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The Trouble with Forbes

Mises Daily: Monday, December 17, 2001 by

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Steve Forbes, the wealthy publisher-presidential hopeful, can be an eloquent defender of free enterprise. But there's another side, too, which was revealed in a recent group discussion on economics that took place on Fox News Channel. Forbes's comments showed a complete lack of understanding of the basics of a free economy.

Against proposals that deflation was at least harmless, at best beneficial to the economy, the commentators generally agreed that deflation would lead to reduced profits and layoffs. The question was asked: "Should the government, then, enforce price cellars? Should it decree arbitrarily that your business cannot offer its wares for less than $X, and the consumer cannot be allowed to pay less than $X?"

This is where the mistakes began. Steve Forbes said, "No, we don't need government action; we need the Fed to inject some liquidity into the market." No member of the gabfest seemed to notice this tap step. The Fed--the central, government-created, -empowered, and -regulated Federal Reserve Bank--doing anything is tantamount to "government action." But somehow Forbes and the thought he represents make a huge exception to their love of free economies: they believe money and banking requires central management.

Remember, the chairman and the Federal Reserve Board are all political appointees, and the Fed is granted monopoly powers; thus, while it is all-powerful, it doesn't operate under the market pressures faced by other banks and businesses.  As to our needing a monetary injection, consider what we got from the monetary injections of the late 1990s:  Instead of inflation, we saw a mountain of malinvestment in various unproven dot-coms.  Some of the brighter Internet entrepreneurs may have salted away their wealth before it dissipated beginning April 2000, but the fall of the NASDAQ index from over 5000 to around 1500 evaporated the retirement plans of many small investors.

Some economics textbooks introduce the Fed by claiming that a central bank is required anywhere you have fiat money--money whose value is utterly dependent on government whim. But our government didn't need such a condition to institute a central bank: the Fed was created in 1914, and we weren't fully off the gold standard until 1971 (though the government began minting cheaper money in 1933, when it stopped making gold coins).

What's wrong with fiat money?  Enough to make it worth less all the time. While fiat money still must function as a store of wealth (i.e., your retirement savings), its value can be destroyed by the government's printing too much of it, meaning your financial security is in large measure dependent on Alan Greenspan's given state of mind.

Again, the main subject that frightened the Forbes panelists was the prospect of monetary deflation.  The lone example offered in support of the contention that steadily falling prices aren't a grave threat was the electronics industry, where prices vis-à-vis features and capacities have fallen for decades. But there's no reason why prices, over the long term, given technological improvements and growing efficiencies, shouldn't fall for everything we buy.

Homebuilding is a good example.  Strong and straight lumber is being made from wood shavings; it is better than traditional dimensional lumber, and should be less expensive than the traditional version once the engineered products gain broad acceptance.  There's no reason toilets and sinks shouldn't get cheaper over time, as materials are mined more by heavy machinery and less by hand, and costs are cut through automated manufacturing, scheduling, and inventory management. Other recent and continuing developments, including just-in-time manufacturing and activity-based accounting, can reduce costs while improving quality. Cost reductions owing to improved business management alone should be expected to obtain for any product or service.

Products that are petroleum derivatives, such as some vinyls, might be expected to get more expensive over time as nonrenewable resources become more scarce.  But such expectations should be evaluated in light of two things. First, in a free market, entrepreneurs find new supplies when prices and profits increase. Second, if goods become too expensive, the market finds alternatives.

As long as prices for business inputs decrease steadily and predictably, wages and salaries can lag behind, if they decrease at all.  This means everyone's standard of living improves, as it did in the U.S. until about the 1960s.  If creditors are unfairly benefited by deflation, the effect won't last long; as inflation affects interest rates, so would deflation affect interest rates as banks compete to remain profitable.

Under falling prices, our standard of living will improve on a continuing basis. What's more, there's no reason that money can't be made of precious metals, and no reason that only the government has to coin it.  If the government were to end its continued devaluation of our money, and cease its absorption of 40-50 percent of our productivity, we'd find ourselves a lot better off in both the short and long run.

What that would require, however, is faith in individuals' personal economic decisions, and that every individual expend the effort to make those decisions for himself.  What prevents them from recognizing that government is merely a hindrance to economic development is their unspoken faith in centralized economic decision making; their faith that a few planners in Washington can do a better job of organizing the economy than can the combined wisdom of billions of individuals, each making decisions based on what's best for them.

Until the day comes when you and I are allowed to save and spend money that has a  secure backing, until the day comes when Greenspan stops growing the money supply at whim, we can expect destructive business cycles such as the current one to recur.  What's more, these cycles will continue to be completely unpredictable to businessmen and economists, and they'll continue to benefit and harm people at random.