History and theory

by Jehu

No examination of a historical event is possible without a theory.  The study of history requires not just the mastery of facts, but a theoretical framework that can make sense of those facts. Most of us approach history with little or no theoretical grounding in this regard, except the nonsense promoted by talking heads on the evening news or the “supply and demand” bullshit we were taught in grade school as children.

Most of us think we can understand historical events without a theoretical framework. This approach is possible, I suppose, but it can leave us prone to critical errors of interpretation even if we know the basic facts. Very significant historical events are complex. It is not always possible to understand the thread of the events merely by mastering the facts.

Let me give an example of what I mean.

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Between August 1971 and December 1980 gold prices rose from around 35 dollars an ounce to almost 700 dollars an ounce — an astonishing 1,934% jump.

Gold price, 1971 to 1980. (Source: Macrotrends)

This was a world historical event, unprecedented in its scale, because the dollar is the world’s currency for all international transactions. The sudden inflation of gold price caught most of us by surprise and a lot of theories were introduced to explain it.

What are we to make of this event? Well, it largely depends on the theory you are using.

If you were using the mainstream economic theory of money, the movement of gold prices is an interesting anomaly but not really of huge concern to most of us.

In the first place, prices of commodities rise and fall all the time. As gold rose in the 1970s so also did the price of oil and other commodities. In second place, how many gold bars do you own. Likely none. So while the rise in the price of gold may be staggering, it really only effected the fat cats who owned gold in the first place. For most of us it was inconsequential.

What we really cared about at the time were the long lines and the skyrocketing price for gasoline.

As we all know, we were waiting in line because of the Arabs, who choked off our access to their supplies of oil. If you were around during that time and asked why gas prices were jumping crazily, you were told it was the Arabs fault — or OPEC.

In a market where the supply of a commodity is constrained, the price for the commodity jumps. Mainstream economists call this a supply shock. This is the sort of commonsense economic theory which we were taught in grade school and it served perfectly well to explain what was happening to the price of oil, and why we were waiting in long lines to get gas.

Now suppose someone told you that the price of gold didn’t rise, because they had a theory that said commodity monies like gold don’t have prices. Suppose they told you that what actually happened is that the purchasing power of the dollar fell by more than 90 percent in the 1970s as in this chart below?

The purchasing power represented by one dollar in terms of the value of one ounce of gold (Source: Macrotrends)

I created this second chart simply by using the reciprocal of the so-called price of gold data from Macrotrends and the result is just the mirror image of the first chart.

Why might this mirror image of the first chart grab your attention?

The answer is simple: unlike the very wealthiest members of society, very few working people own physical bars of gold, but everyone has dollars in their wallets and bank accounts.Without dollars, we don’t eat. So how much a dollar can buy is very important to us.

So, if the price of gold did not rise — if instead the purchasing power of dollars collapsed — that collapse would effect pretty much everyone in society who had dollars in their wallets and bank accounts and who price their commodities in dollars.

Which theory of money you use to explain this historical event can pretty much decide whether that event was only important for a handful of very wealthy people or something that effected everyone in society.

If the price of gold rose in the 1970s by 1,934% this only effected a bunch of fat cats who own big hoards of gold.

But if, instead, the dollar lost more than 90% of its purchasing power in the 1970s, the loss of dollar purchasing power effected everyone who used dollars to buy or sell anything.

Oddly enough a catastrophic loss of dollar purchasing power didn’t only effect you, it even effected those Arabs who choked off the supply of gasoline to Americans in order to raise the prices of their oil as well. Now we can explain why OPEC choked off the supply of oil in order to raise oil prices. And we can explain the sudden rise in the prices of almost everything in the 1970s.

The reason the prices of everything, including oil, suddenly exploded in the 1970s was that the purchasing power of the dollar collapsed.

You would only know this was what had happened in the 1970s if you were using a theory of money that said gold doesn’t have a price. A theory that says gold gives dollars their purchasing power, not vice versa. A small, almost insignificant change in your theory — from “gold price” to “gold as the standard of dollar prices” —  leads to a huge change in how you interpret a global historical event.

A lot of people — including a lot of Marxists — think they can approach history without a theory or with only half a theory, but i think this example demonstrates how wrong that can be. I can’t say that I understand all of Marx, but I do understand enough to realize how little most Marxist academics actually understand of his theory.

 

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