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Source link: http://archive.mises.org/10110/response-to-the-market-failure-drones/

Response to the “Market Failure” Drones

June 10, 2009 by

Now that we’re living through the bust, on the other hand, many people are listening. That’s why it’s so important for economists of the Austrian School to redouble their efforts, whether in terms of writing, public speaking, media, or indeed whatever platform they can get, to promote a sound, free-market interpretation of what’s happening. The drones who exist to repeat clichés about market failure need a robust and energetic reply from people who know what they’re talking about. FULL ARTICLE

{ 27 comments }

greg June 10, 2009 at 8:21 am

Looking backwards, you give us reasons for the economic downturns. Can you do the same and give us reasons why there was always a recovery? And will those reasons help us today?

People will humor you when you lecuture them on what they did wrong, but they will gather behind the people that give them a real world plan that repairs the problem.

CJ June 10, 2009 at 8:34 am

greg…

I challenge you to spend a solid week sifting through Mises.org….I assure you that you’ll find the answers to your questions.

Magnus June 10, 2009 at 9:03 am

Can you do the same and give us reasons why there was always a recovery? And will those reasons help us today?

Federal spending dropped at the end of WWII by about 65%.

The US economy recovered not because of the New Deal and war spending, but because these terrible, destructive expenditures ended in 1945-46.

And, yes, those reasons will help us today. They demonstrate that the Obama spend-a-thon is hurting the economy, not helping it.

Any recovery that such a program of insanely wasteful spending could produce would be an illusion, no more a real form of economic improvement than a Hollywood set is a real town.

dewind June 10, 2009 at 9:08 am

Recoveries are usually the result of the reduction in taxes, government size, and inflation (reigning in low interest rates). I think this can account for almost all of the recoveries in our history.

Post WWII
Post 70s stagflation
Post 1920 bubble

The government’s hand is always forced eventually. But only after our lively hood is dragged through the mud and our brilliant economic chemists have thoroughly experimented on us.

Rob Mandel June 10, 2009 at 9:11 am

Mr. Woods,

I read Meltdown and recently reviewed it alongside Hamilton’s Curse. It is truly a wonderful book and should be required reading for all members of Congress. It’s so well written and clear that even the our dear Speaker of the House could (probably, maybe) understand it. I’d add this administration to the list, but they’re far too busy leading us on the path to destruction to have time to read.

You’re analysis of the savings/investment time distortions perfectly detail our present crisis, as well does your targeting of each and every culprit of this disaster. One would think that a crisis of this magnitude would require a voluminous tome to document and extensive policy to cure. Neither is the case, but rather the exact opposite.

It is actually quite simple, requiring a short, concise explanation and and even simpler solution. But I gather we are living in a wonderful time if you think about it. This will be the death knell of Keynesianism for all time.

And just think of all the jobs that will be created as we clean up the destruction!!

Shay June 10, 2009 at 9:12 am

I’ve only recently found this website and have enjoyed reading it, though the understanding gained has made me quite angry at the current global situation and its (totally preventable) causes. I’ve never previously spent much time examining economics, perhaps because there is so much superstition and false concepts.

I’m trying to understand why there are so many articles here detailing why things are failing and why the responses aren’t working. From what I’ve read, I understand that the fundamental problem is money counterfeiting; take that away, and the organism that is the economy would work, because it wouldn’t have these drug (Fed)-induced hallucinations warping its perceptions and good judgement. So the answer in all these cases seems to be “You’re doing it all wrong”, not “If you made this slight change, it’d be better”.

But perhaps the point of detailing why the current response is failing is partly to provide justification to readers for reconsidering their flawed understanding, and show the way to a correct one, one step at a time. That is, to bring about a process of a shift in general economic consciousness, so that at some point people will demand a drastic shift in policy.

Anyway, I am very thankful of this website and the seemingly endless articles that tirelessly stick to some apparently simple concepts that nonetheless are not widely grasped.

Rajesh Dhawan June 10, 2009 at 9:34 am

It is interesting to note how people define market failure. In a voluntary dealing between two people in the market place how does one say that market has failed?

First one has to be sure that the dealing was free of outside influence which is any government control loaded in favour of one party. If it is so then both people have dealt with each other with their own free will. To say that market has failed would imply that one of them didn’t know what he was doing. So, would a third party (govt.) be a better judge of what his interests are?

