Submitted by Alasdair Macleod – FinanceAndEconomics.org
Parents will tell you the most difficult questions to answer sometimes come from their children. Here are some apparently innocent questions to ask of economists, journalists, financial commentators and central bankers, which are designed to expose the contradictions in their economic beliefs. They are at their most effective using a combination of empirical evidence and simple, unarguable logic. References to economic theory are minimal, but in all cases, the respondent is invited to present a valid theoretical justification for what invariably are little more than baseless assumptions.
A pretense of economic ignorance by the questioner is best, because it is most disarming. Avoid asking questions couched in anything but the simplest logical terms. You will probably only get two or three questions in before the respondent sees you as a trouble-maker and refuses to cooperate further.
The nine questions that follow are best asked so that they are answered in front of witnesses, adding to the respondent’s discomfort. Equally, journalists and financial commentators, who make a living from mindlessly recycling others’ beliefs, can be great sport for an interrogator. The game is simple: we know that macroeconomics is a fiction from top to bottom: the challenge is to expose it as such. If appropriate, preface the question with an earlier statement by the respondent, which he cannot deny; i.e. “Last week you said that…”
Commentary follows each question, which is in bold.
- How do you improve economic prospects when monetary policy destroys wealth by devaluing earnings and savings?
Central bankers and financial commentators are always ready to point out the supposed merits of monetary expansion, but are never willing to admit to the true cost. You can add that Lenin, Keynes and Friedman agreed that debasing money destroyed wealth for the masses, if the respondent prevaricates. Often politicians will duck the question with the excuse that monetary policy is delegated to the central bank.
The argument in favour of devaluation relies on fooling all of the people some of the time by encouraging them through lower interest rates to spend instead of save. However, monetary debasement has become a permanent and continuing fixture today, instead of a short-term fix.
What makes you think that targeting a continual rise in the general price level allows you to overturn the normal price relationship between supply and demand?
Simple price theory posits that higher prices reduce demand, while lower prices stimulate it. For evidence, look no further than the electronics and data industries. Look no further than any product, which a salesman will offer at a discount in order to sell it. The confusion over price formation is highlighted by economists’ response to falling energy prices. Far from being a bad thing, unlike falling prices of other goods, apparently it leaves more money to spend on those other things!
Enjoy the subsequent attempt to justify the impossible. Animal spirits may be mentioned as an escape, which is the focus of the next question.
- What are “animal spirits”, and how do you measure them?
The reference to animal spirits, which cannot be actually defined, is supposed to be a reflection of consumer confidence. However, an increase in animal spirits can only mean a change in overall preference towards buying goods and against holding cash, usually driven by a growing fear of a falling purchasing power for money, and not consumer greed. This is the route to runaway price inflation, and if the policy succeeds in promoting so-called animal spirits, the outcome is impossible to control, without raising interest rates to a level that crashes the economy. It is also impossible to quantify animal spirits, because they are a bad concept.
The reference to animal spirits was always a cop-out for effects that refuse to be modeled. It is in its own small way an admission that the mathematical treatment of economics is fundamentally flawed.
- It’s commonly believed that a lower currency stimulates production. If this is the case, how did Germany and Japan in the post-war years develop into the strongest economies despite their currencies consistently rising against those of their trading partners?
This should stump all mainstream macroeconomists, except perhaps the few remaining sound-money practitioners in Germany. While Germany’s and Japan’s economies developed successfully, Britain actively weakened the pound, the French the franc and the Italians the lira as a matter of competitive policy with abysmal results. Furthermore, since Japan implemented aggressive Keynesianism following its financial crisis in 1990, its economic record has been appalling. It is time for this canard to be well and truly nailed.
- Experience of government intervention in the economy clearly shows that it usually fails. Why do you continue to support intervention, when the evidence is so clearly against it?
Central bankers and economists in the pay of governments are conditioned to believe that the state can fix the apparent shortcomings of free markets. Furthermore, politicians will always promote an advisor who comes to them with a positive solution involving intervention, and demote one that argues the merits of doing nothing. They usually argue something on the lines that it is unfair to ordinary people to expose them to the uncertainties and brutality of markets when they go wrong. In which case, follow up with Question 1, since they obviously care so much about ordinary folk.
- The difference between national socialism and communism was the former controlled people through regulation, while the latter compulsorily acquired their property. Is the government at all troubled to be pursuing the economic policies of the fascists?
This one is best used for poking fun at left-wing journalists. When Tony Blair was seeking office in the 1990s, the British Labour Party did away with Clause 4 in its constitution, the commitment for the state to acquire the means of production. From that moment British socialism embraced the previously fascist policy of regulation as the means of state control. Not one commentator picked up on this aspect of a change that was heralded as necessary to make Labour electable.
- You say you are a socialist and yet you despise communism. Isn’t socialism just a milder form of communism? Please explain where, other than in their degree, these beliefs differ in their economic effect.
The root of this problem was encapsulated in the socialist calculation debate, where it was proven beyond any doubt that the state could never organize production and prices effectively. Socialists like to think that the obvious failure of state control under communism does not apply to modern socialism. They usually argue that modern socialism is based on Christian ethics and has nothing in common with the godless statism of Lenin and Mao. They overlook the fact that the problem is one of government economic intervention.
- Keynesians believe that deficit spending is necessary to make free markets work when they fail. If deficit spending is needed to supplement free markets when this apparently happens, why is it not appropriate at other times as well?
Deficit spending is almost always introduced in an attempt to deal with the results of earlier policy errors, usually made by central banks allowing credit booms to develop. It may sound reasonable to stop a recession from throwing people out of work needlessly, but the state is merely permitting past errors to accumulate. The purpose of the question is to expose the lack of any economic basis for deficit spending, and to expose the policy as purely political.
And finally, a Royal question:
9. If these things [signs of financial failure] were so large, how come everyone missed them?
This was the question Queen Elizabeth famously asked the professors at the London School of Economics about the symptoms that foretold the financial crisis in 2008, when opening the LSE’s New Academic Building later that year. The result was a group of the foremost British economists seven months later met for a roundtable discussion to answer her question. You read that right: it took seven months to cook up a reply.
This was it: “Risk calculations were most often confined to slices of financial activity, using some of the best mathematical minds in our country and abroad. But they frequently lost sight of the bigger picture.”
It is a public admission that macroeconomists are unable to see the big picture. This defies the meaning of the word macro.