Some Reflexions on History and Economics
Nicolas Oresme, a Catholic bishop (1320-1382), studied human behavior with regard to money, which in his time consisted of gold and silver coinage; he was perhaps the first to observe that humans attribute varying valuations to the money that comes into their hands. He stated that holders of gold and silver coins prefer to tender their most deteriorated coins in payments, and retain the most bright, shiny and perfect of their coins. Thus, he was the true originator of what has come to be known as "Gresham's Law", long before the Englishman Thomas Gresham made a similar observation during the reign of Queen Elizabeth I (1558-1603).
Juan de Mariana, a Catholic priest (1536-1624), denounced the Spanish king's policy of reducing the gold and silver content of the prevailing Spanish coinage, arguing that the coinage of the realm belonged to the people and was not the property of the king, to do with it as he wished. For stating this, he was jailed by the Inquisition.
I have presented these two thinkers as illustrations of the first stirrings of the science of economics in The West.
From the year 313, when the Roman Emperor Constantine declared that Christianity was the official religion of the Empire, and up until about the year 1500, the intellectual life of Europe was in the hands of the Catholic Church. The period saw the marvellous flowering of the human spirit based on the belief that humans are endowed with souls which endure to Eternity after the death of the material body. This great hope was the consolation of millions who were thus sustained in the inevitable sorrows that must be endured in this life. We see the consequences of this great hope, in the magnificent Gothic cathedrals erected during this period.
In 1453, after many years of struggle, Christian Constantinople - now known as Istanbul - fell to the fierce Islamic Turks. In the preceding years, many of the city's Greek-speaking people had fled to Italy and had taken with them a multitude of books in Greek, containing the philosophy and history of ancient Greece. One of the places where these fugitives sought refuge was Florence, and the refugees taught the local thinkers the Greek language, so that they became able to read the ancient authors, who had been unknown to them up to that time.
The effect upon those who read the ancient Greek authors was electrifying, as their books opened up new intellectual horizons. Thus was born "The Revival of Learning", also called "The Renaissance". The effect upon the Church was not entirely welcome, for reading the ancient writings promoted freedom of thought, outside the prescribed boundaries of Church teachings. The "Renaissance" spread throughout Europe amongst the learned, thanks to the invention of printing.
Another Revolution in thought, besides that wrought by the revival of the ancient Greek authors, struck the Church. It came from the realm of Astronomy, and weakened the position of the Church which held that Earth was the center of the Universe, around which circled the Sun, the Moon and the Stars. (Actually, from a practical point of view regarding human life, that position is quite acceptable; nevertheless, the findings of the astronomers did weaken the standing the of Church.)
Nicholas Copernicus (1473-1543), born in Poland, a Catholic lawyer, soldier, astronomer and thinker, very cautiously stated in his book On the Revolutions of the Celestial Spheres (of which he received the first printing upon his death bed) that perhaps the Sun did not rotate around the Earth, but rather that the Earth described an orbit as it circulated around the Sun.
After him, Galileo (1564-1642) took up the revolution in Astronomy, and was able to see the moons circulating around Jupiter through a telescope, recently invented in Holland. Thus he confirmed Copernicus and further reduced the religious importance of an immobile Earth as center of the whole Universe. This again, further weakened the position of authority of the Church; Galileo's was a difficult character, swollen with an idea of self-importance. Though the community of Jesuits in Rome already quietly agreed with Galileo, Galileo imprudently ridiculed the Pope for not embracing his theories: a great mistake, for Galileo was punished with jail for life, in his own home.
Johannes Kepler (1571-1630); after a lifetime of meticulous astronomical work and calculations of the movement of the planets, he elaborated his three theories of the motion of the planets around the Sun.
To crown the work of astronomy, Isaac Newton (1642-1727) provided the mathematical calculusand the Laws of Gravitation.
With Newton we reach the 18th Century, when the Western world was boiling with scientific discoveries in all branches of learning. Benjamin Franklin invented the terms "Positive" and "Negative" for electricity, as well as the term "Battery" for the storage of electrical energy. Coal came into use to move machinery. The first flights in balloons took place.
By the 18th Century, Physical Science had displaced the Church as the principal fount of knowledge. Physical Science was what was New, the Church represented the worn-out Old. The amazing feats performed by scientists held the attention of a spell-bound humanity.
For 1500 years, the authority of the Church had maintained a standard of order over a humanity that suffered "the slings and arrows of outrageous fortune". It had now been superseded by Science, that spoke with authority.
Over the course of thousands of years, there have been many successful revolutions, but they only involved the struggle for domination between centers of power. The first successful revolution that intended to improve the lot of humanity was the Puritan Revolution carried out by Oliver Cromwell, but it only prevailed briefly in England from 1648 to 1657.
