Among my own list of “pet peeves”, near the very top are systemic flaws in analysis. Put another way, I am infuriated by seeing analytical mistakes which “everyone” makes, because when the supposed “experts” in our society insist on repeating flawed analysis again and again they teach flawed thinking to those exposed to this defective logic.
At the top of the list of “mistakes made by everyone” is the complete incapacity of commentators (in virtually all fields) to properly analyze the analytical principle known as “causation”. One could write an entire book on this one subject, because there are so many different variations of this flawed analysis.
I will focus on a single example – the inability to distinguish between “causation” and “correlation” – for two reasons. First of all this is (by far) the single largest category of flawed analysis on the subject of causation and because it is essential to understand this distinction/principle in order to debunk one of the central myths which has been perpetuated about a “gold standard”.
Let’s begin with the general principle. The reason why virtually no one in our society engages in competent causation analysis is because this term is so poorly understood. To illustrate this defect in thinking (as always) we must start with definition of terms. Sadly few analysts have more than a vague understanding of the word “correlation”. Once one understands this term/principle correctly it becomes much harder to continue to make the same mistakes in causation analysis.
A correlation is nothing more than the simultaneous occurrence of two events. In short, correlation suggests nothing more than “coincidence”, and (most particularly) correlation implies nothing about causation. To comprehend this, I must repeat one of the earliest lessons I learned while studying economics.
To illustrate the complete absence of any connection between correlation and causation, economists provide the example of the “high correlation” between economic booms and sunspot activity. The “joke” among economists (who aren’t exactly the wittiest group) is that economists are still trying to determine whether economic booms “cause” sunspots; or whether sunspots “cause” economic booms.
Hopefully the general principle here is now evident to readers: by itself, a correlation is an entirely meaningless piece of data – and most importantly correlation never implies causation. “Coincidences” do occur in our universe, with economic booms and sunspots being only one of an infinite list of examples.
This brings us to defining causation. Here the general understanding of this term is almost invariably simplistic. When we say that “A caused B”, what we are directly implying with that statement is that nothing else (in the entire universe) could have “caused B”. When we (properly) understand the magnitude of what causation implies, we realize that in the vast majority of cases when any individual in our society asserts that “A caused B” that they are most likely engaging in a hyperbolic statement – which they are not capable of supporting conclusively with facts.
Sadly, the conceptual understanding of the absolute nature of causation in our society now only exists in the realm of science, and even there we see practitioners regularly “bending the rules” when engaging in such analysis. Because of this failure to observe the rules of causation, we are continually being bombarded with erroneous assertions/conclusions – even from otherwise astute commentators.
A perfect illustration of this comes at the 45-minute mark of a lengthy interview of Professor Webster Tarpley, an academic for whom I have considerable respect. However Tarpley too is guilty of the aforementioned defect in logic when he briefly passes judgment on the wisdom of returning to a gold standard. What makes this such a perfect example is precisely because it is so simplistic.
Tarpley attempts to “prove” that a gold standard is an inherently flawed monetary model in the following manner. He looks at the last three examples of Western governments which implemented a true gold standard – and then notes that in all three examples a severe depression ensued shortly afterward. On the basis of that correlation, Tarpley blames the gold standard as the “cause” of those depressions, and based on that reasoning dismisses a gold standard as an impractical anachronism, as many other commentators have done before him.
As with most simplistic analysis, this is flawed on several bases. First of all, throughout history we have observed long episodes of time where a gold standard was firmly in place and there was not economic depression. On that basis alone we can conclude that a gold standard does not necessarily lead to depression. Furthermore, we can list numerous examples of nations which have experienced severe economic depressions in the absence of a gold standard, with Greece being but the latest example.
Tarpley’s analysis fails. A gold standard does not inevitably lead to depression, and depressions can be caused by other factors which have nothing to do with a gold standard. Where did Tarpley go wrong? First of all he failed to distinguish between causation and a simple correlation, and secondly he refused to explore how/why such a correlation might exist.
In particular, the obvious point of inquiry is whether there are some economic traits/realities which tend to be present when a gold standard exists – and (in fact) one or more of those other factors were the actual cause of the depressions to which Tarpley referred. In this respect, we can boil down a gold standard to having only two effects on any/every economy:
1) It provides an economy with “good money” which cannot be debased/diluted over time (as always occurs with fiat banker-paper).
2) It forces governments to pay their bills.
We can immediately dismiss (1) as a potential cause of depressions. Not only is it impossible to construct any economic argument where having good money causes a depression, but we have centuries of empirical evidence where a gold standard (and good money) was commensurate with prosperity.
