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Source link: http://archive.mises.org/9642/a-free-and-prosperous-commonwealth/

A Free and Prosperous Commonwealth

March 20, 2009 by

Recessions come and go. The consequences can be temporarily tragic, especially for those on the margins of the economy, but recession is also the corrective phase that lays the foundation for a return to sustainable growth. It’s costs are insignificant compared to the impact of policies that retard growth for decades. FULL ARTICLE

{ 9 comments }

greg March 20, 2009 at 10:01 am

Our government failed to protect us from fraud! The gangsters in this case were the Madoffs, aggressive mortgage brokers, fund managers that over leveraged, aggessive speculators, rating agency fraud and many more that share the responsibility for our current problems.

This is where all of you that think the free market is self policing, it isn’t. Society must set the rules to protect the rights of individuals operating within the system. It is competely wrong to assume everyone in society will act in a responsible manner and not infringe on the property rights of other members.

Failure to protect the free market through law will lead to its distruction through misguided solutions by government. By supporting less regulations in the past, we have contributed to the end.

Anatol Podolsky March 20, 2009 at 11:25 am

Dear Dr. Cochran, thank you for your article, hopefully it will help to change the public misconceptions of economic policy. I think we need a more aggressive campaign to educate the politicians and the public. I am sure the donors will step up to sponsor such projects as “Bernanke and Geithner to re-education camp” or “Educate your Senator – send him a copy of Economics in One Lesson”. I also admire your commitment to teaching sound economics to your students.
Sincerely,
Anatol Podolsky, M.D.

Inquisitor March 20, 2009 at 12:49 pm

Nice article. GDP is a misleading statistic, though. Also, I wonder how much the US really spends when its debt is taken into consideration. But the piece is nice for using to alter the opinions of those who think “stimulating” the economy will do any good.

John Rolstead March 20, 2009 at 2:39 pm

Dr Cochran,
This was an interesting read. The point about this being just another recession is well taken. When compared with history, it may be that the current regime is just using this crisis to ratchet up government intervention (ala. Higgs, Crisis in Leviathan).

Inquisitor’s point that GDP is misleading is correct, in that it includes government spending. Rothbard expoused a better method that excluded government spending that I think he called the PPR. I read this in George Reisman’s huge book, Capitalism. Also, you should read Reisman for his excellent point that taxation on corporate profit actually causes stagnation and recession. The more we tax business and capital gains, the less money if available for investment.

The article could have used some reference to inflation. Like how does GDP relate to inflation of the money supply. I wish more was said in relation to an inflation in the money supply and how it distorts growth numbers and profits.

C.Cotter March 20, 2009 at 2:39 pm

This article is a bit positivist for mises.org, isn’t it? The conclusions are correct, but only because irrefutable theoretic arguments support them, not GDP statistics.

Raja March 21, 2009 at 11:26 am

Agreed Cotter. Although I do appreciate your sentiment, Dr Cochran, to equate GDP with growth is a non sequitur. At best it is a measure of output and not growth; at worst it is a completely empty concept exemplary of the intellectual bankruptcy of mainstream economics.

Just consider this: natural disasters boost GDP. Yes, they do. Anyone who argues otherwise is faced with mountains of evidence to the contrary. However, natural disasters do NOT create growth. They create destruction. The reason they raise GDP is because GDP measures output and output does rise in order to replace the destroyed wealth. So although there is negative economic growth, there is positive GDP growth.

I wrote about this here: http://austrianeco.blogspot.com/2009/03/broken-window-fallacy.html

Lowell March 21, 2009 at 10:59 pm

greg

Our government failed to protect us from fraud!

Here, for once, you are correct. One of the few possibly legitimate functions of government is protection of citizens from fraud. No surprise the government failed at this task, as it fails in everything it does.

The gangsters in this case were the Madoffs, aggressive mortgage brokers, fund managers that over leveraged, aggessive speculators, rating agency fraud and many more that share the responsibility for our current problems.

