When Did Market Intervention Become Chic to ‘Free Market’ Economists?

“The only use of money is for the circulation of consumer goods.” These are the words of Adam Smith in Wealth of nations. What Smith wrote is significant that it’s a throwaway line in the book, it was so obvious. It’s still obvious. Money simply has no purpose without production.

It is a reminder that with or without the US Treasury, the Mint, the Fed or any other monetary authority, what we call “money” would be abundant in the United States. This is because the US is populated by the most productive people in the world, away.

If anyone doubts the above truth, consider China today. Its impressive technological rise has been largely financed by American sources of money in US dollars. This happened despite all kinds of laws in China aimed at deterring foreign ownership of Chinese companies, along with the inflow of foreign currencies. As evidenced by China’s enormous prosperity, the laws, rules, regulations and supposedly “tight” central banks are no match for the money flowing to its greatest use.


All of this and more came to mind as I read Hoover Institution researcher David Henderson’s writings about the recently deceased economist Robert Lucas. Henderson called Lucas a “giant in the field” of economics, only to give the impression that Lucas was bursting with original ideas that transformed economic thought. Maybe so, but you wouldn’t get that impression from the examples Henderson used.

With obvious excitement, Henderson wrote that Lucas had argued that “if the Federal Reserve increased the rate of growth of the money supply to get a temporary reduction in unemployment, the policy would only work if the actual rate of growth was greater than what people expected.” It is understood here that market intervention by non-market actors is positive as long as the intervention is properly implemented. And that’s not the only reason Henderson’s respect is so puzzling.

Why, given the global nature of money and credit, would a central bank need to increase the so-called “money supply” as it is? This relates to the issue with respect to the dollar. It is currently the currency of business in Tehran and Pyongyang, among countless other countries, not to mention that you better have dollars if you want to buy a house in Argentina. The basic point of all this is that money does not originate as Henderson alludes to, but is a consequence of production. In other words, the dollar is not in Iran because the Fed “supplied” those dollars to the Iranians, but because the producers want roughly equal value for what they bring to market. Translated, the rial, which has been devalued more than 3,000 times since 1971, is not suitable as a medium of exchange, but the dollar is. Markets work. Not for economists, it seems.


To this day, the accepted wisdom among Keynesians and monetarists is that, according to Milton Friedman, Fed monetary “tightness” was largely a factor in the “Great Depression.” Which is impossible because it implies that there are closed economies within the “closed economy” or world economy. They don’t exist. Money always and everywhere finds production. Financiers compete to find production. Furthermore, imagine free market advocates marrying the idea that economic activity slows down in the absence of government supply of anything (including a medium of exchange). One gets the feeling that Friedman’s disciples have perverted his views on the 1930s.

Henderson adds that one of Lucas’s colleagues (Thomas Sargent) pointed out that “in order for the government to credibly commit to reducing inflation, it could do so without increasing unemployment.” Which is backwards. There is no economic growth without investment, and a stable monetary policy is a godsend for investors who fear a future devaluation of investment returns. In other words, low unemployment is a logical consequence of a lack of inflation, not some extraordinary discovery.

Lucas apparently also discovered that “the same tools, such as tax policy, that are used to achieve economic growth in rich countries can be used to create growth in poor countries.” You think? Economies are individuals, and individuals are better off when they are taxed less. Yet even here Henderson seems preoccupied with what the government can do to achieve growth.


Really, what are you thinking? Why all the politics from Command Heights? Free people prosper because they are free, not because of supposedly wise central bankers, skilled tax writers or brilliant “economists”. To read Adam Smith is to know him he wasn’t economist. He just had common sense.

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Forbes – Business

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