Of Krugman and Diocletian

by Peter C. Earle

Recently by Peter C. Earle: Withholding Consent From the Khan

Several weeks ago, a most intriguing exchange occurred on Bloomberg News wherein presidential candidate Ron Paul, the foremost voice for Austrian School economic policies, faced off against Paul Krugman, New York Times economic columnist and recent winner of the Nobel Prize for economics. While the entire debate is noteworthy, one particular portion of the exchange stands out:

Paul Krugman: "I am not a defender of the economic policies of the emperor Diocletian. Let's just make that clear."

Ron Paul: "Well, you are. In a way, you are. That's exactly what you're defending."

Fortunately, this is an easy assertion to test given Krugman's copious writings and the fairly extensive historical information available regarding the Roman emperor Diocletian. A look at Krugman's New York Times blog and op-ed pieces allows for a fairly easy summation of his positions: on January 8, 2009, he disparaged President Obama's proposed "stimulus package" of $775 billion as "not enough"; on April 19, 2009, he called for a "credible" commitment to higher inflation; and on October 7, 2010, he cited such programs as the Hoover Dam, the Erie Canal, and the Interstate Highway System as examples of the type of projects required to revitalize the moribund economy. More recently – including during his April 30, 2012, debate with Dr. Paul – Krugman has strenuously expressed the view that the continuing slump owes largely to insufficiently interventionist monetary and fiscal measures undertaken by the government and the Federal Reserve. But while the ongoing stagnation of the US economy – now in its fifth year – has been wrenching, the Roman Empire facing Emperor Diocletian in the 3rd century CE was dwindling rapidly; a shadow of its former might.

Decade after decade of uncontrolled spending, a substantial part of which went to purchase the military's loyalty, finally resulted in runaway inflation and then spiraled into hyperinflation. Between 235 and 284 CE, no less than 20 different figureheads, from politicians to generals, seized the throne; each transition typically starting and ending in violence. Capitalizing on the upheaval, neighboring Germanic tribes grew bolder, launching invasions as far into the empire as Italy proper. Other neighboring powers, including the massive Sassanid Persian Empire loomed, hungrily eyeing Rome's decline.

This was a Roman Empire far from the glorious days of Augustus and the Pax Romana; fear and ruin were now the order of the day. With prices rocketing up and the economy awash in valueless coins, barter became the basis for transactions, further increasing hardship. Many Roman citizens fled the cities to claim lands in the countryside or to enter into tenant-farming relationships with landowners; in either case, choosing to eke out a subsistence-level existence. Many small businesses, productive trades and craft skills were abandoned in the wake of exodus. And finally, in an eschatological capstone, a virulent plague spread throughout portions of the empire, killing untold numbers. By 259 CE, the empire splintered into three separate states.

Aurelian, emperor from 270 to 275 CE, undertook a series of reforms intended to reverse the slide. First he took military action: he defeated several of the encroaching German tribes in a series of campaigns that pushed them back from the borders, built walls and defensive works, and forcibly reintegrated the secessionist regions.

Next, he sought to address the monetary collapse in a novel way: instead of further degrading the metal content of the coins (which by this time were simply dipped in silver or copper), he reminted new versions of older, trifling coins and proclaimed their value: confidence being his chosen vehicle for resuscitating the monetary system. While the coins varied from one to the next in actual metal content, it was decreed that several denominations of the new coins, called antoniniani, would add up to one predebasement denarius.

This was only a psychological tactic to stabilize the monetary system, of course, but it worked to some degree and as coin values stabilized, prices leveled off as well. But in a theme that would return to badger his successor, many of the successful measures he undertook simultaneously undermined others, crippling the Roman economy still further. An example is Aurelian's strategy to keep the urban workforce in the cities, which anticipates both the implementation and unintended consequences of the modern welfare state:

In the year 274 AD Emperor Aurelian, wishing to provide cradle-to-grave care for the citizenry, declared the right to relief to be hereditary. Those whose parents received government benefits were entitled as a matter of right to benefits as well. And, Aurelian gave welfare recipients government-baked bread (instead of the old practice of giving them wheat and letting them bake their own bread) and added free salt, pork, and olive oil. Not surprisingly, the ranks of the unproductive grew fatter, and the ranks of the productive grew thinner.[1]

With the Roman economy temporarily stable but precariously balanced, the stage was set for the ascendance of Gaius Aurelis Valerius Diocletianus Augustus. From a simple upbringing in modern day Croatia, Diocletian rose through the military ranks to become a general and emerge amid the tumult of the end of the 3rd century as emperor in 284 CE.

He sprang into action. First and foremost, the Roman state needed plunder to accomplish its ends, and Diocletian found the imperial coffers inadequately stocked even after Aurelian's stopgap measures. So his first major undertaking was, in modern terms, to "rationalize" the then-haphazard internal-revenue apparatus.

