The economic position that the United States is now in is the result of a series of economic bubbles. To explain the nature of bubbles, I’m going to start by talking about their history; I’m not going to go all the way back to Tulip Mania and John Law, but I do want to mention some things from the Roaring Twenties that might sound familiar to us today.
Over the eight-year period of that boom, the money supply increased by 62 percent. All kinds of new appliances and gadgets were sold: refrigerators, phonographs, electric irons, toasters, and vacuum cleaners. Many more cars were built — more than twice as many in 1929 than in 1919. More and more leisure activities became popular. More hotels were built, as were more roadside diners. There was an explosion of movie theaters, and of developments in Hollywood. Professional sports became a big business. Skyscrapers such as the Chrysler Building and the Empire State Building were started. There was a speculative boom in Florida real estate. The stock market boomed. Hoover promised a chicken in every pot. I don’t know what Obama’s going to promise — maybe pot in every kitchen. FULL ARTICLE
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Is it possible that the Austrian school is currently in some form of an ideological “boom” right now? If so, what pitfalls should be avoided?
I contend that we’re in the equivalent of an initial high growth period as faith in the (Austrian) system is restored and Keynesian and Monetarist doctrines are being falsified, but I do think that there is potential to enter something of an unsustainable boom if we allow hubris to hinder our judgment, not so much on the theoretical side, but in our selecting information from the real world on which to rely and our application of theory to that information.
Good post.
There are so many intelligent posters and responders on this site that I feel blessed to have found Mises.org.
My one main complaint is that many people on this site articulate what we have done wrong and why, but nobody has painted a good picture of what life would be like with less gov’t intrusion. For instance, on healthcare most people know that more Gov’t involvment is bad, but very few people can understand healthcare and or life without Gov’t involvement.
Doug, to respond to your last remark, the reason that many on this site criticize but do not propose alternatives is that we can not know, for example, what a free market in healthcare would look like after so many years of government control. To paraphrase Harry Browne: “If the government had a program to give every citizen a free watch, we’d soon forget that watches could be produced and distributed any other way.”
Imagine talking to the citizens of, say, North Korea about their food distribution system. They might agree with all your criticisms of central planning, but what, they might ask, would you offer as a replacement? They would scoff if you told them that food should simply be bought and sold by willing parties on whatever terms they can negotiate. What about fraud? they would ask. What about those who couldn’t afford high-priced food? The whole concept of private supermarkets — providing a variety of affordable foods, kept honest by competition and responsible to the consumer without the threat of government force — would be patently absurd to them. How would you convince them that a superior system would arise simply from leaving peaceful people and their property alone?
A true student of Mises or Hayek does not offer a central plan. He does not presume to have all the information that is dispersed through millions of economic actors, and so he cannot tell you what the most efficient arrangement will be at a particular time. He recognizes that freedom is an end in itself, and that all the fruits of modern civilization flow from spontaneous interactions between countless free actors, and not from the rigid and ill-informed schemes of reckless central planners.
So we may speculate on what health care, or any other aspect of life, might look like without government, as Walter Block has done with his superb book on roads. But to champion a central plan to be forced on all society is the mark of a charlatan.
Well written and easy to read.
I am delighted to see Mises address the definition of inflation implicitly in most of their articles. Inflation is not the increase in prices [necessarily], but rather the increase in the money supply which then causes general inefficiency, wasted capital, and resource mis-allocation.
Austrians are impeccable with regards to the cause of problems but are understandably reluctant to address time lines and what if scenarios. For the very fact that Austrians are not in the business of macro-economics and command economies.
>Many more cars were built — more than twice as many in 1929 than in 1919.
Henry Ford had not invented the moving production line in 1919.
Bubbles – Austrians forget the message of that great economist, P. T. Barnum, “Sucker born every minute.”
Inflation, like IQ, measures something but no one knows exactly what it is. As a member of the working class, all I care about is how many hours I need to work to pay for the stuff I normally buy. Most everything I buy is cheaper than it was 50 years ago in terms of work hours per purchase. I’m living much better sitting on on my butt living on a pension than I ever did while raising 5 kids.
We have more today than in the past not because increases in the money supply, it is due to increases in productivity.
And what I got out of your article is that the boom in real estate was caused by people listening to Realtors and mortgage brokers! If that is the case, I totally agree with you. Why anyone would listen to these so called experts is beyond me.
When will people get it through their head that everytime real estate changes hands, 10% has to be added to pay for commissions and closing cost. Hard to make a profit on a quick turn. But with so much in commissions on the line, it is easy to understand where the big push to buy real estate came from.
Am I hallucinating? Wasn’t this published a few weeks back?
Billwald,
Junk is cheaper now than 50 years ago. Televisions, computers, telephones and a lot of un-necessary gadgets.
However food, gasoline, cars, houses, transportation is a way lot more expensive than it used to be.
Junk Food is a lot cheaper than it used to be but vegetables are way too expensive for most Americans to be part of a daily healthy diet.
A quarter pounder Big Mac is four times cheaper than a pound of fresh produce. Given that I’m eating on a budget, guess what I will buy for supper.
