“The first lesson of economics is scarcity: there is never
enough of anything to fully satisfy all those who want it. The
first lesson of politics is to disregard the first lesson of
economics.”
Thomas Sowell’s aphorism is of special relevance to us now, when
we discover that, without the matter having been discussed or put
to the vote, the most important economic decisions are in the hands
of politicians. Democratic politicians secure their following by
making economic promises—basically to steal from the few in order
to reward the many. And in order to protect themselves from the
cost of this they set up supposedly independent economic bodies,
like the International Monetary Fund, the Federal Reserve Bank, and
the European Central Bank, which they place in the hands of
political appointees. In all the excitement over Dominique
Strauss-Kahn’s adventures in a New York hotel the media seems to
have forgotten to ask the most important question: how was it that
a politician, and one of the French sofa-socialist persuasion,
should be in charge of the IMF? What conceivable attribute could
have qualified him for such a position? Granted that a gargantuan
libido might sometimes be useful in politics, in what way could it
possibly contribute to the process of maintaining equilibrium in
the world economy, and compensating where possible for the rash
promises of politicians?
No doubt DSK’s successor is as well qualified for the job as any
of the rival candidates. Christine Lagarde has, after all, been a
minister of finances in the French government. But this does not
alter the fact that she has inherited the IMF as part of a
political career, that her
main concern is to rescue the political class from the looming
disaster that its profligacy has brought upon us, and that she sees
the principal task of the IMF as a political one—namely
maintaining the status quo and preventing the collapse of the
single currency.
This is not to say that things would be better run by the
economists. If there is one thing that is evident about economics,
it is that no practitioner of the subject agrees with any other
about its results. There are economic truths, such as the first
lesson given above by Thomas Sowell. But these truths are not
hidden in any way from the rest of us, and the theories of the
economists rarely make them clearer than they are. The writings of
Adam Smith owe their persuasive power to the common sense of the
author, who looks on the world as it is, and applies to it the
undeceived consciousness of a cultivated mind. The Wealth of Nations describes what
markets would be like were there no political class to interfere
with them. And one of the lessons that it teaches is this: that
markets tend toward equilibrium, but only if people reap the reward
of their enterprise and pay the cost of their mistakes. When
rewards are stolen and mistakes compensated, the market ceases to
function as a self-correcting device. And that is exactly what we
are seeing in the world economy, now that the politicians are in
charge of it—in charge but not in control.
It is true that the inter-connectedness of national economies,
and the opportunities provided by international finance, make it
possible for traders and financiers to make enormous profits while
passing their risks to those who did nothing to incur them. The
global economy, as we now know it, is a demoralized economy, in
which old habits of accountability have all but disappeared. But
this is exactly what we should expect, when the politicians take
charge. Banks become “too big to fail” when governments rely upon
them; industries become “too big to fail” when the labor unions
persuade governments to take charge of them. And when governments
encourage the belief that they will step in to take the cost of
mistakes, it is not surprising if the spivs and racketeers take
advantage of their promises.
Common sense tells us that if you borrow money that you cannot
repay, then at some point you must go bankrupt. Common sense also
tells us that proceedings in bankruptcy are essential to economic
health. Without them economies cannot regain equilibrium in the
wake of large-scale mistakes. This was abundantly proved by the
economies of the Soviet Empire, which operated without a law of
bankruptcy. The costs of failing industries were redistributed
across the economy by a procedure of “economic arbitrage,” which
meant that unproductive factories with idle workforces absorbed the
profits of the few successful enterprises and guaranteed that, in
the long run, they too would fail. When a properly administered law
of bankruptcy is in place, money, knowledge, energy, and skills are
withdrawn from the places where they are wasted, and deployed to
better effect elsewhere. It is arguable that the vast amount of
skill and entrepreneurship wrapped up in the American automobile
industry would have benefited the economy many times over, if that
industry had been allowed to go bankrupt, so releasing its store of
human capital into the labor market.
Christine Lagarde tells the world that she will use the
resources of the IMF to stabilize the Eurozone and to avert the
potential catastrophe of a default by Greece. She even praises DSK
for having put this policy in place. But what business does a
politician have to interfere in this way in the workings of the
market? Why should the contributions of nations that have managed
their finances efficiently be used to avert the bankruptcy of those
who have not? It is surely clear now, even if it was not clear
before, that the Eurozone was a mistake, that you cannot simply
impose a single currency while leaving the rest of government in
the hands of local politicians and the networks that support them.
In economic life mistakes have consequences, and the attempt to
avert those consequences is usually another mistake. And each
mistake is bigger than the last one, since it enlarges the number
of interests and expectations that depend upon rescue.
In my view there should be no such question as whether Greece is
allowed to default. A country
that runs up debts that it cannot pay is in default, and all the rest is an
illusion—a game of economic fictions, designed to avert the eyes
of the world from the self-evident reality. As the Soviet example
shows, you can keep such fictions going for quite a time,
especially if you do it in the name of socialism. But the longer
you continue, the bigger the crash.
THE ILLUSION that governments do not default ought to have been
dispelled by the case of Argentina, but the further illusion was
quickly put in place that Argentina is a special case and outside
the network of mutual support that has been created in the Northern
Hemisphere. In the event, however, the Argentine default saved the
country from ruin, broke its dependency on international finance,
stimulated exports, and created the conditions for a long-term
recovery. The initial pain was the price paid for a realistic
future. And the pain was experienced not only by the Argentine
people but by those banks and financial institutions that had made
the mistake of buying the bonds of a government that was patently
unable to honor them. People who make unwise investments
ought to pay the cost of them,
and certainly they ought not to pass that cost to others who are
innocent of fault.
Look at the case of Greece in this light and you will surely see
that default is the right option. The Greek people have
consistently voted for politicians who make unrealistic promises,
offer unaffordable benefits, and borrow wildly on the international
market in order to subsidize their folly. This is a mistake made by
the Greek people, and mistakes must be paid for. German banks and
others have made the mistake of buying Greek bonds, on the strength
of a manifestly absurd conception of what the Eurozone will do for
its peripheral members. This mistake too should be paid for. And
after the pain, which will be considerable, all parties can begin
again in a sober determination to do things differently, as the
Argentines did. Only one thing prevents this happening, which is
the fact that economic decisions have been confiscated by the
politicians, who always strive to ensure that those decisions
remain in the hands of some member of their class.
