[This article was originally published on the Ludwig von Mises Institute of Canada website.]
Bad ideas need a lot of marketing to make their sale possible. Good
ideas, on the other hand, sell themselves. In economic terms bad ideas
lead to ruin; while good ones are simply the discovery of a natural law
of economics which leads to prosperity. Naturally, economically bad
ideas require heavy dosages of misinformation, deception and
misconstruing of facts in order to make their cases convincing to the
public. This is so because at the root of an economically bad idea is an
attempt to defraud one party at the expense of another in what is a
negative sum game where in real terms both parties lose
potential gains; and in relative terms the defrauder gains at the
expense of the defrauded. Frauds and deceptions have been around in
economic politics since time immemorial: their contents generally copied
one off the other, repackaged and resold at a different time or place
to a new audience of saps—like the moving carnival.
Our present day bears witness to a grafter who spews a dangerously
ruinous economic idea in exchange for personal glory and media coverage.
The peddler in question needs little introduction even to the economic
layman. Faithfully embodying the legacy of his idol and Lord, John
Maynard Keynes, our charlatan has made his way into popular magazines,
news media, and feature film appearances, tirelessly disseminating the
ideology of perpetual monetary inflation and total war as most desirable
economic policies to be pursued whenever possible in the name of
“economic growth” and “job creation.” Since the person at the centre of
this discussion is a proponent of Big Government, it should come as
little surprise that total war is something that he implicitly
advocates, for as professor Ludwig Von Mises wrote:
The essential feature of government is
the enforcement of its decrees by beating, killing, and imprisoning.
Those who are asking for more government interference are asking
ultimately for more compulsion and less freedom. [i]
We speak here of none other than Princeton economics professor Dr. Paul Krugman.
The subject of our present discussion recently took part in a TV debate[ii]
versus Austrian economic disciple and sound money advocate, Rep. Ron
Paul (R-TX). Needless to say the event became an instant classic if only
for the fact that professor Krugman finally gathered the courage to
face a representative of the school he has done his best to belittle in
recent times; as well as for the fact that he has been mute to the debate challenge
of one of its brightest stars for the past few years. We will focus the
present article mostly on what professor Krugman said during the
aforementioned television appearance[iii], since on the occasion he put most of his arguments succinctly within a few sentences.
Gonna Go Back In Time
Mr. Krugman never passes on an opportunity to disparage the gold
standard. Remaining true to his form, at said debate he informed us that
sound money advocates “are living in a world as was 150 years ago.”[iv]
The professor however failed to qualify the “world as was 150
years ago,” as a good or bad thing. If we take Krugman literally, then
the world as was 150 ago was far more akin to that as he prescribes,
rather than Austrians and hard money types: the American Civil War was
raging, producing unseen quantities of “stimulus,” and the United States
of America was on a fiat currency. The world as Austrians would prefer
is that of say, 160 years ago, of the Jacksonian era, or the world as
was 130 years ago of specie resumption. However, for the rest of this
article we shall take Krugman’s estimate of 150 years ago in a
figurative sense.
I can recall being in the third grade (in Macedonia) and having a
class discussion on poverty when one of my classmates presented the
brilliant proposal that government should simply print money, distribute
it to everyone, and alleviate all economic woes. My elementary school
teacher—a much less economically educated woman than Krugman—quickly
replied that an increase of the money supply was not the answer to our
conundrum. I then put the same suggestion to my father—a person with no
academic credentials in economics whatsoever. The answer I got was that
printing more money would only cause something called “an inflation,”
which was just a fancy word for increasing prices of everything. When I
followed up as why this would be the case, it was explained to me that
more paper money does not produce the goods and services which money is
used to trade for. As a result, people would simply use the extra paper
money to purchase the goods and services already on the market. Given
the fact that these people would have more money at disposal than goods
and services available on the market at initial prices, they would be
encouraged to bid prices up. Considering that his proposal of “stimulus
to the economy” by inflation is comparable to that proposed by my third
grade mate, we can conclude that Mr. Krugman wants to take us back to
the third grade. That is a bad thing because third graders are ignorant,
dependent and trusting in authority. The world populated exclusively by
third graders would quickly find itself wanting of many of the
amenities humans have become accustomed to.
As a proponent of Statism, I have little doubt that Paul Krugman
would have any real objection to transmuting the entire adult population
into ignorant children, for in the wisdom of my father: an ignorant
nation makes for a strong State[v].
Yet, we need to ask ourselves: How was it that my father and my
elementary school teacher had the economic insight that economics Noble
Laureate Paul Krugman seems to lack so desperately with regard to
monetary inflation? Unlike Princeton University professor Krugman, who
gets to enjoy the privileges of being a Court demagogue, my father and
my elementary school teacher lived through perpetual inflation (and
multiple revaluations) of the Yugoslav dinar and saw the devastating
effects of such policies: a billion dinars one day often became a single
dinar the next day. Not surprisingly Yugoslavia was never a poster
child of economic prosperity. In fact, this Keynesian country[vi] is famous for only one thing: its end in the worst bloodshed in Europe since WWII[vii].
