Mises

I have been trying to follow the economic news and ideas being tossed around lately. I was curious about the Austrian school of economic thought that has been mentioned by many writers. These theories have been placed in contrast to the ideas labeled as Keynesian. I read a compilation of essays on the Austrian theory of the trade cycle published by the Mises Institute. Mises was an economist to whom, among others, the foundations of the Austrian theories have been attributed. The published essays provide a brief introduction to these theories as well as the history behind them. I recommend these essays to anyone interested in our present economic situation. They are available in pdf form from the Mises Institute website.

The basics of the theory are that manipulation of interest rates lead to misallocation of capital throughout the economy. Forecasts that appear profitable under these conditions lead to projects and enterprises that would not otherwise have been considered prudent. Depressions are the natural correction of the economy as it reallocates capital in line with sustained demand. In the essay Economic Depressions: Their Cause and Cure by Murray N. Rothbard are the following recommendations on how to react to such a depression.

Mises, then, pinpoints the blame for the cycle on inflationary bank credit expansion propelled by the intervention of government and its central bank. What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of depression? In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. [emphasis added]

Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, "laissez-faire" policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue.

The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.

What I find most striking is that this essay was originally published in 1969. I realize it is naive to hope that our government will take the recommended approach of this essay, but I was glad to find the words that echo my own thoughts on the matter.

I realize that these are theories, and we can argue about theories all day and it will make little difference. Real people feel the pains brought on by economic upheaval, and the economic theory being pushed at the time is of little consequence. That said, I hope that we can look further toward the future and act to place our economy on a more firm foundation rather than sacrificing that future to relieve the current, and I feel temporary, pain of the moment.