This is where the concept of “individual rights” come into picture. Does the society recognize my individual rights and is there physical force involved in dealings between human relationships? Do I the right to my life, work, property or I am just a resource waiting to be allocated for the “common good” or in the name of “public interest.” It comes down to whether I am a free man or a slave.

There is only one system which guarantees the individual rights and the right to exist without physical force and it is Capitalism.

roy June 10, 2009 at 10:28 am

“market failure” means that MY preferred outcomes are not those favoured by the majority of market participants….

or at least that’s how these guys use it.

A. Viirlaid June 10, 2009 at 10:36 am

“I have read the reports of the Demise of Capitalism, and I can assure you, that they are greatly exaggerated, and that Capitalism is alive, well, and prospering.”

Well, let’s hope so anyway!

The observations of Thomas E. Woods, Jr. in his super-article are spot-on IMO.

There are even those ‘drones’ that today send warnings to the Catholic Church that the Church MUST resurrect Marx because the market and Capitalism have ‘failed’ so badly.

Please see http://chiesa.espresso.repubblica.it/articolo/1338746?eng=y

Greg, I humbly submit that the simple and honest answer to your question is:

“Please STOP doing the same things that got you into this mess in the first place!”

Because, believe me, they ain’t stoppin’.
They are making it worse.

That is the lesson of the 1930-s depression as compared to the short, sharp downturn of 1920-1921.

This answer to your question seems too simple. But it is nevertheless true. There is not much one has to do. JUST LEAVE THINGS ALONE. Don’t overburden entrepreneurship —— don’t dam up youthful initiative and great ideas.

Free markets arose first between individuals and small groups. Those markets almost always arise spontaneously everywhere and anywhere, in historical time, and geographical place. At least where humans are relatively free.

It is the (often parasitical) ‘governments’ that came later, seeing that there was a source of revenue upon which to exist —— because without the ‘market’ there can be no large ‘viable’ modern institutional government.

IMO the Catholic Church would be wrong to look elsewhere for a ‘Third Way’ (between Capitalism and Communism) because there is no better way. At least a way that is relatively unfettered.

It was just those federal institutions and their practices (the government’s deficit-spending, the FED’s artificially-maintained, below natural market level interest rates, Fannie and Freddie) that led to the current imbroglio —— and we are doing MORE of it to FIX the problem?

Please —— it beggars the imagination —— it starves the mind of oxygen!

Greg, you must understand in your heart that it is precisely the over-fettering of private initiative and enterprise that is killing us.

Please see http://blog.mises.org/archives/008812.asp

Please read THE ROAD TO SERFDOM by F. A. Hayek at http://mises.org/store/Road-to-Serfdom-The-P252.aspx

The leaders of the Catholic Church would also be well-advised to read this masterpiece before they issue any new Encyclical on Capitalism.

For without freedom of all kinds, there can be no freedom to practise religion or practise one’s ‘market’ creativity in the service of humankind.

fundamentalist June 10, 2009 at 10:55 am

greg: “Can you do the same and give us reasons why there was always a recovery?”

That’s an important question because mainstream economists tell everyone that unless the state bails out the economy with massive stimuli, the economy will spiral downward until unemployment reaches 100%. But if you look at history, that has never happened once even though we have endured hundreds of business cycles over several centuries without any stimuli from the state whatsover. In fact, the world never suffered a depression like the Great D until the state intervened and tried to rescue the economy.

The economy always recovers for many reasons, but chief among them is that most businesses don’t fail and most people don’t lose all of their savings. So resources exist to invest and get moving again. Deflation helps because it reduces costs for the majority of businesses that have some cash. Once deflation begins to slow, (and it always does. No country has ever experience hyperdeflation) then those with cash begin spending again taking advantage of the low prices. Deflation hurts companies that have too much debt, but most of those businesses fail early on in the depression. In fact, their failures are largely responsible for the start of the depression.

Another reason for the economy’s natural ability to revive on its own is that people start saving more in the depression and make more money available for businesses to borrow.

Finally, a more technical reason is the Ricardo Effect. Depressions still happen mostly in capital intensive industries, those that make consumer durables such as housing and autos and those that make labor-saving equipment. During the depression, businesses consume capital by not replacing equipment and often by not repairing it. Deflation lowers the profits of most firms and persuades businesses to invest more in labor-savings equipment, such as computers, or at least to replace existing equipment in order to boost profits. The increase in business for those equipment manufacturers causes them to hire more workers who spend more and the recovery begins to snowball.

