I would have never come across the first book under review, Meltdown…, had it not been for an argument I’d had with a self-described “anarcho-capitalist” acquaintance, concerning economic systems. It ran roughly as follows,
Me: If liberatarianism/anarcho-capitalism is really kicks the butt of every other economic system ever devised, how come we’ve never seen it tried out anywhere in the world?
Him: It was in medieval Iceland.
Me: Well, that’s one very isolated, long-ago example. Can you think of an economically modern and sophisticated country which has made a serious attempt to implement Austrian economics.
Him: The early U.S. economy, prior to the “reforms” of Progressivism and the advent of the Federal Reserve System, approximated a free-market Austrian model most closely. And just look at the unparalleled success and growth of the U.S. from 1776 to 1913! Right up to the time the elites decided to abandon this model and establish the Fed, which has created the boom-and-bust cycle since.
Me: I have my doubts about this version of history. First of all, isn’t it well documented that the U.S. DID have booms and busts before 1913, ones even more severe than the ones since? Second, if that laissez-faire system was working so well for the economy, why would the elites abandon it and substitute something much worse in its place? Sure, bankers and evil, but they also aren’t dumb, wouldn’t simple “evolutionary” considerations argue against the idea that they would do something harmful to their own interests?
Him: I don’t have time to debunk all the misconceptions in that last statement of yours. Go and read Meltdown, by Thomas Woods, Jr., and get back to me when you have.
While I wanted to come back to him someday and say “I read what you asked so now you have NO excuse not to debate me!” I doubted my ability to get through a whole book of what, at the time, I figured would be nothing more than Propaganda for Plutocrats. So I decided to pair my reading of the supposedly arch-Right laissez-faire capitalist Meltdown with a much more (to me) congenial-seeming left-of-center book on the financial crisis, namely ECONned, by Yves Smith, the blogger at naked capitalism, whose work I followed and admired for some time already.
To say the least, the results of this experiment were a little different from what I had expected.
First, because I ended up reading almost the entire 300 pages of ECONned before I even touched Meltdown. Yeah, that’s how much I dreaded exposing myself to the suspect Austrian theory. Second, though, because when I finally did read Woods, I found a lot greater similarities between the arguments and perspective of this fellow of the Von Mises Insitute and the blogger Smith, who implicitly endorses heterodox Sraffian economics, generally considered a “lefty” critique of the mainstream. So much so that, up to a point at least–the point where we start to come to concrete suggestions for remedies and preventative fixes–the two seem to be converging on the same critique of what we might call “mainstream, academically sanctioned” economics and finance. Second, I found myself nodding in agreement much more to Wood’s arguments than cringing at them–although I am not sure these arguments quite add up to what his admirers, my friend included, think they do. But more on that later…first I will expend on the similarities.
Similarities between the two books
Perhaps the most obvious similarity between the two books–almost too obvious to even remark on–is that they both utterly demolish standard neoclassical economic theory, albeit from different theoretical starting points. More to the point both show that the theoretical and empirical timbers supporting the modern mathematical models of finance were rotten, and well known to be rotten to many perceptive members of the economics profession. Smith gives a long quotation from a speech by MIT profe”deltassor Paul Cootner to an important meeting of economists way back in 1962. It simply defies summary, so here it is in part:
If he [the critical mathematician Mandelbrot] is right, almost all of our statistic tools are obselete…Almost without exception, past econometric work is meaningless.
But does Cootner recommend his colleagues get to work devising scientific tests to decide which of the two hypotheses in front of them–A. the neoclassical models relying on assumptions of a “normal” distribution on economic data such as prices or B. Mandelbrot’s hypothesis that these far more closely follow the “untamable Lévy distibution”–better explain the measurable phenomena of price time-series? No, instead Cootner adopts the evasive line,
…it would seem desirable not only to have more precise and unambiguous evidence in favor of Mandelbrot’s hypothesis as it stands, but also to have some tests with greater power against alternatives that are less destructive of what we know.
This is as if the community of physicists (or “natural philosophers” as they were then called) had responded to Galileo’s experiments on dynamics by saying “no, we can’t accept his measurements because they are too destructive of the Theory of Impetus we have been using since Aristotle…so rather than try to reproduce his results and find out if they are right, we will stick with what we have until someone comes along and proves some theory closer to Impetus”. Thomas Kuhn, in The Structure of Scientific Revolutions, wrote of such moments as Galileo’s experiments and Mandelbrot’s analysis of the probability distribution underlying price data, destructive as they were of the currently ruling theory, or “paradigm” in a field, as the preludes to “paradigm shifts”. Its almost as if mathematical economics had its paradigm-shift moment, but instead of the new data actually being allowed to cause the paradigm shift, its practitioners simply shut their eyes and ears to any new data in perpetuity to keep a paradigm shift from occurring!
Woods, for his part, attacks not so much the mathematical-economics foundations of finance as the bits of economic theory that, in a bastardized form, filter down into the platitudes of policymakers and their speechwriters. The crux of his argument is that, contrary to these mainstream hacks claim, inflating the money supply cannot “stimulate the economy”. Rather, tinkering with the monetary supply in any way distorts the actions of the market by spurring the growth of certain activities–already judged by the market to as overdue for a tamping-down–at the expense of others (perhaps more deserving of capital in an of themselves). With admirable clarity, he marks out the distinction between, on the one hand, inflation/deflation, which are nothing more than changes in the size of the overall monetary supply stemming from causes such as “printing of money” (more accurately government bond issuance), debt defaults, or paper-asset apprciation/depreciation; and, on the other hand, rising/falling prices of goods, which are the outcome of many factors, the changing size of the money supply being just one of them. The Keynsian wing of the economics profession and its allies in the press, by Woods’ account, consistently blur the distinction between inflation (? of aggregate money supply) and price rises (? of what a unit of money will buy), and to much malign effect. In particular, the universal confusion engendered is essential to the policymakers’ ability to constant inflate the money supply for nefarious reasons, and their instrument for carrying out this policy is none other than…
The Fed. This is the institution that comes in for the harshest drubbing in both books, a drubbing that occupies a full chapter in Smith’s book. In Woods’ book, “Chapter 4: How Goverment Causes the Boom Bust Cycle” (the chapter title says it all), is explicitly concerned with criticizing the Fed, but really, virtually every section of every chapter contains a bit of Fed-bashing, as if it’s an itch that Woods simply cannot stop scratching. The part they both agree on (and passages in either book dealing with this theme seem interchangeable, as if either writer could have written them!) is the Fed’s role in creating the housing bubble of 2002-6 by cutting interest rates–or at least, giving fuel that someone else was bound to come along and spark into an out-of-control wildfire of speculation. Woods goes way, way beyond that and I’ll have a lot more to say about that in the next installment, where I discuss where these two books differ.del.icio.us |Digg it |ma.gnolia |StumbleUpon |