This brings us to (2). Can anyone construct an argument as to how forcing governments to pay their bills leads to a depression? We don’t even need to go that trouble. Again we can merely point at Greece. Greece’s (insolvent) economy was suffering from a number of problems before severe “austerity” (i.e. trying to pay its bills) was imposed on it – but a depression wasn’t one of them.
What happened when Greece’s government inflicted austerity on its population? A near instantaneous economic depression resulted, which has already reached such an extreme level of economic suffering that the suicide rate in Greece has doubled in less than three years – and all without any gold standard. Immediately we can address the issue of gold standards and economic depressions with certainty: the only way in which a gold standard could ever “cause” a depression was if simply paying one’s bills inevitably led to economic depression.
Again we can point to a recent empirical example to totally refute such absurd thinking: Canada in the 1990’s. When our Liberal government inherited a nearly bankrupt economy from the corrupt and fiscally incompetent Conservative regime before it, that government was not only able to move from the largest deficits in history to a fiscal surplus in only two years – but it did so without triggering an economic depression, and its superb fiscal management led to a full decade of surpluses (until the succeeding Conservative government again destroyed Canada’s solvency).
Armed with this additional data, we can now engage in constructive analysis on the relationship (if any) between gold standards and depressions. Why do governments attempting to impose fiscal discipline frequently cause economic depressions? Political cowardice and/or corruption.
Just as the over-spending which characterizes most modern Western governments is a direct symptom of cowardly politicians who unfailingly “take the easy way out”; so too the same can be said about how most of these governments attempt to be “fiscally responsible” – by doing what is easy rather than what is hard.
What is “easy” for politicians (politically speaking)? Stomping on the poor. When we cast our gaze at the collection of incompetent/cowardly/corrupt Western governments arrayed before us, we see their thinking dominated by a single “equation”: re-election. Given the only consideration relevant to these politicians, we immediately see a cause-and-effect relationship take shape.
Fiscal tightening inevitably implies penalizing one or more groups in society, since the only possible way in which a government can improve its fiscal balance (all other factors remaining constant) is through reducing spending or increasing revenues (i.e. taxation). Now we add “political cowardice” (or corruption) to this equation and we are presented with the following political reality.
In political campaigns which are ever more dominated by top-down political spending (i.e. campaign bribes from the wealthy), it is much, much more politically expedient to stomp on the poor (who have virtually zero political power) than it is to slice into the wealth-hoards of the wealthy (who have unlimited political power).
We can provide conclusive proof of this political principle through empirical evidence and one of the most-basic of all principles of economics: the marginal propensity to consume. The “marginal propensity to consume” is just fancy economic jargon for a simple and indisputable principle of arithmetic/logic: the poorer that someone is, the more of each dollar in their possession that they spend.
We can illustrate this at both ends of the wealth spectrum. The poorest people always spend 100% of every dollar that comes into their possession. Indeed, by definition these people never have enough dollars to even live a “normal” standard of living. The opposite is true at the other end of the scale. Millionaires hoard a greater percentage of their wealth than the middle-class, billionaires hoard a much greater percentage than millionaires, and the (few) trillionaires hoard the most of all (by far).
Consequently we have a simple economic fact which is true in any/every capitalist economy: a dollar in the hands of someone near the bottom of the wealth pyramid always generates more economic activity than a dollar in the hands of someone near the top. Adding this additional principle of arithmetic/economics we now see the relationship between “austerity” and depressions.
Those governments who seek to “balance the budget” on the backs of the poor (and/or middle class) cause depressions, because the dollars they subtract out of the economy do so much more harm. Greece epitomizes this point perfectly. Conversely, governments which engage in humane austerity (like Canada’s Liberal government of the 1990’s) can impose fiscal discipline, balance the budget, and not cause any devastating depressions.
We can now correctly formulate the relationship between a gold standard and economic depressions. A gold standard does not “cause” depressions (governments do). However, at the same time, a gold standard is also not a magical, economic panacea. Specifically, imposing the fiscal discipline inherent in a gold standard will not lead to a good economic outcome in the hands of a corrupt government (i.e. one which governs for the benefit of the privileged few as opposed to the majority).
At this juncture in history, however, such a point is almost completely moot. Corruption in Western governments has reached an all-time extreme in the modern era. Proof can be found in the numbers: the “privileged few” have benefited (across the West) to an obscene degree which hasn’t been witnessed in our nations since the era of Kings and Queens (i.e. the corrupt despots of whom we previously rid ourselves).
Clearly, before we can “fix” our economies we must fix our governments (and in some cases) our entire political system. Only when we have banished the corrupt kleptocracies masquerading as “democracies” can we hope to return to fair economies, general prosperity, and (eventually) the monetary integrity of a gold standard.