No economist I know thinks of the economy as being anything like a machine.
We need decentralization because only thus can we ensure that the knowledge of the particular circumstances of time and place will be promptly used.
F. A. Hayek
Well into the Great Recession, arch-Keynesian Paul Krugman wrote that what drew him to economics was “the beauty of pushing a button to solve problems.”
Yet economies don’t have buttons.
Similarly, imagine someone who claimed she could build, fix, or run the Great Barrier Reef. You’d be justifiably skeptical. The Great Barrier Reef is one of the most splendid ecosystems on the planet. Its beauty is matched only by its complexity. No one on earth could design, much less control, the array of biological processes that allow the reef’s fractal order to emerge.
If you believe in God’s creation, you’d probably argue that only an omniscient being could build, fix, or run the Amazon rainforest.
Because humans aren’t smart enough.
If you’re an orthodox Darwinian, you’d argue that only the decentralized processes of evolution could give rise to such biodiversity.
Because humans aren’t smart enough.
For too long, we have tolerated experts who claim authority over our economies.
Sure, economy and ecology are two different domains of inquiry, but economies are like ecosystems in a few important respects. Both economies and ecosystems are complex adaptive systems that cannot be built, fixed, or run. Both emerge in their complexity thanks to simple rules. And both express unique patterns based on their particular contexts.
Despite these critical similarities, too many interventionists labor under the idea that economies are like machines that can be built, fixed, or run. Here is a handful of examples with my emphasis added:
- How Do We Fix the Economy? Modern Monetary Theory Explained
- Five Ways to Build a Strong Economy
- Labour are Much Better at Running the Economy than Voters Think
Instead of stable institutional rules, interventionists think they have the knowledge required to meddle in the macroeconomy. Instead of respecting economic decisions distributed among those living in unique circumstances, interventionists deal in abstract aggregates and false metaphors.
I’m reminded of Bill Phillips, an older student at the London School of Economics (LSE) after World War II. Phillips built the Hydraulic Computer to model the UK’s national economic processes. And despite the protestations of Paul Krugman, it not only suggests that Phillips’s machine is like an economy, but that an economy is like a machine. The device might even give one the idea that economics is a discipline in which one can push a button to solve problems.
Larry Elliot, economics editor for The Guardian, describes the Phillips machine thus:
The prototype was an odd assortment of tanks, pipes, sluices and valves, with water pumped around the machine by a motor cannibalised from the windscreen wiper of a Lancaster bomber. Bits of filed-down Perspex and fishing line were used to channel the coloured dyes that mimicked the flow of income round the economy into consumer spending, taxes, investment and exports. Phillips and Walter Newlyn, who helped piece the machine together at the end of the 1940s, experimented with treacle and methylated spirits before deciding that coloured water was the best way of displaying the way money circulates around the economy.Max Borders
Most write about the artifact in reverence, even as they admit the device was of its time. Today, they say, economists have computers to model the economy.
Nobel laureate, Friedrich Hayek, known for his understanding of the economy as something decidedly more complex and organic, might, quite literally, have bumped into the thing. Hayek left LSE a year later, in 1950. One wonders what he thought of the device. I suspect he thought it was a conceit of technocracy and scientism, especially as the world would have to wait seven more years for Sputnik to kick off the Space Race.
Nearly everywhere, policymakers and Central Bankers manipulate our economies as if they were sitting at Mission Control. They fancy that if they can turn this dial or that rheostat, they’ll be able to “prime the pump” or whatever inapt metaphor guides such hubris. Sadly, the only way technocrats have been able to take us to the moon since 1972 is atop a financial bubble.
In 2022, we began to hear a great hissing sound as malinvestment leaked from the everything bubble. We have much farther to fall. As of this writing, we continue to experience high inflation, despite the dollar and its exorbitant privilege. The inflation was not “transitory” as the authorities predicted. We share the experience of an ongoing global phenomenon that will compound our troubles quarter by quarter. Paradoxically, as the world plunges into recession, the dollar has gotten stronger for a time due greatly to higher interest rates designed to destroy demand and lower asset prices. But that policy is something of an international wrecking ball, as weaker, more indebted nations compete for dollars to service their debts. This is but a snapshot.
In short: There is simply too much leverage in the global system. Something has to give.
Macroeconomic wizards, as well as the politicians into whose ears they whisper, have never faced the fact that economies are not like machines. Yet these economists’ prestige, positions, and livelihoods depend on scientism. It’s no wonder, then, that these self-same experts fail repeatedly to make basic predictions with any accuracy. Worse, they labor under the notion that, given enough power and largesse, they can play God by pushing buttons, bailing out banks, firing up the printing presses, or setting a different interest rate.
The bill always comes due–and eventually, it will be handed to you and your children.
Meddling Begets Meddling
President Richard Nixon took the U.S. dollar off the gold standard in 1971. Since then, macroeconomic entrail readers have been sowing the seeds of economic collapse by encouraging government profligacy as a cure for every ill. Specifically, Keynesians and their kissing cousins—the Modern Monetary Theorists (MMTs)—have been whispering sweet nothings into the ears of power. Tell the political class exactly what it wants to hear, and you might become a presidential appointee.
The fun usually starts with politicians eager to shower goodies on favor seekers. With Nixon, it had been “guns and butter” funding for the welfare-warfare state. Today the only real difference is one of degree. Politicians are still fond of characterizing everything they do as an ‘investment’ even though real investors have to feel the sting of losses. Neither politicians nor their consiglieres feel any sting or sign any IOUs. Indeed, most mandarins have no skin in the game.
Interest groups and constituents line up at the public trough. Dispensing corporate welfare and helicopter money becomes their raison d’etre. Intervention is a necessary evil for the common good, they’ll say, brandishing their laurels from Harvard or the LSE. Only they, The Order of Macroeconomists, can rescue the economy from crisis to crisis.
