This Einstein platitude is so overused that I’m somewhat embarrassed to be planting it at the beginning of this article. But then I think about how utterly applicable it is to this piteous disaster we still call the global economy, and its presence becomes profoundly justifiable.
We have been told inflation doesn’t exist. We have been told interest rates can stay low forever. We have been told the stock market will continue to climb indefinitely. But these promises — and many others like them — have been made countless times before. The results are always the same.
We are living in fantasy, but the cracks are all around us: commodity prices continue to rise. Innumerable indicators suggest the stock market is almost certainly on the verge of collapse. Price discovery is a distorted illusion that offers very little in the way of meaningful valuation. Current debt-levels maintained by the world’s economic powers are unsustainable — especially in the U.S. and Japan. Yet, despite everything, nothing about this economy is surprising.
For two decades, I have been writing about how important free markets are to progress – to the growth of knowledge, as the philosopher Karl Popper called it. I am by no means alone; minds far more advanced than mine — along with groups like Cato and The Mises Institute, and Zero Hedge (to name a few) — have been defending market liberalism… many since long before I took my first breath. Yet for all the effort, the arguments have met with phenomenal resistance – often ferocious and virulent. Politicians and academics have been blaming markets for our collective problems for ages, and yet I fail to see their reasoning.
Wall Street, for instance, is the favorite whipping boy for the housing crisis that descended upon us like a poisonous fog. And yet it was created not by banks, but by government programs that all but demanded these banks loan money to anyone with a pulse. In this process, banks acted merely as facilitators to the transactions.
To put it another way: if you were a banker, and the government told you it was acceptable (and, indeed, imperative) to lend money to people who shouldn’t qualify — and told you that you would be paid handsomely for the transaction — would you say no? At best, you might say to yourself, “Is this smart?” But then you would (as everyone did) justify the practices by reminding yourself the government not only approved of the loans, but encouraged you to make them.
This is not a defense of banks, per se — but it is rather to point out that large, centralized governments are irresponsible, inefficient monsters that destroy innovation and productivity; they have been the sources of our economic woes for thousands of years. And yet I firmly believe we can (and eventually will) do things differently — much differently.
Below are some major points free market economists have been making for decades. I believe, if the world would take them to heart, we could bring about a new era of unprecedented prosperity.
1. F.A. Hayek – the Austrian economist, author of The Road to Serfdom, and 1974 Nobel winner in economics – observed that centralized bureaucracies lack the resources and meticulous insight to manage an economy’s trillions of components. This tenet inspired the following analogy in a piece I wrote several years ago: imagine your brain trying to manage the decisions made by every cell in your body. How long do you think you would survive? That is what central banks have tried to do with the global economy for almost a century, and we are now paying the price, yet again. This time, however, it will be far worse than ever before – and, indeed, may be insurmountable by the current hegemonic status quo.
2. In his milestone work Socialism, another Austrian, Ludwig von Mises – after whom the above-mentioned institute was named – proposed what I consider to be the most powerful economic axiom ever posited. It is called the Economic Calculation Argument, and it essentially states that any manipulation of price structures distorts the ability to perceive scarcity. In other words, scarcity is the product of every individual actor in an economy casting his or her vote, through transactions, for the relative value of any good or service. The value the collective places on goods and services is the result of these miniature “votes.” When the government tinkers with the money supply, it necessarily distorts price structures and creates inefficiency. But more than that, it destroys any possibility of understanding true scarcity, and when that happens, our ability to discern who needs what, and where, becomes impaired.
It isn’t really possible to believe the U.S. is somehow different than all those empires of yesteryear, who so recklessly manufactured their own currencies — ultimately whittling themselves to a mere fraction of their former, majestic selves. The U.S. is subject to the same economic principles every other foolish empire has had to face, and the fact that it is printing trillions of dollars doesn’t weaken my argument.
The Soviet Union — which is among the biggest jokes of planned economies ever — perpetually failed to ascertain scarcity. Its people had to stand in lines, ad infinitum, just to get simple goods like toilet paper. For my part, I thank the stars every day for the Soviet Union, because it established, irrefutably, the veracity of Mises’ theory (although I do feel sorry for the people who couldn’t get toilet paper).
Unfortunately, academics and politicians alike fail to perceive the irrefutability of Mises’ Argument. They have kept doing the same things, over and over, for a century, because what feels good gets votes.
3. A government cannot print money to solve economic problems. Printing money creates economic problems. It’s called inflation, and it sucks. Again, one has but to consider the declines of such once great empires as Rome, Spain, France, Portugal, and England.
So here we are – wallowing in the filthy muck created by generations of politicians and central bankers. You would think global governmental establishments would finally see the light. Surely the time has come to stop this cycle. But apparently not; governments everywhere continue to print unprecedented sums of money. They create still more easy credit. They continue to do all the same things – on the largest scale ever — that got us here in the first place. And they are actualizing Einstein’s famous dictum.
For the entire economic and financial world is now truly and incontrovertibly insane.