Conrad Black has a capacious knowledge of history, which often makes for an enjoyable read of his regular Saturday column in the National Post. This Saturday, however, Black’s attempt to put the current economic recovery, as sluggish as that has been since 2009, into historical context shows the perils of ignoring a cardinal point made by Ludwig von Mises.
In his Theory and History, Mises argued that any sound interpretation of the past first requires the adoption of a logically valid theory of human action. The historian’s task then is to apply this theory to the relevant facts. If the historian is trying to make sense of economic events, he or she must at least have a working grasp of economic theory to sift through the profusion of facts, organize them into their appropriate categories, and then identify the causal forces linking events.
Black’s article does get off to a promising start when he notes that World War I marked a critical turning point with respect to inflation. Before that conflict, inflation was non-existent in Western economies; afterwards, it became a permanent feature of those economies. Black is a tad vague on the culprit, noting only that, “all the world’s currencies have been steadily removed from any discipline or value yardstick”. To illustrate the inflation that has taken place, he observes that the price of gold has risen by 6,500% since 1933. That happens to be the year that Franklin D. Roosevelt initiated the process of delinking the U.S. dollar from gold by prohibiting American individuals and firms from owning gold and devaluing the greenback in terms of the yellow metal. While he could have been more explicit, Black seems to be trekking in the right vicinity in accounting for the cheapening of Western currencies.
But then his analysis begins to slip. He refers to the rise in oil prices that began in the 1970′s as both the result of inflation and the cause of it. Yet high oil prices can only be the result of inflation. Assuming the money supply remains fixed, it is logically impossible for the price of a single good, even one as important as oil in fueling economic activity, to cause all prices to rise. Since the demand for oil is inelastic, the increase in its price will mean that more money is expended on it as opposed to other goods. With less money left for other goods, the prices of these would have to go down. It’s relative prices that change, not all prices. The latter can only happen if the central bank decides to accommodate the oil price increase with a looser monetary policy — which is precisely what occurred in the 1970′s.
Where Black’s discussion entirely loses track of reality is when he blames a significant part of our economic ills on the decline of manufacturing and its replacement by services. This is a claim that Black has made time and time again whenever he has turned his sights to the economy. I’ve never been able to fully gauge his rationale for preferring manufactured items to services, though in this article one actually finds something of an argument. He writes:
Teeming infestations of lawyers and consultants and stock brokers and merchant bankers and civil servants and other white collar employed people merely raise the velocity of money, the frequency of transactions. More and more people clip a percentage of money as it moves around but a lot of the economic growth is illusory.
Black’s reference to the velocity of money gives his claim an air of economic profundity, bringing to mind as it does the equation constituting the quantity theory of money. The velocity of money (V) represents how much a given supply of money (M) is turned over in a series of transactions. Multiply M and V and you necessarily get the nominal value of output in the economy. If V rises, then, so does that output. But there is nothing wrong if V increases whenever the same money is being continually used on transactions for goods that people authentically want.
Services are just as much goods in this sense as manufactured items. Indeed, the value of such items ultimately rest on their offering a service to us. A car provides us the service of taking our persons from point A to B; a dishwasher serves us in cleaning our plates and cups. As mere objects, a car and a dishwasher are nothing to us.
Manufactured goods are simply more tangible means of tending to our desires that simultaneously reduce the need for continuous human assistance relative to what are ordinarily called “services”. In determining if an economic activity has value or not, what matters is not whether it gives rise to a material object. It is whether people are voluntarily willing to pay for it.
Black elides this point by comparing trade in services to the buying and selling of a poem. If such a poem, he says, is transacted 10 times a day for $100 at each sale, a value of $1,000 in economic output will be recorded in the statistics. Surely, he concludes, the community is not really $1,000 better off as a result? Actually, it may be if that is what individuals are willing to pay for the poem. In trying to persuade his readers, Black is relying on the fact that very few people today (if they ever did) relish poetry. But playing to people’s disinterest in iambic pentameters will not suffice. Black has to demonstrate that people actually view the services produced in our economy the way they do the works of John Donne.
Conrad Black says he will be publishing a history of Canada later this year. There is much to look forward to in that book, but all the signs indicate that the economic portions will be flawed.