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Saturday, April 4, 2015

"'Greedy Speculators' Don't Cause Inflation, But Greedy Princes Do"

An article by Jerry Bower at Forbes that not only gives a simple explanation of inflation, but also takes a different perspective on why Galileo butted heads with religious authorities, but Copernicus did not. From the article:

It is a basic fact of economics that price inflation is caused by excess monetary expansion. It is a fact in the same sense that the idea that the earth revolves around the sun is a fact, in that it is simply the only way to explain the data without reverting to massive distortions in order to save appearances.

In fact, the same man solved both problems: Nicholas Copernicus had a day job and it was not looking up at the stars: it was looking down at our earth-bound economy. Copernicus worked for his uncle in what we would now call economic development when he took up work on his heliocentric theory in his free time.
 
Copernicus identified what is known as the quantity theory of money, showing that it is government officials debasing currency through excess money creation which drove price increases. Not greedy merchants. Not debauched, impious consumers. Not lack of respect for the law. In fact, the law in the sense of the government is what lay behind price inflation.  Copernicus discovered Gresham’s law before Gresham: the law that says people tend to hoard sound currencies at times when other currencies are being debased. It’s not the phenomenon of greedy speculators behind this principle; it is the phenomenon of greedy princes.

The alleged advances of the ‘new’ Keynesian economics were really a move backwards to pre-Copernican Aristotle, who never understood the effects and functions of the interest rate in a market system. Both geocentric and spender-vendor-centric models of astronomy and economics, respectively, depend on surface observations of effects and not on deeper exploration of cause and effect. I understand that it ‘looks like’ price hikes are caused by the people who sell goods and services, not by debasing Polish officials, in the same way that I understand that it looks like the sun goes around the earth. I also understand that in both cases, surface observation is in some sense ‘empirical’, but it is not really science.

Copernicus’ Treatise on Money (less well known as On the Coinage of Money) was in many ways as revolutionary as his On the Revolution of the Celestial Spheres, and probably more poorly received. This may shock modern readers who look  at the late middle ages through the lens of chronological chauvinism and see a morality play of good sciences vs. bad religion. But all of that fails to explain why Copernicus was not persecuted; his books were not banned by Church or State. Modern historiography has undone the war between science and religion narrative when applied at least to geo-centrism, at least to anyone who is paying attention. Copernicus was a loyal servant of the Church which treated his ideas with respect. Galileo’s persecution a century later cannot be understood apart from his particularly vitriolic personality and related political factors.
 
A better hermeneutic through which to view the disputes of that era is not science vs. religion, but evidence vs. tradition. Both the renaissance and the reformation shared a common commitment to ‘ad fonts,’ i.e. ‘to the sources.’ The source might be empirical data for the new scientist, or the actual text of Scripture to the reformer. The enemy was neither science, nor religion: the enemy was the dead hand of unchallenged tradition upheld by established academic elites and enforced by bureaucratic power. The enforced orthodoxy in matters of astronomy was in both cases the same man, Aristotle, his astronomy codified as the Ptolemaic system and his economics codified in usury laws and just price theory. 
Is it any surprise therefore that not just Copernicus, but his intellectual successor Galileo, challenged both orthodoxies? That’s right, Galileo’s famous Dialogue Concerning the Two Chief World Systems did not just attack geo-centrism, but also just price theory. It identified and then resolved the old medieval puzzle of the diamond/water paradox. Why do markets pay more for a cup of diamonds, than they do for a cup of water? Because we are insufficiently philosophical to recognize the greater value of the water? No, it’s because water is far more abundant than diamonds and so the marginal value of an additional cup of diamonds exceed the marginal value of an additional cup of water. It’s not the buyers are insufficiently philosophical; it’s that philosophers were insufficiently practical to understand real world economics from the vantage point of their armchairs. And, yes, I am saying that Galileo invented marginal utility 200 years before the Austrian economic revolution.

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