Monday, August 16, 2010

Fracas of the Fruits, or, Apples and Oranges Mix It Up

As many of you know, CESJ's new edition of Dr. Harold G. Moulton's 1935 classic The Formation of Capital was released. Because we're a little short of staff and have somewhat limited resources, we haven't — yet — sent out a press release on the book, although we expect to, shortly. In the meantime, there is nothing to stop anyone from going to Amazon, calling up the book's webpage, purchasing the book, and posting a review.

Before doing that, however, we thought we'd issue a few guidelines — not about what to write, of course. Your opinion is your own. Some authors are of the opinion that a nasty, ignorant review is infinitely superior to a good review . . . if the goal is to sell books. If you want us to sell lots of copies, then, post something that attacks the book, and be sure to get the facts wrong and misspell a few words while you're at it.

The worst sort of review is the pseudo-scholarly "critique," the author of which pretends (and in most cases actually believes) that he or she knows what he or she is talking about. Coming from academics with turf to protect, these exude an air of authority rooted in a desperate effort to discredit anyone with whom they disagree.

We found such a critique of The Formation of Capital, published by Raymond T. Bye in the December 1936 issue of The American Economic Review (Vol. 26, No. 4.) — hence a few guidelines to help you avoid similar mistakes, whether you agree or disagree with Moulton. A sound disagreement supported with solid evidence and argument is often more valuable than even the most adulatory comment in support, if the former is substantive and the latter mindless.

Unfortunately, when dealing with Binary Economics, a school of economic thought that comes under the "Banking School" (into which category Moulton's work also falls), the critiques — and the critics — turn out to be more than a little off base. We'll keep this short and just give four examples of what we mean from Dr. Bye's article, three rather minor, the fourth major.

First, Dr. Bye implied that Moulton was less than honest in the publication of Brookings's studies on "the Distribution of Wealth and Income in Relation to Economic Progress." As Bye complained, "it is unfortunate that such studies are not subjected to the scrutiny of economists at large before being widely disseminated among the general reading public." (American Economic Review, op. cit., 607.) Why? "If the propositions held by Moulton and his associates are true, a large part of economic theory must be rewritten." (Ibid., 608) In other words, Moulton wasn't "playing the game" by allowing economists who had established their reputations by asserting a different paradigm to trash his work and suppress it if at all possible. We can't trust the public at large to understand such esoteric matters until and unless their economic episcopate has granted the imprimatur to a work. Besides . . . looking at the people involved in the project, Moulton did run his work by other economists. What Dr. Bye seems to have been complaining about was that Moulton didn't run it by him.

Second, Dr. Bye relied almost exclusively on the logical fallacy of the "Appeal to Authority." He did not present his own arguments, or even those of the authorities cited (either of which would have been acceptable), but simply stated that because, e.g., Keynes, Wicksell, Robertson, von Hayek, etc., etc., said something different, Moulton had to be wrong. Without some familiarity with the work of the authorities, how are we to judge the validity of their arguments? Answer: we can't. Dr. Bye's critique does not stand on its own merits.

Third, Dr. Bye misstated Moulton's position, most egregiously when he claimed that Moulton meant the same thing as Keynes and the Gang by expansion of bank credit and the presumed "involuntary savings" that occurs within the paradigm of the Currency School: "Moulton appears to regard the same process as the only means of escape from disequilibrium." (Ibid., 614.) Oops. Sorry, Dr. Bye — Moulton was positing the expansion of bank credit based on the principles of the Banking, not the Currency School, and thus obviating the whole concept of "involuntary" or "forced" savings to which the authorities Dr. Bye cited attached so much importance. This is called the "Straw Man" logical fallacy, in which the critic asserts his or her opponent's position incorrectly, demolishes the incorrect position, and then claims victory in a battle that never occurred.

Fourth, — you guessed it. Moulton, in common with other "pioneers" of the Just Third Way and economic personalism such as (gasp) Adam Smith, Henry Thornton, Jean-Baptiste Say, John Fullarton, Henry Dunning Macleod, and a couple of guys named Kelso and Adler, operated within the framework of the British Banking School. Dr. Bye, however, in common with the authorities he cited to "disprove" Moulton (Wicksell, Keynes, von Hayek, and Robertson), was clearly operating within the framework of the British Currency School. (Caveat: not all Just Third Way pioneers were Banking School. For some odd reason, Banking School adherents tended not to recognize the importance of widespread direct ownership of the means of production — but that is a story for another day.)