Or so the story goes.
The wizards end up facilitating cronyism and corruption. One need only consider the billions the Fed has given to banks and other corporations during the past decade through quantitative easing, not to mention additional pains arising from the Cantillon Effect, a phenomenon in which all earlier-comers to newly created money—the privileged few, such as bankers—benefit directly, while later-comers like you and me suffer from inflation.
In response, populists yowl, and the people demand more goodies. But there is no more blood left in the turnip.
The mandarins of Mission Control have become adept at papering over these problems or, to mix metaphors, kicking the can beyond the next election cycle. Yet, meddling begets meddling. Eventually, the people must pay.
The wizards are not so good at setting impartial institutional protocols that allow the world’s productive people to save, invest, produce, and exchange in a stable fiscal and monetary regime. To deny the wizards the power to adjust the price of credit (interest rate) would deny them an enormous lever. Most people can’t imagine a world in which market actors determine such prices–you know, the same way we determine the price of eggs.
Instead, monetary interventionists sit behind an opaque marble and do their best to maintain targets, such as inflation and employment. The fiscal interventionists roam byzantine halls and smoky backrooms to determine which corporate cronies will win their masters’ spending promises–you know, in the name of ‘creating jobs’ or the ‘common good.’
But neither politicians nor experts create wealth. They transfer it. And that sucking sound you hear comes from taxation and inflation.
The Decentralist Imperative
Whenever one complains about the sorry state of the world—including the all-too-visible hands behind the mess—a chorus of experts will reply:
But what shall be done? And who should do it?
These are not unreasonable questions, but they can mask certain assumptions. The most important of these is that a particular person ought to do something, which implies a centralized effort by some elite. That assumption scratches a distinctly human itch, which is to exert control or, at least, to feel that someone is in control. But the rage for order got us into this mess.
Authority’s handmaidens will cry, “market fundamentalism!” Yet what manner of faith says technocrats can or should play Intelligent Designer with our economies? What economic theory is more ‘trickle-down’ than Keynesianism, obsessed as it is with stimulating aggregate demand? As Hayek taught us, dealing in aggregates completely misses the details—particularly the vital circumstances of time and place.
There are no angels among the mandarins. Legal counterfeiting is no manna. And neither the legislature nor the central bank is near the pearly gates.
That’s why anyone who purports to know the right way, much less the One True Way, should have to enter a vast competition for mindshare, attracting members to their systems rather than compelling them. So my position isn’t market fundamentalism at all. It’s about market fundamentals. The best systems win by creating long-term value for those they claim to serve. If Switzerland beats Somalia, more people will choose the former. Competition among systems makes for a more “antifragile” metasystem, following grumpy Taleb. Failures are localized. Watchful stewards can duplicate successes.
We must therefore enter an Age of Consent in which we choose our monetary systems from a menu of providers who must respond to customers rather than to the powerful. And if they don’t? People will simply vote with their boats.
The Monetary-Institutional Stack
Imagine what we might call the monetary-institutional stack. In that stack, you have the issuers, such as independent banks, cryptocurrency networks, or smaller states. Some will adopt commodity standards, such as gold or a basket/index of commodities. Others will adopt a Bitcoin standard. Still others will generate (and improve) algorithmic stablecoins or currencies that continuously improve based on feedback from the fitness landscape.
Click out an order of magnitude from these issuers, and you’ll find authorities operating in various jurisdictions—perhaps 50—after America breaks up or in the UK after Scottish or Welsh secession. Some of these new authorities will successfully regulate issuers operating within those jurisdictions. Others will not be so successful or will choose market discipline. But at that level of the monetary-institutional stack, there is competition. After a time, we’ll see arbitrageurs do what they do on the way to more stable equilibria—for example, as we did in Canada’s or Scotland’s eras of free banking.
Monetary economists Selgin and White study the empirics of America’s central bank’s history and conclude:
The deep fiscal and monetary structures of the US economy, which have not changed in 200 years, will generate the next boom and bust just as they have done so in the past. But the Crash of 2026 will be much worse than that of 2008, because as the US government continues its annual trillion-dollar deficits, by 2024, the US debt will have grown so large that US bonds will no longer be considered safe, and in the financial crisis, the US will no longer be able to borrow the funds needed to bail out the financial firms.
The Big One
The next recession might well be a depression. The Federal Reserve has run out of tricks and sits on the tines of the Devil’s Fork: Raise interest rates too high, and we’ll see mass layoffs, unaffordable mortgage rates, and weaker governments unable to service their debts; Keep printing money, and we’ll see our purchasing power continue to diminish. We can say something similar about the European Central Bank and Bank of England. The U.S. government is currently sloshing about in an ocean of red ink at nearly 140 percent of GDP, though the dollar is still the world’s reserve currency.
The days of exorbitant privilege seem nigh at an end.
The Bretton Woods era is nearly done. The Fed’s power is waning. Europe is a basketcase. The Great Reset is a technocratic nightmare devised by those still clinging to unholy corporatist hierarchies and green hysteria. Xi’s attempts to sino-form the world aren’t exactly going as planned, either. All such efforts will be weakened by the coming upheaval–which means it will be time to reorganize according to different economic principles among smaller, competing systems.
Instead of what amounts to the economics profession’s version of Intelligent Design, we need a set of practical experiments constrained by economic reality, stable rules, and distributed decision-making. We’ll need more Singapores and Liechtensteins, some on terra firma, others in the cloud.
Let the empires fall.
A version of this article first appeared at Bitcoin Magazine and is excerpted from my book, Underthrow: How Jefferson’s Dangerous Idea Will Spark a New Revolution.