May 26, 2009 - Freedomain Radio - Stefan Molyneux
12:36
| 
| Time | Text |
|---|---|
| Good morning everybody, it's Steph. | |
| Hope you're doing well. It is the 25th of May 2009, 10.39am. | |
| Excellent, excellent, excellent question by a relatively new... | |
| Board member called Radiant Oblivion, which I assume is either a pseudonym or his parents are really into video games. | |
| So, he says about podcast 1364 on religiosity and empiricism. | |
| Great podcast, he says. | |
| I have a question pertaining to a statement Steph made early on. | |
| Paraphrasing, evidence always trumps rationality. | |
| And he says, generally this statement seems pretty solid, but in the realm of economics things may be different. | |
| For instance, Keynesians always insist that there was no inflation during the 1920s, pointing to the relatively stable price level. | |
| However, Austrians know, rationally, that there was indeed inflation due to the Fed's money printing. | |
| And that the price level was necessarily higher than it would have been without the inflation. | |
| The fact that prices did not rise does not disprove the fact that there was inflation. | |
| As the so-called empirical Keynesians would assert, it is generally accepted that the high productivity of the period offset the inflation, preventing prices from rising. | |
| But there is no way that I know of to quantify this. | |
| Is this a misapplication of Steph's statement, or am I onto something? | |
| Thanks. Ah, man, I tell you, you people are the smartest human beings on the planet, that is. | |
| And in the planet, too, should there be a Middle-Earth. | |
| But... That is a fantastic, fantastic question. | |
| I will attempt to subtly redefine my terms so that I remain in the right and so on. | |
| No, I'm kidding. So this is what I would say about that. | |
| What this sort of reminds me of and I know a little bit, but not a huge amount about the details of this. | |
| What this sort of reminds me of is the claim that is constantly made around cause and effect, right? | |
| So we say, as free marketers, that regulation and the Fed have caused, triggered, created, exacerbated, set into motion, and worsened the housing crisis, say, or the boom-bust cycle or whatever. | |
| And Other people who are statists will say, ah, no. | |
| You see, these things are inherent to capitalism, and they would be even worse if we didn't have the Fed and government regulations, right? | |
| So we have this business cycle, to say the least. | |
| I mean, business is like a manic depressive cycle. | |
| We have this business cycle, and the free marketers say, well, it is because of fiat money and regulation, or violence, as I would say. | |
| And others say, no, no, no, no, this is inherent to this, and it would be even worse without, like, it's inherent to the business. | |
| It's inherent to capitalism, and it only hasn't become as bad as the Great Depression because of far more fine-tuned and better government regulation and currency control and so on, right? | |
| These two statements in and of themselves can't particularly be proven, I mean, relative to themselves. | |
| I think everybody would understand, who's even remotely mathematically illiterate, that if you have the same amount of goods and a higher volume of currency, each dollar must be worth less. | |
| I mean, I've always sort of thought if I was an economics professor that I would create a fiat currency and have people trade things in the class and then I would just, you know, quietly give people extra fiat currency and then people would see what happened to the prices of things with all this extra money floating around. | |
| Well, of course, the amount of goods would be fixed and it would only take about 10 minutes for everyone to realize that they were experiencing inflation because it would be a nice controlled And if you are an economics professor or want to, feel free to use that idea. | |
| I think it would be a very effective way to teach people about the problem of inflation. | |
| But in terms of the cause and effect, well, when you are... | |
| Because, of course, prices dropped in general from the early 19th century up until the creation of the Fed. | |
| And prices got all kinds of haywire in the First World War, of course, as it destroyed all the wealth created over the Industrial Revolution in Europe. | |
| And then they went all kinds of more haywire after, you know, the Fed and all that kind of stuff. | |
| So it's fascinating to think, they say, well, prices did not rise, as if that is the only definition of inflation. | |
| But I think we all understand that if Prices don't rise, there may still be inflation, because if the trend was for downward prices prior to this particular period, and then the downward prices, the price drops stopped, and prices maintained themselves, then this is evidence for inflation, right? | |
| So, that is, you know, if you're on a diet and you cut your calories extensively, And you lose weight, right? | |
| And then you stop losing weight, even though you're applying the same, then something else, some other factors occurring, right? | |
| So if you weight plateaus and you stop losing weight, then, you know, everybody will assume that you're either exercising less, or you're eating more, or you've reached some optimum weight, which, of course, there's no downward price spiral that is too low, right? And Or some other factor is some other illnesses in play, right? | |
| So if you've got a trend and that trend is then interrupted, that is evidence of a changed condition. | |
| If prices were dropping and then prices leveled off in the 1920s, that is evidence of a changed condition. | |
| And, of course, the Austrians would say that that is the inflationary policies of the Federal Reserve. | |
| But see, when I say that evidence trumps rationality, What I mean is that a self-consistent argument is not proof of anything's existence in the real world. | |
| So you can create a self-consistent argument for God, like the ontological argument for God. | |
| It is consistent with itself. | |
| In the same way, you can make up an imaginary language that is consistent with itself, but that doesn't mean that anyone can understand what you're saying. | |
