The terms "fiscal and monetary policy" annoy me. The fact that fiscal and monetary policy even exist annoys me. They are the terms that mean government control over the economy. That annoys me too.
It is enough to have to live with my own stupidity and ignorance. It is terribly annoying to have to be made to suffer because of stupidity and ignorance writ large. It is especially annoying when that stupidity and ignorance pose as some kind of miracle men — economists with political power — who are manipulating the economy’s levers for my own good. The whole affair is irritating.
I first began reading about business cycles 35-plus years ago. I am still reading about business cycles. There is a body of knowledge about business cycles. It is still expanding. It will probably expand forever, with diminishing returns. But no one fully understands business cycles, even past business cycles. Accounts of past business cycles always leave one puzzled as to causes. The ways in which business cycles occur vary. Their effects vary. Their depths vary. Their resolutions vary. The subsequent recoveries vary. The lengths of expansions and contractions vary. The many economic time series vary in different ways in different recessions.
No two economies are ever alike in details. The composition of the industries changes. The expectations of people change. The government changes. The international linkages and governments change. The monetary systems vary. The skills and composition of the labor force change. The technology changes. The knowledge changes. The goods being produced and consumed change. The institutions change. Need I go on? No one understands an economy, and no one can understand a business cycle in an economy. I mean really understand it. Sure, there is a broad understanding. There is a grasp of certain features. We are not bereft of knowledge. But we do not know the details. We do not understand the linkages or what goes through people’s minds and affects their behavior. All the models we use, including the Austrian models, are more or less broad-brush affairs.
Fiscal and monetary policy are two of the major national economic policies of a government that are supposed to ameliorate or even prevent business cycles. This is under the theory that governments can do something right. This is under the theory that there are people manning their powerful posts who understand business cycles, who understand this current economy, and who know what to do about it in order to make it work better.
I don’t for an instant believe that there are such people with such knowledge. Ben Bernanke is a learned man and scholar who has studied the Great Depression. He is now applying a very strong remedy to the 2009 economy that he thinks would have worked if it had been applied to the 1930 economy. He doesn’t know if it would have worked then, and he doesn’t know if it will work now.
Even if there were such smart people that we trusted to make good decisions for us, could we recognize them within a political order? We have merit systems within the business world. They work after a fashion, but the leaders in those systems ordinarily take on a good deal of personal risk of ownership. They are monitored. Their decisions are over narrow matters, not whole economies. They are often sacked if they don’t perform. We have ways to see how well they are performing, like stock prices. Lenders look at their borrowers carefully. None of this watching and monitoring goes on in the political sphere.
Bernanke is just a man. He is fallible. We learned this week that he pressured Bank of America into absorbing Merrill Lynch. In doing this, he pressured the leader of Bank of America into withholding critical information from his shareholders about Merrill Lynch losses. Technically, he can be charged with conspiracy to defraud. The loans he had the FED make to AIG look far from wise. A number of his other actions are highly questionable in making various kinds of loans to questionable borrowers.
I am saying that Bernanke doesn’t actually know what he’s doing. But I am using him only as an example. He’s not special. The more important point is that no one knows how to do fiscal and monetary policy, and they never have and never will. No one. For that reason alone, which is a narrowly practical one, no one should have those powers.
This is not news. Decades ago, scholars argued about the lags in effect of fiscal and monetary policy. They knew that it takes time for policy-makers to recognize when something needed to be done. Then it took time to decide what to do. This assumed that they knew what to do, which I am saying they do not. Then it took time to get it done. If it went through Congress, the results were unpredictable. If the FED did something, it took time for the effects on the economy to occur. There were the "long and variable" lags in effect of these policies. And lastly no one actually knew the size of the effects of the policies or where they would hit the economy. None of this has changed. It has simply been ignored.
The public knows nothing of all this. The press does not report it. A good many nave people think that something useful and good is being done. Others could care less. Others like me are annoyed at the whole thing. We write articles to get it out of our systems. Maybe someone will listen, or enough people will listen so that eventually a change is made.
Many people want to know where the economy is going. Such knowledge is valuable. I wish I had it too. We have it — to a degree. If anyone has it to a high degree and speculates on it, they are very wealthy. I am not aware that many people have made their fortunes in this way. Certainly, the economists in power who are formulating fiscal and monetary policy for our benefit (ha!) have not made their fortunes this way. Even if they had, I’d wonder if it were luck. Even if they had, there is no guarantee that their past success at forecasting the economy of 1985 (say) will enable them to forecast the economy of 2010. Even if they had, I’d prefer not to be under the dominion of their pet theories.
Here is what I have come to believe about economies and policy-making.
There really is no such thing as a business cycle in the mathematical sense. The cycles that appear in the data are irregular in timing, amplitude, and particulars. Economies are too complex and changing to give rise to regular cycles.
If no one really understands an economy, then no one can control it. Policy-making at the national level, as usually conducted in the effort to control the economy, is futile. Even when policymakers attempt to make an economy more free or de-control it, they frequently mess up. Perhaps their hearts are not in it.
Attempts to control an economy by national policy-makers make matters worse. In many places in this world where there are nation-states with economic control by the government, the people would be better off without any State at all or at least without such economic control. There is no guarantee that they would suddenly make economic progress, for that takes certain beneficial social institutions. But at least there would be removed an injurious force.
Any country that has a recession that goes on for more than 3 years probably has a serious political problem. Economies usually recover naturally within 3 years if they are going to recover at all. If they do not, there are probably obstacles being placed in their path by policy-makers. Spontaneous recovery can be aborted or delayed by fiscal and monetary policies. Recovery can also be over-stimulated to such an extent that a subsequent recession is caused.
Even if policy-makers manipulate an economy as they would like and get what they want to happen, this does not mean that we the people are any the better off for it. In fact, the more they control it, the more force they probably have used. And the more force they have used, the worse off we probably are.
National economic policies are, as usually carried out, ill-advised and inherently injurious. They replace the invisible hand by the visible foot. Each person in his actions expresses a unique vision of the past, present, and future. There is a theory behind every action, or a truth for each person as he or she sees it and acts upon it. If this theory or truth or vision could be expressed mathematically and met the requisite assumptions, Gödel’s theorems would hold. The personal theory (or truth) would not be a complete theory (or truth). Gödel proves this incompleteness.
Following the suggestion of Ralph Haulk, I conjecture that a theorem like this might be possibly formulated that would apply to the disparate actions of human beings in an economy. If so, it might help support the benefits of spontaneous order and the invisible hand. The policy-makers have their own theory, or truth as they see it. There is a socialist calculation problem that they face. They cannot know all the individual theories and truths. If they impose their version of truth on everyone, what happens? For one thing, they eliminate the union of all the personal truths. They eliminate learning from those personal actions. They eliminate personal adaptations. They reduce diversification from individual actions based upon individual theories. They act upon a reduced set of information. They gloss over disparate personal valuations. If they indeed possess truth, why can’t they communicate it to others? Why must they force others into their theory? This is already a formidable list of negatives.
Looking at the matter in another way, I see fiscal and monetary policy as expressions of a flawed social ethic. It is an ethic of power. This brings forth centralized power, which is a distilled and magnified power. Such power is very dangerous, based as it is on the limited knowledge of a few persons not held well in check. This power ethic minimizes the dignity of each person. It overrules them and dominates their lives.
A social ethic based on the right treatment of others, without recourse to power and domination, has no place for fiscal and monetary policy imposed on all by force at the national level.
My annoyance with fiscal and monetary policy is more than annoyance. I think that such policies are not only ill-advised and inherently injurious but also ethically wrong.
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.