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Say what you will about Keynesian superstar Paul Krugman, he doesn’t mince words. In a recent interview with Business Insider’s Joe Weisenthal, Krugman gave his opinion that Bitcoin was in a bubble because it wasn’t backed by a tangible asset.
Perhaps sensing that this may have undercut the case for Krugman’s preferred monetary system, Krugman was quick to add thatgovernment-issued fiat money was “backed by men with guns.” (See the video for yourself.) Thus, Krugman thought that government currencies were not in a bubble, even if they weren’t backed by tangible assets, because people needed to obtain the currency in order to pay taxes.
Krugman’s analysis provides a good opportunity to explore the subtlety of Ludwig von Mises’ monetary economics. On the one hand, Mises was a “hard money” man who was a fierce opponent of government fiat money. It is also true that Mises was a classical liberal who would have opposed government coercion in the form of legal tender laws, capital gains taxes on gold and silver, and other ways that governments currently use their “guns” to solidify the present system where most people on Earth use government-issued notes as their primary form of money.
However, even though a libertarian and proponent of Misesian economics might object to government-issued fiat money because of the coercion–”men with guns”–involved, strictly speaking Mises would not agree that a currency can be backed by guns, in the way Krugman describes. To speak in this manner is a complete surrender in the face of the economist’s task of explaining money.
Mises’ grand work in this area is his The Theory of Money and Credit, for which my free study guide is available. As Mises conceived it, the central theoretical task when it comes to money is to explain why money has a particular purchasing power. Why should it be that people give up valuable goods and services for a particular item–the money commodity–according to definite exchange ratios?
Mises’ answer is that people form expectations about the future purchasing power of money, and that is what gives it purchasing power today. These expectations in turn are based on their observations of the money’s purchasing power in the past. Thus lays the groundwork for Mises’ famous “regression theorem,” in which people’s subjective valuations of money necessarily involves a historical component (unlike their subjective valuation of, say, pizza). Gold, silver, and other forms of commodity money could ultimately be traced back to the days of barter, in which they had definite exchange ratios with other goods because of their usefulness as regular commodities.
In the case of government-issued fiat currencies, Mises explained their purchasing power using the same theoretical apparatus. The only difference is that at some point in the past, the currencies (such as the dollar, pound, franc, etc.) had been explicitly linked to the precious metals, and that’s what grounded everyone’s valuations of them.
Thus, Krugman’s glib assertion that today’s government fiat monies derive their value from guns completely dodges the problem for the economist: to explain the magnitude of that value. Even if we conceded that the government could force everyone to use something–let’s say a particular type of sea shell–as money, by insisting on payment of taxes in the form of sea shells, that policy wouldn’t explain why an hour of labor should trade for 10 shells, rather than 100 or 1,000. This is especially true when we reflect that most government taxes are expressed in terms of percentages, rather than an absolute amount.
Furthermore, it’s obvious that Krugman’s “explanation” would have no way of accounting for changes in either variable. For example, in the 1970s in the United States, price inflation took off dramatically, meaning the purchasing power of the dollar fell sharply. Was this because of a reduction in taxes? Of course not. And in the 1920s, there were sharp cuts in marginal income tax rates at the federal level. Did this lead to severe price inflation, as people now didn’t need as many dollars to pay Uncle Sam? On the contrary, consumer prices were fairly stable in this period.
As these observations should demonstrate, Krugman really hasn’t offered a viable explanation for the purchasing power of money. One might be tempted to say that at best, governments can use their taxing power to dictate what the monetary unit is, even though they would still have little control over its purchasing power.
Yet even this concedes too much. Strictly speaking, if the only policy we are considering is that the government says every year, “Citizens must turn in such-and-such number of sea shells as tax payment,” that alone won’t even be sufficient to conclude that the sea shells will be the money in this society. People could still use some other commodity as the money, and then use the actual money to buy the sufficient number of sea shells each year right before paying their taxes.
UPDATE: After originally posting this, I realized there was a problem with one of my examples: In the 1920s amidst the marginal income tax rate cuts designed by Treasury Secretary Mellon, the U.S. was still on the gold standard. Thus this period is not a good refutation of Krugman’s explanation for fiat money’s exchange value. (Of course, we can simply look at other examples of governments that engaged in large-scale tax cuts even while using a fiat currency, and we don’t typically see a sharp rise in price inflation accompanying them.)
Robert P. Murphy is the author of The Politically Incorrect Guide to Capitalism, and has written for Mises.org, LewRockwell.com, and EconLib. He has taught at Hillsdale College and is currently a Senior Economist for the Institute for Energy Research. He lives in Nashville.
This past weekend I caught The Hunger Games: Catching Fire at my local theater. The movie is based on the second part of a dystopian trilogy written by Suzanne Collins. In Collins’s fictional world known as Panem, a despotic government rules over all with a violent iron fist. There is a strict separation between the political class and the rest of the populace, with the latter working in slave-like conditions to support the former. The story focuses on protagonist Katniss Everdeen and her struggle to protect her loved ones while surviving the tyranny of her brutal overlords.
