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It’s an Economy, Stupid

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America’s central bank has spooked the stock and bond markets again.

The Dow dropped almost 150 points and the bond market slipped last week on indications that the Fed may raise interest rates if the economy doesn’t “slow down.” Concerned officials there have been expecting a slowdown, but it hasn’t happened. The Wall Street Journal says that “Fed officials are beginning to prepare markets for a Fed move to brake the economy — unless it slows on its own soon.”

This is all perfect nonsense. We’re talking about the economy. It’s not a vehicle heading uphill or down. It’s not a machine that can overheat. It’s an economy. An economy is people — human beings planning and acting to improve their lot. They transform resources into more useful forms and exchange with each other. If they think they are moving too fast, they will slow themselves down. If they get overheated, they will switch on the air conditioning or take a shower. There’s no need for the government to fret.

Words like “slow,” “fast,” “brakes,” “overheating,” and “cooling down” are totally out of place when we talk about economic matters. Thinking this way lends credence to the central-planning mentality. Vehicles have drivers. Machines have operators. But an economy does not have – and cannot have – either a driver or an operator.

Message to the Fed and Treasury: It’s an economy, stupid!

Central banking is the central planning of money. Isn’t it odd that a country which, rhetorically at least, condemns economic planning as socialism engages in monetary socialism? Believing that a few people can decide the proper interest rate is like believing they can decide the proper price for bread or cheese. An interest rate is the price of money, reflecting the intensity of people’s preference for having it now versus having it in the future. Since people prefer things now to later, if you want someone to lend you money, you must be prepared to pay a lender something more than that amount in the future. How much more depends on people’s time preference. The percentage difference is the interest rate.

In a free market, no one can decree an interest rate, because the money supply is not controlled by government. The market itself generates money; it might be gold or a combination of things that is stable and valued generally. The best money is the one the market comes up with. Government currency is always subject to political manipulation, which means disruptive inflation or deflation. The Fed over the last several years has largely kept the growth of the money supply tight. But we can never rest as long as any political institution has its hands on the printing-press switch.

Why fear that the economy is moving too fast? The standard reply is that too vigorous an economy will bring inflation, a general rise in prices. But only the government can cause inflation — by expanding the money supply, as it is doing now. Business people and workers cannot do that. Fear of market-caused inflation is baseless.

It’s time the Fed dropped its pretensions. It does not know what the interest rate should be. Further, it cannot control economic activity by manipulating the interest rate. Today’s markets are sophisticated and fast. Unless the Fed turns wildly erratic, people anticipate and adjust to change in light of their unique circumstances. The Fed cannot predict the effects of its policies. As economists J.W. Henry Watson and Ida Walters write, the system is like a child with toy steering wheel. There is an illusion of control “but the steering wheel is not connected to the drive train.”

Governments really have only two choices in economic matters: mess things up or get out of the way. The right choice is obvious. Letting go of the monetary system is the crucial first step.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.