Economics is not about goods and services;
it is about the actions of living men.

I spoke last night in the general debate on the economy, saying*:

As I rise to speak I am reminded of a quotation from an economist who was a fierce critic of Keynes, a chap called Henry Hazlitt, who said:

“Today is already the tomorrow which the bad economist yesterday urged us to ignore.”

We have heard today some moving accounts of individual and collective suffering in different regions of the country and among different sections of the public. We should be asking ourselves why, oh why, have we been delivered into this misery, which looks as if it will extend over years. Much of the conversation we have heard has been along the lines of aggregates, coarse economic aggregates, and has tended to stray away from individual choices and consequences. We have talked about markets in the abstract, and it is a pity that we seem to have forgotten that markets are a social phenomenon, and that they are about people co-operating. When we talk about markets, we tend to imagine overpaid people, high-frequency trading and those who add nothing to society.

I am reminded of something a constituent said to me recently after hearing a Minister’s speech. He asked, “Why is it that everything always seems to get harder for the working man, whoever is in power?” Indeed, in my constituency unemployment is up by 6.3% among the over-50s, up by 9.5% among those aged 25 to 49 and, scandalously, up by 23% among the young. We have heard that child poverty increased by 200,000 under the previous Government and that it is likely to increase by up to 100,000 under this Government. In the 21st century, that should not be our economic position.

Why are we in this debt crisis? I have just checked the M4 money supply figures—I am sorry to return to aggregates, but needs must. When Labour came to power the money supply was about £700 billion and it is now about £2.1 trillion, so it has tripled over the past 14 years. Unfortunately, most economists talk about money flowing into the economy as if it were water poured into a tank that found its own level immediately, but what if it is like treacle or honey? What if it builds up in piles when poured into the economy and takes a while to spread out? What if that money was loaned into existence in response to individual choices led by the excessively low interest rates pushed by the central bank? What if it was loaned into existence in particular sectors, such as the housing sector, where prices have more than doubled over the same period, and what if it was the financial sector that received the benefit of that new money first? Would that not explain why financiers and bankers are so much wealthier than everyone else, and why economic activity and wealth has been reorientated towards the south-east?

Unfortunately, the idea that money takes some time to move around the economy is lost on most economists, which I very much regret. Why did most economists not see the crisis coming? I put it to the House that it is because their theories of credit are mistaken. They make fundamental errors. Unfortunately I do not have time to go into that, but the fundamental point is that credit is a choice to consume more now and less later. It is about the exchange of present goods for future goods, and co-ordinating the economy through time, and I am afraid that the current intellectual mainstream in economics has dropped us into this desperate mess.

Opposition Members criticise the Thatcher and Reagan years. I think that there was much to applaud in those years, but unfortunately their intellectual underpinning was monetarism, which, like Keynesianism, is infected with those dreadful mistakes. People in the Occupy movement, and our constituents, are right to question the justice of our economic processes. The hon. Member for Penistone and Stocksbridge (Angela Smith) said earlier that the system cannot endure, and I am inclined to agree. I agree that the current debt-based and—I am afraid to say—statist system cannot endure. However, if this system is not to endure, which way should it fall? [Humanity] tried the statist direction in the past and it led to misery and murder. I stand for free markets and free co-operation, but I say this to the House: if this is capitalism, I am not a capitalist.

* (I have made a small correction to the quote and a clarification in [], both of which I have requested from Hansard)

Related reading can be found here:

• Hazlitt, Economics in One Lesson (buy, PDF), chapters 1, 6 and 23 in particular.
• Mises, Human Action (buy, online), especially chapter 20 “Interest, Credit Expansion, and the Trade Cycle”
• Hulsmann, The Ethics of Money Production (buy, PDF).

The Bank of England’s money supply measure M4, which I referred to, may be found here. I used M4 in this context because it is the conventional mainstream measure, but I prefer Kaleidic Economics’ MA for reasons explained on that site (Notes and Coins is too narrow and M4 too broad). MA tells a clear story of where jobs and growth came from and where they went – money supply growth created the illusion of prosperity, broke the banking system and collapsed, taking the illusion with it:

Year on year change in Kaleidic Economics' MA - click for source

Update: Video here. My delivery picked up after about the first minute.

Via Market crash ‘could hit within weeks’, warn bankers – Telegraph:

“The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008,” said one senior London-based bank executive.

“I think we are heading for a market shock in September or October that will match anything we have ever seen before,” said a senior credit banker at a major European bank.

A quick look at Kaleidic Economics’ Austrian measure of the money supply makes obvious why things feel as they did in 2008: the money supply is shrinking. That’s bad news. The answer is not more QE, which would postpone and deepen the problem, while enriching some at the expense of others. We need a fundamentally more stable monetary system.

More in due course.

Via The Telegraph.

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

But this begs the question, “Why is the money supply dependent on interest rates and government spending?”

It turns out the great economist Irving Fisher told us back in the 1930s: banks create and destroy credit money by granting and calling loans. As Fisher wrote:

Thus our national circulating medium is now at the mercy of loan transactions of banks; and our thousands of checking banks are, in effect, so many irresponsible private mints.

He went on (emphasis mine):

As the system of checking accounts, or check-book money, based chiefly on loans, spreads from the few countries now using it to the whole world, all of its dangers will grow greater. As a consequence, future booms and depressions threaten to be worse than those of the past, unless the system is changed.

Fisher set out the problem in the 1930s and a solution, one which offered the possibility of paying off the national debt and largely ending economic cycles: 100% reserves on demand deposits.  We face the same problem today and we have the same tantalising possibilities.

There are politicians who understand: see for example the speech by the Earl of Caithness in the Banking Bill Debate 2009:

The Banking Bill fails to address the fault which has led to every major banking and currency crisis during the past 200 years, including this one. It merely, lazily and weakly, papers over the cracks. Like Lilliputians, we are trying to tie down Gulliver with ever more strands of rope. It did not work then; it has not worked since 1811; and it will not work now.

This is why colleagues and I established The Cobden Centre: we need honest money now to end the crisis and set us on a firm foundation for a sustainable and healthy future economy.