Although we've covered the differences at some length in previous postings, we'll summarize them again so you don't have to go back and look it up. (Besides, we're getting better at expressing ourselves more clearly as we go along.)

Banking School: "Money" is anything that can be used in settlement of a debt, and functions as the medium of exchange and the store of value. Money represents the present value of existing or future marketable goods and services in which the issuer of the money has a private property stake. The essential principle of the Banking School is Say's Law of Markets, which — most simply put — is that we don't purchase what others produce with "money," but with what we produce by means of our labor and capital. Money is simply a convenient means of conveying private property rights in an exchange. Thus, production equals income, which boils down to supply creates its own demand, and demand its own supply. This is realized in the real bills doctrine, which is simply that we can turn the present value of existing and future marketable goods and services into "money" and use it to store value and in the exchange of value by "drawing a bill" and either using the bill itself to carry out exchanges, or discount the bill at a financial institution and convert the bill into "current money" or "currency." Thus, the money supply can, potentially, always match the supply of marketable goods and services in the economy, and there will be neither inflation nor deflation, but the real price of all goods and services. New capital formation can thus be financed by drawing a bill on the present value of the marketable goods and services to be produced in the future by the as-yet unformed capital, and either used as money directly, or discounted at a commercial bank and converted into currency through the expansion of bank credit, that is, the conversion of individual credit into a bank's general credit.

Currency School: "Money" is coin, currency, and (except for the absolute purists), demand deposits (checking accounts) and certain time deposits (savings accounts). The Currency School is divided into "Bullionists" (only gold is money) and "Anti-Bullionists" (gold and State-issued gold substitutes are money). Money is only one medium of exchange and one store of value, being necessarily limited to State-authorized currency and currency substitutes, such as checks. Money is backed not by a private property stake in the present value of existing or future marketable goods and services, but by the State's ability to tax future income and issue claims against existing wealth. Currency School adherents disagree on whether the private sector should be left alone to accumulate savings for reinvestment, or whether the State must intervene to control saving and investment. The only way to finance new capital formation is to cut consumption, save, then invest. This can be done either directly by producers cutting their own consumption and accumulating unconsumed income, or in a "roundabout" way by inducing inflation, which raises the price level. This forces reductions in consumption, but maintains profits at their former level or greater, resulting in a transfer of purchasing power from consumers to producers. These profits are either used directly by producers to finance new capital, or are deposited in a bank and loaned out to other producers to finance new capital.

Now — whether or not you understand the differences between the Banking School and the Currency School, it is evident that there are, in point of fact, differences — and these differences are extremely significant. Dr. Bye, however, failed to note the differences at all, much less their significance. Consequently he insisted on critiquing Moulton's Banking School analysis in The Formation of Capital as if it were a Currency School analysis.

This is like judging the entrants in a cat show using the guide for a dog show, or trying to find your way around downtown Manhattan using a Betty Crocker Cookbook. To use a more homely analogy, Dr. Bye mixed apples and oranges, and came up with a vegetable salad. Dr. Bye's critique doesn't make sense because he judged Moulton for adherence to principles that Moulton wasn't even using! As G. K. Chesterton explained this error in his short bio of St. Thomas Aquinas, The "Dumb Ox,"
It is no good to tell an atheist that he is an atheist; or to charge a denier of immortality with the infamy of denying it; or to imagine that one can force an opponent to admit he is wrong, by proving that he is wrong on somebody else's principles, but not on his own. After the great example of St. Thomas, the principle stands, or ought always to have stood established; that we must either not argue with a man at all, or we must argue on his grounds and not ours. (The Dumb Ox, 95.)
Consequently, Dr. Bye's critique is of value only to show his own misunderstanding of what Moulton was talking about. This misunderstanding was evidently widespread in the 1930s, and continues to afflict those economists Dr. Bye referred to as "orthodox" — a word to which Joseph Schumpeter managed to attach a somewhat pejorative air in his History of Economic Analysis (1954) when referring to the damage done by the failure to question theories such as those of Malthus that had become "enshrined as economic orthodoxy."

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