Commodity prices, especially food prices, have risen by 28% over the last six months. They are the root cause of the demonstrations, riots and uprisings taking part right now in various parts of the world.
Why are they rising?
What’s the cause?
Of course, there’s no single answer to these questions.
Some will point to excessive money printing as the major culprit, some to increased demand from developing countries, some to adverse weather conditions and so on.
But this is typical of economics.
This is what makes it one of the most difficult subjects to teach – especially if one is stood in front of a group of high calibre students. You’re never quite sure of what’s coming next.
It can be described as “at risk” teaching – sometimes it’s a mixture of swinging from exhileration at one end to terror at the other.
To make matters worse the answer to any question will usually start with something like, “Well, it depends … ”, to which the eyes of the questioner narrow into a here-we-go-again look.
It always sounds like such a cop-out.
We can attempt to vary the response by starting with phrases like, “Yes, that would be the case if …”, or, “Certainly that is one possibility, but …”, or, “Well, ‘yes’ and/or ‘no’, because normally …”, and so on.
It really doesn’t matter how we dress the thing up. There are very few, if any, yes/no or black/white answers in economics.
It’s all varying shades of grey.
Given the incredibly complex nature of any single economy, never mind the global economy, it’s not that surprising. Nothing happens in isolation – every change leads to a ripple effect – and no-one knows how far and for how long the ripples will extend.
Once governments intervene the knock-on effects are almost invariably adverse.
However, they rarely get the blame thanks to the general level of ignorance about economics.
A widely held perception is that the current mess was caused by capitalism.
The evidence for this was provided by a BBC survey on free-market capitalism in November 2009. Only 11% of those polled were in favour of it!
I don’t know how accurate the poll was but I have no trouble believing it.
Seems like there’s a mountain to climb here.
The majority think that the current financial disaster is all down to ruthless business people and free enterprise and that, for the most part, governments are blameless.
Nothing could be further from the truth.
Let’s get back to reality with a few quotes from Milton Friedman.
On the power of truely unhampered free markets:
- “So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”
- “The problem of social organization is how to set up an arrangement under which greed will do the least harm, capitalism is that kind of a system.”
- “Underlying most arguments against the free market is a lack of belief in freedom itself.”
On central planning:
- “The greatest advances of civilization, whether in architecture or painting, in science and literature, in industry or agriculture, have never come from centralized government.”
George Reisman, in this very readable transcript, mentions the role of education in sound economics – i.e. Austrian economics – as one of the fundamental components of a sustainable recovery. A great deal has happened on this front in recent years – not through the mainstream media and certainly not through mainstream economics – but through the incredible growth of self-education on the internet.
Central to this learning is understanding what passes for “money” in this day and age.
Without an understanding of what “money’ is – or specifically, what “fiat money” is – it’s impossible to understand why things have gone so horribly wrong. It is the key that opens the lock. Get to grips with what fiat money really means and with the damage it has caused and all the pieces come together.
Until this happens conversations between those who understand and those who don’t will be largely of little value – in fact, at times they may descend into name-calling and some very adult exchanges like, “Yeah, yeah – and boo hoo hoo to you as well!”
As an example of this kind of non-communication imagine two people – Bill and Ben. Let’s say they’re casual acquaintences. Bill has studied and mastered monetary economics. Ben, well educated and intelligent, has never studied this subject.
Suppose, for whatever reason, Ben asks Bill the following question:
“Is it true that US trade deficits don’t matter?”
“Well”, Bill replies , “as long as the rest of the world is happy to accept the USD as the world’s premiere reserve currency then, yes, it’s true, they don’t matter.”
Ben does not understand – but perserveres nontheless.
“But at some point you must run out of dollars?” he says.
“That can’t happen.”
“Because we can just print ‘em up – as and when required.”
“But where have they come from?”
“We just create them from thin air.”
At this point Ben would probably look at Bill and blink a few times – measure the distance between himself and the door – and then make his excuses and leave.
To most people Bill’s answer makes no sense and never will. On an intuitive level you can’t spend what you haven’t got or can’t get.
Fiat money turns this common sense notion on its head – governments can indeed generate spending from nothing.
And boy oh boy – have they ever.
Understand the wrongs that this has led to and you understand Austrian economics. Understand Austrian economics and you understand why we have the boom-bust cycle.
Understand this and you understand both the problem and the solution.
It is governments which have created the current mess – not capitalism.
But let’s go back to Bill and Ben.
They meet by chance a few days later. Ben tells Bill that he’s thoroughly confused about the printing money thing. He asks if Bill can suggest some reading to get him started.
The very last thing Bill should suggest is a book on monetary economics. This would almost certainly destroy Ben’s curiousity at a stroke.
Instead there’s a much better starting place.
“Economics in One Lesson” by Henry Hazlitt.
It can be downloaded free here.
I read somewhere on the internet that this is the most widely read book on economics ever published.
For anyone of any age, if you want to understand what economics is really about, this is the place to start.
Once you have this one under your belt you have a solid foundation in Austrian economics – then it’s on to heavier topics – and then ultimately …dare I say it … on to fiat money!
The future is grim and there’s no other way of putting it. For those of us who are going to live through it, it would be some consilation to at least know why it’s happening and who is really to blame.
Self-Educated American Guest Columnist, Chris Clancy, has been living and working in China for the last 7 years. He is currently employed as associate professor of financial accounting at Zhongnan University of Economics and Law, Wuhan City, Hubei Province, PRC.