Boeing is a good example. It makes very expensive airplanes, which most airlines quit buying a few years ago. With prices and interest rates low, several airlines have announced large orders for Boeing’s jets.

2nd Amendment June 10, 2009 at 11:18 am

“(and it always does. No country has ever experience hyperdeflation)”

If you look at computer prices from 1960 to 2009, you might think that this is an example of hyperdeflation.

Money buys more computing power over time.

Now, Microsoft is a big dilemma for me. It sells bullcrap software that keeps freezing and malfunctionning, is a big nuisance and riddled with annoyances and yet sells for a high price.

Microsoft is like a government yet is a private business. It forces itself on new PC’s that comes bundled with it. I’m scratching my head trying to understand this monstruous absurdity.

Walt D. June 10, 2009 at 11:43 am

As Austrians, I think we have to ask ourselves the following question. Given the current circumstances, why would we expect a recovery? Japan is still waiting for a recovery as is Zimbabwe. The magnitude of the wrong headed decisions that have been and continue to be made is such that it is delusional to expect a recovery. Who is going to create the jobs to employ the millions of people who have lost their jobs since September 2008? Are we going to see a dot gov boom? More likely, we may be witnessing the collapse of the dollar as a fiat currency – all 2000 odd fiat currencies that have existed eventually collapsed.
Tom righty praises Robert Murphy for his excellent account of the last depression and the current crisis.
However, we should not forget the contributors to this site who saw the current crisis developing years ago. (I remember articles by Lew Rockwell, Peter Schiff, Jeff Tucker, Robert Blumen and William Anderson that warned of coming events.)

greg June 10, 2009 at 12:05 pm

Thank you for all your comments, many had very good merit.

Magnus,
Past articles on this site have shown money supply and government growth has not slowed since WW II.

My answer to my own question is technology and productivity advances. While the government has wasted money and resources, growth in productivity and technology has more than offset the government’s waste. You have to understand, productivity has increased over 1000 times since 1900 (History Channel Fact).

CJ,

I studied Mises’s work in the early 70′s, met and talked with Hayek at the University of Portland and continue to read all of their works today. The one thing you are missing is the study of economics is a study of “human action”. It is not strictly money supply and government spending. That is why you need to look to how humans act to these outside forces to understand why things happen and form predictions of how the economy may react. As for the future, you will never be sure of the direction, you can only provide the odds.

Thanks again,

fundamentalist June 10, 2009 at 12:46 pm

greg, So it was a rhetorical question. Didn’t get that. But I think you’re right that we need to emphasize more why the economy doesn’t need the state to rescue it and never has instead of talking so much about why the depression happened.

Shay June 10, 2009 at 2:02 pm

2nd amendment, Microsoft survives because of the great cost in switching platforms, and all the problems it causes in meshing with everyone else who is still using it. The x86 computer processor architecture is a similar situation, inferior yet the most popular. Yet another is the Metric system and its lack of use in the USA, even though it is simpler to work with.

A. Viirlaid June 10, 2009 at 3:14 pm

“You have to understand, productivity has increased over 1000 times since 1900.”

Yeah, good point.

When you also factor in that the FED has so greatly increased the Money Supply since its founding in 1913 that money has thereby been so debased that One Dollar today can only buy what about 5 cents could buy in 1913, then you have some idea of the Real Debasement that has gone on.

If you ask yourself why naturally Everything Has NOT gone down in price since 1913 due to technological advances and the efficiencies in the productivity of humans, machines, and energy, you come up with a real Conundrum.

And you would also be asking a very valid question.

You slowly begin to realize How Much of The People’s Wealth has been Stolen by the FED (and other countries’ Central Banks) over that period of time.

This is Indirect, Non-Voted-For, Created-By-Unelected-Bureaucrats, TAXATION of your Wealth!!!

Realit Bites!!!

A. Viirlaid June 10, 2009 at 3:15 pm

“You have to understand, productivity has increased over 1000 times since 1900.”

Yeah, good point.

When you also factor in that the FED has so greatly increased the Money Supply since its founding in 1913 that money has thereby been so debased that One Dollar today can only buy what about 5 cents could buy in 1913, then you have some idea of the Real Debasement that has gone on.

If you ask yourself why naturally Everything Has NOT gone down in price since 1913 due to technological advances and the efficiencies in the productivity of humans, machines, and energy, you come up with a real Conundrum.

