During the last few years we have regularly been confronted with statements of the chairmen of the Federal Reserve System that made it quite clear that they didn't know how to handle the economy and the related money circulation.

Recent publications (November 1996) have shown that not only the policy makers have very few understanding about the working of the economy, but journalists begin to express clear doubt about a positive answer to the question: "Do they really know what they are talking about?"
In the second week of September several newspapers published an article of John M. Berry of The Washington Post titled:

This title considers the possibility that the FED indeed is using some scientific rules for the establishment of future corrections in interest rates.

It is a logical question to ask: What are those rules? To find an answer on that question is easy because it is hidden in the same article. There are no rules. Mr. Berry highlights in his article a trace of a rule when he writes:

"When unemployment fell [in the past] to sufficiently low levels (and the current 5.1.percent is as low as it has been since 1973), then the scarcity of workers would force employers to offer higher wages.- which would soon be passed along in higher prices for consumers. That, in the Fed's universe, was how inflation happened. But the iron law hasn't seemed to be working in the 1996 the way it did in the past, and even the chairman of the Federal Reserve is struggling to figure out why."

In the next paragraph of Mr. Berry we receive an idea how far away we have driven from a sensible scientific explanation for the development of the economy. It is remarkable how the chairman of the Fed could get away with the following statement during a Congressional testimony. The following piece from the article of Mr. Berry proves how little the men and women on Capitol Hill know about the economy:

"Have we moved into a new environment where inflation imbalances no longer threaten the stability and growth of our economy in ways they once did?" Fed Chairman Alan Greenspan asked in congressional testimony not long ago. "The simple answer, in our judgment, is no. But the issue is not a simple one."
Greenspan explained what may account for the changes. "Powerfull forces have evolved in the past few years to help contain inflationary tendencies," he said, including greater international competition and workers' fear of losing jobs in a world of swift technological change. And because workers are anxious about these factors, they have demanded smaller wage increases than might have similarly tight labor markets in the past.

But Greenspan cautioned that, "at some point," workers would push harder for real wage increases-setting of the inflationary spiral.

Here we read that Mr. Greenspan is still loading the blame for all those inflation spirals of the last thirty years on the men and women who create the real wealth of the nation. He overlooks completely the immense cost burden that his financial environment has placed on the production side of the economy and how more than 35% of all the consumer prices, and probably for a major part more than 50%, consist exclusively of the costs of capital. He never considers it possible that those simple facts have some influence on the economic development.

It looks as if not one person on Capitol Hill has ever made the simple calculation that tells us that probably about 50 percent of the income of every average earner in the United States is used for the payment of capital costs. Not one journalist came to the inevitable discovery that during the last decennia the costs of capital could have outpaced the costs of labor.

There is a good reason to doubt the wisdom of all those men and women who earn their daily bread and butter by using scientific formules on non scientific matters to give Mr. Greenspan a hint on: How to establish a Fed policy for the fixation of interest rates.

But the amazing reality is that neither Mr. Greenspan, nor the White House, nor Capitol Hill, nor Union leaders have become aware that the prices of our daily purchases don't go up because of the increase in labor costs but because of the increase in labor and capital costs.

Another article, this time in the Wall Street Journal, gives us a more in depth look at the wisdom of the men and women in the Temple on Constitution Avenue.

The Wall Street Journal