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Source link: http://archive.mises.org/9197/economic-crisis-and-paradigm-shift/

Economic Crisis and Paradigm Shift

January 6, 2009 by

The current global financial crisis, described in an incomplete manner as the “subprime crisis,” has shown, however, that neoclassical theories are not only descriptively false, but also completely incapable of predicting events. In contrast, the Austrian School’s theories, as Juan Ramón Rallo Julián, will show, not only maintain their realistic approach but also have an important predictive power. FULL ARTICLE


greg January 6, 2009 at 8:52 am

I was excited when I read the intro to your article. At last someone was going to use Austrian economics to forecast. What a disappointment when you just hashed over the past events. And to that, your assessment is incomplete.

Joe January 6, 2009 at 9:00 am

I really enjoyed this article. The entire timeline that was laid out shows, at least to me, that Keynesian economic theory is a farse. I mean, all I did (and I am no economist by any means) was glance at the headlines for each section of the timeline and noticed right off that there is a clear “cause and effect” at work. The massive bank lending coupled with the Fed’s interest cuts clearly lead to the rise in prices and malinvestments which the Fed and Government will never admit.

Later, when the banks started to realize loses they stopped lending on a massive scale and the Fed raised interest rates to counter the rise in prices that the Fed had caused. Those actions have lead us to where we are today. The massive forclosures on homes that were artificially inflated well beyond their actual values by the Fed and the banking system began and continue to crash at a rapid pace. The banks continue to take massive loses and every other aspect of the real estate boom that was also artifically part of this mess (I.E. job creation, etc) are also going by the wayside.

This was just like watching someone blow up a bubble or a balloon. The air (money and credit) being pumped into the balloon (real estate market) by the person (the Fed and Banks) ceased. When that happened the balloon deflated or popped (I.E. housing price declines, forclosures, layoffs, etc.). Now we see the balloon returning to its original size.

Inquisitor January 6, 2009 at 9:34 am

Economics is not for quantitative predictions. I’m not sure why people think it is. Mises criticizes this idea in great depth. As does Hoppe.

martinf January 6, 2009 at 10:23 am

Greg, this article was written and published in February.

marius January 6, 2009 at 11:37 am

At the end of the article we can find this:
“If financial and business communities do not want to sacrifice themselves in an ever-intensifying cycle of monetary chaos, they should start to listen to the Austrians”.

A “business comunity” would be there, for sure. What is not so sure is that the same persons will be there. And they know it very well. It is difficult to believe that this whole artificial elite, erected on the waves of fiat-fictitious-paper money, would accept to lose the “commanding heights” just for the sake of Austrianism or sound economics.

Huelsmann’s Deflation and liberty – available online from mises.org – well documents the position in which this “financial and business comunity” finds itself vis-avis the political class and what is the basis of its significance.

8 January 6, 2009 at 1:42 pm

Housing sector labor did increase, but it was not “official” labor.

Jeff January 7, 2009 at 10:33 am

Regarding points 7 and 12: one of the possible reasons the American building industry did not show the wild swings in employment that Spanish labor markets did is the presence in the US economy of undocumented (or illegal) workers from Latin America, who provide much of the labor in that industry. While I don’t have any numbers in front of me, everything I’ve read about immigration patterns this decade supports Mr. Julian’s article – illegal immigration surged earlier in the decade, but has reversed itself in the last 12-18 months.

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