By Philip Pilkington, a writer and journalist who is in the process of moving to London. You can follow him on Twitter at @pilkingtonphil

You can live in this illusion

You can choose to believe

You keep looking but you can’t find the woods

While you’re hiding in the trees

– Nine Inch Nails ‘Right Where it Belongs”

Many people that I meet who are vaguely interested in economics – usually people in academia outside of the economics departments or working in lower tier sectors of banking and finance – are enamoured with libertarianism and its economic doctrines. Meanwhile the Republican Vice Presidential nominee – an Ayn Rand obsessive – has channelled such ideas into a truly otherworldly budget proposal.

Libertarianism-lite has become the last refuge for the ideological conservative. The ideals of mainstream conservativism appear absurd in light of the 2008 crisis. It then became clear that the entire economic system was far from the meritocracy structured according to free entry and competition that many supposed, but instead one dominated by incestuous ties between quasi-government institutions and big corporations. And the ugly part was those collusive relationships arose as a direct result of deregulation. Less regulation allowed for large companies to exercise unbridled market power, and they channeled those profits into the political process, to further skew regulations in their favor.

However, rather than recognize that “free market” doctrines lead to concentrations of power, many responded to the aggressive promotion by business and economists of this ideology, leading them to move further to the right in the wake of the crisis, become antagonistic and even a little extremist toward the system as it actually exists and embrace radical aspects of the libertarian doctrine. Mainstream politicians then cherry-pick certain aspects of these doctrines and feed them back to their base.

This is, in a very real way, where we are today. No, libertarianism has not gone mainstream. But aspects of it have permeated the mainstream. And this makes some of its purer arguments interesting to consider.

Deflation and Nostalgia

The most popular aspect of the libertarian doctrine today is probably the idea that deflation is not such a bad thing – indeed, it may even be a morally purifying cure. Uncomfortable – like a cold shower – but necessary to rid a gluttonous populace of its worst excesses.

The economic argument among actual libertarians for this view runs broadly that prices in a competitive economy should generally be tending downwards rather than upwards. The rational argument – as is typical of extremist ideologies – for the most part masks a more deeply embedded emotional appeal. Simply put, the argument plays to the hoarding impulse so prevalent among gold-bugs, who appear to overlap strongly with libertarians.

While it would be too much of a distraction to go into the origin of the compulsive hoarding impulse here, it should simply be noted that among right-wing libertarians it is often mixed up with saving. Not only are these two distinct concepts within the sphere of economics – hoarding being a removal of wealth from circulation and saving being the deployment of present wealth to procure future wealth – but they are generally recognised as distinct concepts in psychology, both popular and medical. Even children can distinguish between Scrooge and true capitalists.

The argument for deflation appeals to the idea that the saver – who is seen as the origin of wealth and production by the libertarian – benefits because the money that they have saved becomes worth more. But, of course, this is not true of the productive capitalist whose fixed capital investments depreciate rapidly as they lie unemployed. It is only true of the hoarder, the gold bug and the miser who removes wealth from circulation or transfers it into useless fetish-objects and sits upon it until he acquires more purchasing power.

In order to get around this inconvenient fact the libertarian supplements their argument by saying that all investments that fall as the deflation tears the economy apart were merely “malinvestments” made at a time when money was too cheap. It is thus that the wanton destruction of societal wealth is justified as a sort of Judgement Day. Those who go bankrupt are simply sinners. Thus the fact that deflationary conditions wreak havoc on all those in the economy that are not unproductive hoarders is veneered over through a moral appeal to the supposed quality of outstanding investments.

Tied to this is the idea that production that does take place in a deflationary environment is morally pure. It is seen as “lean and mean” in that it requires real effort on behalf of the investor to accomplish, this in contrast to the “profligate” investment decisions that might be made when money is easy to come by. In a deflationary environment the men, as it were, are sorted from the boys. This crass notion ignores many aspects of how modern economies actually operate; for example, the fact that monopolies, oligopolies and giant corporations will find it far easier to weather a serious recession or depression than a smaller firm simply due to size and outstanding credit relations. But it is an argument that is made nevertheless because it appeals to a sense of moral righteousness and rewards the libertarian’s anti-social hoarding tendencies.

It is here that nostalgia rears its head. Libertarians often hold the 19th century up as a sort of model for what the present should be. Unlike extremist left-wing ideologies, like Communism, libertarianism is backward rather than forward-looking. Where Communism projects into the future a mythic ideal, libertarianism mourns over an ideal past that has supposedly been lost. (Would it surprise the reader to learn that the hoarding impulse is thought to be tied to fantasies of the womb?)