| So you can come up with something that is logically consistent if the premises are faulty, right? | |
| But evidence will always trump that. | |
| And if something is logically consistent with both itself and reality, like a sensual reality, then it is not, well, then it's a factual theory, right? | |
| So there's no problem with it. | |
| So, the first thing that I would say is that when we have the mathematical lab condition of same number of goods, like just in theory, same number of goods and services, or, you know, same demand, or, you know, generally the same conditions, but we have Additional fiat currency, then mathematically the price of that is going to go up. | |
| Now, when we look at that in not quite laboratory conditions, but real-world conditions, certain periods of hyperinflation, say, in Germany in the 1920s, Argentina and Mexico and Spain after the conquest of the New World when they brought in all the gold and destroyed their economy for 400 years. | |
| We have lots and lots of examples where the mathematical proof of inflation is borne out by empirical evidence. | |
| So, when we get to the question of whether there was inflation in the 1920s, we have the logical consistent mathematical proof of inflation. | |
| We have countless evidence of this situation where increased fiat currency or increased currency of some kind leads to inflation and possibly to hyperinflation. | |
| We have countless evidence of this, so mathematically it is logically consistent. | |
| It is consistent with the empirical facts of reality, and we also know that prices were declining until The 1920s when they stabilized and therefore there was a kind of inflation going on because prices were no longer going down, right? | |
| I mean, that we can all understand, right? | |
| If you are making 20% more every year because you're a very hard worker and then you stop making extra money, you recognize that something has changed, right? | |
| Your pay stops going up. | |
| You recognize that some factor you have now plateaued and your pay is no longer increasing. | |
| So, if you were to say, well, is my pay still going up? | |
| Well, no, of course not. And so, if you were to say, well, our price is still going down in the 1920s, you'd say, well, no. | |
| Therefore, some inflationary pressure or some other factor, but all other things being equal in inflationary pressure must be at work. | |
| And the inflationary pressure wasn't just fiat currency, it was other things as well. | |
| But that's sort of where I would say we have, you know, both the recent argument in theory, we have masses of evidence for the additional creation of fiat currency over and above the requirements or proportion to the economy causing inflation, and we have the evidence that prices declined Until the Fed, and then they stabilized, and so on. | |
| So there is, I think, solid evidence for that. | |
| I would not say that there is no empirical or rational evidence. | |
| And certainly, since the question really is empirical evidence, I would say that there's huge amounts of empirical evidence. | |
| And this is actually one of those periods of empirical evidence, because prices were no longer declining. | |
| Now, if there was, you know, in economics, you can never say all of the things being equal unless you're doing one of these A guy on a desert island situations. | |
| But all other things being equal, more or less, if the addition of significant amounts of fiat currency, like enough to alter the basic parameters of an advanced economy, or even a basic one, | |
| I suppose, if significant amounts of fiat currency were injected into an economy and prices dropped, all other things being equal, In an unambiguous way that really couldn't be explained by other factors, then that would be a blow, not just against Austrian economic theory, but mathematics and human nature itself. | |
| So I would not hold my breath for that, but that to me would be an example where the Austrians would have to run back and say, huh, that is a problem. | |
| Now, this of course, there's lots of caveats in economics, right? | |
| Which is... How do you measure prices? | |
| I mean, how do you measure all other things being equal? | |
| And is there bias in the selection and reporting? | |
| Because, I mean, there's no way to measure prices, right? | |
| There's just no way to measure prices. | |
| So what do you pick and choose, right? | |
| And if you believe that prices should be going up, will you pick and choose the most inflationary sectors and call that a snapshot of the economy? | |
| Will you pick and choose the least inflationary sectors and call that a snapshot of the economy? | |
| I mean, economics numbers are really, really, really tough to take seriously. | |
| There is almost always a selection bias involved, and that is something I think that is important to remember, but that doesn't mean that I mean, it's like history. | |
| It doesn't mean that there's no truth in it. | |
| It means that you've just got to be really careful. | |
| And economics is where I would say that the theory, like mathematics, the theory is very, very important because the measurement and data involved in the practice is so tough. | |
| It's so tough to believe in as something that is accurate and objective. | |
| So I would sort of check that and see What happens? | |
| And of course, for those who say that fiat currency is good, because there's a core of genuine economic activity which certain currency represents, even if it's fiat currency, and then there's excess, right? | |
| That is not related to economic activity, but which is simply magically created through government fiat, right? | |
| And so what I would say to the professors who don't believe that what is legally, or not legally, effectively counterfeit currency does not do any harm to the economy, I would simply say, well, then you should have no problem being paid in counterfeit currency, right? | |
| Because that's fundamentally what it is. | |
| And if you do have a problem being paid in counterfeit currency, then you might want to rethink your suppositions. | |
| But anyway, something to mull over. | |
| Thank you so much for a great question. |
Export Selection