No more ‘Doctor NO’: Austrians as policy-makers

Much capital is made by the world’s predominant Collectivists of the supposed fact that the Austrians actively relish the bloodletting which they howl would otherwise occur in the course of an economic bust were that gentle Shepherd, the State, not to step in and forcibly transfuse blood from the healthy to the holt. While one can certainly find something of this expressed in the polemics of, say, Murray Rothbard, and thence jejunely regurgitated by some of the latter-day, American Mises Militia, the man himself, Ludwig von Mises, categorically advised against the adoption of a deliberately deflationary policy in order to restore the status quo ante, both excusing his beloved British Currency School for their understandable ignorance of the consequences of such an action in the early nineteenth century and by using the graphic analogy of not being able to aid the man you have just run down in your car by then reversing back over him.

However, eschewing a deliberate purge of the economy and acting to ensure that the supply of money does not contract unduly from its peak, then allowing matters to take their course by encouraging prices to find their clearing levels, is far, far removed from the sort of active intervention we have now come to expect and which, in the latest slump, has been truly unprecedented in its scale and scope.

Assume, if you will, that in order not to bedevil the adjustment process, we adopt Mises’ counsel to ensure the supply of money (not credit) is kept roughly constant and that we ignore the siren call of the free bankers and even of the later Hayek that what we should really try to stabilize is some ill-defined and immeasurable rate of its circulation by re-monetizing all those ex-substitutes which are now being looked at with so much askance. Further assume that we also remove as many barriers as possible to full price adjustment, arranging for expedited bankruptcy proceedings and speedy loan renegotiation as part of this. Then, this process of Auflockerung will help the conflagration of values burn itself out at the earliest juncture, right at the point when the cash holders realise that their money balances now command a greater volume of goods or assets than that to which they were accustomed (that those balances’ real value has therefore risen).

When people consequently begin to spend a little more freely, this will put a natural floor under prices once again and that selfsame relaxation of the purse-strings will also tend to reduce the perceived need for a larger precautionary reserve. Thus, yet more cash will be put to active use as people see that economic activity has once more begun to quicken and entrepreneurs re-emerge to shape its upward course.

By contrast, the attempt to prop up the volume of credit at its Boom-exaggerated heights inevitably involves the creation of more ‘fictitious capital’ and, moreover, tends to channel it into different hands – not least those of the pork-barrel politician and his pet contractor who will gleefully congratulate themselves on how diligently (and lucratively) they are serving the public good through the debt-financed construction of a fancy, new, Keynes-endorsed, public works programme. How this can be expected to bring about that replication of pre-Crash spending patterns which is the failing firms’ only salvation is, however, something its most avid proponents never quite get around to explaining.

Furthermore, by maintaining what it has now become fashionable to call ‘zombie’ firms in business, on much the same terms as before, all round returns on capital (and hence all round rewards to labour) will be lowered as these sub-marginal enterprises persist, to the detriment of their more fiercely competitive and well-run peers. This will artificially keep up resource costs and slow the adaptation of wage rates by discouraging a full-bodied rationalization of this still-bloated sector and hence prevent the liberation of scarce productive means for profitable use by others. All in all, a thoroughly retrograde policy for all the impassioned advocacy it attracts.

It will also probably involve a ‘soft budget’ – i.e., it will be an official Ponzi scheme, run on a increasing debt load which the operation itself can never hope to repay – and hence it will come to excite anxieties about the guarantor state’s own finances and so raise stultifying fears over the arbitrary (and, no doubt, nakedly populist) measures it will imminently adopt to restore an approximation to order to these. None of this will prove conducive to a rapid and lasting recovery.

However this is done, even people who have been simply handed bundles of newly-printed money are not likely, on balance, to buy yet greater quantities of things with which everyone has already become glutted. Thus, the assistance this supposed ‘stimulus’ will afford to the overbuilt sectors at which it is aimed will prove nugatory, while the appetite for those goods whose lack of availability played a major role in precipitating the crisis will be subject to a considerable sharpening, increase their scarcity even before they have been put to much use in replacing squandered capital.

Rather than speed up the move to a new, more robust interplay of viable production and its considered use, the intervention will therefore act to drive a bigger wedge between the two and may well give rise to a welter of confusion as a relative ‘deflation’ (i.e., lower or, at least, lagging prices) of the old, boomed–up output takes place alongside the relative ‘inflation’ of the under-supplied and more necessitous items: a situation which will be crying out for that very reallocation of capital and human retraining which the support policies will be manfully striving to impede.

