I’ve been thinking laterly about the irrational belief in gold as some sort of magical metal, the only proper foundation for a money system. For a long time now, the most prominent gold bug has been Ron Paul, whose irrationality on the subject is underscored by the fact that he styles himself bas both a populist and a history buff as well. But, of course, historically the populists were deeply opposed to the gold standard. They were bimetalists, and the most famous speech related to the issue was William Jennings Bryan’s “Cross of Gold” Speech. As Paul’s general confusion on the matter suggests, gold buggism is usually not a matter of an isolated mistaken belief. Rather, it’s more of indicator, a tip-of-the-iceberg sort of thing. Which is why evidence is almost always utterly useless in dealing with goldbugs. A couple more pieces of such evidence popped up this past week.
First, working backwards, from Clusterstock this Tuesday:
Gold is perceived to have two useful purposes: one, as a hedge against inflation and two, as a hedge against uncertainty.
The world has been plenty uncertain throughout the month of January. First, a revolution kicked Tunisian President Ben Ali out of power. Next, protests took Egypt by storm, with its leader, Hosni Mubarak, being challenged.
While you would assume a major political event for one of the most influential players in the Middle East would trigger a surge in gold as a hedge against uncertainty, it hasn’t.
Gold has declined this month, and only moved slightly higher in the wake of the protests (things really kicked off on January 17th, with a protester setting himself on fire in Cairo). Gold moved higher after the first big protests, but then moved lower, and has flatlined since.
Egyptian CDS, protection on the country’s sovereign debt, has spiked and stayed high since the protests began.
Then, from Paul Krugman on Sunday:
Recessions Under the Gold Standard
One of the discouraging features of economic debate today – maybe it was always thus, but it seems especially intense now – is how much of it rests on “facts” that aren’t, but which become articles of faith….
Anyway, one alleged fact I keep hearing is that recessions were short and shallow under the gold standard. I don’t know where that’s coming from, but it just ain’t so. The data aren’t as good for the pre-1933 era as they are now, but for what it’s worth they suggest that there were a number of nasty, prolonged slumps under the gold standard. In particular, the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years. Here’s the estimated unemployment rate from Historical Statistics Millennial Edition:
But both these examples are of secondary importance compared to this self-explanatory chart, published in various different forms over a period of months (this colorful version from Matt Yglesias):
The fact that going off the gold standard was essential to recovering from the Great Depression is the death knell of gold bugism, from a rational standpoint.
But, of course, what’s rationality got to do with economics these days? Which brings me to something Krugman wrote last week, “The War on Demand”, which might as well be called “The War on Macro-econmics”, which is roughly the equivalent of the “War on Evolution” or the “War on Global Warming”, although it appears to be far less intentionally organized:
Something really strange has happened to the debate over economic policy in the face of the Great Recession and its aftermath – or maybe the real point is that events have revealed the true nature of the debate, stripping away some of the illusions. It’s a bigger story than any one point of dispute – say, over the size of the multiplier, or the effects of quantitative easing – might suggest. Basically, in the face of what I would have said is obviously a massive shortfall of aggregate demand, we’re seeing on all-out attack on the very notion that the demand side matters….
More than that, it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment – never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years.
So what’s going on here?
Krugman went on to suggest three things: First, there’s a basic inability to see how shortfalls in demand are even possible. Although Krugman doesn’t realize it, this derives in part from arrested cognitive development, explicable in terms of Kegan’s typology. Put simply, Level 3 thinking, in which the individual is the product of their social surround, cannot stand outside of itself, and comprehend the social system as a system. And that is what you must be able to do in order to understand shortfalls in demand. Second, there’s a fixation on Strict Father monetary morality–although, again, Krugman doesn’t explicitly discuss the Strict Father angle as such. Third, there’s a failure of traditional Friedmanite monetarists to realize that they are “part of the problem” in they eyes of the newly-emergent demand-deniers.
