Theory v Observation & Plagiarism
QUESTION: Thank you Mr. Armstrong for opening my eyes. I now realize why you have been able to do what you do. It is experience not theory. You have learned from doing rather them contemplating how the world should work. My question is, do you ever stop learning? I now begin to see how some are out there engaging in outright plagiarism trying to pretend their discoveries are yours. They lack the experience to come up with such ideas. Very disheartening.
Happy Holidays
FG
ANSWER: Every single “THEORY” put forth in economics by people who have just sat behind a desk has proven to be false or applicable only part of the time. David Ricardo was a trader and business man. His proposition of Comparative Advantage was achieved by observation. Adam Smith embarked on his journey toOBSERVE how things functioned. Every other theory from Marxism, Keynesianism, Monetarism, Random Walks, whatever, all have proven to be false. They tried to ascertain HOW things function without the experience. Even Noble Prize winners have been discredited such as the Black & Scholes proved to be a disaster (see When Genius Failed).
Plagiarism
Plagiarism is probably the lowest form of character possible, yet it is very common in economics. Being a student of ancient writers, I stumbled upon a major act of plagiarism from the very outset. It was carried out by the teacher of Adam Smith, Francis Hutchenson.more or less copied Xenophon’s work. It is Book III of this work which carried the title of “The Principles of Oeconomics and Politics.” It is this particular book that is of great interest. It begins with chapters on marriage and divorce, duties of parents and their children, the relationship between masters and their servants and thereafter is largely devoted to politics. It is this book which resurrected the “economics” from its Greek origin “Oikonomikos” stemming from the compounded form of oikos meaning “household” and the complex root nem- meaning in this context to “regulate,” “administer” or “control.”
Yet, one of the most interesting minds has been the victim of Plagiarism. There is perhaps no other major contributor to our understanding of the modern political-economy than the notorious financier John Law (1671-1729), the architect of the FrenchMississippi Bubble. Because of that financial crash andCONTAGION that spread to England with the South Sea Bubblecrash in 1720, John Law has been far too often overlooked, considered a fraudster, and a criminal while his work has been stolen bu many. His critics often point to the fact that he had escaped a death sentence for murder in England. However, the truth of that matter was he fought a duel and won. He escaped from prison in London before being put to death. Nevertheless, that was most likely with the aid of the prison guards. Alexander Hamilton was killed in 1804 also in a duel. Although dueling was declared illegal, it was still a contest often over reputation and honor that was a long-standing tradition left over from the days of Trial by Combat.
The more interesting fact is that fleeing England, Law then embarked upon a Grand Tour that exposed him to the dynamic forces of finance that had dominated this period. He had killed Edmund Wilson in a duel in Bloomsbury Square. He fled England and travel to Amsterdam where he observed the new developments in banking. Law had previously studied mathematics, commerce, and political economy in London. Law remained on the Continent for about 10 years before returning to Scotland, which prior to 1707 under Queen Ann (1702-1714), had been its own country before the union of England, Scotland, and Wales.
Upon his return to Scotland, John Law wrote his best-known piece entitled: Money and Trade Considered, with a Proposal for Supplying the Nation with Money (First Edition 1705, Second edition 1720). John Law was a man with extraordinary vision and comprehension. Once again, he was a man of experience in trading, not simply sitting back and pontificating without ever doing anything in the subject under consideration.
John Law was ahead of his time. He submitted a banking plan to the Scottish Parliament, but they rejected it. This was an age of exciting economic .development. Even the Bank of England was established in 1694. Law had also written the Essay on a Land Bank in 1704 (not published until 1994). His idea was to create a land bank was no doubt influenced by the idea of the Physiocrats, but as a precursor.
Because of the so-called murder and the Mississippi Bubble collapse, Law has been written off as a nobody. However, his writings influenced many, although they would never admit it. John Law was clearly the FIRST to use the term DEMAND and he was certainly the FIRST to join it with the word SUPPLY, for only a trader could have seen this connection in price movements of anything. John Law used these two terms to establish the first theory of price movement.
