Laar and the dilemma of monetarism

A lot of people who don't know much about Estonia have strong opinions about Mart Laar. Photo by the Isamaa ja Res Publica union.

A lot of people who don’t know much about Estonia have strong opinions about Mart Laar. A countryman of mine who I am sure has never heard of Kalevipoeg, A.H. Tammsaare or Tõnis Mägi called him: “one of the greatest men alive.”

An anonymous poster on the Laar’s own blog recently called him: “a right wing pig!” The poster went on to blame Laar for the economic crisis not just in Estonia, but in the whole world.

In a way it’s a backhanded compliment. It is hard to imagine this type of expletive being hurled at Saavisar or Ansip by people living abroad. They are local figures. Laar is global, a world-class statesman.

When I was the editor of Baltic Times, I would receive contributions from him. I was truly in awe of him. His opinion pieces were always well-written, in excellent English, concise and well-argued. His breadth of knowledge was phenomenal.

Now there is talk about Laar heading back to the premiership. President Ilves would like to see a new government.

But the economy is in free fall, worse the ideologies behind many of Laar’s reforms, monetarism and liberal economics are under attack. It is a good time to take a fresh look at Laar’s achievements and ask what can he do to get us out of the recession?

One cannot understate what Laar accomplished. In conservative and libertarian circles he is seen as the truly begotten son of Margaret Thatcher and Ronald Reagan.

He took the ideas of Milton Friedman and other free markets thinkers and made them a reality.

Laar famously had only read one book on economics when he first took office in 1992, “Free to Choose” by Rose and Milton Friedman, the father of monetarism.

For those of you who might have forgotten, monetarism is the economic theory which says that inflation is always and everywhere a monetary phenomenon.

Milton Friedman argued that governments could not micro-manage the economy by spending and taxing more because people would realize what they are doing and change their behavior accordingly.

Monetarism’s focus was on government controlling the money supply to stabilize the economy. Ben Bernanke the current chairman of the Federal Reserve and a leading monetarist famously remarked that the way to prevent prices from falling was to throw money out of a helicopter.

For years monetarist thinking has shaped the way the central banks and world major economics operate.

Monetarism Laar-style meant allowing banks corrupted by organized crime in the 1990s to collapse. It meant total privatization even of the utilities. It meant weakening the power of trade unions, former communists and other interventionist thinkers. Most of all, it meant a flat tax system. The flat tax system has been copied across Eastern Europe and by individual states in the U.S. and Canada. This part of Laar’s legacy will survive.

But Laarism, if I can coin a term, has always meant much more than just monetarism.

Laar like other liberal or libertarian thinkers is also a fan of the laissez-faire economic thinking of Friedrich von Hayek, Nobel Prize-winning Austrian School economist. Austrian School economists believe that human decision-making is too complex for mathematical modeling and government intervention is always bad, the best that government can do is maintain the rule of law, that is all. Although Austrian School economics was outside mainstream economics for decades, Austrian School economists like Peter Schiff correctly predicted the current crisis three years ago.

The problem for Laar is that everywhere laissez-faire and libertarian economic thinking is in deep trouble.

Voters and policymakers are rejecting it. In the United States, Obama was elected on a tax-and-spend, anti-monetarist ticket.

Now the U.S. government is running around like the proverbial headless chicken, raising vast sums of tax payer’s money to bailout banks and then spending the money to nationalize car manufacturers, of all things.

In Britain too banks have been nationalized.

In Estonia and Latvia slashing public spending in a vain attempt to balance budgets is the very type of messing about with fiscal policy that monetarists warn against.

In a wider sense the central monetarist concept, money supply is correlated to inflation, is held in contempt by many mainstream economists and is out of favor on university campuses.

The reality is interest rates are set in Frankfurt and banks are owned by the Swedes, which means there is very little wriggle room for any government in terms of monetary policy.

But that’s not the real problem for Laar. The real problem is that the Austrian School economists and monetarists do not agree on how to deal with this current crisis. Just as they didn’t agree on the causes of the Great Depression.

Monetarist say the problem now is lack of liquidity in the credit system and a contraction in the money supply.

Monetarist argue that had the U.S. Federal Reserve stepped in to save the banks back then in the 1930s the Depression would not have happened. That is why this time around there was a bank bailout in the U.S. Bernanke, remember, is a leading monetarist.

Austrian School economists say the opposite. They argue it was the expansion of money supply and the cheap credit in the 1920s, that caused the Depression in the first place. They say it is a myth that Fed didn’t try to prop up the banks in the 30s. They say that government should allow failed banks and companies to go out of business. They say pumping money into the system is just going to make things worse by creating an inflationary bubble.

According to Schiff and others from the Austrian School, now a recession is inevitable and the only thing that governments can do is allow the free market to correct the situation.

So it’s all very well for Laar to talk about liberalism and the free market but the two schools of thought that Laar subscribes to hold diametrically opposed positions. It leads one to wonder, where does he stand? What will he do?

Laar was asked this question on Baltic Business News Forum last summer.

“I suggest looking at Friedman’s writing on the Great Depression, which was not created by the collapse of the Wall Street, but by mistakes done by governments after this. Looking on the situation now it looks that the World is only repeating mistakes done then,” he said.

This is not a helpful answer. It is not clear whether Laar agrees with the Austrian School mainstream or with Friedman.

What is clear is that Laar is in a bind. If he is truly a believer in the free market he would go to the people and say, “Look, if I get back into power, I will do nothing… doing something will only make the situation worse, we must take the pain.”

But even though this might be the right thing to say, it’s pretty certain he won’t say that. People expect politicians to be like plumbers, they want them to fix things. No politician will go to the people and say “let it be.” But isn’t that the meaning of laissez-faire?

Abdul Turay is a freelance writer living in Tallinn. Read more of his incisive, thought-provoking work here.

Disclaimer:

Views expressed in the opinion section are never those of the Baltic Reports company or the website’s editorial team as a whole, but merely those of the individual writer.

3 Responses for “Laar and the dilemma of monetarism”

  1. Tom Schmit says:

    Please justify this statement – “Now the U.S. government is running around like the proverbial headless chicken, raising vast sums of tax payer’s money to (sic) bailout banks and then spending the money to nationalize car manufacturers, of all things.” Seems to me that the policy is much better thought through than a characterization of being like a “headless chicken.”

    Also, the portion that says “raising vast sums of tax payer’s money to (sic) bailout banks and then spending the money to nationalize car manufacturers, of all things.” is something of a non sequitur. If it is used to bail out banks how can it be used to nationalize car companies?

    Finally, given that you that you do not refer to banks being nationalized in a preceding paragraph how does “too” work here? “In Britain too banks have been nationalized.”

  2. richardIII3 says:

    Tom
    I think the author meant that some of the TARP money was eventually used to nationalize GM, which was not it’s original intended purpose.
    It’s quite clear to me.

  3. Yun Chen says:

    Nomatter you are in which counties, we are all in the financial crisis. Some body said this period was worse than Great Depression. For monetarism, How did they explain the cause of the Great Depression.
    In my opinion, for Friedman, he looked at the data and observed the monetarys M1 and M2 had fallen greatl in the period of Great Depression. So there is a large decline in the money supply in this bad time and this is consistent with the quantity theory. For the monetarists, they also think the velocity was falling as the nominal income had fallen even more than the money supply, Friedman then argue that this is consistent with the quantity theory of money. In monetarist opinion, the central bank fails to deal properly with the depression by letting the money supply to contract. His argument is that the Great Depression is caused in the US and Europe by the failure of Central bank to maintain the money supply.

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