1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/11564/by-the-way-free-markets-are-free/

By the Way, Free Markets Are Free

January 29, 2010 by

A free economy is one that is — how to say this? — free. It is free of cronyism, favoritism, handout-ism, protectionism, or anything else that amounts to using the state as a means of living at the expense of others. FULL ARTICLE by George F. Smith

{ 12 comments }

Jonathan Finegold Catalán January 29, 2010 at 12:24 pm

The recession has been to the Austrian’s advantage, in at least a limited sense. I was walking through campus and was greeted by an old friend from high school. We talked, and he told me he was on his way to start an economics organization. I thought that he was probably a Keynesian, but I told him I would be interested in helping him. He told me that the purpose was to spread “economic truths” (and, in my head I said, “Oh gee, here we go…”). He then went on to say that it was to compare Austrian and Keynesian theory.

I was surprised he said Austrian, so I told him that I considered myself an Austrian, and he said he did too!

He is an engineering major, not an economics major, and not as “in” to the topic of economics as some of us are (at least, I think this is the case). This is quite spectacular, because it is going from being a very obscure school of thought to becoming a very well known school of thought.

So, this article is right on the money: Austrian economics is on the rise, and as long as the current administration continues to fumble, then the Austrian school will gain more reputation.

Richard Allen Wilson January 29, 2010 at 1:55 pm

Classical economics & the Great Depression

U.S. M2 Monetary Supply (% change from previous year)

The “not-so-great depression”
1916: +18.53
1917: +16.88
1918: +9.68
1919: +16.01
1920: +12.22
1921: -5.60
1922: +2.65

This depression had two clear causes. The first clear cause of that depression was the withdrawal of a massive amount of fiscal stimulus that had been injected in the economy during the war years. The First World War was a very demanding war for America, just as it was for Europe, and it required a massive amount of federal spending on armaments. When the war was concluded with the Treaty of Versailles, that government spending was withdrawn and entire industries began to downsize, close factories and shed workers. The quick withdrawal of fiscal stimulus is striking when compared to the economy’s total output during those years. U.S. federal spending fell from $18.5 billion in fiscal 1919 to $6.4 billion during fiscal 1920. That’s a $12.1 billion reduction in federal outlays. The second clear cause of that depression was that the Federal Reserve and Washington started “creating a lot of money out of thin air.” Indeed, the U.S. money supply exploded, causing the Consumer Price Index to double between 1915 and 1920. That’s because the United States pretty much abandoned the Gold Standard. The Federal Reserve was no longer bound by the amount of gold that could back the money that it put into circulation.

The “no-so-great” depression is your typical textbook case of “boom and bust.” Government spending and the Federal Reserve’s “creating money out of thin air” created instabilities in the economy that had to be “corrected” by a financial and economic downturn. Many industries boomed during the war years. As the war was over, there was no longer demand for their goods, so they had to downsize. Factories were closed, businesses went bankrupt and the economy recovered. The same thing would happen again in the years following the Second World War.

The Great Depression
1927: +2.40
1928: +3.78
1929: +0.39
1930: -1.87
1931: -6.65

The Great Depression can’t be explained by the average “boom and bust model.” The money supply didn’t grow that much during the roaring 20′s, as it was governed by the gold standard. During most of the roaring 20′s, we suffered from Consumer Price Deflation. It also can’t be explained by a massive injection and withdrawal of fiscal stimulus. America was at peace with the world. Under the Harding and Coolidge Administrations, the government had embarked on a laissez faire path to growth and prosperity. Government spending and taxation were kept to a minimum.

The causes of the Great depression were very different from the causes of most recessions and depressions. The causes of the boom and subsequent bust were more structural and less fiscal and monetary. The roaring 20′s were a time of technological breakthroughs, growing inequality and the availability of new and more advanced financial instruments that allowed consumers to borrow money to finance their purchases and that allowed traders to borrow money on margin to speculate on stocks. Technological inventions and innovations were creating new demand for new products and making labor more productive and businesses more profitable than was ever before thought possible. All of this culminated in an unsustainable financial and stock market bubble that became attached to the mass public psyche of the time. The roaring 20′s could even be compared to the Dutch tulip bulb mania. Americans, investors and even the banks came to believe that stocks would keep going up forever. Those that started speculating on stocks became financial geniuses and rocket scientists. Those that didn’t get in on the action were naïve and stupid. Nobody foresaw what was coming around the corner.

So the Austrian view just doesn’t hold up against the economic realities of the Great Depression, because it wasn’t your typical government created boom and bust cycle.

