Richard Duncan on Capitalism

Richard Duncan is a well-known author of popular books on economic topics, such as 'The Dollar Crisis: Causes, Consequences, Cures'. He has just written a new book, again with an apocalyptic theme as the title suggests: “The New Depression: The Breakdown of the Paper Money Economy.”

In order to promote his new book, he is currently touring the financial media to give interviews and familiarize people with what the book is actually about.

Yesterday Marketwatch published an article summarizing both Duncan's analysis and his recommendations. Mish has already posted a brief critique yesterday, which we now want to expand a bit upon.

Let us first take a look at Duncan's analytical claims. We have highlighted the salient points in an excerpt from the Marketwatch article below (we are leaving aside his recommendations for now):


„Recognizing that the world operates on a different set of rules from the laissez-faire capitalism of the 19th century is among the key arguments in Duncan’s 2012 book, “The New Depression: The Breakdown of the Paper Money Economy.”

While it might seem like an arcane economic question, Duncan said that, in fact, the stakes are huge.

Global policy makers are running out of time to take advantage of opportunities offered up by the new system to help resolve the crisis, or otherwise face sliding into a corrosive period of economic contraction and rising geopolitical tensions, he said.

“The danger is that this new economic paradigm will collapse through debt deflation,” Duncan said.

Duncan sees the global economy as having undergone a fundamental transformation during the past 43 years. Since changes in 1968 that freed the Federal Reserve from holding physical gold in reserve against dollars in circulation, total global credit has expanded 50 times, or from about $1 trillion to $50 trillion in 2007.

Over that period, credit creation and consumption, or what Duncan calls “creditism,” took hold as the growth dynamic behind the global economy, displacing capitalism, which he says relied upon sound money, hard work and capital accumulation.


Duncan believes that true capitalism died in 1914, when nations across Europe abandoned gold-backed currencies, running up huge deficits in preparation for what would come to be known as the Great War“


(emphasis added)

To this it should be noted that it seems that Duncan uses the term capitalism in its original sense of 'free market capitalism'. He is not far wrong when he says that it 'died' in 1914 with the advent of WW I.

The introduction of the income tax in 1912, the founding of the Federal Reserve in 1913 and the adoption of the 17th amendment to the US constitution on the urging of 'progressives', which made senators subject to popular election all took place shortly before the beginning of the first world war. These were probably not coincidences.

These dates marked the end of the so-called 'Gilded Age' – an age during which the liberal economic ideas of the Enlightenment were implemented and created growth and prosperity for all to an extent that surpassed everything seen before or since. Global trade and entrepreneurship flourished, in an economy embracing free trade and based on sound money.

The Gilded Age had its share of boom-bust sequences of course, due to the practice of fractional reserve banking, but since the banking system was far closer to a free banking system than today's, these booms and busts were far smaller and could not arrest the process of rapid wealth creation. The degree of personal and economic liberty in this time period can hardly be imagined today. Government was a mere footnote in most people's lives – its spending amounted to only between 3 and 4 percent of total economic output.

The so-called 'progressive movement' –  a movement that embraces a static economy in which everybody is poor rather than a dynamic one in which some people will do better than others by dint of better serving consumers – put an end to this prosperous age. The Coyote blog has published an article on the inherent resistance to change of the so-called 'progressive' creed that we highly recommend in this context.

So we agree with Duncan that the end of the Gilded Age marked the end of the by and large  'laissez-faire' economic system. As it were, we still profit to this day from the capital accumulation that happened during this time period. Moreover, his contention that there was yet another decisive shift that occurred when gold was finally abandoned entirely when Nixon defaulted in 1971 on the Bretton Woods gold exchange standard is to our mind beyond contention. A chart of total credit market debt owed in the US economy illustrates nicely how things have changed once gold was finally thrown overboard:



Total credit market debt owed in the US economy – after 1971, a major acceleration in the expansion of money and credit began.



