Economics on Trial - Ideas on Liberty - SEPTEMBER 2000

"An Enemy Hath Done This"
by Mark Skousen

"Government measures . . . give individuals an incentive to misuse and misdirect resources and distort the investment of new savings."
- MILTON FRIEDMAN 1

Several months ago, I had the opportunity of speaking before a Miami chapter of Legatus, a group of Catholic business leaders organized originally by Tom Monaghan, founder of Domino's Pizza. The topic was the outlook for the stock market, which had reached sky-high levels and by any traditional measurement appeared extremely overvalued. Even many experienced Wall Street analysts recognized that a bear-market correction or crash was inevitable and necessary. As the old Wall Street saying goes, "Trees don't grow to the sky." Indeed, in the spring the stock market took a well-deserved tumble. What is the cause of this boom-bust cycle in the stock market? Does capitalism inherently create unsustainable growth? Is the bull market on Wall Street real or a bubble?

The Parable of the Wheat and the Tares

To answer these questions, I applied Jesus' parable of the wheat and the tares (Matthew 13:24-30) to today's financial situation.

Jesus tells the story of a wheat farmer whose crop comes under attack by an unknown assailant. In the middle of the night this enemy sows tares (weeds) in his wheat fields. Soon the farmer's servants discover that the farmer's crop appears to be twice the normal size. Yet the master realizes that half the crop is fake-weeds instead of wheat. But he warns his servants not to tear out the weeds for fear of uprooting the good shoots; they must wait and let the wheat and the tares grow up together until harvest time. Months later, the wheat produces good grain, while the tares are merely weeds and provide no fruit. The servants pull out the weeds and burn them, and store the grain in the barn.

The parable is imminently applicable to the recent wild ride on Wall Street. In today's robust global economy, the wheat represents genuine prosperity-the new products, technologies, and productivity generated by capitalists and entrepreneurs. It represents real economic growth and when harvested, reflects a true higher standard of living for everyone. Under such conditions, stock prices are likely to rise.

On the other hand, the tares represent artificial prosperity that bears no fruit in the end and must be burned at harvest time. Where does this artificial growth come from? The central bank's "easy money" policies! The Fed artificially lowers interest rates and creates new money out of thin air (through openmarket operations). This new money, like regular savings, is invested in the economy and stimulates more growth and higher stock prices-higher than sustainable over the long run.

Who is the enemy who sows artificial prosperity? Alan Greenspan! (Or, to be more accurate, central bankers.) The money supply-which is controlled by the Fed-has been growing by leaps and bounds, especially since the 1997 Asian crisis.

But there is no free lunch, as sound economists have warned repeatedly. At some point, the harvest time comes and the wheat must be separated from the tares. This is the crisis stage, where the boom turns into the bust. Harvest time in wheat is fairly easy to predict, but not so in the economy. Clearly economic conditions are heating up, as measured by asset inflation, real estate prices, the art mar ket, and recently the Consumer Price Index. At some point, a "burning" of excessive asset values in the financial markets must occur. As Ludwig von Mises stated long ago, "if a brake is thus put on the boom, it will quickly be seen that the false impression of `profitability' created by the credit expansion has led to unjustified investments.."2

Lesson: Globalization and supply-side freemarket policies have justified genuine economic growth and higher stock prices over the past two decades, but "easy money" policies have at the same time created an artificial boom and "irrational exuberance" on Wall Street. Ignore this lesson at your own peril. Remember the parable of the wheat and the tares!

1. Milton Friedman, Capitalism and Freedom (University of Chicago, 1962), p. 38.
2. Ludwig von Mises, "The `Austrian' Theory of the Trade Cycle," in The Austrian Theory of the Trade Cycle and Other Essays, compiled by Richard M. Ebeling (Auburn, Ala.: Ludwig von Mises Institute, 1996), p. 30.