can always bet your bottom dollar that politicians and journalists will be the ones leading the mob. (One need only recall the Democrats' recent efforts at whipping up hatred against bankers for confirmation of this dismal fact). But all said and done, you can never beat a good conspiracy story. And that is basically what Simon Johnson has given us. According to this brilliant student of economic history America is facing

elite business interests -- financiers, in the case of the U.S. -- played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. (The Quiet Coup, The Atlantic, May 2009).

These sinister business interests have now formed a "financial oligarchy" whose political balance of power . . . gives the financial sector a veto over public policy". (And some of my readers still wonder why I am so contemptuous of journalists). Like the vast majority of his colleagues Johnson is completely ignorant of economic matters and of anything pertaining to the history of economic thought and economic history. (With respect to the latter the same can be said of the vast majority of economists and economic commentators).
Gerard Jackson is indeed much more highly informed than most anybody with regards to the intricate workings of economics and Austrian economic theory. I don't think I have ever encountered anyone with as detailed a knowledge of the economic literature, and an apparently near photographic memory as he is able to pull up volumes of apt quotations from all sorts of sources for each of his regularly appearing articles. (Gary North might give him a run for his money in this regard, though.) That being said, I think he is wrong to dismiss conspiracy as the source of our problems. It is perfectly true, as he points out, that the Fed and other central banks of the world are the engineers of the monetary inflation that allowed things to go so completely hog-wild. I do not argue one bit with his model of boom-and-bust. But that hardly explains the present stream of selective bailouts. And it hardly explains why central banking and its incurable penchant for inflation exists in the first place. I do not claim to have special knowledge of the inner workings of any supposed oligarchy. But I do know a few facts about basic economics that would lead me to believe that it is virtually certain that conspiracies of the sort to which Simon Johnson alludes must really exist. Namely, individual economic actors tend to undertake behavior which furthers each individual's own self-interest. That is probably the quintessential economic axiom. It is roundly acknowledged by all parties involved without the slightest bit of controversy that inflation results in the net transfer of wealth from one party to another, and further it is clear that the source of inflation is the world's central banks. It is therefore hard to imagine that the main beneficiaries of said inflation, which are primarily the governments and credit institutions of the world, would not seek to exert an inflationary bias towards central banking policy. Yes, I am fully aware of the fact that Austrian economic theory is far from mainstream. But I find it hard to believe that the parties involved are completely unaware that monetary inflation is to their benefit, and are further completely unable to see the dishonesty inherent in government's expansion of the money supply. Furthermore, as Gerard Jackson and every other Austrian economist well knows, central banks are entirely unnecessary to a functioning economy. A healthy economy needs no direction or monetary management. It just needs a functioning money system, preferably a commodity money, which is not an artificial construct but a natural product of human endeavor and needs no body for its creation. Throw in a reasonable degree of rule of law, and that's it; the rest takes care of itself. There really is no reason for a central bank to exist, except to exert influence on the economy. Influence? This seminal fact begs the question: to what end? Why should a healthy economy need influencing? To somehow improve upon reality, for the good of all, we are asked to believe? Hardly. As Adam Smith has said in one of his most famous quotations (and which I find myself using all too frequently):
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
I can't imagine any population which spends more time in meetings and discussions of their collective action than politicians. And if you think that their activities are not undertaken primarily for their own individual self-gain, unlike businessmen who are only in it for profit, you are hopelessly naive. The Chinese conspire against the West and their own population, attempting to use mercantilism to enrich themselves above and beyond their own industrial and manufacturing competitiveness. The Fed conspires against holders of dollars in an attempt to direct the economy to politicians' desired ends and reward client banks. Voting blocs conspire with politicians and against one another, trying to get the biggest share of government-seized booty. The entire world is wrapped up in a conspiracy of all against all and all against God, each actor seeking to have his way through guile or force instead of through voluntary transaction and the normal course of events subject to the non-arbitrary and unchanging laws of the universe. Everyone knows that there will be big, big losers as a result of the implosion of the credit bubble, which is to say, as a natural result of the misallocation of resources caused by the FED's monetary expansion over the last 30 years or so. Everyone knows that during the inflation of the bubble the FED created big winners who were about to become big losers as a result of its tightening. Everyone knows that the entire purpose of the bailout is to ensure that the government gets to decide who it will foist the losses onto. There is no reason for the government to act except to decide who is going to shoulder the burden instead of letting the market decide, and to further the interests of those who have a say in the matter. This universal human tendency towards acting in self-interest is precisely the reason that monetary and economic systems should not be under the control of anyone at all. This is not lawlessness; it is placing these matters into the custody of natural laws which are always in force. If it were otherwise, logically, those in charge would be influenced by their own selfish goals and desires. Placing these matters under the custody of self-serving and dishonest politicians is to subject ourselves to the lawlessness of arbitrary and corrupt human whim, as we are now clearly seeing. It is to subject ourselves to the grandest conspiracies imaginable. To argue that politicians are hopelessly corrupt, which is to say, spend their professional lives neck deep in conspiracy, but that somehow central bankers are pristine little angels who shun such things strains all credulity. Are we to believe that it was all an honest mistake, simply because they happen subscribe to the wrong economic theories? Surely, they do subscribe to wrong economic theories, but I believe it is obvious that there must be more to it than that, particularly with regards to why they subscribe to their chosen theories in the face of countervailing facts. These people aren't stupid. Spilling a glass of iced-tea on oneself over dinner is an honest mistake. Printing money isn't. Taxpayer financed bailout isn't. Both are inherently, obviously dishonest. These activities create winners and losers. The deciders have motives. They aren't good ones.

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