Unlike Lord Keynes and professor Krugman, my teacher and my father had
the insight that there is no such thing as a “deficiency in aggregate
demand;” rather that demand is omnipresent as a result of human nature
and desire to constantly improve one’s own condition. On the other hand
there constantly exist deficiencies or surpluses in specific demands of
given goods and services which can only be discovered by market
participants and can be satisfied provided that it makes economic sense
to do so. Likewise, my father and my teacher, living under a
Keynesian-command economy were aware that supply is hampered by the force majeure that is concentrated in the hands of central planners.
More advanced nations have not managed to fare any better using fiat inflationary policies either. Throughout the 20th
Century Germany, France and Austria went down the path of the sort of
“economic growth” as advocated by professor Krugman. The US Federal
Reserve System has been flooding the market with new dollars at an
unprecedented rate since the outset of the current recession. Yet,
professor Krugman says, that this is not enough. Let us then examine
what sort of results we are to expect if the Princeton professor’s
advice is to be further followed. Self-taught economic great Henry
Hazlitt provided insight into the German hyperinflation of 1921-1923 in The Inflation Crisis And How to Resolve It. According
to Hazlitt, the paper mark having been at par with the gold mark at the
outset of the inflation (1918) depreciated so much that “[t]he exchange
rate of the paper mark, calculated in gold marks, was 1,523,809 paper
marks to one gold mark on August 28, 1923.” [viii]
As the German government kept “primping the pump,” and caught itself in
its own trap the mark’s value kept on plummeting to “28,809,524 on
September 25, 15,476,190,475 on October 30, and was ‘stabilized’ finally
at one trillion to one on November 20.”[ix]
The vivid picture of inflation’s effects on production painted by Hazlitt is alarming:
The real effect of the inflation,
however, was peculiarly complex. There were violent alternations of
prosperity and depression, feverish activity and disorganization. Yet
there were certain dominant tendencies. Inflation directed production,
trade, and employment into channels different from those they had
previously taken. Production was less efficient. This was partly the
result of the inflation itself, and partly of the deterioration and
destruction of German plant and equipment during the war. In 1922 (the
year of greatest economic expansion after the war) total production
seems to have reached no more than 70 to 80 percent of the level of
1913. There was a sharp decline in farm output.[x]
Professor Krugman wants to takes us back to 1923 Germany. This is bad
because it was a time of “a great decline in labor efficiency,”
explained Hazlitt. These were inhumane times.
Part of this was the result of
malnutrition brought about by high food prices. Bresciani-Turroni tells
us: “In the acutest phase of the inflation Germany offered the
grotesque, and at the same time tragic, spectacle of a people which,
rather than produce food, clothes, shoes, and milk for its own babies,
was exhausting its energies in the manufacture of machines or the
building of factories.”[xi]
To be sure, inflationism and socialism have much in common. For one,
both regimes not only neglect personal property, they violently attack
it and appropriate it. Furthermore, since monetary inflation distorts
the price formation process, it makes economic calculation difficult.
This difficulty is directly proportional to the extent of the monetary
inflation. Finally, due to its intervention in the market, government
distorts the market’s natural flow, thereby directing it in ways it
prefers. In a sense, inflationism is a form of socialism. Professor
Ludwig von Mises discussed at length the importance of economic
calculation to human prosperity in his seminal and often neglected (by
the mainstream) work Economic Calculation in the Socialist Commonwealth. In this paper Mises proved in theory what has been demonstrated in practice in: that economic calculation is impossible in a socialist economy due to a lack of real
monetary prices; as a result socialism can only lead to a regression of
a society toward the primitive state of our early ancestors. More
specifically, Mises argued that the monopolized ownership in the means
of production by the state makes it impossible for the participants in
an economy to properly value the soundness of their decisions. He
further refined this argument to say that arbitrary assignment of prices
by the economic planner could not (and in fact it did not) remedy the
problem, because in the free market, prices are designated as a result
of the strict causal relationships of the supply and demand of the
billions upon billions of factors taking part in an economy. That is to
say, prices are real rather than abstract entities. Yet government
intervention into the market through monetary inflation disrupts the
price formation process, thus making economic calculation close to
impossible.
