A great deal of nonsense about the 2008 financial crisis has been written, virtually all of it utterly worthless. Apart from the absurd calls that we should learn from Marx’ fallacious trade cycle theory1 there is also Robert Shiller’s opinion that there was
a speculative bubble driven by excessive optimism, driven by public inattention to risks of such an eventuality2.
Completely missing from the commentary on the global financial crisis, at least in the numerous articles I read, was any historical perspective. Although economists, unlike physicists or chemists, cannot perform experiments they do have the next best thing and that is economic history. That so few of them draw on this invaluable source is to be deeply regretted. Equally regrettable is the unfortunate fact that of those few members of the economic commentariat who sometimes try to use this tremendous pool of material virtually all of them fail to apply it effectively.
It is a little known historical fact, particularly among economists, that financial crises originating in the banking system existed in medieval times. Continue reading Financial crises from medieval Italy and Spain to tulip mania, the Mississippi Bubble and eighteenth century England: And economists still haven’t learnt the lesson
Although these articles are not a direct criticism of Modern Monetary Theory they do show that Australia’s free market economists are just as wrong about the trade cycle as are our MMT theorists and as such serve to undermine MMT teachings.
Last week I singled out P. D. Jonson, Peter Smith and Steve Kates, who teaches at RMIT, as being hopelessly wrong in arguing that the boom-bust cycle is a natural feature of a capitalist economy. I chose these three because they have written books in which they clearly state their views on the subject. To my knowledge there is not a single free market economist in Australia who would disagree with them. In this respect there is no fundamental difference between these economists and Bill Mitchell and his fellow MMT theorists. (It also puts them in the Marxist camp.) The striking thing about all of these economists is that not one of them ever provided the slightest indication of being aware of the crucial role the gold standard played in classical thinking when it came to what they called “convulsions” or “revulsions”. Continue reading Nineteenth century trade cycle theory: fact versus myth 1
It Professor Mitchell’s real objection to a gold standard is that it puts a leash on government meddling with respect to monetary policy, meaning that politicians could not apply those so-called flexible monetary policies that nearly 220 years ago Walter Boyd aptly called “quack medicine”1. To the classical economists this was a powerful argument in favour of a gold standard, believing as they did that the “self-acting”2 mechanism of the gold standard was infinitely superior to monetary policies made by opportunistic politicians driven by a desire to obtain short-term electoral advantages. But more than anything else, they probably feared that in their ignorance politicians would fall prey to those economic fallacies that Walter Boyd warned against. Now Professor Mitchell is certainly entitled to question the classical view of the gold standard and its adoption. In doing so, however, it is incumbent upon him to get his facts straight and so avoid misleading his readers. He states:
Under what was called a gold specie standard (sometimes called a 100 per cent reserve gold standard) the central bank was required to hold gold in proportion to the currency it issued (the proportion being the gold currency exchange rate). (Return to a gold standard – don’t even think about it ). Continue reading Professor Bill Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 4
The striking thing about those who malign the gold standard (this also applies to most of its supporters) is their ignorance of how it really functioned, as revealed by the fact that Britain was not even on a genuine gold standard but on a quasi-gold standard. Before continuing with this line of thought we need to clarify further points regarding Professor Mitchell’s error that classical economists focused on trade deficits with respect to gold drains.
One cannot help but be struck by the professor failure to mention exchange rates or even provide an explanation for gold drains. As the classical economists had determined that the exchange rate, not the trade deficit, was the key indicator with respect to an unhealthy trade deficit and the depreciation of the currency it is necessary to understand how they arrived at this conclusion, a decision that contains important and lasting economic lessons. Continue reading Professor Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly: Part 3
Professor Mitchell tells us that under the gold standard gold was the principle means of making international payments. So when countries developed “trade imbalances” (for which he gave no explanation) gold would have to be shipped from one country to another until the balances were restored. Using Australia and New Zealand as a hypothetical example he argued that if Australian exports to New Zealand exceeded the latter’s exports to Australia “this would necessitate New Zealand shipping gold”.
He follows through with the Hume’s specie-flow theory (the classical theory of gold flows) that the inflow of gold would inflate Australia’s money supply which would drive up prices, making her exports more expensive and hence reversing the gold flow by sucking in more imports. In the meantime, poor old New Zealand’s loss of gold would cause a monetary contraction bringing about a deflation that would cause “rising unemployment and falling output and prices” until her trade balance was restored. Continue reading Professor Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly: Part 2