Tuesday, August 20, 2013

Who Is Pre-Copernican and Will Never Understand Monetary Policy?

In what has to be some of the weakest commentary in quite some time, Christopher T. Mahoney, a former Vice Chairman of Moody’s, mixes awkward metaphor with unfounded claims in his post, "Protestants Will Never Understand Monetary Policy." In his brief missive he strings together a series of mere assertions with very little actual analysis.

In doing so, the product he offers could be characterized as "Krugman-lite." Here is a sample:

"There are powerful forces arrayed against growth in the world today: the Dallas Fed, the Bundesbank, the ECB, the Ron Paul family, the entire German nation, Obama’s monetary ignorance, and the editorial board of the Wall Street Journal, the official organ of the orthodox right."

Additionally, Austrian economic philosophy of hard money, no central bank, and zero inflation is dismissed as
"pre-Copernican. The earth is not flat, and money matters. Yes, it would be a better universe if the earth were flat, and the sun revolved around the earth on a daily basis, and money didn’t matter. But it just ain’t so." 

Here Mahoney follows one of Krugman's favorite tactics in argumentation (if one can call it that). Instead of attempting to explain why an opposing theory is incorrect, merely claim that it is so old as to be pre-modern and, ergo, we can dismiss it.

He ends with this moralistic barrage where he implies that the key to economic progress is reflation:

Why is the Right so in love with hard money, low inflation, and high unemployment? Here is my answer: because they do not believe that there is such a thing as a free lunch. You could spread out a smorgasbord of caviar, salmon, lobster and Dom Perignon, and they would turn their heads and eat a cheese sandwich. Reflation is easy and thus sinful. It’s that Protestant thing.
This is another Krugmanesque tactic: dismissing an argument with a claim that it is moralistic or religious in nature.

There are a number of problems with this method. Nowhere does Mahoney get around to explaining why hard money, a free market in money production, and zero price inflation hinders economic progress. It is a mere assertion. It is, as Joseph Salerno notes, Mahoney himself and others like him are "the narrow-minded dogmatists . . .who insist against all reason and experience that the creation of money miraculously begets real goods and services and ushers in an earthly paradise of plenty." In fact, because economic prosperity requires a market division of labor made possible by capital investment coordinated by wise entrepreneurial decisions, it is imperative that the government not monkey around with our monetary system, destroying purchasing power and leading entrepreneurs astray through artificially low interest rates.

It  should also be noted that the Austrian view that hard money is conduce to economic prosperity while government monetary inflation is useless at best and destructive at worst is, in fact, positively Copernican! As Murray Rothbard documents in his Economic Thought Before Adam Smith, Copernicus himself was the first "to set forth clearly the 'quantity theory of money.'" In his 1526 essay Monetae cudendae ratio, Copernicus, while discussing an increase in overall prices, wrote,
'We in our sluggishness do not realize that the dearness of everything is the result of the cheapness of money. For prices increase and decrease according to the condition of the money.' 'An excessive quantity of money should be avoided.'
  So it turns out that Copernicus himself was pre-Copernican. Who knew?

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