Moralism and Monetary Policy
Last week I mentioned in the comments to this post that I think most political and financial problems are fundamentally technical rather than moral and cultural in nature. Several people took exception to this idea, so I figured I should probably try to elaborate a bit on what I meant.
Start with a historical example. During the 14th century, European society was rent asunder by the Black Death. Between a third and half of people died, and the resulting turmoil caused serious political, economic, and social upheavals. As Wikipedia notes, many governments “instituted measures that prohibited exports of foodstuffs, condemned black market speculators, set price controls on grain and outlawed large-scale fishing,” none of which stopped the spread of the disease. Given the vast amount of suffering, it’s only natural that many people concluded that the causes of the Black Death were fundamentally moral or cultural in nature. Many people argued that human sinfulness, greed, pride, etc., had caused God to turn his back on Western society, whereas others sought to blame the outbreak on a specific group, such as the Jews. Today, of course, most people recognize that the cause of the plague was less a matter of morality than of hygiene. But if you were to tell an average 14th century European that the plague was being caused by fleas from rats, he would likely think you were naively trivializing the issue.
The Great Depression, though on a much smaller scale, also represents a time of political and economic turmoil, with unemployment reaching as high as one third in some areas. With disturbing parallelism, governments responded by restricting foreign trade, instituting price controls, and attacking Jews.
As with the plague, many people concluded that the Great Depression indicated some deep flaw in the capitalist system. Yet as with the plague, the root problem was not moral but technical. John Maynard Keynes and Milton Friedman did not agree on much, but they both saw monetary policy, and in particular the contraction of the money supply, as being the primary cause of the Depression (Austrians, of course, take a different view, but their explanation of the Depression is also technical in nature). If the Federal Reserve or other government entities had adopted a more expansionary policy during 1929-32, it is likely that most of the suffering caused by the Depression (and the rise of Nazism) could have been avoided. But because of its simple technical nature, many at the time and since have viewed the monetary idea as frivolous (it is said that when someone proposed to FDR that the government end the Depression via monetary expansion, he dismissed the idea as “too easy.”)
Today, of course, we are in the midst of another period of economic turmoil which is to some extent reminiscent of the Great Depression, though on a lesser scale. And again some have suggested that the crisis has exposed a serious moral flaw at the heart of Western civilization and/or liberal capitalism. Given the large amount of suffering caused by the current crisis, the idea that the crisis could have had a technical cause (such as, say, the decision of the Federal Reserve to start paying interest on bank reserves in October of 2008) may seem unlikely. My belief, however, is that if one wants to discover both the causes of and cure for the current crisis, one is best off looking in the realm of technique rather than moralism.