No argument that Madoff is a criminal. However, most people who are suffering economic hardship were not hurt by Madoff. Let’s look at the other people you accuse of being gangsters. Aggressive mortgage brokers are not gangsters. If they made mistakes writing mortgages they should pay the economic consequences of those mistakes. No one else is hurt. The buyers of those mortgages overextended themselves. If they lost money or houses they couldn’t afford anyway, they deserve to suffer the consequences.

Fund managers that over leveraged are not gangsters either. As a trader, you are very familiar with leverage. You use it in the gold trade you have described in other blogs. I assume, by over leveraged, you mean a fund manager who lost money. Certainly, a fund manager who makes money is a hero. The question is how much risk did the fund manager take. Was the risk appropriate for the type of fund as described in the fund’s prospectus. Were people who invested in the fund apprised of the risks involved. If so, losses are a part of life and have to be accepted. If the risks were indeed excessive, then the fund investors would have a claim against the managers. However, I don’t understand how so many previously successful fund managers could all have become so over leveraged at the same time. Think it’s a coincidence?

How is an aggressive speculator a gangster? You’ll have to admit wimpish speculators have a hard time making a living. George Soros certainly has a reputation of being an aggressive speculator. The British Pound was never the same. You statists love that guy. A speculator who loses money only hurts himself. The people on the other side of his trades made money. Certainly aggressive speculators caused no harm to the economy.

Like the broken clock that is right twice per day, you are correct that individuals involved in rating agency fraud are indeed criminals.

This is where all of you that think the free market is self policing, it isn’t.

Greg, where do you see a free market? I see markets where government goons bestow monopoly privilege on a chosen few.

Society must set the rules to protect the rights of individuals operating within the system.

Society does this in the form of common law. Markets do regulate themselves in order to generate trust and promote business. I remember e-bay in the days before Pay Pal. There were many more problems and complaints than now. You seem to confuse government power with society. Civil society is good. Government power is inherently bad.

By the way. I hope you are prepared to quickly cover your gold shorts. One of these days (or years) gold is going to burst above 1000 so fast it will make you head spin. Consider the possibility (as Nassim Taleb says) your gold trades may really be picking up pennies in front of a steamroller.

Robert C March 23, 2009 at 2:23 am

Greg:

Your accusations of the role of overleveraging, aggressive speculation and rating agency fraud are accurate. Unfortunately, you have not acknowledged, either here or in your other posts, the role of government in encouraging this behavior.

Overleveraging and aggressive speculation become common when interest rates are forced far below market levels by central banks including the US Federal Reserve. When central banks make it cheap for banks to borrow reserves, banks are more likely to lower their standards and lend to more people. When this makes it easy for other people to borrow, spending becomes easier. This makes prices rise quickly as borrowers make increasingly high bids on just about everything. People understandably get the idea that they should “get into the market now” while it’s still affordable, further increasing demand.

The present crisis would be bad enough with only that effect, but the ability of governments and central banks to bail out those firms who make the worst decisions further removes incentive for people to regulate themselves.

Government agencies and government-sponsored enterprises encourage risky behavior by cosigning loans. Fannie Mae and Freddie Mac cosigned trillions of dollars in bad loans, removing any incentive for banks to regulate themselves. If that wasn’t bad enough, aggressive government policies promoting “homeownership” exacerbated these problems by defaming or punishing lenders who did not want to make risky home loans.

Furthermore, by effectively cosigning the liabilities banks have to their depositors, few people have any incentive to examine their bank. I admit I knew nothing about my bank’s impending failure. It would have been a waste of my time to research my bank since my deposit is fully insured by the government.

Economic actors are capable of regulating themselves and each other in a free market, where the threat of large losses acts as a cap on how much risk people are willing to take. What we see in the United States, however, is a hollow charade of the free market where easy money and government guarantees make prudence and diligence foolhardy policies.

It’s true that the our financial system is not regulated enough, but it’s because governments at all levels have aggressively dismantled the self-regulating structure of the free market, not because they have been too lax. I hope you stick around and keep reading more about the Austrian theories, as doing so will help you see more and more evidence of this over time.

Florian Kren March 23, 2009 at 6:52 am

20%?27%?

Oh my god, please stop whining, i would celebrate any politician aiming for a governement share of GDP of 27%. Already someone aiming for 35% or even 40% would be nice.

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