What Krugman really wants to take us back to the Stone Age. Professor
Joseph T. Salerno explained the imperative of economic calculation in
the essay “Postscript: Why a Socialist Economy is ‘Impossible’”:
Mises’s pathbreaking and central insight
is that monetary calculation is the indispensable mental tool for
choosing the optimum among the vast array of intricately-related
production plans that are available for employing the factors of
production within the framework of the social division of labor. Without
recourse to calculating and comparing the benefits and costs of
production using the structure of monetary prices determined at each
moment on the market, the human mind is only capable of surveying,
evaluating, and directing production processes whose scope is
drastically restricted to the compass of the primitive household
economy.[xii]
This is a bad thing because, as Salerno explained,
in the absence of monetary calculation,
human economy … comes to consist of super-short and repetitive household
processes utilizing minimal capital and with little scope for
adjustment to new wants. The result is that time itself—in the
praxeological sense of a distinction between present and future—ceases
to play a role in human affairs. Men and women, in their capitalless,
hand-to-mouth existence, begin to passively experience time as the brute
beasts do–not actively as a tool of planning and action but passively
as mere duration. Humanity as a teleological force in the universe is
therefore necessarily a creation of the inextricably related phenomena
of calculation and capital. In a meaningful sense, then, socialism not
only exterminates economy and society but the human intellect and spirit
as well.[xiii]
Shell Games
Misleading statements are a key weapon to the proponent of inflation.
Krugman’s most obvious shell game is in calling himself a “liberal” so
as to suggest that he propagates liberty, when he indeed propagates
statist coercion. We may have to excuse his propensity to deceive, since
Jörg Guido Hülsmann argues that inflation causes people to lie.
In such an environment, people develop a
more than sloppy attitude toward their language. If everything is what
it is called, then it is difficult to explain the difference between
truth and lie. Inflation tempts people to lie about their products, and
perennial inflation encourages the habit of routine lies.[xiv]
Deception is a Keynesian favorite. Indeed, in The General Theory of Employment, Interest and Money,
John Maynard Keynes explicitly spelled out that the point of
inflationary policies is to deceive wage earners. According to Keynes
workers are more likely to accept a higher money wage which is lower in
real terms, rather than a lower money wage which is higher in real
terms.[xv] We shall see below that this is not the case. Nonetheless, it is one of the key reasons
why governments embark on inflationary policies. A faithful Keynesian,
Paul Krugman is a master of deception. For instance, in the
aforementioned TV appearance he makes the claim that he is “a believer
in the market economy,”[xvi]
thereby giving the layman the idea that he is a proponent of
capitalism. Yet, “the theory of output as a whole,” as Keynes himself
wrote in the Preface to the German Edition of his General Theory,
which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state,
than is the theory of the production and distribution of a given output
produced under conditions of free competition and a large measure of laissez-faire.[xvii] (Emphasis added)
When Krugman proposes that hard money advocates want to take American
society “to the world as it was 150 years ago,” he only appeals to
emotion: people tend to have a general attitude that as a rule the
future is better than the past in every way. Murray N. Rothbard writing
on the basis of a study of another inflationist, Milton Friedman, came
to conclusions proving Krugman’s disparaging of the gold standard wholly
unwarranted. Writing on the effects of the reintroduction of the gold
standard after the American Civil War and the collapse of the fiat
greenback, Rothbard found proof of the most prosperous decade in
American economics: the 1880s.
Once again, we had a phenomenal expansion
of American industry, production, and real output per head. Real
reproducible, tangible wealth per capita rose at the decadal peak in
American history in the 1880s, at 3.8 percent per annum. Real net
national product rose at the rate of 3.7 percent per year from 1879 to
1897, while per-capita net national product increased by 1.5 percent per
year.[xviii]
This represented a great benefit to the populace at large since,
[b]oth consumer prices and nominal wages
fell by about 30 percent during the last decade of greenbacks. But from
1879–1889, while prices kept falling, wages rose 23 percent. So real
wages, after taking inflation—or the lack of it—into effect, soared.[xix]
In addition, the saving and lending industry also prospered:
We stress that with consumer prices about 7 percent lower in 1889 than they had been the decade before, the real rate of return by decade’s end was well into double-digit range, a bonanza for savers and lenders.[xx]
Therefore, Krugman’s fear mongering concerning the doom and gloom
that is to ensue with the reintroduction of the gold standard is wholly
baseless.
Let us now compare and contrast this information with the
unemployment statistics during the peak of the German inflation,
December 1923, and the months that followed. Paul Krugman submits that
inflation stimulates trade, employment, and production. It should follow
that the higher the “stimulus” provided by inflation, the better the
economy ought to fare in those terms. The statistics tell a different
story, however—the peak of the inflation saw the highest unemployment
numbers:
| Month | Total Unemployed |
||
| October 1923 | 534,360 | ||
| November 1923 | 954,664 | ||
| December 1923 | 1,473,688 | ||
| January 1924 | 1,533,495 | ||
| February 1924 | 1,439,780 | ||
| March 1924 | 1,167,785 | ||
| April 1924 | 694,559 | ||
| May 1924 | 571,783 | ||
| June 1924 | 401,958 |
The dramatically different outcomes the German hyperinflation of
1921-1923 and specie resumption in the US present a self evident proof
of the fallacy of professor Krugman’s call to prosperity by inflation,
since, according to his theory, these outcomes ought to have been
reversed.