One could also look at charts of the true money supply or the public debt – they all show the same thing: exponential growth beginning with the abolition of the gold exchange standard.

In that sense, when Duncan says: „Over that period, credit creation and consumption, or what Duncan calls “creditism,” took hold as the growth dynamic behind the global economy, displacing capitalism, which he says relied upon sound money, hard work and capital accumulation.“, we don't entirely disagree with his analysis. One could well call this 'creditism' as distinct from the 'free market capitalism' of old. The question of labels is probably not too relevant, although it tends to be helpful when words have a definitive meaning understood by all.

We would however disagree vehemently that 'credit creation and consumption' are the relevant 'growth dynamic' of the economy over this period. Economic growth is not achieved by consumption – consumption is an effect of economic growth, not a cause of it.

In other words, Duncan already puts the cart before the horse in this part of his analysis. So what about the growth in debt? Is it not 'all bad'? To this it is necessary to dig a little deeper. Credit as such is neither good nor bad. Credit that is used productively and is funded by genuine savings is definitely a good thing. If it grew to a large amount, that would by itself not indicate that anything was amiss. If savings were very large as well, then the amount of credit outstanding could be very large as well without there being anything wrong. There is also nothing wrong with consumer credit as such. As Murray Rothbard notes in 'Man, Economy and State':


“[…] consumer credit that does not add to the money supply is not inflationary; it simply permits consumers to redirect the pattern of their spending so as to buy more of what they want and ascend higher in their value scales. In short, they may redirect spending from non-durable to durable goods. This is a transfer of spending power, not an inflationary rise. The device of consumer credit was a highly productive invention.”


Do however take note of Rothbard's qualification: 'credit that does not add to the money supply'. This is an important distinction – consumer credit that is financed out of existing savings is as Rothbard contends 'a highly productive invention'. Inflationary consumer credit by contrast is definitely harmful. Inflationary credit is credit that has been created out of thin air by the fractionally reserved banking system. It adds to the money supply by the creation of fiduciary media (deposit money that is not backed by standard money). This enables exchanges of 'nothing' – the money from thin air – for 'something' – the goods and services this money buys.

What happens when we consume without preceding production? Imagine briefly a primitive economy without money, were a handful of participants trade in a barter system. Now, obviously such an economy can not be very efficient. The complex modern market economy and its highly specialized division of labor would not be possible if we did not have money that enables indirect exchange. There can for instance not be any economic calculation without money, hence the complex latticework of the economy's production structure would soon break down if we were to revert to barter. But we can imagine a small community on an island, inhabited by say,  Tom the coconut grower and Pete the fisher, that is subsisting on barter. The savings of this community would not be expressed in money terms, but in terms of the consumer goods produced – in our example, coconut and fishes. When you think about an economy in these non-monetary terms, it immediately becomes clear that consumption without preceding production is simply impossible. If Tom wants to build a hut and in order to sustain his life while he builds it (he can not harvest coconuts while building the hut and has failed to save any) asks Pete for a loan of fishes, then this will only be possible if Pete has indeed saved up enough fishes to see Tom through until the completion of his hut. Tom could not hope to get a loan if the amount of fishes in Pete's stock were not sufficiently large.

The fractionally reserved banking system creates the illusion that such a thing is actually possible. It creates the ability to consume without preceding production. Obviously this can only 'work' as long as the pool of real funding (the real goods that money represents) is still growing. It is equally obvious that it will do damage to this pool of real funding, as more of it will be consumed than is produced. Credit from thin air enables some to take from the pool of real funding without actually contributing anything to it.

There are numerous negative effects that can be attributed to monetary inflation: it redistributes wealth from the late receivers of newly created money to the earlier receivers; it distorts relative prices in the economy as new money only ever enters the economy at specific points and not everywhere at once; and lastly, while it can add nothing to the existing pool of funding or the existing stocks of capital, it will damage the pool of real funding and misdirect capital investment. In the end, capital will be consumed.

