The Economics of Daily Bread part 216th September 2013

We were truly delighted that the Economic Research Council, Britain’s oldest economics-based think tank, discovered last week’s FYI blog The Economics of Daily Bread, awarding it No 1. in its Top 3 blog reads of the week. This week we continue with learnings from history that can be applied today, with the aspiration that we will seek to match this accolade from the ERC in the future. You can follow ERC on Twitter @EconResCouncil.

As a quick recap, last week we looked at Maslow’s Hierarchy of Needs, of which the basics such as food and water are the foundations for human existence, and the foundation for security, social, self-esteem and self-awareness pleasures that life brings. We speculated on whether employers or the state actually do a better job of helping individuals create solid foundations to their lives.

Through the experiences of the French revolution we found that the state can actively harm the chances of the populace in securing their daily bread, and thus their very existence, through interference that positively discriminates against individual motivation and initiative … and that whilst we don’t hit the extremes today, there are noticeable similarities in the state’s meddling behaviour … so really very little has changed.

I continue to be inspired by Florin Aftalion’s work The French Revolution: An Economic Interpretation. It really is quite incredible what went on just over 200 years ago, and here are some of the more ridiculous highlights of the politicians’ attempts to fix the market:

The state had run out of money, with over-spending and shortfalls in tax receipts. The worst thing they could do, which they did do, was to print paper money to fill the void, claiming that it was just as valuable as gold, silver and copper coin. Bad money drove out good, as people hung onto their coins and used their paper money as fast as they could.
Incredibly, most leaders and their advisors understood the inflationary damage that would be caused by money-printing. More money initially boosts the volume of trade, raising optimism and prices, but then damages trade as merchants find that replacement stock costs more than before and that fewer can afford to buy; ultimately more money chases fewer goods, pushing up prices ever faster. Many also understood the total folly of fixing prices, realising that this would only create losses for farmers and traders, reduce production and encourage hoarding. But on both money-printing and price-fixing, the country’s greatest minds pursued short-term populism and expediency rather than good sense.
The revolutionaries swore to uphold property rights. As they couldn’t take from Frenchmen they settled on invading their neighbours, “lending help to all peoples wishing to recover their liberty”. Once defeated, their neighbours’ “liberty” required them to pay war contributions, to maintain armies, to surrender the property of the clergy and nobility, and to use France’s paper money.
Even in France, property rights were only valid if you were on the right side. The assets of the Church were seized, to be put to “moral” use by the revolutionaries, supposedly securing the value of their paper money. The assets of those who had fled the country were seized and sold.
Forced loans were raised from “the rich, the egoists and the apathetic” … so even keeping your head down made you worse off. Revolutionary committees rapidly drew up fresh lists of unfortunate tax-payers, selected without any assessment of their incomes, who had just 48 hours to pay a third of new demands, and a month to pay the rest. Around the country “Patriots” wrapped revolutionary scarves around their necks and made-up taxes on the spot that they demanded from the rich, further diminishing the capital available to be invested in the production of essentials.
As the regulations carved out their damage, the revolutionaries decided that even more regulation must be necessary. Oh, and why not blame those who don’t share the same political views, or the rich, or the bankers (does this sound familiar today?). This brought about “The Terror” of mass-beheadings under the direction of the inappropriately named “Committee of Public Safety”.
Soon, anyone who held bread, meat, wine, vegetables, fruit, butter, oil, vinegar, brandy, soap, sugar, help, paper, wool, leather, cloth or fabrics had 8 days to declare this. Commissioners could seize it and sell it at cost price. If you failed to declare accurately you could be clapped in irons for 4 years or literally lose your head.
Attempts to fix prices led to the introduction of Maximum wages which, being inadequately adjusted for inflation, along with the numbers called-up for military duty, meant insufficient labour to plant and bring in the harvests, leading to inevitable famine. Of course the wages cap didn’t apply to the politicians, as their wages rose as the value of paper money fell. Even the civil servants, selected not on capability but for their political opinions, became paupers. Strikers were threatened with Revolutionary tribunals and the loss of their heads, until the mob realised they could cut off the head of their principal revolutionary, Robespierre, and put an end to the cap on wages.
Finally, just five years into the revolution, the state-controlled economy could go no further. Little commerce remained, and the extreme poverty across society, the scarcity of supply, and the runaway prices demonstrated that those who claimed to speak out for the needy had, through their policies, turned them into oppressed, starving victims.
The roll-back of regulation coincided with the coldest winter in 100 years, and starvation was rife. Continued printing eventually left the paper money worth one three-thousandth of it’s initial stated value. It took a full 25 years to restore agricultural production back to pre-revolutionary levels.
Virtually the only productive man left standing was Napoleon Bonaparte, who at the time led the French army in Italy, sending back vast treasures seized from occupied lands to help balance the books. Eventually it was left to him to start returning the country’s economy to sanity, declaring “I will pay cash or nothing … While I live I will never resort to irredeemable paper.” But of course his strength, and ultimately his weakness, was war.

The lessons …

As we demonstrated last week, re-distribution and regulation can never create opportunity or prosperity. Only a free-market of motivated and incentivised individuals can do that. Yet each generation seems to have to re-learn these lessons the hard way, having experienced, to various degrees, the folly of a fresh batch of eager politicians who either through ignorance, populism or hubris are driven to believe that they can improve on the natural order. It is worth noting that today’s most heavily regulated industry – both before the recent financial crisis and now – is banking.

There are those who learned from the times, including the outstanding economist Frederic Bastiat, but his influence is today sadly limited. But underlying all the damage in the revolutionary period was the absence of sound money policies.Paper currency, or credit, has ultimately always failed. In fact the fathers of the revolutionary leaders experienced first-hand the disaster that befell France at the instigation of the Scottish Economist John Law with his issue of paper money and his role in the Mississippi Bubble in the early 1700s. Indeed colonial America befell the same fate, as paper money issued in 1775 eventually fell to a thousandth of its initial value.

We still struggle with these concepts today, and the lessons of history are seemingly cast aside in the short-term desire just to keep the show on the road. The modern corollary is not paper money but credit, the growth and availability of which has done much to enable huge Government indebtedness and the rise in asset prices, with all the economic distortion and worsening of opportunity that brings for most individuals, other than speculators. We will look at the principles of sound money and why this is so in a forthcoming blog.

The Greeks knew …

Last week I criticised the BBC TV’s news coverage. But in all things there is some good to be found. Anyone who has followed Michael Scott’s outstanding BBC4 series on Ancient Greece, The Greatest Show on Earth, will have learned about Aristophenes’ play, Plutus, from 388BC which dealt with the disparity between rich and poor, and the imprudence of re-distribution.

It was said in the play that the character Wealth is blind … that it distributes riches unfairly … and that in restoring sight to Wealth the virtuous could finally prosper through an equal distribution of wealth. But the character Poverty intervened, “casting doubt on the entire scheme … as by distributing all in equal portions, no one would develop craft or expertise … and once there is no incentive, who is going to smelt the metal, build the ships, or make the clothing, manufacture vehicles, stitch the footwear, brick the bricking, wash the washing, farm the farming?”

A healthy economy is based on free-market, sound money and minimal regulation which allows both capital and labour to flourish with integrity and humanity. If the Ancient Greeks got it, why do we still struggle so much with the basics of sound, motivational economics? It must be because it isn’t in the politicians’ interests.