The Efficient Muffin Hypothesis

During this financial "crisis" and subsequent bailout, some Austrian economists have surprised me with their optimism. Essentially, they argued that the market will pull through. Even if stupidity got us into the mess, and stupidity was going to compound the mess, so long as the market is allowed to chug along we will always ultimately "grow our way out." In the end, these Austrians argued, we would end up better off after the crisis and bailouts are all over (say, a few years hence) than we were before the whole thing started. We might have been even better off had we not passed some of the stupid policies, but we would only lose growth, we would not shrink in real terms.

Austrians also talk a lot about inflationary policy, or other kinds of foolish policies that governments engage in for a short term fix, despite having bad longer term consequences, as being like a drinking binge. They then argue that you can't cure a hangover with more drinking.

Now, if original hedonistic policy is like the binge drinking of a wild night, then the morning is the time for recovery. And if, in fact, if a semblance of protection for private property rights is all it takes to "grow our way out" then we can pretty much use whatever hangover cure we want, and be alright.

We can call this the "efficient muffin hypothesis," because the muffin we eat for breakfast manages, as it breaks down, to metabolize away the worst of the negative effects of our night of drinking. This theory says that we will make it through the hangover and to complete recovery fairly quickly. We can even have a mimosa with the muffin to take the edge off.

The inefficient muffin hypothesis, then, would state that in fact any old hangover cure may not work, the effects of these policies may compound each other, and we may never recover. In this scenario, the muffin cannot purge the poison, nor can time alone, and permanent damage may have been done.

Now, if the efficient muffin hypothesis is true this has significant implications. If, so long as the market is not completely banned, the wee market left can always "grow us out" of any idiocy of government policy, then we might have to take a second look at whether these policies are so bad. A night of drinking ain't a bad thing, sometimes.

Corporatism & Money

What is the role of monetary policy and the gold standard, with regard to government levers on the economy, and corporatism? There is certainly a grand role for it. I will post more on this later, but a few words (p.105) from Garet Garrett on inflationary money policy (speaking of a law of 1933):

The law reads: "That every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment in gold, or a particular kind of coin or currency, or in an amount of money of the United States measured thereby, is declared to be against public policy; and no such provision shall be contained in or made with respect to any obligation hereinafter incurred."

It follows, literally, that it is now unlawful in this country for a borrower, be it the Government, a corporation or a private person, to promise that the value of what is to be paid back shall equal the value of what was borrowed. The ostensible reason for this amazing prohibition is that the Government shall be free by fiat to fix the dollar at any value it may deem expedient; that it shall have the power to say of a 50-cent dollar, a 25-cent dollar or a 5-cent dollar , as it has already said of a 60-cent dollar, "This is the standard dollar and full legal tender in settlement of all obligations." It follows again, literally, that no one knows today what the value of the dollar will be tomorrow, or a month hence, or a year from now. The Government itself does not know. And that is now the state of the currency.

What a perspective. Do we know? We think we know because we think we know inflation, and we think we accurately predict it. But, as anyone who has looked into the CPI much knows, we don't really. Not even close.