What Happened to the Austrian School Economist that took a Job at the Fed?

By Gary North

If there is a single confession of faith uniting economists all over the world today it is this: their uncompromising hostility to a full gold coin standard.

The second confession of faith is their qualified support of the idea of central banking.

The two positions are operationally one position.

Austrian School economists oppose central banking. This goes back to Ludwig von Mises' 1912 book, The Theory of Money and Credit. Mises promoted free banking: commercial banking governed by the law of contracts. He did not support the idea of legislation to establish 100% reserve banking.

His disciple Murray Rothbard promoted 100% reserve banking. But, because he opposed the existence of the state, his call for 100% reserves was not a call for legislation requiring 100% reserves. As far as I can see, operationally speaking, his position was the same as Mises' position: free banking.

Austrian School economists support whatever monetary standard that a free market society produces through voluntary exchange. They believe that this monetary standard is likely to be monies – plural – based on the precious metals. They believe in parallel standards: silver coins, gold coins, and token base metal coins trading without any state-legislated controls. They do not believe in price controls – fixed exchange rates – as the basis of unifying multiple metal coin standards.

Hard-core Austrians reject the idea of state-issued money. Money issued by the state should not be trusted. Why not? Because the state's officials always are tempted to debase the currency. They want to increase government spending without imposing visible new taxes, which lead to political resistance. It is cheaper, easier, and safer to expand the money supply, and then spend the newly created (counterfeited) money into circulation. They buy today's goods at yesterday's lower prices, at least until the investors catch on and begin to bid up prices in the commodity futures markets. I have written a book on this, Honest Money.


Why are economists so opposed to a gold coin standard? There are three reasons: (1) self-interest, (2) arrogance, and (3) faith in the State.

SELF-INTEREST

Let us begin with the #2 assumption of all free market economic methodology: personal self-interest is the #1 motivating factor behind economic action. (The #1 assumption is scarcity: "At zero price, there will be greater demand than supply.")

Let us assume that a newly minted Ph.D. in economics goes looking for a job. He has no ability to make money as an entrepreneur. He is a bureaucrat certified by bureaucrats. He cannot successfully forecast markets.

No one in the private sector is likely to pay him to write unreadable term papers based on formulas that have no relation to actual markets. Yet writing such term papers is his main skill. His only other skill is taking exams based on these formulas.

He is in his late 20s. He is heavily in debt. The state has funded most of his education, but still he is in debt. He overpaid.

There has been a glut in Ph.D.s since 1969. It has gotten worse every year. But, because university departments are paid more by the university for graduate students than for undergrads, the faculties have an incentive to recruit students into graduate school. He was sucked in. He did not see my debate on why it is not a good idea to get a Ph.D. in economics.

No department of economics will hire him: the glut. But the Federal Reserve System will, if he specialized in money and banking. The Huffington Post in 2009 published an indispensable article, "Priceless: How the Federal Reserve Bought the Economics Profession."

In 1993, we are told, Alan Greenspan informed the House Banking Committee that 189 economists worked for the Board of Governors (a government operation) and 171 worked for the 12 regional Federal Reserve banks (privately owned). Then there were 703 support staff and statisticians. These came from the ranks of economists.

This was only part of the story: the proverbial tip of the iceberg. From 1991 to 1994, the FED handed out $3 million to over 200 professors to conduct research.

This is still going on. There has been growth. The Board of Governors now employs 220 Ph.D.-level economists. But the real growth has been in contracts.

A Fed spokeswoman says that exact figures for the number of economists contracted with weren't available. But, she says, the Federal Reserve spent $389.2 million in 2008 on "monetary and economic policy," money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That is a great deal of money. This amount of money, the author implied, is sufficient to buy silence. He added that there are fewer than 500 Ph.D.-level members of the American Economic Association whose specialty is either money and interest rates or public finance. In the private sector, about 600 are part of the National Association of Business Economists' Financial Roundtable.

If you count existing economists on the payroll, past economists on the payroll, economists receiving grants, and those who want in on the deal, "you've accounted for a very significant majority of the field."

I can think of only one Austrian School economist who ever took a job with the Federal Reserve. He did so as soon as he received his Ph.D. He ceased writing for Austrian School publications for the next 35 years. "If you take the queen's shilling, you do the queen's bidding."

Read the rest here.