The following is an example of a factually correct, totally logical argument coming from a totally sound premise.  Yet, the conclusion is totally false.

"Government intervention is bad.  Market manipulation is evil.  Price fixing is counterproductive.  And the attempt to control markets is futile.  All of the above are fallacious notions that will lead to financial and economic havoc.  True?

Well, here is a description of the 19th Century Gold Standard, considered by many as the most efficacious monetary standard in history.  First of all, under the Gold Standard, gold is a reserve currency.  It is held mostly by one country such as The Central Bank Of England during the 18th Century, and the Central Bank of the United States in the 19th Century.  But wait!  We have been told by some that any country that  administers a reserve currency amounts to a monopoly on money.  That a Central Banking system is inherently coercive.

The essence of the Gold Standard is that the Central Bank stands ready to intervene into the market and buy and sell gold at a fixed price.  What?  Price fixing?  Market intervention?  Isn't this manipulation, pure and simple?  And by a Central Bank, yet?  Isn't this a case of the "powers that be" imposing their values on the market?   Isn't this a perfect example of the Fed trying to control expectations and perceptions?

Thus, the Gold Standard must be Keynesian in that it manipulates perceptions!  Or  It is Fascist  in that it offers the illusion of owning property, but controls the value of it.  Or it is Communist as it eliminates any market originated pricing method.  It is totally arbitrary in that the Central Bank sets the value of gold by decree!

So, it must follow that those that advocate a Gold Standard are evil...They seek to prevent the free market from working.  They believe in market intervention.  They believe in price fixing.  They are manipulators!  The result of the Gold Standards' mandatory government intervention would ultimately bring the whole monetary and economic system down.  Only a new monetary system can prevent economic catastrophe, i.e. a monetary system absent of any government intervention."

Now, this is why so many economists and economic pundits rarely agree on anything.  They argue logically from valid premises and facts, their arguments are logical, and yet they come to totally different conclusions.  The logic above is inescapable.  The reason the conclusion is wrong however, is CONTEXT. Economics is not a science.  It is a social system.  It is always contextual.  It is made up of man made devices and institutions in order to bring stability to markets and rules to transactions.  It is more about psychology than gravity.  It is more about art than metaphysics.  It's about both of course, yet it is ultimately "context" that separates the logic from the conclusion.

How many times have you heard the phrase that the market is irrational.  It is many times irrational because individuals are irrational at times.  It is impossible, and would be a major mistake, to try and apply logic to any market.  And yet, this is what most commentators try to do.  This is why most commentators end up telling us why they are right and the market is wrong.

Well, the market is never right or wrong -- it just is.

The above logical argument that concludes that those that advocate a Gold Standard are
evil because the Gold Standard involves Government intervention, price fixing and the rest, is wrong because the Gold Standard is the exception.  There are many, many exceptions in economics -- and that's where "context" comes in.

In the Case of The Gold Standard there was no harm done, and much stability brought on by, the imposition of the discipline provided by the Gold Standard.  Where all the evils of Government intervention cause harm elsewhere, it does not always do so.  The Gold Standard is a case in point.  The Gold Standard worked precisely because the value of money was fixed.  Money is not the same  as an economic good.  It has a different nature and a different function.  It does not respond the same as an economic good.  There is economic theory and there is monetary theory.  They are not the same.

There are a lot of commentators that are totally oblivious to this fact -- most in fact.  Many view economics as almost a religion.  They cite principles (verse and chapter) but have no idea how to apply the principles. They have a little knowledge -- much of it correct -- but come to totally wrong conclusions, because they do not understand the total context of the ideas and principles they are dealing with.   In economics the phrase "a little bit of knowledge can be dangerous" goes double.

My advice to the layman is to never place too much weight on what any one pundit says.  Like I said in a previous article you don't have to know about economic and monetary theory.  You don't have to know about derivatives, hedge funds, and sub-prime loans  -- the Market does.

Today, we are in a debate as to whether we are in deflation or inflation, growth or recession, a bull market or a bear market;  whether government should intervene to protect the banking system or not, and whether the Fed should take a hands off policy and allow the market to clear itself -- or not.  All of this debate is good and healthy, but at the end of the day, it will be those that hold context near and dear that will be right.

My advise is to just watch the direction of things like gold, the dollar, the stock and bond markets, and let the market tell you what to do.  It's as simple as that.

Paul Nathan
Paulnathan.biz