By Gary North
“You can’t get something for nothing.” All economists say they believe this. With the exception of Austrian School economists, none of them believes this.
We are told by everybody except the Austrians that Federal Reserve policy, being loose, is now stimulating economic growth. Yes, this growth is minimal, but it is real. This is real economic growth, economists tell us. Americans are getting a little bit richer because of this growth, and this growth is the result of Federal Reserve policy. If the Federal Reserve had not tripled the monetary base ever since October 2008, economists insist, the American economy would be in something like the Great Depression. There would be economic contraction. There would be economic losses. The only thing that has prevented this, we are told, is a combination of Federal Reserve monetary expansion and the federal government’s spending.
Only the Austrians have a consistent methodology, which says that the government is not the source of economic growth. It is merely redistributing wealth by force. They make the same claim with respect to the Federal Reserve System. The central bank is using its government-granted monopoly power to expand the monetary base, which is then used by government agencies to promote government programs. This monetary creation transfers wealth from the private sector to the public sector. This is not the creation of wealth, the Austrians say; this is the destruction of wealth.
This destruction of wealth takes place because the Federal Reserve creates economic signals, by means of digital money, which mislead entrepreneurs and consumers. These false signals represent a threat to accurate decision-making, and accurate decision-making is the heart, mind, and soul of entrepreneurial theory. Thus, central bank expansion increases the amount of error, and these errors will build up over time. This will eventually lead to a catastrophic contraction of the American economy.
Only the Austrians are consistent in maintaining that you cannot get something for nothing. The “nothing” that Austrian economists have in mind are the digits called Federal Reserve money. These digits cost the Federal Reserve nothing at the margin to produce. These goods have negative consequences. They create false signals that are then used by both consumers and producers to plan for the future. These false signals create losses, and the losses reduce economic wealth. The losses produce economic contraction, not economic growth.
Keynesians demand that the central bank expand the money supply. Chicago school economists also demand this, although they want this increase to be lower and more predictable. The rational expectations people want fiat money because they do not want any changes in policy. The supply-siders want it, because when push comes to shove, they are defenders of the federal deficit. They also believe in monetary expansion by the central bank as a means of stimulating economic growth.
If we say that digits are nothing, economically speaking, and if we also say that economic growth is something, then we have to conclude that either the digits are not the cause of the economic growth, or if they are the cause, then the old rule is incorrect. It turns out that we really can get something for nothing.
When we view digital money as nothing, meaning that it costs nothing at the margin to produce, then we are faced with an inevitable conclusion, assuming that it is true that we cannot get something for nothing. The “something” which digital money appears to generate — economic growth — is an illusion. If money can be generated out of thin air, as critics of fractional reserve banking like to say, then the economic growth which takes place has to be an illusion. It has to be drawing on scarce resources in some unseen way, so that at some point, there will be economic losses. In other words, the economic growth that is measured by statistical indicators is not really economic growth. It is a transfer of wealth from sectors of the economy that are not weighed heavily by the people who construct the statistical indexes that are used to identify economic growth. The statistical indicators are ignoring the costs associated with the transfer of wealth by investors and consumers that is based on false information.
A BAD DIAGNOSIS
To understand this better, consider a person who goes to a physician. The person complains that he is suffering from certain kinds of pains. The physician diagnoses the condition incorrectly. The person is prescribed certain medicines, and the symptoms go away. The person thinks he is better off. He thinks he is healthier. He thinks he has gotten well. On the contrary, he is getting sicker, but because the symptoms have gone away, the person assumes that he is getting well. He will not take steps to deal with his illness. The illness could be terminal.
I know a man who has long suffered from symptoms that are identical to Parkinson’s disease. For 25 years, his physician diagnosed his condition as Parkinson’s disease. He was put on a regimen to deal with Parkinson’s disease. It now turns out that he does not have Parkinson’s disease. He has a genetic disorder that creates the symptoms of Parkinson’s disease. These symptoms can be dealt with effectively by means of an operation. He will go in for that operation next month. In all likelihood, most of the symptoms will go away. The treatments that he has recently adopted, which are devised for dealing with the genetic disorder, have dramatically improved his condition. In short, the diagnosis 25 years ago led to a series of expenditures on medicines that were not necessary, and in turn led to a false conclusion, namely, that the medicines were dealing with the disease. They were not. They were only dealing with symptoms that look like symptoms created by Parkinson’s disease. He has lost 25 years of better health, and he has lost all of the expenditures that he made in dealing with a disease that he never had.
This is exactly what central bank policy does. It deals with symptoms. Worse than this, it deals with symptoms that previous policies adopted by the central bank created in the first place. So, year after year, generation after generation, central banks expand the money supply. They do so, all in the name of dealing with recession and depression. Yet central bank policies create the boom-bust cycle. So, the remedies imposed by the central bank expand the threat of future negative sanctions. Free digits produce bad information. This bad information produces the illusion of economic growth, because entrepreneurs have invested money that they should not have invested in projects that they should not have launched.
We do not get something for nothing. We get bad information for nothing, and this bad information produces losses. But economists across the board, with only the exception of the Austrians, insist that Federal Reserve monetary expansion is the basis of maintaining the present weak recovery. They have abandoned their original position, namely, that we cannot get something for nothing. They are so self-deluded that they do not see the inconsistency of their position.