by Alvino-Mario Fantini
World-famous economist, scholar and writer, Dr. Richard M. Ebeling, spoke at the Hayek Institut this past March about the different economic policy challenges facing Europe. Reflecting his expertise in history, politics, and economics, his lecture focused on the benefits of a gold standard for sound monetary policy, and the advantages of a free banking system. He recently spoke to the Hayek Institut’s Secretary General about monetary policy, his life-long interest in the Austrian School of Economics and the important legacy of Friedrich A. von Hayek.
This is Part II of that conversation.
What do you think about the viability and long-term sustainability of the Euro? Do you foresee a collapse?
I have often found that one of the most difficult things to predict is the unpredictable! We must remember that the Euro did not develop as a market-selected medium of exchange. The European Union political elite, who wished to reinforce the integration of the EU institutional order, politically imposed it on the member nations. If the citizens of the member states had had an open and free chance to decide through referenda or plebiscites it is highly unlikely whether the national currencies would have been abandoned.
The stability and viability of a common currency requires that the regions within the currency area allow their relative price and wage structures to adapt to and reflect changes in the demands for goods and money over the common currency zone. This is a theme in Hayek’s highly insightful but neglected 1937 lectures on Monetary Nationalism and International Stability.
The member states of the EU are not willing to do this; or I should say that interest groups within these countries, including the government bureaucracies, are unwilling to fully and consistently adjust to the reality of the supply and demand for goods and money across Europe, as well as with the world economy with which the European Union inescapably interacts.
This is the reason why some groups in the countries hardest hit in the current economic crisis are calling for a return to their national currencies. Their panacea is currency devaluation and domestic price inflation through money creation to fund government spending to resist relative price and income adjustments in their economies. Inflation, however, is only an illusionary solution that soon brings about its own distortions, imbalances, and injustices.
The Eurocrats in Brussels are frightened by the fact that their dream of a United States of Europe—which they would command and control through the EU regulatory and legislative mechanisms—might implode with a successful currency “secessionist” movement. Thus, the survival of the Euro is partly dependent upon the willingness of those at the helm of the EU and the European Central Bank to provide the loanable funds and central bank-created money to put off the necessary national internal adjustments.
Why do people find it so hard to allow the market to function without calling for government solutions? Is it simply a fear of risk? Or is there something in our psychological make-up that makes us look to the state for help?
This is one of the most difficult but important questions that friends of freedom can ask, and try to answer. Adam Smith was highly pessimistic about the chances for winning the war of ideas and establishing a regime of free trade. In The Wealth of Nations he despaired of the “prejudices of the public” and the “power of the interests.” By the prejudices of the public, he meant the difficulty of getting people to understand the seemingly counter-intuitive argument that when men pursue their own self-interest in a competitive economy the outcome in terms of both freedom and prosperity is far greater than when governments attempt to guide and command the productions of society. By the power of the interests, Smith meant the influence of special interest groups to gain monopolies, trade protections, subsidies and other benefits from the government at the expense of the general consuming public, and their determination to fight “tooth-and-claw” to prevent losing these political privileges.
Others, such as the Italian economist, Vilfredo Pareto, British economist, Philip Wicksteed, and German, free market economist, Wilhelm Röpke, pointed out that there is an inherent “bias” in society toward “producer” interests over the interests of the general consuming public. The reason being is that while each of us is the consumer of many goods, in the division of labor we are the producer of one or a small handful of goods. And unless we have been successful in earning income in our producer role in society, we do not have the financial means to purchase whatever other goods we desire to buy as a consumer. Thus, people tend to place greater priority on limiting competition in their own line of production, than fighting for competition for all the separate goods they purchase as consumers.
Still others, such as Joseph A. Schumpeter, or the French social critic, Bertrand de Jouvenel, or Mises and Hayek, emphasized the role of the intellectuals in society in influencing and shaping public opinion and attitudes about the social order and the economic system. The fact is that since the times of the ancient Greeks philosopher-intellectuals have expressed a deep disrespect and contempt for the arena of work, industry and commerce. For the ancients, with their slave societies, work and trade were reserved for the “underclass,” while the “free citizen” devoted himself to the “higher” callings of life—the pursuit of “beauty,” the “good” and the “virtuous.” The modern intellectual grew up with the development of industrial capitalism. Indeed he could never have devoted his near full-time efforts to “ideas” if not for the productivity of capitalism to support his “life of the mind,” which freed him from the “sordid” affairs of having to earn a living from market-based production of goods and services.
The modern intellectual’s disapproval of free market capitalism often comes from two frustrations: First, the market frequently fails to appreciate the intellectual’s work to the same degree he values his own worth. That is, the intellectual sees the university dropout make millions from inventing a new sink faucet, while he must get by on a university professor’s salary or a research grant with little or no recognition of his “big ideas” in the society as a whole. Second, the intellectual is confident that he knows how to correct all the “ills of society” through regulation, control, and redistribution. Yet, his Olympian perspective on how to make the world a better, a more “just” and “fairer” place remains stillborn because self-interested and narrow-minded people do not appreciate his grand vision for creating a “good society.”
Finally, freedom, as has often been pointed out, has an accompanying requirement: self-responsibility for one’s actions—both when they succeed or fail. Hence, freedom can be a scary thing. This has made the appeal of the modern welfare, “entitlement” state, well, so appealing to many. Worse, still, once a large number of the members of