This brings us to Duncan's conclusion and 'solution'


Duncan's Erroneous 'Solution'

Although Duncan's analysis is at least in part correct – true free market capitalism based on sound money, hard work and capital accumulation has given way to a vast inflation in money and credit and all the negative effects such a policy creates – he comes to an entirely wrong conclusion from this.

For one thing, while it is true that we have by no means had a 'laissez faire' market economy over the past century, it was and still is a market economy. Ludwig von Mises referred to this type of economy as a 'hampered market economy'.

A hampered market economy won't be as efficient as a free one, and the more hampered it is, the less efficient it becomes. It unnecessarily restricts production by over-regulation, by protectionism, minimum wage laws, too high taxation, various welfare schemes and so forth. However, one must never underestimate the power of the market economy to create wealth.

Just consider that in the latter decades of the communist bloc's existence, the Soviet Union allowed farmers to use about 2% of the total farmland available in the SU for their own private business. This was a concession to the age-old dream of Russia's peasants, who had been serfs until 1861 and always wanted to possess their own land. Under Lenin's 'New Economic Policy' in the early to late 1920's, this dream had come true for a little while, but it was shattered again shortly thereafter by Stalin's forced collectivization. Anyway, the point we wish to make is only this: the entire SU's supply of fresh fruit and vegetables was produced from this mere 2% of the arable soil that was privately owned.  The 2% of privately owned soil produced far more and in better quality than the 98% that were collectively owned.

From this we can deduce that even a hampered market economy will be capable of producing a great deal of wealth – just not as much as would be possible in a free market economy. This genuine wealth creation is what allows for the temporary illusion that the central bank-led fractionally reserved banking cartel and its credit expansion from thin air actually 'works'.

Duncan has fallen prey to this illusion – which illustrates the danger of relying on empirical data to make an economic case. Let us see what he says in this context:


“Attempts to break the global economy’s reliance on credit creation as a driver and reboot back to earlier ways won’t work, said Duncan, who sees “sound money” policy recommendations as a recipe for disaster.

Underscoring the system’s dependence upon credit is the fact that there were only nine occasions in the past five decades when total system credit in the U.S. grew less than 2% annually.

However, each one of the slower credit-growth years was accompanied by a recession that ultimately was brought to an end by another round of massive credit creation, Duncan said.”


Duncan said that governments can now prop up their economies through government spending longer than would have been thought possible a few years ago, owing to the new dynamic.

“I’m recommending making use of this new economic system. Borrow money at the government level at very low interest rates and then invest that money and change our world for the better.” Duncan said.

Duncan said some of his ideas were inspired by the U.S. economist Irving Fisher, whose 1912 writings helped identify the role of money supply in determining prices and economic activity.

It’s important to realize that “money essentially became credit” when the dollar lost its gold backing, heralding a new era where increased government spending doesn’t necessarily push up interest rates, Duncan said, adding that he reworked Fisher’s theories in a chapter entitled, “Quantity Theory of Credit”.


While Duncan’s talk of sound gold-backed money and overreliance on credit sounds close to standard libertarian and Austrian school arguments, his policy recommendations are downright Keynesian.

In suggestion a future course for the U.S., Duncan warns against repeating Japan’s mistake of squandering stimulus money on useless make-work projects and instead invest in sectors that would give an edge in future technologies that could be commercialized to help bring global trade back into balance.

Building a national solar-energy grid that could tap the arid landscapes of Nevada are among Duncan’s recommendations.

Duncan said he first outlined his thinking on government-led investment in a 2008 book. On speaking tours, he encountered the “greatest push-back” from free-market, libertarian thinkers who are skeptical of government involvement in the economy.

He says many libertarians “are with me along through the argument” on causes of the global crisis, but that they tend to be “very surprised” by his conclusion that part of the solution requires governments to spend more — not less.

Duncan says he tried to counter those views by bringing up previous examples of successful government initiatives, ranging from victory in World War II to the invention of the Internet.

