The Bear’s Lair: The Marie Antoinette economy

The Financial Times this week reviewed yet another adulatory biography of John Law, the financier/swindler/Keynesian responsible for France’s Mississippi Company disaster of 1716-20. Meanwhile the Congressional Budget Office published a suitably gloomy study of the budget cuts needed to stabilize U.S. public debt. With a massive financial crash coming, an inability to finance the government’s needs thereafter and social attitudes heavily favoring the destructive over the productive, 21st Century America increasingly resembles 18th Century France. Hopefully its fate will be less bloody!

For those not up to speed on him, Law was a Scottish adventurer who attracted the attention of Philippe duke of Orleans, Regent of France for the infant Louis XV. A proponent of paper money, Law set up twin companies, the Banque Royale and the Mississippi Company, and through the Banque Royale issued paper money supposedly secured on the riches of France’s Mississippi possessions. Inevitably the Banque Royale collapsed, and those with its notes lost their money.

There were two differences from the contemporary British South Sea Bubble. First, there was no bailout at all; the French state had no money to arrange one and no institutions that did have money. The South Sea Company had a partial bailout, accompanied by the bankrupting and disgrace of both the ministers and the company officials involved. Second, while the South Sea Company attempted to take over the British National Debt, its main speculative instrument was South Sea Company stock. Nobody thought of that as money, and very few people put all their savings into it.

Law’s scheme, on the other hand, involved bank notes, claimed to be money. That attracted a much higher percentage of the wealth, especially of the middle classes. With no bailout, a large portion of France’s savings base was wiped out by the Banque Royale’s collapse, and savers were discouraged from investing in government paper of all kinds. The result was national impoverishment, an inability to finance the century’s numerous wars and eventually guillotines for all.

There is a parallel to our recent bubble episodes. In 2000, the bubble was simply in tech stock, so the resulting downturn was pretty mild. In 2008, the bubble was in housing and mortgage debt, much more fundamental to the financial system, and much more damaging when the bubble burst. Today the bubble, which has been inflated by the crazed monetary policies of the last decade both here and internationally, is in everything, money, debt of all kinds, tech stock, venture capital and stocks of Fortune 500 companies, which have leveraged themselves to the eyeballs through buybacks. Consequently, the crash when it comes will be devastating, like that of France in 1720. As in France in 1720, it will leave behind it a decapitalized economy and investors very unwilling to take risks of any kind.

There are however other parallels between today’s United States and eighteenth century France, in the ideas and social structure of the society itself. Eighteenth century France was very unlike contemporary Britain. The aristocracy held itself apart, cultivated its own intellectual and fashionable pursuits and lived around the court at Versailles, separated from the sources of its wealth and with very little contact with the populace as a whole. In Britain, in contrast, the aristocracy tended to live on its estates, enjoying hunting, cricket, beer and other rural pursuits in common with its poorer neighbors, and with a healthy respect for the wealth opportunities offered by commerce.

There was an intellectual difference, also. French intellectual life was far more oriented to theoretical rather than practical knowledge. N.A.M. Rodger, the Naval historian, illustrates this difference nicely. Among others, Leonhard Euler, the greatest mathematician of the 18th Century, advised the French Navy on ship design, focusing on the fashionable subject of hydrodynamics, but omitting consideration of skin friction, which at sailing ship speeds contributed almost the entire resistance to motion. Euler’s work on naval design was thus useless. British shipwrights, meanwhile, focused on the practical problems faced by sailing ships under normally rough conditions over prolonged periods at sea, and came up with copper-bottoming, which after its adoption by the British Navy in the 1770s gave Britain a decisive naval advantage for the next generation.

The French elite also had a distaste for free-market economics, or anything that might lead them towards industrialization. Jean-Baptiste Colbert, Louis XIV’s great finance minister, had favoured import substitution, developing domestic industries to replace foreign capabilities. With many trades closed to outsiders, those without established wealth or political connections were unable to build businesses, reducing competition. While Colbert attempted to increase internal trade, he could not abolish internal customs duties because of the Royal need for revenue, so the French economy remained atomized and inefficient.

France had one decent economist, Richard Cantillon, who had made money from Law’s scheme and in his Essai published in 1730 set out several sensible economic postulates. Regrettably, after Law’s scheme crashed Cantillon was forced into exile, and was killed in 1734 when his house in London was burned to the ground, making his influence limited. Instead, French economic thought for the remainder of the 18th Century was dominated by the Physiocrats, who believed that the source of economic wealth was land and agricultural labour, and that agricultural products should therefore be priced as high as possible. All industrial and non-agricultural labour, products and services were “unproductive appendages” to the agricultural sector.

With the important exception of the Trump administration, still young and possibly about to be cut off in the flower of its youth if the midterm elections go badly, the great majority of U.S. elites have a decidedly French air to them. They are now very separated from ordinary people, as Charles Murray brilliantly demonstrated in his “Coming Apart” a few years ago. The distance between Murray’s tony suburb of Belmont and his working-class community of Fishtown has only grown larger over the last few years, and the cultural gap, both in terms of interests and based on all kinds of other indicators, has also increased. Today’s intellectual Ivy-educated elite is wandering around the Petit Trianon playing at being a shepherdess, not playing cricket and hunting with ordinary folk.

In its economic attitudes, the U.S. elite is also 18th Century French. It sees essentially no limit to its ability to make economically damaging regulations if some pet cause is at stake. It takes a far greater interest in the theoretical possibility of global warming a century hence and in theoretical dangers to the environment from coal extraction than in the practical problems of generating electricity from wind power on a calm day or from solar power on a cloudy day.

Today’s U.S. elite is fond of claiming complete scientific agreement with its propositions, as if the fact that Leonhard Euler had designed the new French battleships would make them overcome a skin friction for which Euler had not calculated. An openness to practical difficulties, and a disdain for the over-theoretical approach, is as beneficial today as 300 years ago.

Finally, today’s U.S. elite is subject to innumerable quack economic theories, whether from Thomas Piketty or Larry Summers, that postulate ever-greater levels of government involvement in the economy to get rid of problems of inequality or stagnation which they have identified. Needless to say, like the nostrums of the physiocrats, such quack remedies will serve merely to divert resources from the economy’s true needs, to which a low-tax, free-market approach would direct them.

The French eighteenth century suffered from a lack of savings as well as from a lack of appropriate practical-oriented intellectual activity. Likewise, the CBO study shows that, to retain U.S. debt at 100% of GDP, well above the current level, in 2048, additional budget savings of $270 billion per annum would be required, starting in the current fiscal year. Nobody close to power is proposing such budget savings or seems likely to. Consequently the U.S. economy, like the French 18th Century economy, is likely once the current bubble bursts to suffer from an acute shortage of capital, public and private, and as under the ancien regime, ever more draconian forms of taxation will be imposed to meet the needs of the fisc.

President Trump represents a last chance to avoid the fate of the French aristocracy, although he does not have all the correct solutions. However, today’s bicoastal ancien regime is fighting him with all its might, as he represents a rough plebeian intrusion on their mannered, doomed world.

Today’s Marie Antoinettes have just one difference from the original: they take health-consciousness far more seriously than she did. Their advice for the rabble will thus be foul-tasting as well as disdainful: “Let them eat kale!”

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)