November 17, 2015
[Editor’s Note: This letter was written by Tim Price, London-based wealth manager and frequent Sovereign Man contributor.]
Léon Walras is the patron saint of modern economics.
other words, he was a clueless failure who hijacked immutable
principles from the world of physics and misapplied them to the economic
The result, predictably enough, is that modern economics doesn’t work.
doesn’t work because it masquerades as a science when it is really just
a combination of dogma and very crude modelling. The modelling doesn’t
work because garbage in equals garbage out.
this doesn’t stop the governor of the Bank of England from advocating
overly simplistic policies in a highly complex world.
is alarming today is that almost nobody dares challenge the mandate or
even ongoing existence of central banks as prime fixers of prices in the
financial markets. (Spoiler warning: price fixing doesn’t work.)
to control and fix prices and wages span most of recorded history,”
writes David Meiselman in the foreword to the definitive history of
economic hubris, ‘Forty centuries of wage and price controls’ (Robert
Schuettinger and Eamonn Butler),
“Price and wage controls cover the times from Hammurabi and ancient Egypt 4,000 years ago to this morning..
experience under price controls is as vast as essentially all of
recorded history, which gives us an unparalleled opportunity to explore
what price controls do and do not accomplish.
know of no other economic and public policy measure whose effects have
been tested over such diverse historical experience in different times,
places, peoples, modes of government and systems of economic
results of this investigation would merit attention for the light it
sheds on economic and political phenomena even if wage and price
controls were no longer seriously considered as tools of economic
fact that wage and price controls exist in many countries and markets
and are being seriously considered by others, including the United
States, compels attention to the historical record of wage and price
controls this book presents.
then, have price controls achieved in the recurrent struggle to
restrain inflation and overcome shortages? The historical record is a
grimly uniform sequence of repeated failure. Indeed, there is not a
single episode where price controls have worked to stop inflation or
of curbing inflation, price controls add other complications to the
inflation disease, such as black markets and shortages that reflect the
waste and misallocation of resources caused by the price controls
themselves. Instead of eliminating shortages, price controls cause or
the clear lessons of history, many governments and public officials
still hold the erroneous belief that price controls can and do control
inflation. They thereby pursue monetary and fiscal policies that cause
inflation, convinced that the inevitable cannot happen.
the inevitable does happen, public policy fails and hopes are dashed.
Blunders mount, and faith in governments and government officials whose
policies caused the mess declines. Political and economic freedoms are
impaired and general civility suffers.”
rates across the developed markets have been kept at emergency levels
(and all time historical lows) for seven years. Do we think that
allowing banks to access essentially free money is more or less likely
to give rise to the sort of malinvestments that caused the financial
crisis in the first place?
you believe that the answer is ‘less likely’, there is a job at your
local central bank with your name on it. (It will help secure the
position if you have previously worked at Goldman Sachs.)
David Meiselman again:
all the evidence and analyses, many of us still look to price controls
to solve or to temper the problem of inflation.
public opinion polls show that a majority of U.S. citizens would prefer
to have mandatory controls. If the polls are correct, and I have no
reason to doubt them, it must mean that many of us have not yet found
out what forty centuries of history tell us about wage and price
it raises the unpleasant question, not why price controls do not work,
but why, in spite of repeated failures, governments, with the apparent
support of many of their citizens, keep trying.”
the aftermath of this weekend’s horrible events in Paris, religious
dogmatism is rightly condemned. If only dangerous economic dogmatism
could be similarly repudiated.
Until next time,