8-20-11 Hodgepodge

Saturday, August 20, 2011

One, Both, or Neither?

Regulars here have heard of the "impostor syndrome," but through Scott Hanselman, I learned that the opposite problem has a name, too. Hanselman quotes Wikipedia:

The Dunning–Kruger effect is a cognitive bias in which unskilled people make poor decisions and reach erroneous conclusions, but their incompetence denies them the metacognitive ability to recognize their mistakes. [links omitted]
Hanselman writes about a problem all of us face: objectively judging our ability and performance. I think many people tend towards one type of error or the other. However, I think it's also possible for one person to make both types of error, although I would guess that this would normally depend on the area of expertise on which such an individual is attempting to gauge himself.

Weekend Reading

"Let me translate: The only argument with any chance of success in today's Supreme Court starts by admitting that Congress has authority to control every single economic, 'activity' known to mankind -- farming, building, manufacturing, transporting, storing, insuring, selling, buying, leasing, practicing medicine, operating a hospital, you name it -- but then denies any authority to invade the sacred right of 'inactivity.'" -- Thomas Bowden, in "How Important Is the Obamacare Litigation?" at The Daily Caller

"Four decades on, a comparative review shows Nixon's decision [to abandon the gold standard] to have been a catastrophic error, and indicates the need for fundamental monetary reform." -- John Allison and John Chapman, in "It's Time for Pro-Growth Monetary Reform," at The American Magazine

"As a former gold standard advocate, I concede that I was wrong on the issue." -- Wendy Milling, in "Forget Gold, Let's Denationalize Money" at RealClear Markets

"At what point does the chance co-location of two houses (and all the property lines and restrictions that go with it) develop into a warm fuzzy friendship?" -- Micheal Hurd, in "Be a First-Class Neighbor" at DrHurd.com

"Funny how nobody has an issue with computer trading when stocks rise, only when they sell off." -- Jonathan Hoenig, in "High-Frequency Trading Fears Do Not Compute" at SmartMoney

"In contrast to 1971, and the four decades since as a fiat currency tied to Washington's waning fiscal credibility, a dollar today buys 98% less gold, 96% less oil, 85% less in terms of a basket of consumer goods, and 39% less even against major foreign currencies. The fiat paper dollar also has lost 83% in terms of toilet paper." -- Richard Salsman, in "Gold, Reagan and the Reds: From Degraded Dollar to Downgraded Debt" at Forbes

"In effect, macroeconomics was a two-step public relations strategy for those seeking to finance the entitlement state. Step 1 was to define the goal as aggregate spending increase (which, of course, you always refer to as "economic growth"). Step 2 was to have the central bank engineer a long-term expansion of the money supply." -- Mikiel de Bary, in "Macroeconomics and the Entitlement State" at American Thinker

My Two Cents

Even among today's handful of thought-provoking pieces pertinent to the fortieth anniversary of the abandonment of the gold standard, Wendy Milling's column provides the most interesting look at the problems caused by fiat money and, more important, how to reestablish sound money. Anyone who considers himself an advocate of the gold standard should read her piece carefully.

Balzac on Coffee

A Q&A by Leonard Peikoff on whether one can morally sanction the use of caffeine indirectly reminds me of an amusing essay by Honore de Balzac on "The Pleasures and Pains of Coffee."

-- CAV


Snedcat said...

Ha! Yo, Gus, the Balzac essay reminds me of the spread of coffee in the Islamic world. There was a great deal of controversy in the 16th century as to whether coffee was an intoxicant such that it should be prohibited under Islamic law. There's an entertaining little essay on it here.

Jennifer Snow said...

Wendy Milling's article reminds me of something I read in a recent Objectivist Roundup about "there's no education bubble"--her entire article is based on a misunderstanding of what gold-standard advocates are really advocating.

Capitalists who advocate a gold standard *don't* advocate a government-monopoly gold standard. They advocate precisely this "de-nationalization", just having the private currency-issuing organizations use gold (or silver) because of its superior trading qualities. A bank or other private entity *could* issue a fiat currency just as easily as a government, and, in fact, if a bank doesn't peg its currency to SOME sort of material value, it IS a fiat currency no matter how "stable" it is or how in-demand.

Gold is a superior material for this because it is rare, (largely) homogenous, imperishable. But you could use gems or seashells or seed grain or reactor-quality uranium or gold-pressed latinum or microchips.

Wendy's other arguments are specious. We don't have a ready means for returning to a gold standard without financial uproar? Well duh. This is like saying that it's impossible to lose weight without making serious life changes, so you should just go ahead and keep being obese forever--or that you should adopt 50 fad diet plans that all together advocate you pretty much keep doing what you were already doing. The short-term pain involved in changing over to a proper currency model is not an argument against changing over. No doubt many people on welfare would find themselves in trouble if those programs were ended. Yet that's no argument for not ending them. It just means that you need to manage the changeover intelligently.

