Quarterly Journal of Austrian Economics
Review of The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression by Scott Sumner
The Midas Paradox is an impressive piece of scholarship, representing the magnum opus of economist Scott Sumner. What makes the book so unique is Sumner’s use of real-time financial data and press accounts in order to explain not just broad issues—such as, “What caused the Great Depression?”—but to offer commentary on the precise zigs-and-zags of the economy during the 1930s.
Sumner rejects the standard Friedmanite monetarist “long and variable lags” approach, and argues that financial markets respond virtually instantly to new information, including announcements and events that would change expectations about the future path of monetary policy. Both because of his methodological innovations and his painstaking research, Sumner’s book is an invaluable resource to economists and historians interested in the Great Depression and the operation of the classical gold standard.
Although I admire much of the book, I must reject its central thesis. Indeed, the very title The Midas Paradox is an allusion to the disaster that comes from an obsession with gold. Sumner agrees with standard Austrian critiques of the New Deal and its crippling effects on labor markets, but he also thinks a large portion of the blame for the Great Depression lies with the unfortunate fact that policymakers’ hands (and currencies) were tied to gold. Even though economists back in the 1930s thought that central banks were “pushing on a string” with their low interest rate policies, Sumner thinks it is now well established that it was unwittingly tight money that made this depression “Great.”
Furthermore, Sumner draws lessons for today, believing that economists are wrong to focus on low nominal interest rates and even the huge expansions in monetary bases that the world’s major central banks have delivered since the 2008 crash. Instead, with his “Market Monetarist” framework, Sumner believes that central banks have foisted enormously tight monetary policy on the world, and that this largely explains the horrible crash and then sluggish recoveries of Western nations in the last decade.
In Sumner’s view, only by adopting a more useful criterion for assessing monetary policy can economists explain past crises and help policymakers avoid future ones.
Cite This Article
Murphy, Robert P., "Review of The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression by Scott Sumner," Quarterly Journal of Austrian Economics 19, no. 1 (Spring 2016): 101–111