The burden of elitism
By Henry C K Liu
This report is the second in a series.
Part 1: Monetarism enters bankruptcy
From its founding in 1913, the dominant guiding principle of US central banking had been monetary rather than economic, notwithstanding that the Federal Reserve's founding charter directed it to conduct monetary policy to "accommodate the needs of commerce and industry".
There is an extensive field of monetarism economics that attempts to define the causal relationship of economic growth to monetary conditions and policies, but this body of work has yielded mostly selective positivism to support ideological preferences for the importance of money. A positive analysis is
supposed to yield a description of what is if left alone without intervention. Yet "what is" in economics is generally the outcome of policy. Central bank policymakers have since focused on monetary policies designed to prevent inflation in order to counter investor fears about money defaulting on its role as a reliable storer of value. Maximizing the role of money as a storer of value is often accomplished by sacrificing the role of money as a facilitator of the maximization of economic value.
Ironically, asset appreciation is viewed by monetarists as growth and not inflation. Inflation is supposed to be caused primarily by wage increases. While the preservation of the value of money is not an unworthy cause, neoclassical economic theory has given the Federal Reserve, the central bank of the US, doctrinaire justification to ignore policies that promote full employment. Anti-inflation bias has also prevented the central bank from reversing the falling income of working families, particularly wage earners and farmers. Central bankers speak of "liquidation of labor" to detach economic demand for labor from the natural demand of labor in a growing population. As a result, monetarists subscribe to stabilization of the nominal money supply rather than total aggregate nominal demand.
Joseph Schumpeter argues that monetary measures do not allow policymakers to eliminate economic depression, only to delay it under penalty of more severity in the future. In a market economy, economic depressions are painful but unavoidably recurring. Countercyclical monetary measures to provide more money to keep ill-timed investment on a high level in a depression are not creative destruction but are positive destruction. And such measures will ultimately be detrimental to the general welfare.
Artificially high asset prices absorb liquidity to stall economic activities that lead to high unemployment. High unemployment in a depression is merely a sign that the market economy is performing its prescribed function. It is the natural socio-economic mechanism for stabilizing production and consumption. Unemployment needs to be eliminated, but it cannot be eliminated by monetarist measures designed to hold up asset prices in a depressed market economy.
Countercyclical fiscal measures are indispensable for the elimination of unemployment in an economic downturn. In a depression, unemployment can only be eliminated by fiscal-driven demand management, that is, providing deficit-financed money through increased work with high wages to the working population so that they have enough money to buy what they produce without inflation.
Herbert Hoover wrote in his memoirs about mainstream liquidationist sentiments after the 1929 crash:
The "leave-it-alone liquidationists" headed by Secretary of the Treasury [Andrew] Mellon [1921-1932] ... felt that government must keep its hands off and let the slump liquidate itself. Mr Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.'… He held that even panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.'Out of Mellon's equalitarian liquidationist formula, only liquidating labor has become an essential part of monetary economics. Theories behind monetary economics harbor an ideological bias toward preserving the health of the financial sector as a priority for maintaining the health of the real economy. It is a strictly elitist trickle-down approach. Take good care of the moneyed rich with government help and the working poor can take care of themselves by market forces in a market economy. All are expected to swim or sink in a sea of caveat emptor risk, but bankers can swim with government-issued life jackets filled with taxpayer money on account of a rather peculiar myth that without irresponsible bankers, there can be no functioning economy.
The fact is: while banks are indispensable for a working economy, badly-run banks ignoring sound banking principles are not. What is needed in a depression is not more central bank money for distressed banks suffering losses on loans from collapsed assets prices, but government deficit money to sustain full employment with living wages. [more]
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