Throughout Catching Fire, the subject of revolution is paramount. Since the first instalment of the series when Katniss bested her oppressive dictators in the highly-publicized, annual fight-to-the-death tournament, she has become a symbol of agitation to the people. They look to her as a chink in the government’s armor – a sign that tyranny is not immortal but can be damaged. The plebs and their desire for freedom results in riots in the streets with vicious crackdowns from Orwellian-named “peacekeepers” who maintain tranquility with the bloodied end of truncheons. At one point during Katniss’s victory tour, an older gentleman raises his hand in defiance of the regime and whistles the popularized tune of revolution. He is summarily executed on the spot while the crowd that attempts to protect him is beaten handily.
The act of violence drew a startled and winced response from the movie audience. It was a demonstration of the horribly destructive nature of tyranny. There was no question as to the evilness of Panem’s dictatorial government. The line between enemy and hero was straight and untainted.
Stories such as the Hunger Games are wonderful things because they spark what conservative statesman Edmund Burke called the “moral imagination.” In his famedReflections on the Revolution in France, Burke chided the Jacobin revolutionaries for endeavoring to paint “the decent drapery of life” and the “moral imagination” as “ridiculous, absurd, and antiquated.” Russell Kirk expanded on this phrase and defined it as the “power of ethical perception which strides beyond the barriers of private experience and momentary events.”
Whether viewers know it or not, the basic plot of the Hunger Games series is an appeal to the moral imagination that men should be free from working as servants to others. It’s not exactly a new theme when compared to other modern movies. There are a multitude of storylines where a strong-willed protagonist finds the courage within themselves to fight off an authoritarian power, not alone, but with the help of others. The narrative follows a familiar pattern: while outgunned and outmanned, good ultimately triumphs over evil not so much because of one person but rather the hope for a better life embodied within a symbol.
The engrossing message of liberty over tyranny in the Hunger Games is thought to be why the franchise is so popular. In some ways, that is correct. People tend to have the urge of rooting for the underdog. When the abuser receives his just deserts, it’s seen as a representation of justice fulfilled.
But as great as the moral imagination is, it ultimately means nothing if it does not translate into real-life behavior modification. It’s one thing to cheer on a character on screen who is risking their life for a freer world. It’s another to embody that risk yourself in a reality that is slipping towards despotism.
Anyone who claims the post-apocalyptic setting in Hunger Games bears an uncanny resemblance to state control in our time is liable to be marked as a black helicopter-type. The ridicule is the same that was aimed, and still is aimed, at Friedrich Hayek after his great work The Road to Serfdom was released. “No,” the critics say, “the existence of the large welfare-warfare state has not translated itself to one world authoritarianism.” That is certainly true for now. Still, the general public finds it fun to mock the government as an over-bearing and inefficient behemoth while relying on the beast for a bi-weekly allotment of tax subsidies.
We may not be living hand-to-mouth while being forced to labor for thuggish overlords but the modern trend is clear: the political class is consuming more and more wealth-generating capital for themselves. It can be seen in highly-unionized European countries and within the bubble of richness known as the District of Columbia. The police state is ratcheting up its already untamed authority. Economic regulation is becoming more varied and intrusive. In the West, the state as an institution has been growing by leaps and bounds for over a century. Only an imbecile would deny this mass centralization in government power.
Yet most viewers of the Hunger Games will not let that message sink into their consciousness. They will not make the connection between a story and their own lives. It’s far too discomforting. At the same time, they will revere characters in a tale who come off as heroes. These fictional thought constructs are viewed as perfectly noble persons who sacrifice for the greater good. One would think the same reverence would be shown to those individuals who engage in the same art of defiance against what is generally deemed an unjust situation. If characters in fiction can be seen as courageous, why not real-life persons who display the same type of behavior?
Edward Snowden, the now-infamous whistleblower of the National Security Agency, is still seen as a dirty, rotten traitor by much of the public. It’s a strange cognitive dissonance that while a majority are irate over their government’s spying, they see the man who clued them in as some type of mendacious plotter who hates Uncle Sam. It’s equally as strange that the same folks who hardly bat an eye when calling Snowden a scumbag will just as quickly latch on to the fighter of injustice in a movie.
Stories provide valuable insight into the limits of mankind and what constitutes good. But they are not reality in the end. There is little risk in admiring a character in fiction who stands up for the right thing. Doing so in real-life is apt to bring ridicule, and thus has a social stigma attached to it.
It takes no spine to be a warrior on paper. It also requires little brain power to bend your will with that of an author’s. The science of critical thinking demands a logical and coherent approach to viewing issues. Criticizing someone for doing the very same action that you praise in make-believe land is inconsistent and a sign of poor judgment. The borderline between the real and the imagination does not render ethics and morality capricious. A proper way to live is to be transcendent of observable examination alone.
Hunger Games contains a pertinent message to those living under big government. The heroes and villains of the story should not be unfamiliar to current events. Edward Snowden is a real life Katniss Everdeen. He defied the powers-that-be in order to do what he believed was right. But instead of receiving praise, he got condemnation from voices normally wary of statism. The irony remains that the same men and women who call Snowden a traitor should be cheering for the tyrannical government of Panem to squash the rebellion and restore its oppressive hold on society. Of course, that suggestion sounds crazy, but then so does the person who pays lip-service to freedom while cheering for the death of someone who risks their life for greater liberty. Their moral imagination is in great need of fine-tuning.
James E. Miller is editor-in-chief of the Ludwig von Mises Institute of Canada. Send him mail
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