Interview with Jesús Huerta de Soto, Professor of Political Economy
‘We must allow the market to detect and rectify its own errors.’ Professor Huerta de Soto holds that ‘governments attack the symptoms, and not the causes, of recessions.’
D. Gracia / C. Cuesta (Madrid) Expansión
If we are to emerge from the crisis, ‘politicians must resist implementing grandiloquent rescue plans,’ warns Jesús Huerta de Soto (Madrid 1956). Professor of Economics and one of the foremost current representatives of the Austrian School, Huerta de Soto, who recently delivered a lecture at the Madrid Association of Family Businesses (AMEF), is certain that ‘the great social crisis of our time is statolatry.’ In other words, it is the tendency to expect the state to resolve any problem that arises. In an interview with Expansión, he confidently stated that once the economy is back on its feet, ‘we will again enter into a phase of credit expansion which will give rise to widespread malinvestment.’ Thus, the seeds of a new recession will be sown.
Do you feel the crisis is being properly dealt with?
The authorities invariably react to recessions by increasing regulation. They attack merely the symptoms, not the causes. If credit expansion continues, companies cannot be prevented from investing in rasher projects. Central banks are responsible for the bubble of the last decade: they inject credit into the economy at extremely low interest rates, and entrepreneurs rush to invest in nonviable projects.
How must the economy be adjusted if we are to move ahead?
The market is highly efficient at correcting errors. In fact, in Spain 150,000 companies have already folded, and another 150,000 may yet disappear. To expedite this process, the economy must be flexible, particularly the labor market. Millions of workers who were involved in nonviable investment projects must be moved to other, sustainable areas. When unemployment peaks, at around five million unemployed, the economy will have recovered. The companies that have survived will be the healthy ones. The problem is that hiring a worker is almost like marrying him — or worse, since express divorce makes it easier to separate from your spouse than to fire an employee. This situation makes re-entry into the labor market much slower.
The government has just introduced a tax increase. What will be the consequences?
Companies and households get their finances into shape by repaying loans and reducing costs. This is easier when one has more income available, so it is important that taxes not rise or, better yet, that they fall. Just as individuals must practice austerity, so must those in charge of the public sector. During the Great Depression, however, President Roosevelt did the opposite. He made the labor market more rigid, increased wages by decree, raised taxes, and boosted the role of the state in all sectors. That is what made the depression of the 1930s so severe.
Often it is the private sector that demands state intervention.
Entrepreneurs in Spain are accustomed to a manic-depressive economy, which swings from bubble to crisis. To be sustainable, the economic recovery must be cold, with no rushed growth. For the first time in history, Spain cannot react to a recession by deceiving citizens with currency devaluation. This crisis has revealed that the problems are real and must be faced. We need a legion of entrepreneurs to detect the errors. Then, we must cut costs, restructure companies, and bend over backwards to improve product quality.
D.G./C.C. Madrid (Expansión)
Huerta de Soto advocates ‘bringing the fall of the Berlin Wall to its culmination in the financial sector.’ As long as central banks continue to exist as ‘central planning agencies in western countries,’ this follower of the Austrian School believes cycles of artificial credit expansion will repeat themselves again and again.
‘Central banks insist on dictating manu militari what should be the freest of market prices (the interest rate), and on managing the money supply. Austrian theorists showed that a central planning agency could not possibly gather all the information necessary to make its commands meaningful. This is the principle of the impossibility of socialism. Monetary authorities trigger and reinforce economic cycles instead of stopping them.’
Huerta de Soto’s solutions would be ‘first, to eliminate planning agencies’ and second, ‘to establish a system in which bankers are subject to general legal principles. In other words, there should be a 100% reserve requirement on all demand deposits and equivalents. This way, bankers could act solely as pure financial intermediaries: they could lend only what had been lent to them. This would separate the business of financial intermediation from the business of money creation.’
Without central banks, who would generate the money supply? The professor advocates ‘a return to the gold standard, since growth in the stock of gold is independent of human will. The world’s stock of gold grows between one and two percent per year, and hence we would eliminate the possibility of manipulating the financial system. All loans would be granted against prior saving, and there would be a balance between saving and investment. Recessions would then be history.’