And you would also be asking a very valid question.

You slowly begin to realize How Much of The People’s Wealth has been Stolen by the FED (and other countries’ Central Banks) over that period of time.

This is Indirect, Non-Voted-For, Created-By-Unelected-Bureaucrats, TAXATION of your Wealth!!!

Reality Bites!!!

A. Viirlaid June 10, 2009 at 3:15 pm

“You have to understand, productivity has increased over 1000 times since 1900.”

Yeah, good point.

When you also factor in that the FED has so greatly increased the Money Supply since its founding in 1913 that money has thereby been so debased that One Dollar today can only buy what about 5 cents could buy in 1913, then you have some idea of the Real Debasement that has gone on.

If you ask yourself why naturally Everything Has NOT gone down in price since 1913 due to technological advances and the efficiencies in the productivity of humans, machines, and energy, you come up with a real Conundrum.

And you would also be asking a very valid question.

You slowly begin to realize How Much of The People’s Wealth has been Stolen by the FED (and other countries’ Central Banks) over that period of time.

This is Indirect, Non-Voted-For, Created-By-Unelected-Bureaucrats, TAXATION of your Wealth!!!

Reality Bites!!!

Dick Fox June 10, 2009 at 3:22 pm

I am not aware of any other book on this subject that both carries the story from the 1920s through World War II and is economically sound throughout.

Tom,

Check out Benjamin Anderson’s Economics and the Public Welfare. It is one of the best books ever written on the period. You can find it at Mises.org for $20.

Tom Woods June 10, 2009 at 4:21 pm

Thanks, Dick. I’ve read that book and cited it in a couple of my own books. Anderson, though, is not a full-fledged Austrian, and I think bits and pieces of the book are quirky. But you’re right that it’s worth reading.

Bruce Koerber June 10, 2009 at 9:44 pm

Classical Liberalism Protection
Wednesday, June 10, 2009

The Great Depression/New Deal Then And Now Book Tour!

Great book review.

If anyone can evaluate the veracity of a book about the Great Depression and the New Deal it is Tom Woods!

I sure hope both Tom Woods and Bob Murphy can go on the road and canvass the United States over and over again to both promote their books and to educate the wakening, literate and discontent masses.

Gil June 11, 2009 at 12:54 am

“If you look at computer prices from 1960 to 2009, you might think that this is an example of hyperdeflation.” – 2nd Amendment.

Puhhh-leeeasse! I prefer deflation to refer to the withdrawal of money from the system or the quantity of money failing to keep up with goods&services in the economy. Besides the ‘bang of the buck’ performance of computers has slowed down around 2005. Some computer parts (e.g. hard drives, video cards) have slowly got a little better over the past few years whereas other parts (CPUs, RAMs) have barely budged.

“You slowly begin to realize How Much of The People’s Wealth has been Stolen by the FED (and other countries’ Central Banks) over that period of time.” – A Viirlaid.

For someone to have lost 95% of their wealth due to inflation could only amount to someone who was stockpiling cash for the 90 or so years. When people are constantly transacting and own assets that will go up with inflation they’ll barely notice the change in the purchasing power of a dollar because they’ll have more dollars to trade with.

A. Viirlaid June 11, 2009 at 10:26 am

For someone to have lost 95% of their wealth due to inflation could only amount to someone who was stockpiling cash for the 90 or so years. When people are constantly transacting and own assets that will go up with inflation they’ll barely notice the change in the purchasing power of a dollar because they’ll have more dollars to trade with.

One pertinent point is that this loss in purchasing power is actually far more than 95%. That is why the quote about productivity was included.

BTW, I apologize for the multiple postings.

Advances in most areas of human endeavor (even say making butter) — if allowed to be reflected in ‘money’ that reflects a more absolute value than our current ‘relatively-valued’ (and regularly FED-debased) paper money — would cause virtually ALL prices to drop similarly to the drop in the prices of computers.

There is nothing to fear from price deflation. It is a phony bogeyman. It is the “AGW” of economics.

And the point is not that someone would keep cash around for 90 or so years.

The point is that as paper money is slowly, methodically, and intentionally debased by central banks — and yes, I know the Keynesian-type arguments for “lubricating” the economy with slowly-depreciating money — it causes malinvestments and misallocation, not to speak of declining moral standards. Farfetched? Not really.

