The Mystery That Is Martin Wolf's Influence

Martin Wolf is a prominent columnist for the Financial Times, and a brief bio of sorts on the FT website notes that "leading economists" regularly debate his musings on the global economy. While Wolf's influence over deep thinkers within the economic commentariat perhaps speaks well of him, the contrarian view offered here is that his clout serves as more evidence of how very debased the level of thinking is among today's economic establishment.

Indeed, it could be argued from a classical economic perspective that Wolf's rising sway correlates with a weaker global outlook. Or put more simply, as Wolf's influence rises, the possibility of real economic recovery declines.

Taking nothing away from a man who has written so well in the past on the certain positives that result from the globalization of the world economy, to read Wolf today is to be bombarded with nearly every discredited economic fallacy in the book. Some with similar views might say it's a relief he's no longer foisting bad ideas learned at the World Bank on hapless individuals in undeveloped parts of the world, but if it's true what they say about his influence among those who do implement policy, any relief felt is misguided.

For evidence we need only reference Wolf's latest column, titled "The world economy has no easy way out of the mire". Although Wolf may well be right about our global economic health in the future, it's fair to say that to the extent he continues to influence policy, he'll play a certain role in promoting the ill health he decries.

First off, Wolf posits that absent "unprecedented monetary loosening" and "huge fiscal deficits", "we would be in another Great Depression." Where does one begin?

Well, first off it should be stressed that money itself is not wealth as Wolf assumes. We can't eat money, nor does money make us more productive, but to believe Wolf, its mere existence in the form of greater supply is holding up an economy that would be in freefall without it.

More realistically, money is insignificant except for serving as a measuring rod that enables us to price investments, all the while exchanging our surplus for that of others. In short, we trade products for products and investments for other investments. Money merely serves as a medium of exchange allowing us to do so.

In that sense, its supply is irrelevant, while it being stable in value is of extreme importance. Wolf in the past has written of the need for a currency "golden anchor", but at present he seems to buy into the charitably false notion that money itself in great quantities will cure what ails us.

If by "monetary loosening" he means lower interest rates, a thought experiment is in order. Why not allow governments to set the price of goods in addition to the price of credit? I'd certainly like an Aston Martin at a much lower price, so if the British government would just reduce its cost, I'd buy one while stimulating England's economy.

The obvious problem with the above is supply, and if one of the world's most prestigious automobiles were made cheap by government fiat, the car itself would likely disappear altogether. Applied to interest rates, central banks can set any rate of interest they want, but just because they set rates low doesn't mean supply of the credit needed is going to be there at this low rate.

Interest rates are meant to be the intersection of supply of and demand for credit, but in Wolf's Ivory Tower, it seems the law of supply and demand can be suspended. That's fine, but back in the real world savers need to be compensated for doing just that.

In short, whatever the low rate or "loose" monetary policy, lots of luck finding savers willing to be undercompensated for their capital. In this sense, is it any wonder that businesses are finding it so difficult to access credit amid these low rates? Not really.

On the spending front, without any supporting evidence Wolf of course lauds the stimulative nature of heavy deficit spending. By his lights, the global economy would be on its back absent this extreme form of government generosity with the money of others.

In that case, another thought experiment is over. The next time readers are in a packed movie theater, imagine if each individual on the left side of the center aisle were forced to hand over $20 to each attendee on the right. No doubt the right side of theater would be "wealthier" by $20, but only at the expense of those on the left.

This simplification of the absurd notion of "stimulus" or government spending shows why it never works. Governments have no resources of their own, so to stimulate anything they must depress others, in particular those in the private economy. This to a high degree explains why the U.S. economy roared back from the horrific 1921 recession amid government spending cuts, and also helps to explain why the U.S. economy remained listless in the ‘30s despite massive spending increases.

Stimulus not only penalizes some at the expense of others, but since it creates no incentives for production, it actually weighs on true economic growth. For more modern evidence of the wanting nature of stimulus, we need only look to Japan's economy, which has suffered mightily (deflationary monetary policy foisted upon it by the U.S. another large factor) despite nosebleed spending increases.

A thoroughgoing Keynesian, Wolf bemoans "huge shifts towards frugality" among private businesses in the OECD in concert with not enough consumption among Chinese citizens as another certain factor driving weak economic growth. But in making this suggestion, Wolf ignores the greater truth that savings don't in any way detract from demand. Savings, it can't be stressed enough, are merely a shift of demand from those who don't have immediate consumptive needs to those who do.

Even better when it comes to economic growth, is that savings placed in banks frequently reach entrepreneurs eager to innovate. To put it plainly as possible, there are no entrepreneurs without capital, which means there are no Amazons, FedExes or Googles without savings first.

In the scary world of relentless economic fallacy resided in by Wolf, individuals and companies would spend with abandon in order to prop up the existing commercial outlook. This would perhaps be nice for those businesses already in operation, but for those of us hoping for cancer cures, safer cars and faster Internet connections (to name a few innovations we'd like entrepreneurs to produce), it would be quite problematic.

Considered in this light, Wolf, despite his laudable reputation as a future-focused globalization advocate, is somewhat of a Luddite. Captive to Keynesian teachings which say we must consume so that economies can grow, his ideas would if implemented calcify our present economic existence while starving entrepreneurs waiting in the wings to disrupt the existing commercial order.

This perhaps explains his popularity among macroeconomists. Paid handsomely to analyze economic ill health which is frequently the result of their own bad ideas, Wolf's continued influence ensures their own.

Indeed, in a world free of fallacious and discredited economic thinking along the lines of "loose" money, government stimulus and "global imbalances" (in an economy of individuals - meaning the global economy - there are by definition no imbalances), we'd all be much better off, and as such less desirous of answers from the modern day snake-oil salesmen who populate the economic establishment. Wolf's ramblings about economic Armageddon absent proper policy crafted by economists give those same economists something to do.

So when it comes to the mystery of Wolf's influence, maybe the answer to this perplexing riddle is that there's no mystery at all. The more influence Wolf has, the more work there will be for economists. But for the rest of us, Martin Wolf's influence is our penury.