John Law and A.R.J Turgot
Monetary theory has been a hotly debated topic amongst economists and philosophers for centuries, dating way back to the days of Aristotle. Even to this day, economists still disagree on the exact role money plays in our economy. In July 2019, we are still preoccupied with current event topics that have roots in debates over monetary theory throughout history.
Though the arguments have evolved over time (slightly), the philosophies that underlie the different points of view have stayed fairly consistent. In fact, two traditions of monetary thinking can be illustrated through a contrasting examination of the works of John Law and Anne Robert Jacques Turgot, 17th century economists. Both men wrote about the role money plays in our economy, and both men came to conclusions that were diametrically opposed to one another.
The first was John Law, a banker from France. Law was held in high regard during his time, having founded effectively one of the first central banks in modern history, the Banque Générale Privéeand. He was also one of the first men to wreak havoc as a result of a mismanaged central bank, having destroyed the French economy in four short years (1716–1720). Economist Joseph Schumpterer proclaimed Law as the “Father of modern monetary thought”.
A few years later, A.R.J Turgot responded to Law’s monetary theory. During their time, Turgot was undoubtedly less popular than his opponent, however, later on, recognition for Turgot’s work would come. The great economist Murray Rothbard had high praise for Turgot, as can be seen in his 1961 article titled “The Brilliance of Turgot”:
“If we were to award a prize for “brilliancy” in the history of economic thought, it would surely go to Anne Robert Jacques Turgot, the baron de l’Aulne (1727 — 1781). His career in economics was brief but brilliant and in every way remarkable.”
By contrasting the key points of both Law and Turgot’s monetary theories, we’ll be able to examine what underlies central disagreements in the debate over money’s role for our economy today.
John Law’s view of money led him to economic conclusions that he would later use as supporting arguments for his public policy prescriptions. One major idea coming out of Law’s theory is that money is a creature of the state, not the market, and, under the oversight of central planning, control of the money supply is a tool that governments should leverage to steer an economy towards an agreed-upon goal, ultimately benefiting public welfare (full employment, price stability, GDP growth ,etc).
Law states that money’s main benefit is merely as an ‘exchange token’, having no other use rather than as the measuring stick of value to other goods. Law does not believe that money follows the same principles of supply and demand that a typical consumer good or capital good does. Flowing from this line of thought, Law believes it’s an important part of a government’s duty to control the supply of money in order to improve economic conditions for the general public welfare.
Law’s belief that money’s only benefit is in its use for exchange leads him to declare that the hoarding of money (which some might call savings) is detrimental to society. It should come as no surprise then to learn that Law supported legislation that gave the king full authority to discourage the holding of cash reserves. In Law’s mind, discentivizing hoarding encourages spending, which is important, because Law believed a main cause of economic stagnation was a “shortage of money”. Therefore, It was up to the King (or some other central authority) to increase the supply of money available in the market, in order to keep up with the demand for trade.
This explains why Law was an ardent opponent of any metallic monetary standard. Monetary metals, like gold and silver, present natural obstacles to having its supply increased during an economic slowdown, just when the economy needs to be pumped with more fuel. This led Law to favor paper money over metal money, and pointed to the cost-intensity of gold mining as a waste of resources. Law argues that paper money needs to be readily supplied to the market to facilitate trade, pay for wages, and ultimately keep the economy chugging along.
A few short years after John Law’s writing, A.R.J Turgot proposed a different theory of money. He rejects Law’s claim that money is merely an ‘exchange token’, and argues that “sound” money is a vital part of the market-clearing process.
First, Turgot criticized Law’s insistence that the money supply needs to be controlled and manipulated by a central planner to keep pace with trade. Turgot claims that any quantity of money is suitable for trade. This is because the ever-changing prices of goods in the marketplace simultaneously take into account 1) the supply and demand of the good, and 2) the supply and demand for money.
Turgot writes:
“has it been left to Law to remain ignorant that gold falls in value like everything else by becoming more plentiful? If he had read and studied Locke … he would have known that all the commodities of a country are balanced between themselves, and with gold and silver, according to the proportion of their quantity and the demand for them;”
In Turgot’s view, fluctuating prices, far from being an antisocial event to be feared and fought via the printing of fiat money, is the market’s response to the changing social demand for money, due, for example, to a growth in real output or to greater uncertainty of the future. (**)
Changing market prices, including the changing purchasing power of money, represent the constant flux in the constellation of consumer preferences, production techniques, and resources availability in our economy. Natural alterations in consumer preferences lead to a market adjustment process which reappraise and reallocate productive resources to their best use, see: law of costs.
Market prices are signals that entice profit-seeking entrepreneurs to take action in combining and transforming underpriced means into more productive end-products. This is the entrepreneurial calculation process, where the free market pricing of goods in terms of a sound money is a foundational pillar of progress, and where artificially controlled Monopoly money hinders and distorts this phenomenon.
Even to this day we see the debate ongoing amongst mainstream economists, who opine in the NYT and WSJ about “deflationary spirals”, “liquidity traps”, and “rules-based monetary policy”.
Someone who supports cryptocurrencies believes in the free market competition of money production, not the monopolization of money production by the state. The more we educate ourselves about this topic the better off we’ll be, and the less we’ll have to hear Paul Krugman obsess over “stimulating aggregate demand” in our futures. Hopefully.
**For example, the phenomenal growth of the U.S. economy between 1879 and 1896 occurred against a backdrop of declining prices. See Ron Paul and Lewis Lehr- man, The Case for Gold: A Minority Report of the U.S. Gold Commission (Wash- ington, D.C.: Cato Institute, 1982), pp. 102 — 10.
Published at Mon, 29 Jul 2019 18:38:35 +0000
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