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The Forum > Article Comments > A new international Bretton Woods system? > Comments

A new international Bretton Woods system? : Comments

By Bill Lucarelli, published 10/7/2009

The present international monetary system hinges upon very fragile and perilous foundations.

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As an economic innocent I am fascinated by the term "euthanasia of the rentier", which to my untutored mind just seems to be another term for theft. There is nothing new in this, as throughout the ages debtors have sort ways to weasel out of their debts, using methods such as pogroms, confiscation, inflation, and expulsion. To justify this the moneylender has been portrayed as a Shylock, miser, parasite or other antisocial being better removed from society. Why a person cannot choose to delay his consumption until his declining years, instead of blowing it all today has never been fully explained. It reminds me of the early years in Sydney, when everyone in the colony was issued with an equal food ration which they had to eke out over a week. Of course there were those who pigged out in the first few days, and then expected to share in the food that the prudent had saved, resulting in them eating more that the prudent.

One method being used today is for governments to print money, with the inevitable result that no-one will wish to hold such money, which, to have value, must be scarce. As far as I know, no country has ever become prosperous by debauching its currency.

The real need today as I see it is extremely simple. It is for governments, and citizens to live within their means. The current standard of living of the average person is clearly unsustainable, and needs to be reduced substantially. Prudence, frugality and thrift need to become the principal theme of the times, and debt financed consumption seen to be the disaster it is. The secret to success in life is not to spend, particularly on items advertised in the media.

I have one last question for any Keynesians that are left:

If you do euthanaise the rentier, from whom will you subsequently borrow?
Posted by plerdsus, Friday, 10 July 2009 6:27:21 PM
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Mr. Lucarelli, you said ‘anarchy’ instead of disorder. Anarchy, were it to be, would imply the concept of mutuality, totally extraneous to the schools of economists.
Posted by skeptic, Friday, 10 July 2009 8:46:08 PM
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What none of the interventionists will ever explain is how, and from where, government is supposed to get the knowledge and the capacity to manage the money supply. We may *wish* they could. But *how* can they?

We already know governments can't manage the whole economy, even if they have totalitarian powers.

In saying that a particular government intervention is necessary or desirable, we are saying that there is a difference between what the market price is, and what the market price should be - for literally billions of transactions. The idea is that government regulation will manipulate them from where they are to where they should be.

But how will this task be more possible as to part of the economy, than it was as to the whole?

How is government to *know* what the price should be? Will someone please answer this question specifically on point - without assuming what is in issue?

Those who argue that booms and busts are an inherent result of a free market do not account for the fact that, at all relevant times during the 19th and 20th centuries, governments have been actively intervening in numerous ways to change the price of money from what it would be in an unhampered market to what the government thinks it should be.

Now the argument against such interventions is that they result in unintended gross surpluses and shortages in all the wrong places - in terms of money, that means booms and depressions - causing disruption and injustice.

Yet when the entirely predictable, and predicted, result of such government interventions appears, their advocates simply assert that the problem was not enough government interventions. This seems to me to assume what is in issue.

While we get these booms and busts in areas where government is intervening to fix or influence the price level, such as money, we don't get them in areas where the market is not hampered with such interventions, such as with shoes, socks, pizzas, and refrigerators. Why not?
Posted by Jardine K. Jardine, Saturday, 11 July 2009 1:34:53 PM
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So I ask any of the interventionists to explain honestly and directly on point: how is any governmental officer or office to know the difference between the market price, and the supposedly proper price, in billions of transactions? Where will they get the knowledge from?

As subjective valuations are the critical variable in the formation of prices in individual transactions; as they are changing all the time; and as aggregate prices are aggregates of the large number of prices in individual transactions, how is the central planning authority to know what the values are, and how to prioritise them relative to other values?

In the abence of such knowledge, how can the government do a better job of regulating the relevant transactions?

How are they going to avoid systematically favouring one side of the transactions, as they now systematically favour banks and debtors, and rob savers and the poor?

A simple admission that they don’t have the relevant knowledge, capacity or disinterested virtue will do.

If government is to be given such monopoly regulatory power what reason is there to think that they will not use theirs powers to favour their own interests as against those of everyone else? Given that that means ever more inflation, why should not the blame for the recurring booms and resulting busts be sheeted home to government's chronic addiction to inflationary finance, where it belongs?

No-one has given any reason why government should have the power to control the money supply in the first place; nor explained how it will not be turned into an instrument of privilege, exploitation and fraud on a grand scale, which is exactly what has happened.

On the other hand, no-one has explained how, if government control of the money supply were abolished, each person would not have a sufficient remedy against such fraud by exercising the freedom, now legally denied, to simply withdraw his money from a fractional reserve bank, if indeed he ever chose to deposit it in one in the first place.
Posted by Jardine K. Jardine, Saturday, 11 July 2009 1:56:58 PM
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Excellent comment Jardine; the government cannot not know but sadly the same applies for the individual consumer in the free market system. The argument is not simply about intervention versus non intervention. Part of the problem seems to be that politicans generally have not grasped the essentials of of game theory on which they appear to base their economic policies. There are essentially three principles that determine whether a system works: stability, efficiency and fairness. A system is stable if it is in equilibrium (a Nash equilibrium) It is efficient if it is Pareto Optimal. The problem is that there are many different equilbrium points and likewise an efficient system is not necessarily the best system. (The tragedy of the Commons is essentially the unwanted result of one form of an efficient system) to choose therefore among a range of competing alternatives the notion of fairness is invoked. The notion of fairness can be described in terms of "do unto others as you have them do unto you" principle - it seems most cultures have a version of that principle embedded in their ethical systems. The point being that if an economic system adheres to all three of these then there will be few objections to the outcomes. If you want to follow this through then Binmor's book Natural justice is a good introductory text to game theory and its application to economic systems. (Binmore was the person, who using this theory of economic intervention, advised the British Government on the Privitaisation of their Telstra equivalent)
Posted by BAYGON, Saturday, 11 July 2009 3:21:35 PM
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Baygon, the individual consumer only needs to know whether he is ready willing and able to pay an agreed price. It is not a defect, it is not unfair, and it is indeed irrelevant to the question that the consumer doesn’t know a different notional price, that the government arbitrarily says should be the market price.

We can talk about money being a ‘system’.

But the application to human action, and therefore economics, of such mathematical concepts as Pareto optimality and perfect knowledge, promotes more confusion than understanding. It does not describe the reality of the money system either under government interventions, or as it would be without them.

As Murray Rothbard said of such mathematical economics “It’s not junk mathematics, it’s junk economics.”

We can just as well talk about a shoe ‘system’. Ultimately we are describing human action by which a certain real individual is willing to hand over a certain amount of money, to get certain shoes at a certain place and time. To talk of a system is to imagine aggregates of all these related actions by many individuals.

Every single one of the prices that the mathematical economists study contains the necessary element of *subjective * evaluation which bears no constant relation to anything else.

When we see contracts for leather, or transporting leather, or derivative contracts to hedge risk in the future supply of leather, these merely represent people taking action now to adjust the supply of factors of production, with a view to an uncertain future. They do not fundamentally change the fact that the ‘system’ is an artefact of all the actions of many individuals, as concerns shoes, each trying to increase his subjective satisfaction by buying or selling something to someone else.

It is completely illusory to talk of this system as if it were a machine, subject to the laws of physics and mechanics, under the control of an overall designer engineer pulling policy levers and turning policy dials.

It is also nonsense to talk about a system that requires perfect anything to be effectual or permitted because obviously
Posted by Jardine K. Jardine, Sunday, 12 July 2009 6:23:20 PM
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