On the first point, Krugman writes:
First, Keynes was right: Say’s Law – the notion that income must be spent, and hence that supply creates its own demand – really is at the heart of the issue. Many, many people just can’t see how it’s possible for there to be an overall shortfall of demand. The reason I’ve always loved the baby-sitting coop story is that it’s a human-scale example of how demand shortfalls are possible. But my experience is that if you try telling that story to someone convinced that demand can’t ever be a problem, it just bounces off: the minute you finish, they’re back to saying that income must be spent on something, so a shortage of demand can never happen, and any rise in one person’s spending must lead to an equal fall in someone else’s spending.
Krugman’s baby-sitting coop example comes from a 1978 paper, which he described in a 1998 article in Slate. It comes from a real-life experience with a decent-sized baby-sitting coop that used script to keep track of what was basically a simple swap of services. Yet, despite the underlying simplicity and the fact that every act of baby-sitting created a matching credit and debit, hoarding–and thus demand shortfalls (i.e. recessions) still occurred and had to be dealt with. In the original Slate article, Krugman describes it like this:
[T]here must be a system for making sure each couple does its fair share.
The Capitol Hill co-op adopted one fairly natural solution. It issued scrip–pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable–and these young professionals certainly were–what could go wrong?
Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve–then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.
Now what happened in the Sweeneys’ co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple’s decision to go out was another’s chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.
In short, the co-op had fallen into a recession.
The solution was fairly straight-forward: Issue more script. (Expand the money supply). This is a traditional monetarist solution, but it depends on recognizing the systemic nature of the problem (it’s not bad couples who refuse to baby-sit for others, or who go out too much), and the importance of finding a way to create effective demand (the ability to purchase what’s wanted) where only latent demand (the want itself) currently exists.
This gloss on Krugman’s story actually shows how all three of his points fit together. But I’m getting a bit ahead of myself. Another key point is how this story fails to penetrate. As Krugman put it:
[I]f you try telling that story to someone convinced that demand can’t ever be a problem, it just bounces off: the minute you finish, they’re back to saying that income must be spent on something, so a shortage of demand can never happen.
This ability to hear something, but not actually grasp it, is explicitly discussed by Robert Kegan in his discussion of different levels of cognitive development in In Over Our Heads. The clearest example is his discussion of a teenager staying out after curfew, confronted by their parents on finally returning home. The problem, Kegan explains, is not a moral failing on the teenager’s part. It’s actually a cognitive, well “failing” isn’t really the right word. But it is something missing–and it’s missing at the beginning of the scenario, when the teenager promised to be home by midnight, or whenever. The problem is, by the very structure of the teenager’s consciousness, they can’t make that promise in the same sense that his parents hear it.
The problem here is at Level 2, but the principle is the same. At Level 2, the teenager is their point of view (it is subject for them). They can’t actually have their parents’ point of view (take it as object), because that’s a function of Level 3 consciousness. They can only appear to take on their parent’s point of view when it doesn’t actually conflict with theirs. Which is fine at 7:30, when they ask for the car keys. At 7:30, there’s no conflict. The conflict only occurs later, when their friends say, “Don’t be a party-pooper.” But Level 2 consciousness simply can’t take that future state into account: It’s simply not real for that level of consciousness.
In the same way that the Level 2 teenager at 7:30 cannot cognitively grasp the midnight conflict of points-of-view–and cannot grasp what it fails to grasp–the Level 3 demand-denier cannot grasp the point of the baby-sitter coop story, and cannot grasp what it fails to grasp. In Kegan’s story, the parents are just as mystified as the teenager–because they have no idea what it’s like not to think at Level 3. Even if they did, of course, that wouldn’t help them fix things. Level 2 can’t be “fixed” in that way. It can only be grown out of. And that’s the same problem we face today with demand deniers.
Except for one thing: It is possible to find work-arounds. Perhaps most simply, those incapable of actually grasping the baby-sitting coop story can simply trust people who do grasp it. Mostly, in the past, that’s precisely what did happen. And it was a perfectly rational arrangement: the right people were trusted to say and do the right thing, because it worked. That was how things worked during the era of macro-economic competence, before the era of chicanery began with the election of Ronald Reagan in 1980.
We didn’t know it at the time, but that’s when the inevitable slide into gold buggery began. The trust in gold is a very Level 2 sort of thing, since the organizing principle of cognition at that level is the “durable category”, a perfect description of how gold bugs see gold as an unambiguous emdodiment of value.