First, he assessed the need to increase the effectiveness of tax collecting with the eye of a military logistician, and he did so by systematizing the state's knowledge about the population's wealth and resources. He did this using a police-state measure familiar to us today: the census. Second, with that data, legions of newly hired government accountants and collection agents set about calculating exactly how much – directly, in currency or in kind – a given individual or community would be required to pay: capitatio, roughly translating to "tax liability." The principle was absolutist to its core, with the Roman state asserting the right to take as much as it needed from the populace to pursue its self-determined mandates. Tax assessments and collections were now bureaucratized. And finally, the heartland of the empire – present-day Italy – lost its long-coveted tax exemption.

It is important to return, here, to the Krugman's assertion that he doesn't advocate policies akin to Diocletian's. In fact, on January 19, 2012, Krugman wrote that "The main reason [that] the rich pay so little [in taxes] is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries," going on to say that "claims [that low capital gains tax promote both economic growth and job creation] are false." In suggesting that taxes on these forms of investments – financial instruments, ownership in corporate entities, property, and the like, not to mention carried interest on alternative investments – be raised dramatically, and considering the often-illiquid nature of such holdings, Krugman is essentially touting a modern payment-in-kind tax code directed at the wealthy.

With the machinery of mass appropriation codified and staffed, Diocletian turned his attention toward the other pressing issues of the era: maintaining the military's loyalty and working to arrest social upheaval by building on Aurelian's economic ballasts. His next enactment, in 286 CE, was to issue a nearly pure gold coin, a new aureus, struck at 60 to 1 pound of gold. It was only used, however, to pay generals and high-level administrators, as gold was in very short supply. As per Gresham, gold had disappeared from circulation during the ravages of the recent hyperinflation – buried, melted into plates, or molded into jewelry and ornaments. Soldiers were still largely paid in goods, which had to be collected (or seized) from the broad population, so further monetary innovations were necessary; paying the military was of utmost importance for Diocletian to remain in control.

The silver content of the common denarius was improved, adding real economic value to Aurelian's confidence-building measures. Throughout the empire, however, prices began to rise yet again. What Diocletian may not have known (and, if he did know it, it might not have given him pause, as the ancient Romans had few economic theories) is that his fiscal policies were sabotaging his attempts at currency improvement. The state mints were pouring vast quantities of the new coins into circulation to pay for his other programs. And those programs, a wave of vast public-work projects, resulted in the Roman government outbidding private entities, running prices back up in the process. "By no means," wrote C.E. Van Sickle of Franklin College, are "the least of Diocletian's claims to pre-eminence among the Roman emperors to be found in his energy ... as [a] builder."[2] From Gaul to Africa, roads, bridges, aqueducts, baths, and temples – not least of which were three huge armories in Damascus, Antioch, and Emesa – were either built anew or, where repairs had lapsed, were fixed.

But at least one contemporary critic saw the infrastructural projects as "reckless extravagance in the expenditure of public funds," chastising the effort:

Here public halls, there a circus, here a mint, and there a factory for warlike stores; in one place a habitation for his wife, and in another place one for his daughter.

To manage the newly revamped tax system, the hyperactive mints, multitudes of public-work projects and the affairs of the nascent Tetrarchy – Diocletian's division of the empire into four separately managed regions – the Roman bureaucracy exploded.

He ... created so many boards, commissions, and bureaus that every Roman with any pretensions to political pull had a government job, while his less fortunate fellow-citizens were fast being taxed to death for the support of a benevolent bureaucracy.[3]

Summarily flooding an economy with money inevitably brings the forces of inflation to bear, and before long soldiers and civilians were again unable to afford the staples of life due to rapidly escalating costs of living.

With a despotic tax ministry at work and having observed a brief respite from soaring prices, the return of rampant inflation must undoubtedly have frustrated and confused Diocletian. He turned to the last realm of free and voluntary discourse: the markets.

The subsequent attempt to control prices was the most sweeping in Rome's history, but not the first: two centuries earlier, Gracchus issued the Lex Sempronia Frumentaria, which imposed a below-market price on grain designated for public consumption. Diocletian's initiative came in the form of his Edict on Maximum Prices (Edictum De Pretiis Rerum Venalium), published and promulgated in 301CE.

It was most ambitious, setting price ceilings for over 900 commodities, 130 labor wages, and freight charges and published broadly throughout the empire in both Greek and Latin. In addition, the preamble of the edict informs a demagogic armamentarium that continues to serve politicians to this day. It begins by appealing to divine selection and militarism, evoking the indispensability of the empire:

We may thank the good fortune of our state, as well as the immortal gods, on remembering the wars we have waged successfully ... [and] by supernatural forces' benevolent support ... will secure [economic stability] ... with the reinforcements Justice deserves.

It continues by appealing to plebian envy ("Greed raves and burns and sets no limit on itself ... in ripping up the fortunes of all."), rising to a crescendo of inflammatory class warfare (the wealthy "wallow in the greatest riches, with which nations could have been satisfied ... day after day ... carry[ing] off so much [that] they don't even know [what] they have!"), and ultimately offering sating promises for swift retribution ("Toward remedies, therefore ... we spring into action. We care not for complaints.").