For the right-wing libertarian the 19th century is the era of a true capitalism with little or no government intervention. Indeed, even warfare was limited and required little government meddling. Yes, this era was unstable – even the libertarian would not deny that – but this instability gave rise to a dynamism and a freedom that was crushed in the “statist” 20th century.

But it is not the inflationary era of high liberalism that is often looked back upon through rose-tinted glasses, but the deflationary era of the third quarter of the 19th century. This would be unusual if we did not already understand the motivations for the libertarian argument for deflation. The right-wing libertarian needs an era that was both non-inflationary and at the same time one of “free” competition as a screen on which to project their utopian fantasies. But, as we shall see, in this they are trying to have their cake and eat it.

The Contradictions of Deflation

The era that is often focused on is known to historians as the “Long Depression”. It is variously dated from between 1873 and 1879 to between 1873 and 1896. The former dates are more accurate insofar as how long the true deflationary period actually lasted, but the latter dating highlights that the forces unleashed dragged on much longer.

The depression was set off, as so many are, by a financial crisis that took place in 1873. The causes of the crisis are hard to determine, but it would appear that a great deal of the reason for it was an asset price bubble inflated by speculation in US railroads. This, in turn, was partly due to the government subsidising land.

It is here that we begin to understand more fully why it is the depression years that are often focused on by the libertarians rather than the boom years that preceded them. The boom years – also known as the era of high liberalism which ran from roughly 1848 to 1873 – were characterised by cheap money. This was in spite of the fact that the gold standard was to a large extent in place during these years – although the US dropped it in 1861 due to the Civil War. The reason that the gold standard did little to restrain money and credit expansion was because of the enormous discovery of gold deposits in these years. Whereas between 1831 and 1840 about 20,300kg of gold were mined worldwide, between 1851 and 1860 this had risen to an enormous 206,100kg. With these huge inflows of gold banks were able to massively extend the money supply in the form of loans and this allowed for not just rapid economic growth but also massive speculation.

Since the boom years were, by all measures, inflationary and unsustainable, it is instead the deflationary years that are focused on by the right-wing ideologues. Usually they zoom in on economic growth which, according to the best figures we have, was not as poor as one might assume. The fact that unemployment was high – by the standards of the time – is usually ignored and is simply chalked up as part of the pain that had to be borne in order to usher in a new era of prosperity. This line of argument also excuses the swathes of bankruptcies during these years.

However, the most peculiar aspect of the argument favouring this deflationary period is that it completely ignores the broader historical picture. The libertarians, hiding as they are in the trees, completely fail to take notice of the woods all around them. For it is widely recognised by historians that this was the era when laissez faire capitalism fell and the ground was cleared for a new era characterised by government intervention, monopoly men and imperial conquest. As the great British historian Eric Hobsbawm put it in his ‘The Age of Capital’:

The new era which follows the age of liberal triumph was to be very different. Economically it was to move away rapidly from unrestrained competitive private enterprise, government abstention from interference and what the Germans called ‘Manchesterismus’ (the free trade orthodoxy of Victorian Britain), to large industrial corporations (cartels, trusts, monopolies), to very considerable government interference, to very different orthodoxies of policy, though not necessarily of economic theory. The age of individualism ended in 1870, complained British lawyer A.V. Dicey, the age of ‘collectivism’ began. (P. 354)

Or again:

A new era of history, political as well as economic, opens with the depression of the 1870s. [This era] undermined or destroyed the foundations of mid-nineteenth-century liberalism which appeared to have been so firmly established. The period from the late 1840s to the mid-1970s proved not so much, as the conventional wisdom of the time held, the model of economic growth, political development, intellectual progress and cultural achievement, which would persist, no doubt with suitable improvements, into the indefinite future, but rather a special kind of interlude. (P. 63)

This new era was to be one in which trade unions grew to become a serious force while the first true wave of corporate mergers would establish a new monopoly or oligopoly structure for the capitalist system. It was also an era in which the government would begin to play an increasingly large role in economic affairs. The foundations would thus be laid for the state capitalist systems of the 20th century – the very systems that the libertarians decry – not to mention for the rise of socialism.

Indeed, when the lifeblood of cheap money had run out the era of high liberalism ground to a halt and economic forces began to become increasingly concentrated. This is no coincidence. But nevertheless right-wingers today continue to fool themselves into believing that austerity and deflation rather than easy money and credit are the path back to some sort of purified capitalism. They are no such thing. For the libertarian right-wingers are chasing an historical ghost – a ghost that never existed in corporeal form and so one that they have no chance of resurrecting. In clinging to these crude ideological notions and historical myths it is their own ability to engage in practical politics that they bury – and those politicians who embrace their creed will not last long.