“I’d like to offset the toxic effect cable news television has had on the way the economy works and what needs to be done to fix this crisis,” Duncan said.


(emphasis added)

It should be easy enough to spot Duncan's basic error in light of the foregoing.  What limits economic growth is not the amount of 'spending' and 'consumption'  in the economy. What limits economic growth is the amount of capital available and the size of the pool of real funding.

These can not be grown by inflating the supply of money and credit further and   by government spending more money. The government does not possess any resources of its own. Every cent it spends must be taken from someone else – either by taxation, borrowing, or even worse, inflation. The government possesses no magic wand that can conjure capital goods into existence – its spending can merely redirect production from where it would have been employed in an unhampered market to the employments favored by politicians and bureaucrats or those successfully lobbying them.

What about the empirical observations Duncan offers as proof that more spending and inflation are the way to go? To this we would note that he fails to interpret them correctly in light of economic theory. Why was renewed credit expansion seemingly 'successful' in restoring economic growth whenever the boom seemed to falter during the bubble years?

The answer is simply that monetary pumping and deficit spending can create the illusion of economic growth as long as the pool of real funding is still growing and not every sector of the economy has been reduced to penury just yet due to the wealth destruction of the preceding credit boom iterations. It does this by misdirecting more capital into malinvestments – malinvestments which then masquerade as 'economic growth' in the official statistics, even while they in reality consume capital and weaken the economy structurally.

Illusory accounting profits make everybody feel richer even while they get poorer. The housing bubble was a prime example of this: while it went on, the government's statistics showed 'GDP growth' and falling unemployment, giving the impression that wealth was actually increasing. In reality, wealth was consumed, as everybody could see when the boom inevitably faltered.

As to Duncan's concrete recommendations – what precisely government should spend money on – this is merely saying:

'I want to plan the economy. I know better than the market what should be done. The government should hew to my advice and we will all be better off. Oh and besides, don't do what the Japanese did. For some reason that didn't work.'

In reality, it does not matter into what areas government spending is directed. It always means that the resources are no longer available for wealth generators in the private sector who seek to satisfy the most urgent wants of consumers. There is no way for government bureaucrats to know how to best deploy scarce capital – not even bureaucrats advised by Richard Duncan.

As to the 'danger of deflation' – it is true that the bloated money supply and the huge amount of outstanding credit exert a deflationary pull. In an unhampered free market these could never have grown to the proportions now in evidence. That they have done so is entirely due to the fact that a fractionally reserved banking system backstopped by a central bank and based on a pure fiat money system can practically create credit and money without limit. However, Duncan seems to ignore that over the past 12 years alone, the broad US true money supply has grown by nearly 190% – a near tripling (from $2.9 trillion to $8.42 trillion). The government's total debt also tripled during this period.

However, over the same stretch, we have experienced two of the worst stock bear markets of the past century (the second and third worst) and finally the housing bust and the worst economic contraction of the entire post WW2 era – followed, thus far, by the weakest 'recovery' of the entire post WW2 era.  How can this situation possibly be 'improved upon' by inflating and spending even more? Since Duncan likes to use empirical evidence to buttress his claims, should he not consider that the evidence of the past 12 years completely contradicts his notions?

Now, we don't deny that if market forces had been allowed to work unhindered on occasion of  the 2008 credit crisis, there would have been a painful deflation of the money supply and a severe economic downturn. Many big banks would have gone bust, instead of being allowed to continue to vegetate as zombies. However, this severe downturn would likely have been brief and have given way to a genuine recovery relatively quickly. Instead, the authorities essentially followed Duncan's recommendation: they bailed everyone out, inflated the money supply and went on a deficit spending spree. They even invested in 'green energy', with predictable results (see Solyndra as a pertinent example). This has ensured that the 'recovery' is a sham – the moment the  artificial support by inflation and deficit spending is lessened even a little bit, corrective forces will immediately take over again. We have essentially exchanged 'short term pain and long term gain' for 'short term pain avoidance and long term misery'.