Monetarists blame the Federal Reserve’s inaction

Monetarists would have us to believe the Federal Reserve’s policies were the root of all evil. While I do agree the Federal Reserve could have stimulated the economy and job creation during the depression years, I don’t blame the Federal Reserve for “making the depression worse by not printing more money.” Even if they had increased the money supply and lowered interest rates quicker and further, there is no concrete evidence that American consumers and businesses would have been willing to borrow the money. And considering the financial system had become insolvent, there’s no concrete evidence that the banks would have been willing to lend the newly created currency.

Japan is a perfect example of where monetary stimulus hasn’t spurred growth. Japan’s Central Bank lending rate has remained zero for almost a decade and still their economy seems to be suffering from a permanent macroeconomic recession, with few signs of a sustainable recovery. Even when the global economy was booming during the late 1990′s, Japan’s economy was still struggling to grow.

Britain’s return to a Pre-WW1 gold standard had a lot to do with the depression spreading abroad. Britain has always been a nation that has wanted to benefit from more restrictive macroeconomic trends. Indeed, those countries that stuck to the gold standard the longest, i.e. Britain and France, were among the last to recover from the global depression.

ABR January 29, 2010 at 1:56 pm

George F. Stone writes: “But don’t markets need regulating? Of course. Markets in which the government hasn’t turned criminal regulate themselves without violating anyone’s rights. If a bank insists on practicing fractional-reserve lending, for example, and finds itself unable to meet depositor demands, it files for bankruptcy, not a bailout.”

The problem with bankruptcy and corporate law is that the bankers who perpetrate these frauds walk away without having to pay the bank’s debt. Yes, the banksters’ shares in the bank end up worthless, but the banksters are quite happy to use those shares as wallpaper in the multi-million dollar homes they built for themselves from the gigantic bonuses they ‘earned’.

James January 29, 2010 at 6:12 pm

The argument put forth by Walter Block in the article “Is ‘Academic Freedom’ a Special Kind of Freedom?” risks unintended consequences. The article seems to pre-suppose that ‘Academic Freedom’ means a certain kind of coercive law, but that important premise is never stated. The result is that it is far too easy for the unnuanced reader to lump together the distinct concepts of ‘Academic Freedom’ as a general idea, as an ethically sound contract between teacher and university, and as a coercive law. The only concept and cause worth taking up on Libertarian grounds is opposing ‘Academic Freedom’ as law. However, there are plenty of Libertarian compatible grounds for supporting the general idea, so we should be careful to be clear what exactly it is that we oppose. To do otherwise hurts the Libertarian cause.

Russell Munves January 30, 2010 at 1:38 am

Richard Allen Wilson wrote:

“So the Austrian view just doesn’t hold up against the economic realities of the Great Depression, because it wasn’t your typical government created boom and bust cycle.”

The Austrian School does not require that all bubbles be created by the government that I am aware. But Murray Rothbard did some interesting analysis of the growth of credit in the 20′s that facilitated the stock market boom.

Nevertheless, the Austrian School their does predict that the government intervention after a bursting bubble or economic downturn caused by restructuring would interfere with an economic rebalancing and rebound.

And that is what happened. Governmnet intervened in the free market for wages and spurred economic activity in some areas at the expense of others. This prevented a balanced recovery and prolonged the depression. Henry Morganthau, Secretary of the Treasury, lamented in 1939 that the government had tried everything to fix the depression and nothing had worked. That is because the government’s efforts interferred with a balanced economic regeneration rather than encouraging it.

Rick Fitzgerald January 30, 2010 at 11:37 am

Richard Allen Wilson ignores his own data. Look at his M-2 money supply stats for years 1929 to 1931.

The gold and silver money supply was greatly contracted by the Fed starting in 1929 until FDR broke his campaign promise and allowed the Fed to print a flood of fiat paper “I owe you nothing” notes in 1933. Breaking another campaign promise, FDR ordered lawful gold money to be confiscated in violation of the U.S. Constitution, Art. 1, Sec. 10.

The Austrian School explains the Great Depression better than any other logic I have ever read.

Jonathan Finegold Catalán January 30, 2010 at 2:37 pm

Richard Allen Wilson,

Interesting comment, but I feel there are a number of myths involved.

