United Liberty

An editorial in today’s Wall Street Journal brings home a fact that I’ve known for a long time: Economists tend to be schizophrenic.

The article mentions Larry Summers’s double talk. Summers commented on Obama’s latest budget by saying, “There are no, no tax increases….” The article points out that there are tax increases, namely the death tax that will be returning to its 2009 parameters, instead of disappearing as it was scheduled to do in 2011. That wouldn’t be more than a fib, but the story gets worse.

In 1980, Summers co-authored a study at the National Bureau of Economic Research supporting the elimination of the estate tax.

Go figure. Schizophrenia, anyone?

Another example of economic split personality is one of my favorites: Milton Friedman, a Nobel Prize-winning genius, a great man, and one of our best economists—but just a bit split when it came to monetarism, as noted by lesser economist Edward C. Harwood.

Friedman would say things like this, quoting from “Capitalism and Freedom”:

The Great Depression in the United States, far from being a sign of the inherent instability of the private enterprise system, is a testament to how much harm can be done by mistakes on the part of a few men when they wield vast power over the monetary system of a country. It may be that these mistakes were excusable on the basis of the knowledge available to men at the time—though I happen to think not. But that is really beside the point. Any system which gives so much power and so much discretion to a few men that mistakes—excusable or not—can have such far-reaching effects is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic—this is the key political argument against an ‘independent’ central bank. But it is a bad system even to those who set security higher than freedom. Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an ‘independent’ bank. To paraphrase Clemenceau, money is much too serious a matter to be left to the Central Bankers.

Clearly, Friedman didn’t believe a central bank could carry out its intended function because of an inherent defect in its makeup, i.e. its dependence upon humans.

That doesn’t prevent him from recommending, in the same work, indeed in the same chapter, that human legislators be given the power to control the money supply:

… [I]t seems to me desirable to state the rule [the legislative rule for monetary policy] in terms of the behavior of the stock of money. My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specific rate of growth in the money supply.

The rest of his work is so monumental that we could almost forgive him, if it weren’t for the fact that the whole world took his admission of the validity of centralizing the control of money supply as a justification for their central bank—which is what got us where we are today. Sorry, Milton, but it’s partly your fault.

Our third example of inconsistency is the original Accident of Personality himself, Alan Greenspan. In his chapter entitled “Gold and Economic Freedom” published by Ayn Rand in her “Capitalism: The Unknown Ideal,” Greenspan says the following about the faulty reasoning of the Federal Reserve in 1927:

The reasoning of the authorities involved was as follows: If the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The ‘Fed’ succeeded: It stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom.

Strange words from a man who did exactly that in 2004.

Perhaps you can now understand why I named my economics blog after Sybil, the star among multiple personalities.