To be sure, Krugman’s favorite disinformation is that war is the
ultimate stimulus to remedy for even the worst of economic ailments. He
is not ashamed to flaunt it when he writes that America’s salvation from
the Great Depression was delivered in the form of WWII braking out in
Europe, “and the United States—though not yet at war itself—began a
large military buildup, finally providing fiscal stimulus on a scale
commensurate with the depth of the slump.”[xxii]
Judging by his explanations of how to get out of the current
recession we can conclude that Professor Krugman wants to take the world
into another war. This is a very bad thing because untold
millions are sure to die, be maimed, left parentless and traumatized.
And it would be all for nothing, for as Robert Higgs[xxiii]
has proved, the ”stimulus” to the American economy was not WWII itself,
but the departure from New Deal policies in the aftermath of it! The
danger is real, for not only is professor Krugman presented as a
credible authority on economics by the media, the US economy is reaching
the levels where desperate politicians eager to prolong their careers
can easily take Krugman’s rationale as a selling point to a populace
equally desperate to see an improvement of their lot.
The U.S., Canada and the EU have experienced unprecedented inflation
over the past four years, yet we see no recovery. Professor Krugman’s
excuse as to why his prescription has not worked is that there simply
has not been enough inflation “commensurate” to the depth of the slump. I
submit that have been lucky enough not to experience a situation
comparable to that of Germany 1923 only due to the fact that a
number of Third World countries have made been accepting our fiat money,
thereby creating a situation much like during the 1920s where the
monetary inflation could not be easily noticed due to increases in
productivity.
Conclusion
When one listens or reads Paul Krugman’s opinions on the economy, one
is left with only one conclusion: the only way to prosperity is through
war and misery. Considering that the man calls himself a “liberal” and a
“believer in the market economy,” that is to say “capitalism,” it is
little wonder that laymen perceive capitalism to be an evil ideology.
Yet, professor Krugman is to capitalism (and economics for that matter)
what an alchemist is to chemistry. Whether he is aware of it or not, he
is one of the most dangerous persons on the face of the planet right
now.
[i] von Mises, Ludwig, Human Action (Auburn, 1998), p. 715 http://mises.org/daily/5660/
[ii] Video: Ron Paul vs. Paul Krugman on Bloomberg TV, April 30, 2012
[iii] In a blog-post Mr. Krugman explained that he agreed to the debate in an effort to promote his new book End This Depression Now, a book which much like JM Keynes’ General Theory of Employment, Money and Interest is aiming at providing a quasi scientific justification for government intervention in the economy during a recession.
[iv] Video: Ron Paul vs. Paul Krugman on Bloomberg TV, April 30, 2012 (2:10)
[v] In fairness, the original maxim used to be that stupid
people make for a strong state. However, I have altered the maxim, for
stupidity, as a level of intelligence, is given by nature. Ignorance is
produced by human action.
[vi]
It is my hope to elaborate on this somewhat in the future. For now, it
will have to suffice to say that the postulates of the Yugoslav economy
were full employment (factory workers would literally spend their entire
shift in the cafeteria), fiat money and perpetual inflation.
[vii]
Contrary to Paul Krugman’s claims that wars provide economic stimulus,
the former constituent states of Yugoslavia were left quite impoverished
as a result of the wars of the 1990s.
[viii] Hazlitt, Henry, The Inflation Crisis and How to Resolve It (New York, 1978), p. 61
[ix] Ibid., p. 61
[x] Ibid., p. 62
[xi] Ibid., p. 63
[xii] von Mises, Ludwig, Economic Calculation in the Socialist Commonwealth, p.35
[xiii] Ibid., p. 38
[xiv] Hülsmann, Jörg Guido “The Cultural and Spiritual Legacy of Fiat Inflation”
[xvi] Video: Ron Paul vs. Paul Krugman on Bloomberg TV, April 30, 2012 (3:00)
[xvii] Keynes, John Maynard The General Theory of Employment, Interest and Money (Preface to the German Edition)
[xviii] Rothbard, Murray N., History of Money and Banking in the United States: The Colonial Era to World War II, (Auburn, 2002), p. 159
[xix] Ibid., p. 161
[xx] Ibid., p. 163
[xxi] Hazlitt, Henry, The Inflation Crisis and How to Resolve It (New York, 1978), p. 69
[xxii] Krugman, Paul, “Easy Useless Economics”
[xxiii] Higgs, Robert, “The Trouble with Economic Statistics”