Plagiarism is a strong word. What appears to have taken place was that nobody seems to be interested in quoting Law because of these two issues and that the Mississippi Bubble was pitched as some sort of scam rather than a step toward a market economy. It is hard to imagine anyone truly understanding price and value without trading experience. Only one involved in markets sees how prices rise and fall often rapidly and there is not always a reason and certainly there is no formula for establishing a fair value nor an equilibrium. What we do see in John Law is someone who was confronted by the movement in price. Law explained value using two objects from nature – water and diamonds. What we find in Adam Smith’s Wealth of Nations in Book I, Chapter IV (Of The Origin and Use Of Money) the same example used by Law.
“The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the ultility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use;’ the other, ‘value in exchange.’ The things which have the greatest value in use have frequently little of no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce any thing: scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantiiy of other goods may frequently be had in exchange for it.“
The Water/Diamond Paradox was a central observation made by Law that led to his understanding behind the concept of replacing precious metals with effectively a paper money. This was no trivial discovery, and it is not entirely sure that anyone else fully grasped the reality of this Water/Diamond Paradox. Law saw in his mind’s eye the real driving force behind the economy. He saw thatMONEY rose in value relative to goods, but its value was a function of DEMAND that was “proportion’d to people, land or product.” (John Law; Oeuvres Completes, ed Paul Harsin, 1934; reprint Vaduz, 1980, i, 100). Law was also the FIRST to envision the concept of a Gross National or Domestic Product. I believe, that this was also understood by Smith and helped him to reach his idea of the Invisible Hand.
People who cannot engage in the field and acquire real experience tend to lean more toward Plagiarism since they cannot envision original thought. In my case, what I have learned has been forced upon me by my clients. Having to actually solve problems rather than theorize scenarios has made all the difference. In this respect, it is always a work in progress.
There is nobody who can engage in Plagiarism of my work and pretend it is their’s without the world seeing their inner character and what they have done. Knowledge is accumulative. This is why I attribute knowledge from where it emerges. We can build upon it and move forward, but we have to understand how it first appeared.
Free Markets Always Win
QUESTION: Hello Martin. Recently you stated “The entire central banking system is in serious trouble. They have manipulatedrates lower but fear what happens when the economic pressure forces as rise.”
In your opinion do any “free markets” exist or is the “black market” the only true free market left?
And if all “markets” are manipulated how can there be… ” Had itNOT been for the free market there would be NO check and balance.
Can you please identify one true “free market” from manipulation?
Thank you! O
ANSWER: the Free Markets are what force all manipulation attempts to fail just like Communism could not be sustained and that was an attempt to “manipulate” the economy to eliminate the business cycle. The Fed is generally accepted as being able to manipulate /control the short-term rates because they will actually lend at those rates. However, the attempt to manipulate the long-end is the QE program because the Fed does not lend long-term. Long-term rates are set by the market bid and ask (demand and supply). The Fed attempt to influence the long-end has been a disaster and while they can “manipulate” for a brief period of time, when the economy turns down again, they will be out of bullets. Their balance sheet is at $4 trillion. They cannot sell what they have without fear of driving rates higher and they will take huge losses on their portfolio, which is why they may go bankrupt in 2025 or require restructuring.
Therefore, the Free Market always provide the check and balance just as they ensured the collapse of Communism and are busy at work undermining the Socialism of the West. The long-end of the market was actually driven down in rates because of pension funds and retirement. The traditional asset allocation was at about 40% long bonds before 2007. There was so much money chasing the long-end, this is why they even created mortgage-backed securities – demand was there if rates AAA. The demand for long-term was so high, this is what truly drove rates lower as people bid for long-term paper.
So yes. There is a check and balance. Sometime this takes more than a decade to materialize for it is slow and methodical. Nonetheless, the free market always force change on every front.