Wednesday, February 9, 2011

What's Ron Paul's Beef with the Federal Reserve?


My, it has been quite a while, hasn't it.

A friend posed the following question:

...And I am truly trying to wrap my brain around the Federal Reserve information I want so much to understand, but I can't get any 'good' out of it, only criminal mischief. And I never trusted Ron Paul, but a lot of people I know are ready to put him in the White House. Why do I mistrust him? Can you tell me, because I don't know exactly why, BUT I KNOW...
I'll try to give something like an answer; hopefully, it'll be coherent.

Ron Paul (like his son, Rand) is intensely devoted to libertarianism. I don't know if you're familiar with that particular ism. Basically, the underlying idea of libertarianism is that the only frame of reference for analyzing society is that of the individual. Collective behavior of any kind is inherently suspected. Culture, history, sociology, psychology--forget it. There's only the individual & the only question worth asking is whether any social program, idea or phenomenon increases individual freedom. For a number of libertarians, this dovetails neatly with the writings of Ayn Rand, the creator of a "philosophy" called objectivism. Rand posited in Atlas Shrugged that the smartest, most individualistic people in society are carrying a vast majority of sheeplike wastrels on their backs, giving more to society through the results of their hard work & taxes than they receive from the masses of shirkers. Her hero, John Galt, and other producers decide to withhold their labor in protest, thereby bringing society to its knees. You can see that same sense of indispensibility & entitlement among today's hedge fund managers & bond traders as they howl along with Rick Santelli on MSNBC about how they're paying the mortgages of all those lazy people who sit around expecting handouts, blah blah.

You can see how this almost hysterical exaltation of the individual is a very attractive notion. After all, we're products of the most extremely individualistic culture on earth. But the problem is that by essentially ruling out every other way of looking at society except the individual & his/her freedom, libertarians exclude the vast majority of evidence available to our sense organs (not to mention research libraries). That denial of context leads to weird positions such as Rand Paul's statement that he would have voted against the Civil Rights Acts of 1964 & 1965 as encroachments on the individual rights of segregationists (OK, in Rand's case there's clearly something else at work here. He certainly doesn't consider infringements on the individual rights of black people caused by discrimination, for example). To be fair, some libertarians are very good on first amendment rights issues (after all, individual rights is their sole obsession), but on everything else, you get this weird prezel logic based on denial of everything beyond the individual & his or her rights. In their denial of the importance of power differentials in society, libertarians, whether intentionally or not, open the door to Social Darwinism.

The libertarian obsession with the individual leads to economic ideas hostile to government & to collective activity of any kind. Thus libertarians like Ron Paul find congenial economic theories that rationalize the elimination of government action & programs. Paul is an adherent of what's known as the Austrian School of economics, an approach that's rejected by mainstream economists, both liberal & conservative. Essentially, the Austrian School argues for laissez-faire economics with government involvement in & oversight of the economy reduced to the barest minimum. Austrian School adherents also argue that mathematical modeling, statistics & testing are basically useless in the study of economics & argue instead for the use of logical deduction based on first principles instead. And ouija boards (just kidding).

One of the heroes of economic libertarians, Friedrich Hayek, was a member of the Austrian School. Hayek argued that Britain was going to become another Soviet Union due to the creation of its National Health Service. (Hayek is often cited for saying that the bigger the government, the greater the encroachment on human freedom. What exactly is meant by "big" & "small" in this context has always confused me. Does this mean that the US, for example, is less free than Chile under Augusto Pinochet?) Needless to say, Hayek's prediction didn't work out very well, but that hasn't dulled the ardor of his adherents. (After all, who needs evidence when you've got first principles?)

Paul is also extremely hostile to the Federal Reserve, which he wants to eliminate (Paul Ryan, another libertarian, shares this view). Another big institution, and therefore threatening to human freedom. Have I told you how oppressed I feel when I hear that the Fed has lowered interest rates? The irony is that the Federal Reserve was set up in 1913 in response to the extreme concentration of economic power, lack of regulation of banking activities, and the absence of a central bank to bolster the economy in the case of a crisis, all of which was exposed in the aftermath of the Panic of 1907. The Fed provided the latter, but it was far too weak to deal with the other two problems, as was illustrated by the Great Depression. Now, you may be wondering, in the aftermath of the deepest economic crisis since the Great Depression, with extreme concentrations of economic power in a highly unregulated financial system, why Ron Paul wants to do away with the institution that provides the bulwark for that system. Why, you might ask, does he not instead focus his efforts on strengthening regulation of the financial sector (creating an institution that would provide training & advancement to successively higher levels of regulatory complexity & responsibility, a la the training program at the State Department, for example, and working to make the salaries of regulators comparable to those of their counterparts at banks, thereby removing the incentive of regulators to go to work for the firms they regulate)? Why, in short, does Paul not work to prevent a recurrence of the crisis we’ve just experienced, rather than weaken one of the institutions responsible for minimizing the damage when such crises occur? That question applies to the GOP in Congress, almost across the board. It’s one of the questions of the age.

1 comment:

dmnorman said...

Nice work! While I think the Austrian School is a little more wedded to mathematics than you assert, and accepted by more economists than I would like, I certainly agree that it is ridiculous.

All in all a very good analysis of the "philosophy" that underlies libertarianism.