Tuesday, December 4, 2012

A new understanding of why money and democracy don’t mix well.

Of the many events that happened in November 2012, one of them was the first Toronto Austrian Scholars Conference. The conference was held by the Mises Institute of Canada, whose mission is to educate the public to the importance of placing human choice at the centre of economic theory.

One of the featured speakers at this conference was Assistant Vice-Provost of the University of Guelph-Humber and Program Head of Business, Dr. George Bragues. My daughter interviewed Dr. Bragues, and here is what she wrote. This originally appeared here.

If democracy needed only to be viewed through a moral lens, Dr. George Bragues, would have many good things to say. “Equality is the moral pivot of the whole democratic regime. And in many ways, a very noble aspect of it,” he says.

But enter a financial lens, and the picture becomes clouded with contradictions.

Money in a democracy is an affair of the State; the State prints the money, and oversees its supply. But in a democracy, the State is also voted in by the many. This naturally brings political incentives into the picture – and more than that, the necessity to please the many in order to win their votes.

“Given the moral climate democracies tend to foster, and given the incentives that politicians face to get votes – politicians tend to be inclined toward deficit spending,” says Dr. Bragues. He explains: “Democratic politics becomes a bit of a bidding war, where politicians tend to outbid one another in an ‘I can offer you that’ manner in order to win a majority. But never is there talk about how it will be paid for. In a democracy, the cost of public goods always appears cheaper than they really are to the voter,” he says.

Once politicians are faced with deficits, Dr. Bragues explains the three options from which they have to choose: “One – you can cut spending, which is not very popular. Two – you can increase taxes, which is difficult from a political standpoint. Three – you can just print more money.”

Dr. Bragues says it is this third option that is often the chosen route, given the innate realities of a democracy. But to take this one step further, Dr. Bragues adds that printing more money leads to its devaluation. Soft money, as it is otherwise known.

Here comes the part where Dr. Bragues prefaces his thoughts with “I hope I don’t sound pessimistic.”

“Soft money raises serious moral questions.”

He argues that certain virtues become undermined with soft money, ultimately and inevitably leading to a moral decline. “What ends up happening is one part of society uses another part. The people who profit more from a soft money regime gain at the expense of those who get hurt by it.”

“So – are you really treating everybody equally? Or is the political regime just helping one part of society to gain at the expense of another?”

Here is Prof. Bragues in his own words at the conference:

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