The View From 1776

For those not familiar with the categorization, the Austrian school of economics can be seen broadly as the antagonist of all varieties of governmentally-managed economies that fall under the secular religion of socialism.  In the United States, the principal socialist school of economics is that of British economist John Maynard Keynes and his acolytes in the 1930s Harvard economics department.

Keynesian doctrine is the origin of Democrats’ (and liberal Republicans’ ) knee-jerk reaction to every economic downturn and every economic hardship: increase spending, relieve people of responsibility for their imprudent actions, expand the money supply, cut interest rates, and boost inflation.

The most disastrous product of liberal-progressive-socialism was the Depression of the 1930s.  The 1920-21 recession, as severe at the outset as the Depression, was allowed to work itself out through normal market processes.  It ended in less than two years. In contrast, the Depression lasted almost 12 years, because of continual government interventions, first under President Herbert Hoover, then under President Franklin Roosevelt.

The first definitive theoretical confrontation of socialism was a masterly work by Austrian-school economist Ludwig von Mises, published in 1922 and translated into English under the title Socialism.  In the early 1920s, Mises held regular discussion groups with young economists and political scientists to come to grips with the irrationality of socialism.  Among those young attendees were Friedrich Hayek and Eric Voegelin.

Austrian school economic ideas can be explored at The Mises Blog, which reprints a piece written by Jim Grant for, believe it or not, the New York Times.

The Austrian-style Business cycle in one lesson

James Grant, writing in the New York Times, gives the briefest possible explanation:

ECONOMISTS cannot reliably forecast recessions. Nor can they detect for certain when a recession is in progress. Only after the fact do the official cyclical timekeepers identify the beginning and ending dates of a slump.

Though deficient in the powers of foresight and observation, economists do believe they know how to treat an economy on the brink of recession, as this one seems to be. They administer what non-economists know as the “hair of the dog that bit you.”

But booms not only precede busts, they also cause them. Bargain-basement interest rates are a potent stimulant. Borrowing more than they might at higher rates, people stretch. Businesses stock up on labor, machinery and buildings. Consumers buy cars and houses — houses, especially, these past five years. The G.D.P. takes flight.

Then unwelcome facts intrude. Easy money, it seems, was an illusion.

Society was not so rich as it seemed. The prosperous future for which people had collectively prepared is slow to arrive. The inflation rate picks up.

Supposedly creditworthy consumers and businesses turn out to be risky. They were creditworthy only so long as lenders were willing to advance them more and more funds at those ever-so-affordable low rates.

Now what to do? Why, slash interest rates to coax forth still more lending and borrowing. It’s the customary curative, seemingly as humane as it is politic.

And if recessions served no useful purpose, it might be. But recessions do. On Wall Street, they speak of “corrections.” What corrections correct are errors in judgment. So do recessions.

They allow the sorting out of boomtime error. They permit — indeed, force — the repricing of inflated assets. In a downturn, previously overpriced businesses, houses and buildings are made affordable again.

Naturally, people hate these painful, salutary interludes. Nobody likes insecurity, bankruptcy and joblessness. So the Fed keeps slashing interest rates. And this balm does mitigate the suffering. Homeowners and businesses refinance their debts. Fewer houses are thrown on an overstocked market.
Observe, however, that the great preceding illusion is undispelled. Prices have not come down as they should have. Neither has indebtedness. The architecture of the economy remains as it was. Land, labor and capital are still structured for an imagined glittering future.

Presently, a new upcycle does begin, but it’s slow off the mark. The world’s top economy seems curiously sluggish. And the economists and politicians ask, “What happened to America’s dynamic economy?” The answer: It’s wrapped in the coils of debt.

— James Grant, the editor of Grant’s Interest Rate Observer

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