The first enduring revolution in human history that proposed a New Order of Things - the famous motto on the Dollar Bills of the USA, "Novus Ordo Saeclorum" - was the French Revolution of 1789.
The French Revolutionaries -the brightest and best of French intelligentsia- were under the spell of Science as the road to the future happiness of mankind. The dazzling successes of Science in all fields had produced in their minds enormous confidence in their Revolution as the road which all mankind would have to follow, in order to achieve a better and just world, free of famine and political oppression. It was their intention to create "A New Order of the Centuries". They had nothing but contempt for the Church, that taught that the condition of man within Creation is unalterable.
The French Revolutionaries looked upon Monarchy and upon their own King Louis XVI as totally ridiculous institutions. How could it be reasonable that the destinies of millions of Frenchmen should depend upon the whims of a young, fat and idle king, whose main interest lay in the workings and repair of his collection of clocks and watches?
Clear intelligence should rule the nation, and the members of the revolutionary Assamblée Nationale were the most intelligent and highly educated men of the French nation. They intended to bring Science to the aid of government, and ever since that time, "Science" has been the guiding light of all governments all over the world.
An elementary pitfall presented itself in 1790: the same pitfall that has plagued "Scientific" governments since the time of the French Revolution.
The French Revolutionaries, convinced that Science (as they understood it) could open the way for a new life full of hope for the masses, were faced with a problem familiar to all who observe current events today: The Revolution produced uncertainty in all businessmen, from the greatest to the most modest, and what we would term a "Depression" ensued in France. Gold - the money of France - became scarce and economic activity slowed very noticeably. Businesses closed and unemployment grew.
The members of the National Assembly, being as they were the most intelligent and most highly educated of the French, were undaunted by the nasty depression that spread over France: "What do we have intelligence and education for, if not to solve problems? Let us attend to this obstinate depression." So the illustrious members of the National Assembly put their heads together and came up with The Solution - the same Solution that governments today apply to recessions and depressions: they created an artificial money, based on credit, to which they gave the name of the "Assignat".
The members of the National Assembly invented a new money for France, each unit of which was to constitute a partial mortgage upon the vast extension of French land recently confiscated from the Church. "What can constitute a better money than the Assignat" they argued, "since it represents the enormous land-wealth of France?"
In short order the Assignat was launched, with a monetary value equivalent to a given amount of gold franc money.
To the enormous consternation of the National Assembly, the Assignat promptly fell to a discount against gold. As usual, now that we have become accustomed to the result of such "Solutions", the National Assembly was of the opinion that "the nefarious forces of reaction to Progress were at work" and had caused the fall in value of the Assignat.
More and more "quantitative easing" of the Assignat followed as the National Assembly attempted to re-establish the productivity of France. The more Assignats placed into circulation, the faster it fell in value. The more intelligent sector of the population took on huge debts in Assignats, and with them purchased as much as they could of everything of value. (Does this sound familiar?)
Books have been written on the measures enacted by the National Assembly, to punish individuals who insisted upon owning gold or selling their goods for gold - punishments such as beheading or being sent to the galleys as slaves for life.
To make a long story short, in seven years' time, by 1797, prosperous France was reduced to misery, and crowds of hungry Parisians fought for pieces of rotten bread distributed by the government.
The misery only ended when Emperor Napoleon declared: "I shall pay with gold, or I shall not pay."
An end was put to the Assignat experiment, but not to the idea, which survives to the present day. Today we have an entire world which is attempting to function with invented money - the Dollar, or the Euro, or the Yuan, or the Japanese Yen, or the British Pound, or the Swiss franc itself: all are invented money.
Why do the governments of the whole world have to rely on invented money, which always has fallen and always will fall to its intrinsic value of zero? Why do governments persist in using invented money? They do so, because all governments today are the intellectual heirs of the French Revolution - "Liberté, Egalité, Fraternité" - in their attempts to erase the central fact of human existence: that the condition of mankind within Creation is unalterable. Elected and non-elected governments today still attempt to do what is impossible: to eliminate suffering; that takes a lot of money, and the only way to have a lot of money is - to invent it.
The result will necessarily be the same as it was for France in the 18th Century: misery and desolation, with famine for quite probably many millions of humans.
The blame cannot be placed upon Science, but only on 1. the mistaken use of Science to 2. uphold an impossible objetive: to create a world without suffering.
I must clarify that there are two radically different sources of Science.
There is Physical Science, which has produced the marvels of our age, an undeniable achievement of enormous importance. Physical Science is based upon the experimental method, formulated by the Englishman Francis Bacon (1561-1626). The experimental methodoperates by selecting one unchanging factor and recording its response to another changing factor. By this method, we arrive at a physical truth; the method is called induction. To simplify, an example: we place a raw hen's egg in water at various temperatures, and observe the results upon the egg. It turns out that an egg placed in boiling water for 11 minutes or so, becomes a hard-boiled egg. We have arrived at this truth through the method of induction, i.e. by experimentation. All physical science is based upon this method. (Bacon died of pneumonia, and it is said that he contracted it while he was experimenting on the effects of freezing upon meat.)