1. World War I expenditure & the 1921 Depression

A decrease in fiscal spending has no reason to turn into a bust. There was a radical fall in government expenditure after the end of the Second World War, yet the 1946 “recession” was very mild and short. The establishment of more political certainty, and the abolition of much of the regulations which Roosevelt had enacted in the previous decade, allowed the private sector to easily soak up returning soldiers and led to an industrial boom (cut short by the Korean War, mind you).

The cause of the 1921 depression was the intertemporal dis-coordination caused by the Federal Reserve to pay for the First World War.

2. The Roaring Twenties Was a Credit Boom

If you need exact statistics on credit expansion during the Roaring Twenties, see America’s Great Depression by Murray Rothbard. You should also read Benjamin Anderson’s Economics and the Public Welfare, and Garet Garret’s The Bubble That Broke the World.

Interestingly, you bring up Tulipmania. The Austrian Business Cycle Theory has been used to explain that, as well. See Doug French’s Early Speculative Bubbles & Increases in the Money Supply.

Upon closer inspection, you will notice that the Austrian theory of the trade cycle is applicable to the Great Depression. Friedrich Hayek, in Monetary Theory and the Trade Cycle, alludes to empirical evidence during the Roaring Twenties and the Great Depression.

3. Monetarist Theory

In this case, I completely agree with you. Murray Rothbard shows how the Federal Reserve did try to inflate the money supply, but could not compete with uncontrolled reserves. The Federal Reserve could do little to soften the Great Depression, and so blaming it on its inactivity would be incorrect.

Academic Fiefdom January 30, 2010 at 4:23 pm

Regarding Academic Freedom:

There is a far bigger problem then how something is taught; it’s what being taught.

The university determines texts which usually are anti-American, anti-white, anti-male and anti-christian (even in math books).

There is no reason for Americans to fight for Amerika when it is constantly drummed via tv, media, schools, that we are bad evil and destroy the world and steal other peoples land, and use too much energy. The military, who swore an oath to uphold and defend the constitution, have no idea what it says, and if they did it wouldn’t matter.

When USA is 25/30 in industrialized nations for mathematics, when first year college students cant do fractions and view education as a piece of paper there is more behind the scene then the faculty.

Schools are avoiding tenured faculty – its cheaper to hire part time adjuncts, and there are no benefits, job security, or retirement.

I teach at a “catholic” college where the brothers are openly affectionate with each other, the gender-studies course is totally anti-male, english texts are anti-christian, and much of the faculty pro-darwin-socialists. Truth doesn’t matter, conformity does. So much for a “safe” place to send your children.

It’s about profit, control, indoctrination. Education now means this.

For many, academic freedom is to get along or find another job.

The_Orlonater January 30, 2010 at 9:43 pm

Richard Allen Wilson,

Firstly, the economy of World War was also a fake economy based on inflationary action by the Federal Reserve. The higher-order goods industries and obviously the defense industries did very well because the war was going on, but the credit helped fuel their activities.

I would also like to substantiate Johnathan’s point on the credit boom of the 1920′s. The period from 1922-1929 was a period where there was some consumer price deflation, but when speaking in the aggregate. The total price level was stable thanks to the Fed’s inflationary policy of purchasing many government securities. Mises and Hayek predicted a great crash because of this consumer price stability that was artificially constructed purposefully by the Fed(Keynes helped advise this if I remember correctly).

The_Orlonater January 30, 2010 at 9:44 pm

For a more detailed account of this matter, I would suggest the classic book Banking and the Business Cycle. You can buy it for $14 dollars here on mises.org and or read it for free.

Gerry Flaychy January 31, 2010 at 5:41 pm

” … credit growth is a powerful predictor of financial crises, suggesting that such crises are “credit booms gone wrong” … ”

Source: http://www.nber.org/papers/w15512

http://blogs.ft.com/economistsforum/2009/11/credit-booms-gone-bust/

http://www.econ.ucdavis.edu/faculty/amtaylor/papers/w15512.pdf

appeal2 January 31, 2010 at 9:59 pm

Mises predicted the the great depression. There was a massive inflation during the 20′s. The margin requirement was just 10 percent to purchase stocks. The newly minted dollars went into the stock market. A funny story I remember when reading Mises. In the late 1920′s he was offered a job by a leading bank that would have paid him many times his professor’s salary. He refused the position. His fiance/wife was extremely angry at him for not taking the position. It would have led to a major increase in their standard of living. He replied to her, “If I took that job and after what is going to happens, happens, I would never be able to speak again.” Six months later the depression hit and the bank went out of business. Guess old Ludwig knew what he was doing.

Comments on this entry are closed.

Previous post:

Next post: