25 Aug 2011

Must…Respond…to…Yglesias

Gold 20 Comments

There is something delicious in a guy who hates everything about my worldview and yet is quite new to the material. His critiques come out of left field, and it takes me a minute to figure out what is wrong with them. Anyway, here’s Yglesias on the gold standard:

I was asked to offer a brief explanation of what’s wrong with the gold standard.

The simplest way to see this is to think about what’s not wrong with the current system. Suppose that you have a pile of U.S. dollars. One hundred thousand of them. And you think that you have a problem. Inflationistas at the Fed are going to reduce the value of your pile. You think the solution to this is to take away the Fed’s discretion over the supply of dollars, and mandate that each dollar be backed by a specific quantity of gold. This, you think, will protect the value of your dollar stockpile by linking it to long-run trends in the supply of and demand for gold. Maybe you’re right that a pile of fiat dollars is a worse investment than a pile of gold-backed dollars and maybe you’re wrong. But if this is your issue, nobody is stopping you from trading your fiat money for gold. Other people who would rather have fiat money than gold will sell it to you. I promise. This exchange of fiat money for gold happens every day, and you, too, can participate in it.

Interestingly, what won’t give you the security you crave is the adoption of a gold standard. If a federal law mandates that $1,000 be worth a certain amount of gold, there’s nothing stopping congress from changing the law later. If you want the alleged security of gold, there’s no substitute for gold. A gold standard is neither necessary nor sufficient.

I love this rhetorical move of casting the gold standard as government price-fixing (Yglesias does it more explicitly in his critique of the woman-hater Ron Paul). So let’s deal with that first.

The classical gold standard doesn’t involve a price control in the same way that, say, New York City imposes rent control, or the federal government has a floor on wages. It’s not even akin to a tinpot dictator putting in place “currency controls.” On a gold standard, you can buy and sell gold at whatever price you want. The point is, at least one party to the transaction would be stupid to do so, if the price deviated significantly from the official parity. For example, in 1932 the Treasury stood prepared to give people an ounce of gold in exchange for $20.67 in currency (plus a small margin). If Jim Smith tried to sell Joe Blow an ounce of gold for $25, the police wouldn’t care–it’s just that Joe Blow would be an idiot to pay $25, when he could get an ounce of gold for $20.67 from the U.S. government.

So even if we think of “the gold standard” as involving merely a formal peg, where the Fed targets the price of gold instead of (say) “core inflation” or “nominal GDP” or some other metric, then this isn’t price fixing in the usual sense of the term. Given that there is a Fed that is taking prices into consideration at all when it makes policy, that is “price fixing” and hence un-libertarian on Yglesias’ usage. (And yes, for what it’s worth, Ron Paul and every Austro-libertarian I know, would prefer that the government get totally out of money and banking altogether. So this is no contradiction in their worldview.)

What’s more, the truly hardcore Misesian/Rothbardian types don’t want a mere target–where the Fed announces its intentions to keep the price of gold in a certain range, much as it currently says it will keep core inflation in a certain range–but they actually want the Fed/Treasury to stockpile gold to back up the pledge. In other words, it’s not merely a pledge, it’s an offer of full redeemability. In this article, I explained Mises’ very clever plan to gradually go from our current system back to one of full redeemability. Thus we see yet another way in which Yglesias’ claim–that the gold standard is un-libertarian because it involves government price-fixing–is nonsense.

But let’s go back to Yglesias’ quotation above. There is something even more fundamentally wrong with it. Here goes:

The problem is that Yglesias is setting up an opponent he wants to sit on a pile of dollar bills as an investment, and is concerned that future inflation will erode the value of his dollars. (At least Yglesias apparently agrees with me that cash balances are a form of savings!) Yet that’s not really the issue, or at least, that’s hardly the main issue.

The point of the gold standard is to severely limit the government’s ability to inflate the monetary unit. As Yglesias and other critics of “goldbugs” have said repeatedly, right now the common medium of exchange in the United States is the dollar, not gold. You can’t walk into the grocery store and pay with gold, or at least, you’d have to first talk to a manager. You can’t go online and pay your utility bill with gold, etc.

Yes, someone who fears the collapse of the dollar can partially protect himself by stocking up on physical gold. But such a person is hardly “made whole” by this move. It is still going to be awful if the (paper) currency collapses.

Here’s Mises:

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.

So if I were to take Yglesias’ move with respect to the gold standard, and apply it to (say) the freedom of speech, it would go like this:

Let’s say you are a critic of the U.S. government. You’ve written an essay that you think the authorities are going to throw you in jail over. You may be right, you may be wrong, but that’s what you’re worried about.

Now some people think that the way to protect yourself is to have the government endorse a Bill of Rights, in which the freedom of speech is considered a very sacred thing. Yet that’s nonsense. The true way to protect yourself is to move to another country, such as China, where the U.S. government doesn’t have a good means of getting at you, and where the authorities won’t mind if you criticize the American regime.

Really, faith in a paper Bill of Rights is useless. The government might promise that they won’t throw you in jail for criticizing them, but they might change their mind down the road. A Bill of Rights in the U.S. is neither necessary nor sufficient for feeling safe in criticizing the U.S. government. Libertarians should stop whining about this “sacred right” that’s really an obsolete throwback to an old view of the proper role of government.

So, would Yglesias like the argument above? If not, then he should admit his critique of the gold standard is goofy too.

20 Responses to “Must…Respond…to…Yglesias”

  1. Subhi Andrews says:

    Economic stimulus package, Irene, is headed into NY city. hope it does some real stimulating to Krugman’s economy.

    Joking of course.

  2. Yosef says:

    If we agree with the hypothetical Yglesias on free speech must we also agree with him on gold? Because, well, faith in a paper Bill of Rights is useless. It is the people and institutions of the United States which matter for freedom, not the fact that the government at some point promised to protect (some of) them. In fact as the hypothetical Yglesias says “they might change their minds down the road” and have. The faith is in a dispersed government with opposing powers and prerogatives. It isn’t the paper Bill of Rights which determines free speech but the flesh and blood justices of the Supreme Court (among others). So yes, it makes sense to agree with that argument.

    Also, saying “The true way to protect yourself is to move to another country, such as China, where the U.S. government doesn’t have a good means of getting at you, and where the authorities won’t mind if you criticize the American regime.” is just a cheap ploy, and from reading your blog I have come to expect a bit better (or at least wittier).

    • bobmurphy says:

      Yosef, so you’re saying if the government began locking people up for criticizing it, and some libertarians were flipping out saying, “Hey! We’re supposed to have free speech!” that you would tell them to quit being so naive? That’s what Yglesias is doing here. He’s saying we’re being silly for stating that it would be a good thing if the government went back on the gold standard.

      And what are you talking about with the cheap ploy? That is analogous to what Yglesias is saying. The reason his “solution” isn’t very good, is that it would be extremely inconvenient if everyone had to switch out of dollars and into gold (given the current situation) to protect themselves from hyperinflation. Just like it would be a real pain if the way you “protected” yourself against a tyrannical government was to move to China.

      • bobmurphy says:

        Let’s make sure you (and others) get the debate here, Yosef. People like Ron Paul, Lew Rockwell, and me are fully aware that the government/Fed could go off the gold standard again. We’re largely talking about it as an educational campaign. Of course our ideal outcome would be no Fed / government intervention at all.

        Yglesias isn’t saying that, though. He’s saying it’s dumb to pine for a restriction on government, since the government in principle might not respect that restriction. So I’m pointing out that we could use the exact same reasoning to prove that it’s silly for people to talk about free speech, the 5th amendment, etc. Can you imagine Yglesias in a million years writing a blog post titled, “The Trouble With Freedom of Religion”? Of course not.

        • Major_Freedom says:

          Yglesias isn’t saying that, though. He’s saying it’s dumb to pine for a restriction on government, since the government in principle might not respect that restriction. So I’m pointing out that we could use the exact same reasoning to prove that it’s silly for people to talk about free speech, the 5th amendment, etc. Can you imagine Yglesias in a million years writing a blog post titled, “The Trouble With Freedom of Religion”? Of course not.

          Great stuff.

          I think you hit on what I only vaguely grasped. Deep down I think they are all Marxian historical materialists, who hold growth in government as inevitable, i.e. that socialism is inevitable.

          Don’t attack the state. Don’t be a libertarian. Attack those wanting more liberty on the basis that it is a lost cause and silly, it is only disruptive to the inevitable movement towards socialism. The state won’t remain restrained even if it were restrained more. The gold standard is allegedly a dumb idea because even if the government went on gold, they’d just go right off of it again soon after.

          You’re right on the money. Yglesias might as well say there is no point in fighting for ANY restriction on government. There is no point in fighting for free speech, 5th amendment, 2nd amendment, etc.

          Socialism will come “with the inexorability of a law of nature.”

          Gold haters hate gold so much because they perceive gold as a hindrance in the march towards socialism. That’s why the sneers, the belittling, and the vicious insults. It’s like they all went to a lecture on Marxism and learned how to debate against your ideological enemies.

          Have you seen Roubini’s recent twitter tirades against gold and against pro-free market in money types? The guy is acting like a 10 year old whose mother just disconnected his videogames.

        • Yosef says:

          I am saying the if the government (meaning here federal and state legislatures) passed a new amendment to the Constitution allowing them to lock people up for whatever reason, that it would be naive to wave the Bill of Rights and say “but we have this paper!”. Or, if the government starts locking people up and on a Constitutional challenge the Supreme Court backs the government then any arguments to the Bill of Rights would be…well a paper shield. In both cases the solution for libertarians and other freedom lovers would be to change the Constitution either back, or to include explicit language on the limits of government. And that involves institutions and people, not the paper documents.

          • crossofcrimson says:

            ” In both cases the solution for libertarians and other freedom lovers would be to change the Constitution either back, or to include explicit language on the limits of government. And that involves institutions and people, not the paper documents.”

            I think you might be a little confused on Bob’s point. He’s not addressing what is the best or most correct way to regain or retain liberty per se. He’s criticizing Yglesias’ criticism(s) of a call to something more free merely because the system is malleable – a criticism that would seemingly apply just as much to the conclusion in your response. I don’t think Bob thinks the Constitution magically creates or protects rights (at least he hasn’t made that argument here). But that doesn’t mean that pushes for liberty, should they appeal to such things, are illegitimate or that such political actors are naive merely for making the push.

            • Yosef says:

              “I don’t think Bob thinks the Constitution magically creates or protects rights”

              But the hypothetical Yglesias that I was responding to says exactly that, and says it is wrong. ‘He’ says “Now some people think that the way to protect yourself is to have the government endorse a Bill of Rights” and then says it’s wrong. My point was that I agree with the hypothetical Yglesias on that argument. So if Bob’s point was that if the argument is ridiculous with regards to the Bill of Rights then it must also be ridiculous with regards to gold, then I find myself thinking the opposite: since I agree with the argument with regards to the Bill of Rights, do I also agree with the argument with respect to gold? This was even my first line in all of this. (However, I see now that Bob might have instead been making a point about Yglesia’s being hypocritical, applying the argument selectively. Maybe. I was just saying that I agree with the hypothetical Yglesias. Maybe he is better than the real one?)

          • bobmurphy says:

            Yosef, again, I am showing the hypocrisy in Yglesias’ worldview. The way he is criticizing the gold standard, I could just as well write a blog post saying:

            “The Trouble With Gay Marriage

            People like Jon Stewart et al. are lauding the wave of states granting gays the legal right to marry. Yet they might renounce that right tomorrow. If you really want to protect yourself from a homophobic culture, you need to get a floating city from Patri Friedman and move far away so nobody will bother you.”

            Would Yglesias ever write that?

            • Bob Roddis says:

              I say that the pathetic and perpetual weakness of Yglesias’ “arguments” on this topic over the years proves that he hasn’t a counter-argument at all on this topic. He should just give up.

            • Yosef says:

              Would Yglesias ever write that? Maybe, at least I hope so. Because it would be generally right, except maybe that you would take the word “gay” out. Government can set aside any marriage, so yes lauding the fact that at the moment they are promising to recognize more while still retaining the ability to take it back later is wrong. (In fact, this almost happened in CA after gay marriage was temporarily allowed but has since been revoked, and the question was whether those marriages would be respected)

              If your point is that Yglesias uses this argument selectively and is being hypocritical then I won’t argue. My point was that I still think it’s a valid argument whether used by the hypothetical Yglesias for the Bill of Rights, Marriage, or Gold.

  3. David S. says:

    Even the usual objections to the gold standard aside, such that it’s deflationary, it ties our currency arbitrarily(and by fiat) to a volatile, small market commodity, etc. it’s a profoundly dumb idea as it completely misses the point even with respect to its own ends. There’s the ridiculous presumption that it will insure monetary discipline, when in reality governments have always just watered them down or abandoned them altogether whenever they wanted.

    The real issue is discipline, if you like the gold standard, and lacking that, there will be none, no matter what system’s in place. Of course, this is a good thing, as the kind of discipline it calls for is economically ruinous.

    • Major_Freedom says:

      Even the usual objections to the gold standard aside, such that it’s deflationary

      Typical confusion brought about by an inability to identify and thus separate “good” deflation from “bad” deflation.

      Price deflation brought about by increasing productivity is HEALTHY. The electronics industry sells goods at gradually declining prices, and have been for many years, and the industry isn’t suffering from massive unemployment or recessions. The reason why prices of electronics gradually falls over time is because the productivity in the industry, i.e. the supply growth, tends to exceed the rate of monetary (demand) growth, i.e. inflation.

      What happens in electronics vis a vis fiat money, is fully capable of happening for ALL goods vis a vis gold in a gold money economy.

      The supply of gold and hence aggregate spending in gold gradually rises over time as more and more gold is mined and entered into circulation. If the market is free enough, then the productivity in the real goods market will be greater than the production of gold money, and that will lead to growing demand, but gradually falling prices, i.e. price deflation.

      There is nothing wrong with this deflation.

      The reason you monetary cranks get so confused is because you connect deflation with depressions. But the deflation you see in depressions is on account of a decrease, or a slow down in the rate of growth in, the money supply. It is not because of sudden bursts in productivity.

      it ties our currency arbitrarily(and by fiat) to a volatile, small market commodity, etc.

      No. A gold standard does NOT tie currency to a volatile commodity. In a gold standard, gold IS the money, not the paper claims redeemable in gold. You are confusing what you see in today’s fiat money standard where gold is not money but carries a (volatile) dollar price, with gold itself being volatile. But gold itself is not volatile. What is volatile is the fiat money. The production of gold is more or less stable over time, and inflation expectations and other factors influence the price of gold in fiat money. The fluctuations in the dollar price of gold is not due to the supply of gold fluctuating. It is due to the dollar fluctuating.

      it’s a profoundly dumb idea as it completely misses the point even with respect to its own ends. There’s the ridiculous presumption that it will insure monetary discipline, when in reality governments have always just watered them down or abandoned them altogether whenever they wanted.

      Hahaha, you’re making the same excuses that Murphy pointed out Yglesias as making.

      If fighting for a free market money standard (i.e. gold and silver) is a bad idea on the basis that the government cannot help itself in violating, then by that logic, we should not fight for free speech, or for the 5th amendment, or for any restraint on government ever, because the government can always violate whatever restraint on government is being fought for.

      Is your position that we should cease fighting for free speech because the government can in principle eradicate it tomorrow and impose draconian speech laws? No? Well, now you know why we “gold bugs” fight for monetary freedom.

      The real issue is discipline, if you like the gold standard, and lacking that, there will be none, no matter what system’s in place.

      You sound like an anarchist.

      Of course, this is a good thing, as the kind of discipline it calls for is economically ruinous.

      Restraining government from being able to print and spend money is what helps PREVENT economic ruin, for the government ruins the economy by printing and spending.

  4. jjoxman says:

    How is Yglesias the least bit competent to talk about a gold standard? And since when is there only one way to run one? I’d hate to see what he’d say about free banking.

  5. Bob Roddis says:

    I’ve been hassling Yglesias in his comments section about his complete ignorance of everything Austrian at least weekly since May 2009 when he first attacked Tom Woods.

    http://www.lewrockwell.com/woods/woods166.html

    Back in September 2009, I posted long quotes from “End the Fed” about 19th century panics. In the “strange” Ron Paul post, I issue my usual challenge in the comments that neither M.Y. nor his minions know the first thing about Austrian ideas.* At first, I thought they would say, “Oh yes we do” followed by nonsense. But they don’t even do that and never have. They just immediately degenerate into name calling and Yglesias simply ignores the matter. This is the “scientific” elite of the “progressive” movement. If we don’t cream these clowns in the public debate, something’s wrong because they bring nothing to the table but hysterical squeals. They can’t think to save their lives.

    *Last week, Krugman said that the Austrians were having a “real – and really bad influence” upon monetary policy. Thus, wouldn’t NOW be a good time for “progressives” to actually learn something about Austrian ideas, at least so they might stop that really bad influence? As we’ve seen from our own precious Keynesian Kommenters, I guess not.

  6. Bill Woolsey says:

    I think he is right about gold as an investment.

    It is better for the money price of gold to freely adjust according to buyers and sellers in the gold market if gold is to be used as an investment vehicle. Having a system were everyone else setting their money prices determine the relative price of gold makes entrepreneurship in gold much more difficult in gold and entrepreneurship slightly more difficult in everything else too. It has to do with specialization. With a gold standard, everyone is making a market in gold as well as the particular goods and services they produce and sell. When the money price of gold is free to adjust, then specialist gold entrepreneurs can make a market in gold.

    The ease of devaluation and revaluation is also a good point. Oddly enough, one way of fixing our current situation monetary disequilibirum would be a devaluation–if we were on a gold standard. That isn’t possible under the current scheme.

    I agree, however, that using gold to determine the fundamental nominal value in the economy isn’t at all the same thing as creating a price ceiling or floor.

    • David S. says:

      Bill,

      I started reading your blog after seeing you post here and you’re an actual economist with a clue. What makes you want to post here and where does your patience with these people come from?

  7. AP Lerner says:

    But Mr. Murphy, when you say ‘they actually want the Fed/Treasury to stockpile gold to back up the pledge. In other words, it’s not merely a pledge, it’s an offer of full redeemability’ you are still handing over control to the evil Fed/Treasury .

    What’s funny is MMT’ers figured this out a long time ago and have also figured out the natural rate of interest is zero and the Fed should get out of the inflation/rate targeting business. MMT’ers already started the movement to ‘End the Fed’..they just never came up with a catchy slogan (or a factually inaccurate book).

    In all seriousness, the MMT’ers have a more free market oriented framework to the monetary system than Austrians claim can occur under gold.

    http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF

    http://moslereconomics.com/mandatory-readings/soft-currency-economics/

    • Bob Roddis says:

      It’s not an “Austrian” proposal per se . It is a “second-best” policy proposal.

      When it comes to “second-best” policy recommendations in a world of government intervention, we can never find perfection (by definition). But if we are going to have the government providing a monopoly of domestic currency, Ludwig von Mises’s proposal for a return to a gold standard is theoretically elegant and eminently practical.

      Also, if, in fact, bank reserves are irrelevant to the amount of fiat money created out of thin air in a certain geographic area, that is merely a question of fact. A factual mistake regarding such fact is nowhere part of “Austrian ideology” as you like to call it. If you have more informed information about the complex (and immoral) creation and movement of fiat money and purchasing power around the evil system, so be it. An alleged mistake in that regard has nothing to do with Austrian “ideology”.

      Further, when are you going to demonstrate the slightest understanding of basic Austrian concepts?

      Also, where is all the stuff going to come from to satisfy all of the unpayable government debt?

    • David S. says:

      AP,

      You have to be kidding. You’re just an alternative brand of wingnutters. At least you agree that we can use some fiscal stimulus, but your views on money are silly at best.