There's no concrete plan extant for this because it depends first on obtaining a political climate favorable to laissez-faire capitalism. Only when that political climate exists can the precise monetary situation at that time be evaluated and a plan put forward to (basically) privatize the Fed. I, personally, don't think it necessarily has to involve some sort of huge financial strife. You just legalize private currencies (of whatever kind), close down the federal mint, and let the free market do what it always does: provide solutions. The absolute need for people to be able to trade goods and services with each other will ensure that solutions arise very quickly. Some incautious people may lose their shirts, but incautious people losing their shirts is, in fact, a feature of capitalism. (No one said it was NICE.)

Stability is not the be-all, end-all of desirable currency. Bobbles in prices are (largely) immaterial when what's being traded is *real goods*. If you use, say, seed grain as your currency, a bumper crop might cause tremendous "price" rises. This isn't a bad thing, it just means there's lots of grain for everybody! Likewise, how much of the "inflation" she talks about during the gold-standard years is a result of increases in the supply of gold? The stuff is continually being mined. In fact, under the gold standard "inflation" of this type might be considered a good thing because it means there's a constant increase in the supply of money. People are always working to increase the supply of *everything*. If you don't have influx of gold supply, you'll have the situation they had in England around the 1760's when there was so little coinage in circulation that wages were sometimes paid in one coin for three or four men.

She talks about a fantasy situation in which prices will remain fairly "stable". But the relative prices of goods change ALL THE TIME due to this or that good being in higher demand or supply or whatever. If banks issue currency that isn't pegged to anything, these prices will still fluctuate.

Now, I won't claim to be an expert, but I can't see any sense whatsoever in this proposal of hers.

Gus Van Horn said...

Thanks! That was a fun read.

Gus Van Horn said...


I don't have time to address your comment point for point, but...

I find your general interpretation of (and opposition to) Milling's article somewhat puzzling since it seems clear to me that a free market would select something like a gold standard, anyway. (A point that Milling either makes outright or which is implicit in the whole idea of privately-issued currency.)

What I saw as the take-home from her article was that more gold standard advocates need to become aware that the government needn't and shouldn't be involved in establishing currency. (In my early days as an Objectivist, I didn't see anything wrong with the government issuing gold coinage. I doubt many conservative "gold bug" types would, either.)

Whether she would have been better off arguing against a government-mandated gold standard is arguable, but if she had, Milling might have lost the rhetorical "hook" that the early part of the article featured, in which she merely appears to be backing off a gold standard, but draws readers in through this appearance to consider her argument more fully.


Jennifer Snow said...

That's precisely my problem with her article--she completely mistakes what capitalists are advocating when they talk about a "gold standard", versus, say, what maybe conservatives are talking about. She misrepresents the capitalist position, attributes this to Objectivists, and then constructs this fantasy universe of paper money that isn't pegged to anything but still somehow operates as currency.

I'm in full agreement that the de-nationalization of currency is vital--and will probably lead to a private "gold standard". Portraying these two things as somehow different AND OPPOSED is a problem.

Gus Van Horn said...

Pegged? By whom?

Free enterprise will demolish currencies that don't have objective value of some form in a fully private banking system.

With government decreeing the currency pegged, history shows us that no such protection exists.

Jennifer Snow said...

You did read her article, right? Wendy is advocating currency issued by banks that has *no objective value* other than how "stable" it is. By doing so she is totally missing the point.

There are basically three stances on this issue:

1. The proper capitalist stance: i.e. that the government should be hands-off. This would naturally lead to the use of gold or other comparable values as currency.
2. Fiat money operated by the government.
3. This "de-nationalization" stance, which equates to *banks issuing fiat currency*.

I see #3 as a serious problem. Wendy is advocating against using actual values as currency for a number of utterly pointless reasons. She is not advocating for a proper free-market standard. She is advocating for "non-governmental" fiat currency by misinterpreting the *actual* free-market position and equating it with #2.

Jennifer Snow said...

*rereads comment* WTF is wrong with me I sound deranged. I had caffeine today, too, when I've abstained for basically 2 months.


Gus Van Horn said...

She talks about fractional reserve banking, which I've seen debated in HBL (and which I think is probably OK, but don't feel qualified to make a definite stand on it), but also the need to insure the value of deposits, as well as the bank taking action (e.g., selling assets) when necessary to maintain the value of a currency. I don't see how, on the level of a currency having objective value, this is substantially different than gold.

That said, if I read her piece and your objections correctly, you object to the practice of fractional reserve banking. If so, then, I see why you don't like her piece.

Gus Van Horn said...


The baby is making me slow to post replies, so my reply to your penultimate comment occurs before your last comment.

That said, if I am grossly misunderstanding Wendy Milling's position, your comments might perhaps help others see the flaws in my reasoning.


Jim May said...

I have long said that the entire raison d'etre of modern economics other than the Austrians was to rationalize the welfare state. Mikiel de Bary is the first one other than myself I've seen make that case. Thanks for linking it Gus!

Gus Van Horn said...

Glad you enjoyed it!