April 28, 2002
Natural Law Economics?

When Thomas Sowell posts a column of Random Thoughts, he is very close to a blogger. Like the Impromptus at National Review Online, all this column needs to qualify as a blog is a few subtitles, some links, and not to be posted all at once. And not to be earning the author any money, I guess. (Thanks to the Banana Counting Monkey for the link to Sowell. I really should be keeping an eye out for his stuff.)

I have some further thoughts on one of today's entries:

Capitalism is not an "ism." It is closer to being the opposite of an "ism," because it is simply the freedom of ordinary people to make whatever economic transactions they can mutually agree to.

It seems to me that he could, and probably should, go further and claim that capitalism is economics. If it doesn't work, it's not capitalism.

An example should show what I mean:

Way too many people talk about 'choosing between', say, fixed exchange rates and floating exchange rates, as if they were equally valid and (dare I say it?) natural choices. A newly independent country, or a country which has just gone through a change of regime, will often switch from one to the other.

In fact, exchange rates float. A government can set up a fixed exchange rate in addition to the floating one, but that will inevitably lead to more trouble as the rates diverge. And they will inevitably diverge, since a floating rate will go up and down at least a little bit, while a fixed rate obviously won't. A government can attempt to outlaw floating exchange rates by outlawing free trade in currencies, turning the currency market into a black market (like that for drugs) and shutting it down. But it can only hope to succeed by applying North Korean or Kampuchean levels of repression. Even then, trading outside the country will continue, and the currency will still have a floating exchange rate on the world market, at least until the actual value of the currency gets so close to zero that it's not worth trading. That usually doesn't take long.

My conclusion is that exchange rates have floated, do float, will float, and should not be kept from floating. That's not just the opinion of some (capitalist) economists, contradicted by other (socialist) economists, it's observable fact.

The difference between fixed and floating exchange rates is not like the difference between Coke and Pepsi, which is merely a matter of taste. (Coke tastes far better to me, but I wouldn't want to impose my own good taste on the poor misguided fools who continue to drink Pepsi.) Nor is it like the difference between chemotherapy and radiation treatment, two methods of achieving the same goal, either of which may be more effective in a particular situation. It is more like the difference between antibiotics and magic ointment: one (usually) works, the other doesn't. One is science, the other is not. (Another possible analogy would be capitalist economics : socialist economics :: astronomy : astrology. But these do not claim to be doing the same thing.)

I hope my total lack of professional training in Economics isn't showing. And yes, I know that fixed exchange rates are far less common than they were a few years back. I'm not arguing against them, rather using them as an argument that capitalist, free-market economics is economics. I suspect that my remarks on Coke and Pepsi will attract the most comment. Try to stick to the point, guys.

Posted by Dr. Weevil at April 28, 2002 10:33 AM