“I’m living much better sitting on on my butt living on a pension than I ever did while raising 5 kids. ”
That’s why I’m single with no kids, that way I can save all my money for myself. I owe nature nothing.
Doug,
Mises himself and his economic philosophy wasn’t positivistic, it merely showed what couldn’t be done. The economy is an ever shifting a moving entity as it is really just made up of one instance of human action moving into another moving into another, etc, etc and so the basis of not only trying to understand it in a positive way, much less control it, was anethma to him.
So it may come off as merely complaining without solutions, but to offer “solution”, or even paint a portrait of life without central planning such as we have it, isn’t what is all about. It merely states that we would have with individualism is going to be better than what social planning and command economies would produce.
Another way that I look at it is that, even outside of economics specifically, that a world with six billion people on it, with varying opinions, and finite views, is an infinitely complex and not subject to simple charts and statistical tables. For myself I can barely make heads or tails of navigating myself through my life with any certainty and security, and I have seen little evidence that most other people do much better and very many seem to be doing significantly worse. To have a sector of people, whatever discipline it may be, who think they not only have the finger on the pulse of their own lives but have a special ability to devine better other people’s lives, and why they behave the way they do, is nonsensical to me.
Whether I am right or wrong I don’t know, but I see Misesian economics and ultra-microeconomic. There are, of course, raging debates between the proper form of economics between micro- and macro-economic forms, and so Mises as extremely micro-economic, and weaves in sociological and epistimological elements as well, it is very different from “normally accepted” economic forms of thought that have an a priori vantage point problem that ultimately leads to a ciruclarity in thought. The premises are inherently collectivistic and so its investigations and subsequent modeling are inherently afflicted and necessarily output collectivist answers. At best such forms are incredibly static and by the time the mathematical formulas are written and applied, reality has moved on. Personally I view mainstream macro-economic forms as serving particular Statist endeavors, left or right.
But all of this is from a layman, and I am sure solid initiates found much to cringe about within what I just wrote. I will gladly stand corrected.
Ah, dose wer da days! Fond memories of days past fill my head, too. I remember admiring a 21 year old stripper who owned three condos working hard to get together the down payment for a large house on top of that; being impressed by a dentist who leveraged everything he had to build a condo development; seething that a dumb-as-rocks realtor (pardon the redundancy) unworthy to shine my shoes owned 20+ homes(!) – all leveraged at 100%; and so many others. There was so much hope in the air. Meanwhile, poor little me was stuck in a panic because my head was full of Gary North, John Williams (Shadow Stats), Bill Bonner, et al. It didn’t help that I was and am a thoroughly indoctrinated Austrian. Instead of having a great time, I acted like the gloomy fellow who played the muse to Ferris Bueller. Gloom! Gold! Cash!
Yet, even with all that in my head, and many proper conservative financial moves, including my great decision to sell my home for double the purchase price in 2005, I still screwed up (in part by letting the wife convince me to buy another one in 2007, partially financed by selling gold funds -lol). You see, as Mr. French points out, when you are in the bubble, and reality seems to reinforce every fundamentally unsound decision, it’s hard to stay the course. Just ask any determined young man intent on saving his virtue while surrounded by pretty temptresses. The saintly few emerge unscathed. We can strive to do the right thing, but with every signpost pointing the wrong way, it’s bit rough. Yet another reason to really dislike the shysters who occupy plush offices at the Fed, Treasury, etc.
Matthew,
The problem with Austian economics Matthew is that by ‘following it’ the establishment has soo much more to loose than to gain.
First, I wanted to give my appreciation of such an enjoyable article to read.
Second, what an excellent debate started by Doug. One of the problems my non-libertarian friends have raised with me is that many libertarians attempt to offer a Utopian view of a free society. Where-ever there is people, there will be social problems. In contrast to many peoples perceptions, the libertarian philosophy is distinctly non-utopian.
I think we have to be extra careful when offering advice or potential solutions to emphasize that the market is the mechanism of discovery, and that these are not always what we personally have in mind or would desire.
A very well written article. I would think it must be pretty obvious that living beyond one’s means, whether it be a country, a company or an individual doing so, is something that cannot last forever.
On the subject of real estate booms, being British, I remember the mid-80′s when the world and his wife were talking about nothing else except mortgages and housing. The first UK housing boom was triggered by Margaret Thatcher’s “right to buy” policy, which gave renters of social housing the right to buy that property at heavily discounted prices, up to 70% discount. Of course, government always distorts the market and house prices soared, new houses were built and by the beginning of the 90′s the bust had arrived and over a million people were in negative equity.
It beats me how many of those same people and their children find themselves in the very same position today, only nowadays the number in negative equity will be at least double and probably more.
A bubble is a bubble is a bubble. And the day always comes when the bubble will burst.
Thank you for saying with authority what I’ve been trying to get across to some of my less educated friends for the last 2 years on my journal. Maybe they will believe you.
They put undue ‘stock’ in ‘paper’ after all.
Hello Douglas,
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