In relation to a fiat currency regime, the key element of a commodity standard is its potential for automaticity and consequent absence of political control over the quantity of money and the absolute price level… The choice among different monetary constitutions — such as the gold standard, a commodity-reserve standard, or a fiat standard with fixed rules for setting the quantity of money…may be less important than the decision to adopt some monetary constitution. On the other hand, the gold standard actually prevailed for a substantial period (even if from an “historical accident,” rather than a constitutional choice process), whereas the world has yet to see a fiat currency system that has obvious “stability” properties.

Granted it is an old quote and he may no longer stand by that last sentence.

Barro’s Harvard homepage can be found here. He is also famous for work on Ricardian equivalence (that government dis-saving encourages private saving), but besides that I can’t really comment on his work.

Obviously the absence of democracy and social freedom are drawbacks, but interest in these grows as wealth increases. In China, for example, corrupt government officials are being increasingly exposed and imprisoned (or in some cases executed) as economic prosperity rises. The recent outcry against child slaves in brickworks would never have happened without economic freedom.

Governments are also reluctant to retreat from economic freedom due to the potential for a backlash. Military action that would damage the economy, eg invading Taiwan, is in that category.

What the hell has being “happy” got to do with anything? Happiness is entirely relative. Until I have a Porsche Carrera 4 alongside a Bentley in my garage, there’s no way I’ll be happy.

Every OECD country is democratic. Poor countries either have no or unstable democracy. As Korea & Taiwan developed they slowly shifted (note: not a revolution) into real democracies. China is still too poor to expect it to be democratic.

Robert J. Barro did a study comparing economic wealth & democracy. In 1980 he looked at countries that had “too much democracy” for their level of wealth and predicted their democracy would not last. And for countries that had “too little democracy” for their level of wealth were predicted to find democracy. His predictions came true.

Not only does the above idea have significant supporting evidence but it is also quite logical. It is well known that democracy, the environment, women’s rights, civil liberties etc are “luxury goods” that people care about after they have satisfied their basic wants.

Finally, the happiness literature is problematic at best and entirely useless at worst… but that is a debate for a different day.

As China liberalises its economy it is doing nothing but convincing the population that the authoritarian regime they currently have is doing a good job. The people are becoming more prosperous and comfortable and so are less likely, not more likely, to revolt.

It gives its government more tax dollars to build up its armed forces, making the government stronger, and as the economy is strong we aren’t going to see anything like the Soviet implosion, infact had the Soviets liberalised, we would probably still have them around today (ignoring the fact they we almost do, in Putin).

I would be interested in any objective studies into whether the Chinese populous is any less ‘happy’ than we are, in any case. If they are happy with their lives, western views on the evils of authoritarianism would seem irrelevant, even evangelical.

As to the actual point of this post, the idea that capitalism might be growing roots in the middle east warrants serious consideration.

As JC said, the ME is essentially a corrupt socialist quagmire. But it wasn’t always socialist. Prior to that it was feudal. Applying a bit of revisionist Marxism, perhaps capitalism is the next evolutionary phase.

India, China and Vietnam have shown that once the economic freedom genie is out of the bottle, the government finds it hard to put back. I understand the only real challenge to the government of Iran is from people who fear it will undermine economic prosperity. Even the nuclear program is unpopular due to the risk of sanctions.

On the other hand, I am not convinced the roots are deep enough in the ME to be sure the process will keep moving. A certain critical mass, based on an aspirational middle class, seems to be required for that. In most of the ME there is only an elite governing class and the peasants.

On a practical note, what could Australians do that would help move the process in the right direction? Free trade agreements that excluded government-owned businesses?

http://en.wikipedia.org/wiki/Hong_Kong_dollar

You are right that monetary policy should not be decided on day to day political whim. However most fixed exchange rates are not. Denmark has been fixed to the Euro within a 2.25% band and this fix is managed by a central bank as independent as our own.

In New Zealand the central bank must pursue price stablity. But the parliament defines how that is measured. If parliament decided that it was measured in terms of the exchange rate with US dollars or Euros then they (politicians) could fix (and/or devalue) the New Zealand dollar.

In any case we are now discussion governance issues. And one of the neat things about a fixed exchange rate is that the governance over the monetary authority is very simple. They either meet their target every day or they fail. There is no room for fudging figures. In a nation like Saudi Arabia where corruption is prevalent this factor is significant.

Short term political agendas should not decide monetary policy. However a fiat currency is never entirely above political consideration. There is no national currency perfectly isolated from political meddling. However there are fixed exchange rate regimes and inflation targeting regimes and other regimes that are generally free from meddling.

Regards,
Terje.

p.s. I note that the Heriatge Foundations 2007 index of economic freedom gives Saudi Arabia and Australia a roughly similar score on monetary management.