Thursday, March 05, 2009

A return to economic sanity

During his State of the Union speech, President Obama, whose budget roughly doubles the percentage of government spending with respect to GDP, insisted that his reasons for the lavish spending increases were pragmatic and not ideological: “I called for action because the failure to do so would have cost more jobs and caused more hardships.” Attempts to justify such profligacy invariably depend on a narrative that suggests that capitalism is inherently unstable. Unless the system is somehow buttressed by government action, its greedy paroxysms will cause it to collapse. It is implicitly assumes that we do in fact possess a system of laissez-faire capitalism. But as is so often the case, the narrative is ultimately at odds with the facts.

In Meltdown, Thomas Woods attempts first, to point out the absurdities of blaming capitalism for the economic crisis, given the immense dissimilarities between the present system and a truly free market. Second, he puts the blame squarely where it belongs: at the feet of the central bankers of the Federal Reserve. Especially considering how quickly the book was written, Woods succeeds admirably. Despite being a short book, Meltdown makes a thorough case against government intervention in the economy, and more than vindicates capitalism for the latest economic crisis.

As Woods reasonably points out, “We cannot expect the situation to improve until we understand how we got there.” This may seem too obvious to deserve mentioning, but most economists have no idea what causes a recession. Paul Krugman, neo-Keynesian and columnist for the New York Times, lamely asserted on C-SPAN that “bubbles happen”. One wonders if he also posits incredulity about the reasons for a recovery.

Although an alarming number of economists share Krugman's ignorance, the small but growing Austrian school of economics, of which Woods is a member, professes to know why the crisis occurred, as well as the way out. Woods spends an entire chapter explaining the business cycle theory, which accounts for the boom and bust cycle of the economy. Although businesses fail all the time, a recession occurs when a whole sector of the economy is revealed to have made bad investments. By artificially lowering the interest rate and injecting money into the economy, the Federal Reserve deceives businesses into thinking that it will be profitable to make long-term investments—something which would never happen to all businesses at one time if the interest rate was allowed to float freely. Sooner or later, the malinvestment becomes apparent to all. To take a present example, the scores of McMansions which were foolishly built on credit are without buyers: all of the capital and labor spent in the building process has been badly allocated. The economy will only recover as production becomes reallocated to sectors of the economy in which demand actually exists. And, since the easy credit policy of the Federal Reserve was the cause of the bubble, attempting to inflate oneself out of a crisis will only serve to encourage malinvestment and postpone the recovery.

This is precisely what happened during the Great Depression. Rather than letting capitalism correct itself, as it did admirably during the depression of 1920-1921, Hoover put into action a drastic program of economic intervention—which FDR then continued. The argument that the Great Depression was somehow too big for the market to solve holds no water as “Conditions were worse [by the middle of 1920] than they would be in 1930, after the first year of the Great Depression.” Throughout the book, Woods presents evidence that government repeatedly prevents economic recovery.

Another valuable chapter focuses on the issue of money, which is crucial if we are to understand the economic crisis. The health of an economy cannot be improved by injecting more money into the economy; for money is only a means to an end. The real ends are the goods and for which we hope to exchange for the money we earn by producing goods which are in turn used by others. The productive powers of an economy are of far more importance than the number of paper or electronic dollars in circulation, and no attempt to increase the latter will improve the economy unless production also increases.

Meltdown concludes with a logical and well-articulated political program. It's completely impractical, of course, but it will become less so as the arguments the book presents take hold in a culture which must sooner or later realize that sound money and economic freedom have more to offer than the perpetual inflation and turmoil provided by central planners.

2 comments:

troutsky said...

I see it as a crossroads. We could, through radical intervention, go to a true free market or we could choose to go to a coordinated participatory economy.What we have now is neither central planning (which is different than what I propose) nor is it managed capitalism nor is it free market, it is an unworkable bastard.I actually believe even a free market eventually crashes or destroys the ecosystem but I can't prove it. We would just have to let it play out.

The real question then becomes do we want a savage winner take all system (globally) which reproduces and reinforces the basest, least ethical tendencies in the human character ( violent self interest, consumer fetish,alienation) or one that fosters an elevated, progressive man. Simple choice.

A Wiser Man Than I said...

I see it as a crossroads. We could, through radical intervention, go to a true free market or we could choose to go to a coordinated participatory economy.What we have now is neither central planning (which is different than what I propose) nor is it managed capitalism nor is it free market, it is an unworkable bastard.I actually believe even a free market eventually crashes or destroys the ecosystem but I can't prove it. We would just have to let it play out.

Well said. It's high time we stopped pretending that we can reject a system when witnessing its misapplication.

The real question then becomes do we want a savage winner take all system (globally) which reproduces and reinforces the basest, least ethical tendencies in the human character ( violent self interest, consumer fetish,alienation) or one that fosters an elevated, progressive man. Simple choice.

But I would argue that capitalism, despite its flaws, doesn't necessary reinforce the base characteristics in man, at least in comparison to its alternatives. If it did, I would have to reconsider my stance on the matter.

Nor does an "elevated, progressive man"--whatever that is--rise somehow from socialism. We are not so far apart in our aims, it is only in the means we would use to achieve them where we differ drastically. In any event, that's a matter for another day.