The "Famous Debate"


What are Business Cycles? Are they natural expansions and contractions of the economy? or are they exploitative machinations of the Money Trust? Who causes these cycles? Why? How do depressions, recessions, crashes, and panics come about? These questions have bedeviled many experts; apparently, without much success.

The Origin of Economic Change. The "famous debate" between the experts has best been framed by Galbraith as follows: "Where does economic change originate?. . . Does money influence the economy or does money respond to the economy?"1 [my emphasis].

"Faustian Money." Many theories, speculations, and prophecies about money have been advanced; the most famous (or infamous) being Marx's theory of the trade cycle.2 Like it or not, much empirical evidence does support aspects of Marx's theory. But this support does not in any way justify totalitarian state control.

Marx and his followers were clearly wrong: instead of confronting the evils of "Faustian money,"3 as embodied in the Legal Code, they moved in the wrong direction. The Communist solution, first to expropriate all the net advantages of Capitalists, then to concentrate these in a totalitarian regime (the politburo and the Communist party) was absurd! (As discussed in Book I, the proper solution would have been to eliminate all net advantages of Big Business and Big Government -- over the Citizen, in the Legal Code.)

But what is "Faustian money"? Most people think of money as the value of some commodity. By contrast, many usurers think of money as "Faustian money" -- a mind tool to generate even more money. Ironically, usury can often be achieved using other people's money. Of course, "Faustian money" can be used to control and dominate people -- as entrepreneurs, as borrowers, etc. Most important, it can be used to acquire things. For Spengler, it is precisely this "acquisitive" characteristic that makes the "dictatorship of money" possible.4

In The Decline of the West, first published in 1918, Spengler, wrote: ". . . every Socialist outbreak only blazes new paths for Capitalism."5 Spengler believed that even Communists operated in the interest of money. He wrote: "There is no proletarian, not even a Communist, movement that has not operated in the interest of money, in the direction indicated by money and for the time permitted by money -- and that without the idealist amongst its leaders having the slightest suspicion of the fact."6 In other words, the deception of "Faustian money" is absolute. The "electorate" is nothing but an "object" to be manipulated by the "subject" -- the Capitalist who thinks in money.7 What are the roots of this deception? In his Preface to Spengler's The Decline, Arthur Helps provided the following clues: "Marxism, based on a typically British poor man's hatred of the rich, coupled with Jewish memories of the Old Testament curse on manual labour, was adopted by Russia under an ardent misunderstanding."8 Apparently, the Russians were victimized.

The Theory of the Trade Cycle. The theory of the trade cycle has been reviewed and criticized by Karl Popper. Following Popper, the exploitative mechanism of the trade cycle, can be highlighted as follows:9

  1. Capitalists increase their investments -- productivity increases.
  2. Consumption increases.
  3. Unemployment increases.
  4. Destruction increases. Consumption and capital goods are destroyed or not used -- productivity decreases. Unemployment and destruction lead to "undesirable" effects, such as "depression, the manufacture of armaments, and war."10

Monetary Policy. Supporters of the Free Enterprise System have a different perspective. Hayek held that "the most effective method for securing those services that can be priced" is the "market mechanism."11 But Hayek also recognized "that there are needs which the market does not satisfy." These must be handled by the government. But what about the control of money? Unfortunately, and this has been pointed out by Hayek, the control of money, which should be "as predictable as possible," isn't.12 The danger comes, not from the free marketplace, but from flawed monetary policy. If we do not "stop the inflationary trend," Hayek warned, we risk "drift[ing] toward more and more state control."13 Following Hayek, the dangers from a flawed expansionist monetary policy can be summarized as follows:14

  1. Politicians opt for an expansion of the economy -- an inflationary trend is initiated.
  2. The rise in prices stimulates the economy.
  3. Saving is discouraged and people run into debt. The middle class is destroyed. The gap between the "propertyless" and the "wealthy" increases. The tensions in the society increase. Society risks "more ominous. . . psychological effects" -- more and more people are exclusively concerned with "immediate advantages," at the expense of the long term.
  4. Government control increases. The risk of destroying "the foundations of a free society" increase.

For supporters of the Free Enterprise System, the danger to freedom, then, stems from flawed Monetary Policy and increased State Control. For others the danger stems from the Monopolistic Practices of rapacious exploiters. Who's right? Who's wrong? The resolution of this "famous debate" is the subject matter of this short Book.


1 John K. Galbraith, Money, 1975 and 1995, at 36-37 and 103-118.

2 See Karl Marx, Capital, an abridged edition, edited with an Introduction by David McLellan, 1995. For a discussion and critique of Marx's trade cycle, see Karl R. Popper, The Open Society and Its Enemies, Vol. II, The High Tide of Prophecy: Hegel, Marx, and the Aftermath, 1962 and 1966.

3 Spengler's expression; see Oswald Spengler, The Decline of the West, an abridged edition by Helmut Werner, with a new Introduction by H. Stuart Hughes, 1991, at 97 and 403-407 (Thinking in Terms of Goods and in Terms of Money), 407-408 (Classical and Western Money-Thought), 408 (Money and Work), and 409-415 (The Form-World of Economic Life: The Machine); the English Abridged Edition was prepared by Arthur Helps, from the translation by Charles Francis Atkinson.

4 Ibid., at 391-393 (The Fate of Democracy), especially 393 ("dictatorship of money"), 401 ("producing" vs. "acquisitive" kinds of economy), and 403 ("acquisitive" vs. "creative" economics in the market).

5 Ibid., at 389-391 (Political Theory), especially 390.

6 Ibid., at 362-370 (The Bourgeoisie), especially 367.

7 Oswald Spengler, The Decline of the West, an abridged edition by Helmut Werner, with a new Introduction by H. Stuart Hughes, 1991, at 408 (Money and Work).

8 Ibid., at xxiii.

9 For an evaluation of Marx's theory of the trade cycle, see Karl R. Popper, The Open Society and Its Enemies, Vol. II, 1962 and 1966, at 193-198 (An Evaluation of the Prophecy), especially 194-195.

10 Ibid., at 195.

11 Friedrich A., Hayek, The Constitution of Liberty, 1960, at 125.

12 Ibid., at 324-339 (The Monetary Framework), especially 334.

13 Ibid., at 338.

14 Ibid., at 337-339.



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