Now what will happen if these policies continue unabated? At some point,  market forces will intervene anyway. If one continues to inflate at every sign of an economic downturn, one will eventually end up with the complete destruction of the underlying currency system. Likewise, governments can not hope to spend without limit. They will either face a market revolt at some point and become unable to roll over their debt (as has happened with several euro area member nations), or they will have to risk destruction of the currency by printing the money to buy their debt (the path the  US, UK and Japan are currently on). But there is no way of avoiding the eventual catastrophe – the later it comes, the more profound and  all-encompassing it will be.

In the end, Richard Duncan has revealed himself as a charlatan. He's selling the same Keynesian snake-oil that has brought us to this juncture in the first place. The fact that he correctly analyzes how we have arrived at this point does not alter the fact that his proposed 'solution' is nothing but more of the same interventionism, inflationism and statism we have already had to endure for the past 40 odd years.

We leave you with a few apposite quotes by Ludwig von Mises on the topics discussed above. Needless to say, Mises would certainly not agree with Duncan's scheme. In Mises' words, Duncan represents on of the purveyors of  “the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.”


“The government and its chiefs do not have the powers of the mythical Santa Claus. They cannot spend except by taking out of the pockets of some people for the benefit of others.” (in 'Planning for Freedom')

“On the unhampered market there prevails an irresistible tendency to employ every factor of production for the best possible satisfaction of the most urgent needs of the consumers. If the government interferes with this process, it can only impair satisfaction; it can never improve it” (in 'Human Action')

“State interference in economic life, which calls itself economic policy, has done nothing but destroy economic life. Prohibitions and regulations have by their general obstructive tendency fostered the growth of the spirit of wastefulness.”  (in 'Socialism')

“What the government spends more, the public spends less. Public works are not accomplished by the miraculous power of a magic wand. They are paid for by funds taken away from the´citizens.”(in 'Human Action')

“The endeavors to expand the quantity of money in circulation either in order to increase the government’s capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange

economic calculation.” (in 'Human Action')


“The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion—policemen, customs guards, penal courts, prisons, in some countries even executioners— had to be put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were

openly defied. And hosts of servile writers praised what the governments had done and hailed the dawn of the fiat-money millennium.” (in 'The Theory of Money and Credit')

“Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.” (in 'The Theory of Money and Credit')

“It is the typical policy of après nous le déluge. Lord Keynes, the champion of this policy, says: “In the long run we are all dead.” But unfortunately nearly all of us outlive the short run. We are destined to spend decades paying for the easy money orgy of a few years. (in 'Omnipotent Government'),

“The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the “deficit spending” policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.” (in 'Planning for Freedom')

Laissez faire does not mean: let soulless mechanical forces operate. It means: let individuals choose how they want to cooperate in the social division of labor and let them determine what the entrepreneurs should produce. Planning means: let the government alone choose and enforce its rulings by the apparatus of coercion and compulsion.” (in 'Planning for Freedom')

Laissez faire, laissez passer does not mean: let the evils last.  On the contrary, it means: do not interfere with the operation of the market because such interference must necessarily restrict output and make people poorer. It means furthermore: do not abolish or cripple the capitalist system which, in spite of all obstacles put in its way by governments and politicians, has raised the standard of living of the masses in an unprecedented way.” (in: 'Omnipotent Government)

“Government does not have the power to encourage one branch of production except by curtailing other branches. It withdraws the factors of production from those branches in which the unhampered market would employ them and directs them into other branches.” (in 'Human Action')

“History does not provide any example of capital accumulation brought about by a government. As far as governments invested in the construction of roads, railroads, and other useful public works, the capital needed was provided by the savings of individual citizens and borrowed by the government.” (in 'Human Action')

“Therefore nothing is more important today than to enlighten public opinion about the basic differences between genuine Liberalism, which advocates the free market economy, and the various interventionist parties which are advocating government interference. “ (in 'Economic Freedom and Interventionism'




Richard Duncan: in the end, just another snake oil merchant.