It goes on to characterize aspects of business as incomprehensible, conflating complexity with deception ("[T]he human tongue's reckoning cannot untangle ... all the accounting and the deed[s.]"), threatens speculators ("Nor will he be ... exempt from injury ... the sort who supposes that he [will] hold back necessary kinds of food or service when he has them ... the punishment ought to be even more serious for someone who initiates a scarcity") and generally excoriates the price system: "[s]ome people ... are [so] eager to turn a profit ... [that] they seize the abundance of general prosperity and strangle it."

While it is true that there was an economic crisis afoot, it is likely that Diocletian was much less interested in protecting the common Roman citizen than he was in maintaining the readiness and favor of his last line of defense: the military. "[A]n inspection of the items [listed in the] edict ... reveal[s] that a majority of the maximum prices ordered refer to articles that enter largely into military stores." Soldiers may have already been rebelling against the inflationary prices and confiscating food from civilians, as the 6th century writings of Malalas report that at around this time "warehouses for the storage of grain [were established] ... so that no retailer should be cheated by the soldiery."

Not long after the edict was published, and despite explicit prohibitions against hoarding, shops began to close and goods began to disappear from Roman markets. Civil disturbances over the availability of food broke out. With mints continuing to churn out tidal waves of coins and the infrastructural work continuing unabated, the edict led to more social upheaval:

For merest trifles, blood was shed and, out of fear, nothing was offered for sale and the scarcity grew much worse until, after the death of many persons, the [Edict on Maximum Prices] was repealed.[4]

If the edict is revealing, the academic criticism that follows it is equally so. One scholar blames the failure of the edict on its incompleteness; whether the historian believes that the list should have included even more prices or more draconian efforts should have been used to catch and execute incorrigibles (or both) is left to the reader's mind.

But there is a difference between rescinding a law and not enforcing it, and the regulatory burden of the edict seems to have survived, albeit unenforced, in some places:

The government continued to demand declarations of prices from the corporation of dealers in various commodities for decades afterward ... [some research] show[s] that the practice continued at least as late as 359. Moreover a group of fifth-century papyri show that the data from these declarations were at that time still compiled at the provincial level.

Whatever the case, the Romans learned a lesson that wouldn't be repeated again for almost 1600 years: that attempting to control inflation through price controls is like attempting to control obesity by wearing tight clothing: the results are generally frustrating, often painful, and sometimes deeply embarrassing.

To Krugman, again: while it is true that he has not, as yet, advocated for a capping of consumer or capital-goods prices, he has vociferously defended the existence of central banks and endorsed their mission to set the price of money via interest-rate targeting, which is tantamount to fixing prices across the entire economy in a singular monetary contrivance.

We may also view the impact of Diocletian's reforms in the rise of a new but deeply significant feature in the lives of the Roman people: walls. They reflect not only new architectural sensibilities but social and economic concerns as well. Archeologically, it is at around the time of the continuing economic crisis and the publication of the Edict on Maximum Prices that walls – higher, thicker, and more plentiful than before – begin to appear, crisscrossing civilian neighborhoods. To no small extent, this reflects the breakdown of civility, the disengagement from economic life, and the reaction to the systematic replacement of moral law by state-imposed codes and regulations.

Despite the failure of his attempt to impose a command economy, Diocletian retired peacefully to an estate after over two decades of rule. The political zeitgeist of intervention and coercion was alive when he took office but under him it grew and evolved far beyond attempting to influence the availability of comestibles or reducing the freedom of Roman citizens to negotiate prices: Diocletian's "attempt ... resulted in complete regimentation under a totalitarian state." Over subsequent decades, despite the limited currency reforms of Constantine, taxes were incrementally increased and the vague semblance of private enterprise progressively crushed.

Compared alongside American political icons, Diocletian seems the ur – Franklin Delano Roosevelt. Immersed from the very start of his reign in exigent economic circumstances, and forced to choose between the constrictive moorings of repression and the dangerous, expansive seas of greater liberty, he doubled down on power, attempting to annul the relationship between supply and demand and reduce the gregarious, enterprising spirit of man to points on a graph or constants in an equation.

It is certifiably true that Krugman doesn't "defend" Diocletian's economic policies; rather, those advocated by him match those tried by Diocletian almost precisely. The Nobel Prize economist calls vociferously for higher taxes, which was a specific policy objective of the Roman emperor. He goads policy makers to create more money and target higher levels of inflation – which Diocletian did, with clearly adverse outcomes. Diocletian's massive buildup in both state-funded construction projects and a broadened state officialdom correspond neatly with Krugman's specification of greatly amplified state-employment initiatives.

But the inept tax, inflation, and price-fixing approaches of Roman emperors can, in part, be excused by virtue of their having had little history to consult alongside a limited number of economic theories, all of which were grounded in pantheistic theology. With 2,000 years of recorded history between the 3rd-century calamities of the Roman Empire and the present day – plus a handful of recent, well-documented economic crackups perusable amid a wide range of discredited economic theories – what excuses can Krugman offer?

Reprinted from Mises.org.

June 9, 2012

Peter C. Earle [send him mail] is the CEO, founder, and head trader of FINAGEM, LLC.