John Law is “the pleasant character mixture of swindler and
prophet.”
------------------Karl Marx
Yet his
swindle has some similarities with contemporary monetary theory?
There is
much more to talk about the Mississippi Bubble than I have space to explain
here. But basically, Law’s idea is that
1: get the
right to issue the bank note.
2: Issue
the share of his company with the government debt as collateral.
3: The
government use the bank note to pay back to the public.
4: The
public use the bank note to pay for the share of Law’s company.
From the prospective of history, Law is a
pioneer. From the strategy above, we can see something similar with the theory
of Keynes and Schumpeter. It also reminds me of Krugman’s advice for Japan of
90th last century which was mainly to say that just print money to
pump the economy. The causes of the burst of bubble had been concluded by many
researchers. But it is a problem that whether to ask why the bubble burst or to
ask why Law’s theory didn’t sustain.
Law values paper money. Law’s theory is that in
order to make the country rich, money should be utilized. As long as the
monetary policy can be flexibility used, prosperity can be achieved. As long as
credit can be appropriately adjusted, the economy can be more efficient. Put
aside the Mississippi bubble, Law’s theory can win a place in the history of
monetary theory. Schumpeter ever praised him as one of the most important monetary
theorists. Advanced theory is like the rabbit tied to the tree, run a circle and
back to the origin.
Law ever controlled all of the financial market, tax and
trade of France. Few economists can be as lucky as him in that he can apply his
own theory into practice in such large-scale. Although the Mississippi Bubble
seems simple and crude in today’s view, but is reveals the essence of bubble:
under the stimulation of optimistic expectation, the excessive expansion of
credit is likely to stimulate the price of the stock to offset its fundamental.
The essential relationship is concealed in modern economy by all kinds of
complicated tools and the system itself. But it hasn’t changed too much.
What if Law’s theory had been carried out in a more
conservative way? What if the state apparatus is more powerful at that time in
France? What if Law succeeded in transforming the bubble into a new bubble?
What if the incidental incentives that leads to the burst of Mississippi bubble
at that time had been put off?
All of these
give us a new angle in prospecting the dot com bubble (And the financial
crisis?).
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