(FT video grab)




Ludwig von Mises: the eternal enemy of the planners.

(Photo via Wikimedia Commons)




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3 Responses to “Richard Duncan’s Faux ‘Solution’”

  • Andrew Judd:

    Miseans appear to me to emphasise credit from thin air but they do not also seem to recognise that savings come from from this same thin air process.

    If the bank gives you a 20,000 credit card you have 20,000 credit. You also have nothing other than an ability to create a debt when you chose to have that debt. The moment you create that debt the retailer gets their created savings. Same is true for a HELOC. Nearly all loans are like this. Almost no loans enable you to have money in an account (your savings) prior to another person having their savings.

    So what are people actually complaining about? In the modern world if you have a product that people want to buy you can get savings. In a world of gold only you can only get savings if there is sufficient gold.

    One of the bigger problems today is the way that the government issues paper bonds which are a quality asset because they are secured upon the tax payers ability to be taxed, and this paper then becomes a wealthy persons, or a banks, money like instrument. Ie issuing bonds creates money like instruments. A whole class of people and companies are then created or funded who consider themselves wealthy because they are still holding savings as bonds, and *also* a whole class of organisations and firms have activity, employment and business who gain from this redirection of savings, where the saver still has money like savings.

    In the end we have three choices.

    1 We allow deflation of paper *and* physical assets, and have job distruction, hunger, pestulance, population reduction, war and who knows what else. We could call this the German or Misean way.

    2. We devalue the paper savings and hope we get a better outcome than 1. We could call this the French or MMT way.

    3. We allow large falls in some asset prices, high unemployment, while attempting to get a general price inflation above zero. We could call this the American or middle way.

    • rodney:

      Miseans appear to me to emphasise credit from thin air but they do not also seem to recognise that savings come from from this same thin air process.

      Real savings come from production that is not consumed, never from credit from thin air. Everything you wrote rests on your assumption that money and credit fund economic activity, and this assumption is wrong.

  • Crysangle:

    Absolutely . Would the inclusion of interest count as base monetary expansion ? Under a static base it would not be conceivable to charge interest maybe . Interest may setup a form of competition where one repays extra where another looses , Islamic finance might do the same with shared profits. Credit expansion is little more than printing money and distributing it according to whatever central plan exists. It cannot increase the economy as such , but might front run supply to those credited who would otherwise be shrewder in their spending , while undermining savers. I might argue one point – consumption increasing the economy . This has little to do with credit expansion except that the redistribution of wealth it creates means that the pattern and nature of demand is altered from one that normally would follow true earnings more strictly. In essence I understand your point of view , however I could suggest circumstances where increased consumption of fuel say diverts resources into increased future production of oil , and the related economy of oil would increase . Would this be at the expense of other economies ? Not necessarily – the rest of economic productivity might remain equal (the resources being redirected happened to be a million unemployed people) , might find its real earnings decrease (be diluted) but still have physical production remain equal, or might even benefit from an eventual cheaper supply of oil or energy being found. The markets are very dynamic and they adapt to demand and consumption by adjusting productivity to them , and not necessarily by reducing productivity elsewhere . However monetary and credit over expansion along with associated poor allocation, and attempts at control using this medium, often help make a mess of this dynamic. I could even argue also that this whole circumstance is in effect the free market at work – people choose to believe and vote for who they want and hence choose how their money will be valued and allocated . Maybe most people don’t study the concepts to such a degree , but would you go so far as to question if a citizen is a voluntary collaborator with a media’s or politician’s hype ? The social paradigm of monetary value maybe , but in this case the biggest majority decides how the game goes and who and how and what is to be more valued. By channeling demand and reward into a certain field certainly does not mean such an enterprise will succeed , and that applies equally by national spending , if not more so .

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