It generally causes bad decision-making.

It causes people to be fooled.

Think of how much ‘money’ your grandfather made each year. Then look at your income. You’re making ‘way more’ money — but are you? Not really. If you are married, then more than likely both of you have to work to survive. It did not have to be that way in “the old days”. You are running faster, but going backwards. This seems normal in a world of Globalization. You are being fooled. You think you are better off. But you are not. That is what you call “barely noticing the change” amounts to — you are falling apart but you think it is just because of the ‘modern’ treadmill you are on.

You are right — the loss in purchasing power may not be apparent. And you may not care.

But if productivity increases over that 95-year period of time had not occurred, I can guarantee that you would have noticed the loss in purchasing power of paper money.

In essence, my point is that slowly or not, it is not for others to reduce the purchasing power of money you have earned. And furthermore, as Austrians know, there is no compelling reason to debase money.

Beyond this, it allows a hidden agenda to be implemented. It allows for ‘aversion to money’ to be insidiously inserted as one of the prevailing mores of our Western society. It is a very erosive moral value.

This, again as Austrians know too well, is extremely damaging to all of us.

It makes for the personal inclination to move away from saving and money-holding, to over-consumption and purchasing of ‘assets’ simply to avoid the relative LOSS of purchasing power. Why would you buy a house with saved money? You wouldn’t because “you would never catch up” to the expected increases in house prices. Housing — never goes down in value, right?

This is what the Normalization of Slow Price Inflation has done to all of us.
We don’t think it is weird — we think it is “The Way Things Are”.
But this is just pernicious manipulation, pure and simple, of you, your money, and your thinking. (Even if this ‘manipulation’ is unintentional from the central bank point of view.)

We don’t have to go back to 1913 and the intervening period of time to conclude that this is a very unhealthy way to look at reality. And a very unhealthy paradigm within which to make financial and personal decisions.

All we have to do is to look at the last 10 years or perhaps back to 1987 when Alan Greenspan’s tenure at the Federal Reserve started.

Do you really think people would have bought financial and real ‘assets’ like CDO-s and houses in the quantities they did, if our society was not harmfully conditioned to think of “cash as trash”?

Don’t you think now, after the start of the Great Recession of 2008 to ?, that a little Saving might be a Good Thing? That such saving might make for a more stable and sustainable Economy? That it might make for fewer Booms and Resulting Busts?

Don’t you think that might be healthier for all of us?

Sonic Ninja Kitty June 11, 2009 at 9:57 pm

This book sounds great. Timely, too, as the Great Depression has many emotional fans in need of people to factually counter argue with them. I will get it after I finish Meltdown (Woods) and The Road to Serfdom (Hayek) both of which I am in the middle of now and both of which are–you guessed it–great!!

But here’s something that still bothers me: can anyone answer this question or direct me to a related article? If the financial institutions had been allowed to fail, wouldn’t there have been a run on banks a la the S & L crisis? And wouldn’t this have had its own repercussions?

Many thanks to anyone who would care to address this hypothetical.

A. Viirlaid June 12, 2009 at 10:18 am

To Sonic Ninja Kitty,

Banks don’t actually have to ‘fail’.

Ordered winding down of failing banks involves finding sound financial institutions (which there are plenty of) to take over the assets (loans) and deposits (liabilities) of the ‘failures’.

The idea is to allow the system to get rid of the managment groups that led the ‘failing’ banks to ‘failure’. Otherwise they can potentially not learn from their own mistakes and continue to harm society.

Runs on banks?

They would happen only if the depositors had some reason to think they would not be made whole.

So long as depositors were not made to suffer for the mistakes of the ‘bad’ bankers, this should not be an issue.

Sonic Ninja Kitty June 14, 2009 at 10:41 am

Thanks, A. Viirlaid. I appreciate your response!

billwald June 17, 2009 at 3:24 pm

>there will be nothing on the store shelves for them to buy when they attempt to spend their fat paychecks…. If more stuff is produced within America than within Mexico, obviously Americans are going to have a higher standard of living, regardless of “wages policy.”

Sounds reasonable. So as long as most consumer goods are made off shore we will be in trouble?

Usually economists say “goods and services.” Can service industries dominate the economic mix and still raise the net standard of living?

Say that every American decided that they needed their hair cut and nails done twice a week. This would be a service industry job explosion but would it actually increase the overall standard of living? I can’t think it through.

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