Today's Economy Compared To That Of...The Early 18th Century

Back in the days before I was alive, the term "eighteenth century" was used as a term of abuse. Now, as a column by Neil Reynolds reveals, it's being used as a serious comparison.

He opens up with a quote from near-permabear and deflationist Robert Prechter:

Robert Prechter, the iconoclastic Atlanta market analyst (publisher of the Elliott Wave Theorist), says the world remains in a bear market of "supercycle" degree - meaning that the world's current economic troubles will be "the deepest and longest since the 1700s." Assume for a disturbing moment that he is right. What went wrong in the 18th century? In what way are we replicating the wrong? What consequences should we anticipate?

The rest of Reynolds' column relates the well-known real-life tale of the notorious John Law. Law, of course, was the central banker who created France's first all-out economic bubble through inflating. That bubble ended in tears, and with a repudiation of then-new paper money.

How similar is today's period to that of Law's France? The author of a recent biography of Law, Janet Gleeson, like to think there's quite a bit, and Reynold gives her her speed at the end of his column:

The checklist from 1720 remains relevant: a central bank and a brilliant central banker, easy credit and novel financial investments, high taxes and expansive State debt to appease the populace. Was 1720 a unique calamity? Perhaps. As Ms. Gleeson says, though, these same forces have since then combined repeatedly to produce economic disasters. They appear "little altered," she says, "in 300 years."

There's a certain compelling aspect to the comparison, both to Law's France and the 18th century in general. We associate the 18th century with laissez-faire and free trade, but the fact is that both ideas were mere theory - intellectuals' creations - for most (if not all) of the century. The only exception was America, but the let-alone policy was then known as "benign neglect"...and the reasons for it were not exactly consistent with the ideals of laissez faire. Britain was solidly mercantilist, and so were other "advanced nations" of the time. Thanks to Jean de Colbert, domestic mercantilism - what we now call indicative planning or stimulus policy - was solidly ensconced in France as the 18th century opened. Of course, mercantilism as policy is solidly ensconced in the world of today.

Yes, so-called "eighteenth century ideas" were little more than ideas until the Corsican and American Revolutions. Not until the British surrender at Yorktown and the subsequent Treaty of Paris did it occur to practical people that those intellectuals' notions could actually be relevant to governing a real nation. By that time, the eighteenth century was less than twenty years away from ending. Until then, practical men thought in terms of domestic industry and national advantage like good mercantilists should. The only difference between "sevententh century thinking" and that of nowabouts was that today's uses the "resources of the nation" in place of gold in the treasury.

The shucking-off of the gold standard, and the replacement of gold by a first lein on the resources and incomes of the nation's citizens, vastly expanded the scope of government funding. So did the introduction of fiat currency, which is now the world norm. The near-universality of fiat currency these days, along with the habit of papering over instabilities with more monetary inflation, does invite a comparison to the time of John Law.

However, the more specific comparison to Law's time is a bit of a stretch. Back then, no-one knew what paper money could do. Lack of historical knowledge left a huge knowledge gap that was filled by fiat-money utopianism. That's far from true nowadays. Just as Herbert Hoover had no idea he'd be "Herbert Hoover" as of 1930, so it was that France didn't know the outcome of the Law experiment at the time it was launched. Todays' central bankers know it well.

So, I have to conclude that a new Missisippi Bubble isn't in the cards nowadays - at least, not in the developed nations. There's just too much institutional experience with fiat money. The kind of utopianism that France's fiat-money experiment engendered 'way back in 1716-20 is very unlikely today in developed nations.


Regarding the comparison of the eighteenth century to today: there is a feature that hooks our optimistic side. The Industrial Revolution didn't go auto-catalytic until the latter part of the 18th century. If today's economic world is like the early 18th century's, then there's an economic Revolution that's yet to be born. Like the Industrial Revolution itself, that new Revolution will be born in outlier land and looked down upon until it's too big to be treated with disdain. The Information Revolution invites the comparison, but there may be another that we have not yet seen - perhaps in, say, nanotechnology.

Soory to be cyncial, but it won't come from the hyped sectors. Political hype goes better with mercantilism.