2008-11-14

The Austrian Economics solution to the crisis.

A very well known and respected Austrian economist offers a solution to the crisis. I have edited his statement to make it shorter and have added emphasis (no emphasis was present in the original text, all emphasis is mine). Please read until the very bottom.
[...]
For forty years we have been told, in the textbooks, the economic journals, and the pronouncements of our government's economic advisors, that the government has the tools with which it can easily abolish inflation or recession. We have been told that by juggling fiscal and monetary policy, the government can "fine-tune" the economy to abolish the business cycle and insure permanent prosperity without inflation. [...]

Confronted with this stark destruction of all their hopes and plans, surrounded by the rubble of their fallacious theories, the nation's economists have been plunged into confusion and despair. Put starkly, they have no idea of what to do next, or even how to explain the current economic mess. [...] Some economists, union leaders, and businessmen, despairing of any hope for the free-market economy, have in fact begun to call for a radical shift to a collectivized economy in America [...].

In the midst of this miasma and despair, there is one school of economic thought which predicted the current mess, has a cogent theory to explain it, and offers the way out of the predicament—a way out, furthermore, which, far from scrapping free enterprise in favor of collectivist planning, advocates the restoration of a purely free enterprise system that has been crippled for decades by government intervention. This school of thought is the "Austrian" theory [...]. The Austrian view holds that persistent inflation is brought about by continuing and chronic increases in the supply of money, engineered by the federal government. Since the inception of the Federal Reserve System in 1913, the supply of money and bank credit in America has been totally in the control of the federal government [...].

The Austrian theory further shows that inflation is not the only unfortunate consequence of governmental expansion of the supply of money and credit. For this expansion distorts the structure of investment and production, causing excessive investment in unsound projects in the capital goods industries. [...] The recession periods of the business cycle then become inevitable, for the recession is the necessary corrective process by which the market liquidates the unsound investments of the boom and redirects resources from the capital goods to the consumer goods industries. The longer the inflationary distortions continue, the more severe the recession-adjustment must become [...].

What, then, should the government do if the Austrian theory is the correct one? In the first place, it can only cure the chronic and potentially runaway inflation in one way: by ceasing to inflate: by stopping its own expansion of the money supply by Federal Reserve manipulation, either by lowering reserve requirements or by purchasing assets in the open market. The fault of inflation is not in business "monopoly," or in union agitation, or in the hunches of speculators, or in the "greediness" of consumers; the fault is in the legalized counterfeiting operations of the government itself. For the government is the only institution in society with the power to counterfeit—to create new money. So long as it continues to use that power, we will continue to suffer from inflation, even unto a runaway inflation that will utterly destroy the currency. At the very least, we must call upon the government to stop using that power to inflate. But since all power possessed will be used and abused, a far sounder method of ending inflation would be to deprive the government completely of the power to counterfeit: either by passing a law forbidding the Fed to purchase any further assets or to lower reserve requirements, or more fundamentally, to abolish the Federal Reserve System altogether. We existed without such a central banking system before 1913, and we did so with far less rampant inflations or depressions. Another vital reform would be to return to a gold standard—to a money based on a commodity produced, not by government printing presses, but by the market itself. [...]

As for avoiding depressions, the remedy is simple: again, to avoid inflations by stopping the Fed's power to inflate. If we are in a depression, as we are now, the only proper course of action is to avoid governmental interference with the depression, and thereby to allow the depression-adjustment process to complete itself as rapidly as possible, and thus to restore a healthy and prosperous economic system. Before the massive government interventions of the 1930s, all recessions were short-lived. [...] When the stock market crash arrived in October, 1929, Herbert Hoover intervened so rapidly and so massively that the market-adjustment process was paralyzed, and the Hoover-Roosevelt New Deal policies managed to bring about a permanent and massive depression [...].

In this time of confusion and despair, then, the Austrian School offers us both an explanation and a prescription for our current ills. It is a prescription that is just as radical as, and perhaps even more politically unpalatable than, the idea of scrapping the free economy altogether and moving toward a totalitarian and unworkable system of collectivist economic planning. The Austrian prescription is precisely the opposite: we can only surmount the present and future crisis by ending government intervention in the economy, and specifically by ending governmental inflation and control of the money supply, as well as interference in any recession-adjustment process. In times of breakdown, mere tinkering reforms are not enough; we must take the radical step of getting the government out of the economic picture, of separating government completely from the money supply and the economy, and advancing toward a truly free and unhampered market and enterprise economy.

MURRAY N. ROTHBARD
Palo Alto, California
May 1975
Introduction to the Third Edition,
America's Great Depression
Yes, ladies and gentlement, this extract was written in 1975 and yet, as you can see, all the facts match our current issues perfectly. I am sure you could show this extract to your friends/family/colleagues and tell them it's from November 2008 and no one with have doubted.

Everything that happened during the great depression is happening again, the same mistakes are getting done again. At least, we now know where we are headed. It's going to be ugly, and we can all thank our incompetent politicians and economists for putting us on the highway to the 2nd Great Depression.

You can read Murray Rothbard's book online on the Mises.org institute web site, download and print the PDF version, or just buy the book and save the environment while contributing to the Mises Institute - all from the same links just a few lines above.

As usual, comments are welcome :-)

7 comments:

jjstein said...

This seems to ignore bank created credit, both pre- and post-creation of the Fed.

pej said...

Thanks for your comment.
Indeed he doesn't. But this is just the introduction to the book. The book itself extensively discuss the credit boom issue as early as the first chapter.

Anonymous said...

Have you heard about the African Pattern? Excesses by the right, followed by collapse & a flight into Facisim. Read the above sentence carefully. This is what has happened several times in Africa. Welcome to the Third World.

pej said...

Hi Anonymous
Interesting pattern. Is it one you came up with? And/Or is it actually something somebody has studied?

Anonymous said...

This explains what causes a depression and what its roots are. I understand that. What I was expecting was what would an Austrian Economist do after a depression? Allow the markets to equilibrate over time? thats going to take a lot of time given the 1929 scenario. Why not stimulate the economy a bit and not intervene after?

pej said...

Anonymous,

The reason why we are in this mess is that governments and central banks have been stimulating for 20 years, and have been borrowing and spending money they do not have. What cause the problem cannot possibly also be solving it.

It seems like you are doing all the assumptions that a keynesian-state-direction education system would make you believe into. This is not your fault, but government organised brainwashing leeds to this.

I would highly recommend you read the book "America's great depression" by Murray Rothbard (available for free as a pdf or with a little fee on amazon or mises online store) to understand exactly what happened during the Great Depression and why it took so long for the economy to recover.

Anonymous said...

Where is the inflation? In 1975 we had inflation in the 10-11% range and now it's more in the 3% range.