However, besides Physical Science, there is another Science, which is Economics.
The great mistake of the French National Assembly, and of all governments and their "economists" up to the present time, has been to ignore the fundamental difference between the Physical Sciences and Economics, whose source of knowledge is not experimentation, i.e. induction, but rather deduction. Economics begins by establishing one irrefutable fact, that human beings choose, and from that fact deduces by Logic the choices available to humans when they act in various circumstances.
The members of the National Assembly of Revolutionary France were blinded by the impressive achievements of the physical sciences and were unable to see that human affairs cannot possibly respond to experimentation - including for instance, experiments such as "QE" - in any predictable way.
The method of experimentation, i.e. induction, is inapplicable to the understanding of human affairs, and therefore to their guidance, because experimentation upon human beings is nullified by the fact that humans choose, while atoms and molecules have no choice, and their operation is thus predictable via experimentation and induction. Humans are by nature unpredictable, much to the chagrin of all renowned economists of our time.
The foregoing statement invalidates the whole corpus of modern economics as taught at all major universities in the world and which guides all governments in their economic policies.
There does exist a body of Economic Theory which is based on the correct methodology of deduction: Austrian Economics, whose creator was the Austrian Carl Menger (1840-1921) and today, the updated version of Austrian Economics, the New Austrian School of Economics, whose founder is Prof. Antal E. Fekete, of Budapest, Hungary. (One scholar maintains that Juan de Mariana, whom we have previously mentioned and who lived in the 16th and 17th Centuries, actually thought along the lines of the Austrian School of Economics, elaborated three centuries later.)
Unfortunately, the governments of the whole world and their guides, the professors of the erroneous doctrines of the inductive school of economics, studiously avoid any reference to truly scientific economics as presented by the Austrian Schools. And they do so, because they are under the surviving influence of the ideas of the French Revolution, that postulated a reformed world where there would be no suffering. Today, if an economics professor publicly accepts that a world without suffering is an impossible proposition, he is in great danger of losing his job.
The predictable consequence of a whole world under the management of a false economics based on induction - i.e. experimentation - is an inevitable total disaster for the world.
The thinkers of the world are hoping that Christian Russia and Confucian China, the two great powers of Eurasia, will return to gold as money, by virtue of their military power, and sweep away, as Napoleon did before them, the present existence of "Assignat-like" fiat moneys in the world.
Such a transformation, in full concordance with the doctrines of the Austrian Schools of Economics, would immediately re-vitalize the world's economy, due to its inevitable consequences: 1. The immediate stimulation of hope for a better future, in all nations. 2. The immediate activation of all able-bodied individuals to work as hard as possible, in order to obtain the precious money of gold and silver. 3. The re-emergence of the principle which has ruled human life in all ages past: "He who does not work, shall not eat" to motivate all those who waste their lives in idleness.
The illusions which now occupy millions of idle minds would vanish: dreams such as populating the planet Mars; inhuman fantasies to "automatize" work by means of robots, in order to eliminate human labor; vain investigations of "Artificial Intelligence", when what will be needed will be the intrinsic asset of all humans: human intelligence, operating upon the problems of existence through the medium of real money; absurd policies, such as those that tax the producers to insure the survival (and multiplication) of the idle with guaranteed incomes from "Welfare payments"; all these denials of Reality would have to be forgotten.
But by far, the worst damage being caused by fictitious money is the ongoing and irreparable pure waste of precious natural resources. The world is squandering limited natural resources forever, depriving future generations of their use, without any perception of the huge damage being incurred, because natural resources are not receiving their true valuations; correct valuations in gold money would preserve their use for strictly rational reasons: today, the true costs of natural resources are masked by the huge sums of "invested" fiat money involved in their exploitation - "investments" which are actually costs which will never, ever, be recovered by the investors.
The transformation to a world in which only gold - complemented with silver coinage - is money, would surely be a very painful process, but there can be no way to correct a terrible fundamental error such as the world's reliance on fiat money, without paying a heavy price for the correction.
Before this enormous economic mistake is corrected, it seems likely to me that the whole world will have to go through the fiery furnace of a cleansing of the spirit, with the final acceptance of the fact -by those who outlive the furnace - that human life is essentially problematic; that there is truth in what the Church taught for centuries: that the condition of mankind within Creation is unalterable, and that if we are troubled by the sufferings of our fellow humans, then we should exercise personal charity, or pledge support to private charitable foundations, and not palm-off the problem to the State.
I hope that with these brief lines, I may have contributed to a greater understanding of the fundamental problem facing humanity today, and perhaps I may have armed a few individuals with knowledge which may be useful in surviving the trying times that lie ahead.
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