The (revolutionary) road less travelled

stephen clarke, 13 August 2012

‘You never want a serious crisis to go to waste’

– Rahm Emanuel, Chief of Staff for President Obama

Although it may be scant solace for politicians, businesses and, above all, those suffering financially from the current economic malaise, one benefit of the economic crisis and ensuing recession has been the growth of heterodoxy.

The crisis laid bare the failings of some dominant business models and schools of thought, providing not only the opportunity but also the motivation to try something different.

Last year the Economist ran a piece discussing the growth of heterodox economic ideas. The article drew attention to the fact that one ‘heterodox’ school of thought, ‘market monetarism’, had attracted so much attention that the Federal Reserve had debated one of its recommendations, the targeting of nominal GDP by central banks, at a meeting last November.

Not just the ideas themselves, but also the way in which they have spread, marks a departure from the past. The growing influence of economic blogs as forums for debate represents a move away from the cloistered academic settings where economists used to battle it out.

In the business sphere new developments are putting academic ideas into practice. Stimulated by the recession, and by the glaring failures of banks, bond and equity markets, companies connecting savers and borrowers are growing in importance. In the UK peer-to-peer lenders, Funding Circle, RateSetter and Zopa, created the Peer-to-Peer Finance Association to represent the interests of a sector that will provide £200 million of loans to individuals and small businesses in 2012.

While peer-to-peer lending represents financial innovation, some businesses have been keen to turn back the clock. In some respects this is underpinned by a renewal of previously marginal economic ideas. In The New Depression Richard Duncan charts the divergence of gold reserves and credit in the American economy since the US finally abandoned the gold standard in 1968. He points to the fact that the ratio of credit to gold grew from 128 times in 1968 to 4,000 times in 2007. In 2007 total credit in the US economy stood at approximately $50 trillion up from $1 trillion in 1968. Duncan argues that this huge growth in credit fuelled the bubbles that brought down the global economy in 2008.

For some people stopping these bubbles re-emerging in the future requires a return to a monetary system that cannot be manipulated and abused by policy-makers or central bankers. Such a monetary system would see a return to commodity money; money-backed by something of intrinsic value. In March 2012 Euro Pacific Bank run by American businessman, investor and financial commentator Peter Schiff launched a gold-backed debit card with which savers could hold their money in gold and still pay for goods and services as they would with a regular debit card. Schiff’s hope is that:

‘If enough people use my debit card, and other banks follow my example, governments will be under even more pressure to return to a gold standard.’

Putting his Austrian economic ideas into practice, Schiff represents another instance of intellectual and practical heterodoxy.

I began by observing that it was probably little consolation for those suffering from the recession that it had engendered heterodoxy. A glimmer of hope is that new ways of thinking and of doing things could one day improve the economic system that we all rely on.