Here is the flipside of the planners’ hubris for, just as their blunt object attempts at social engineering were what either caused the Boom or assiduously fed and watered it after it began to shoot in a more spontaneous fashion, their similarly ham-fisted, Gosplan efforts to repair the damage they have caused is only likely to retard the machinery of self-repair built in to the unhampered market.

Just as prosperity cannot be forced, but must be built one exchange at a time as individuals further their own self-interest by catering to the interests of others, so recuperation must also take place on the finest of scales, with each person, each partnership, each company taking resolute steps to put its own house in order before forcing its solutions on it neighbours, regardless of circumstance.

Just as ‘growth’ is best fostered, not by dirigisme or diktat, but by providing the right framework of transparent law, the swift and impartial arbitration of disputes, by upholding the sanctity of contract, by promoting the security and clarity of title to property, and by giving the firm assurance that money will neither be a plaything of those in power nor an experimental tool of the eager economic Frankensteins who cluster about them – but rather a yardstick of the greatest possible stability – so recovery can only hope to be given the best possible arena in which to play and cannot consciously be orchestrated by those who will, ineluctably, turn out to be both tone deaf and lacking in all sense of rhythm.

None of this should be construed as fatalism for, if the long, debilitating years of New Deals, Great Societies, and Social Contracts, are to be rolled back and the economic organism suitably re-invigorated by the deeds of responsible self-supporting individuals and underpinned by the spirit of voluntarism, there will be many bonds to be loosed, many deadlocks to be picked, and many creaking joints to be oiled, even if every shackle comes endowed with its own vociferous lobby group, each firmly set upon its preservation and the maintenance of the privileges it unfairly confers upon them.

Nor are we, in fact, ‘Austerians’ in the current pejorative usage: scowling creatures who take a sour delight in seeing past sins punished, railing like a pack of Savonarolas at the excesses of the upswing and demanding universal sackcloth and ashes as a penitence for them.

Not at all. We are just not subscribers to what Albert Hahn tellingly christened the ‘Economics of Illusion’, to the Keynesian belief in the Commissar as Tooth Fairy. Instead we hold that the first steps to a cure for a dangerous over-reliance on credit is, as with that for many other forms of addiction, a full and frank admission of the harm it has done; an honest attempt to make amends for the losses it has imposed upon us and those around us; and a disavowal of its abuse in future.

We are also mindful of the legend of Vortigern, the Dark Age British warlord, who, in seeking to prevent the Pictish sneak-thief from pilfering his household, invited in those brutal Saxon Mafiosi, Hengist and Horsa, to ‘protect’ it and so set in train the subjugation of his entire race, as well as the near extinction of its culture.

If expanding the role of the Provider State and increasing the scope for the exercise of its soft tyranny is a major part of the recommended cure for the ills of the Bust, those who know how hard it will be to prise its jaws off our property and liberty when the danger has passed will be sure that the time has come to seek for another remedy altogether.

It should be self-evident that the search for such an alternative can only begin if we first abandon the quack medicine so widely practiced today. We must move beyond the primitive theory of the humours – of propensities to consume, liquidity preferences, multipliers, aggregate demands, and similar mediaevalisms – and foreswear the crude poultices, purges, and bloodlettings of deficit spending, autarky, and inflationism which they seek to inflict upon the patient.

The goal should be to progress towards a rational therapeutics based upon a detailed understanding of the physiology of the patient, not on a rehashed occultism from the mercantilist and under-consumptionist past. As a first step in this direction, it would help if we could inculcate in policy-makers a proper understanding of the pivotal role of unbacked credit expansion and monetary debasement in both staging the whole tragic peripeteia of the trade cycle and in dragging out its denouement to the point where both players and audience become too enervated to continue.

6 Comments

  • My thoughts, after participating in several debates (manly in comments of mises.org blog posts):

    1- Do not bail out banks, but…

    2- Central Banks would issue and place all the reserve money needed for a 100% reserve requirement on demand deposits (maybe some short maturity time deposits also).
    With this, no demand deposit would be at risk, only time deposits, some banks could still be bankrupt but systemic panic would be contained.

    And no more credit expansion would take place by issuing non-previously demand deposits – the cause of business cycle.
    3- New money would only enter in the economy by the central bank monetizing public spending – yes, this is inflationary but that is precisely the point – excessive money supply would impact traditional inflation measures, so much more controllable.

    The problem with partial reserves is precisely that excessive money supply enters in the economy causing the reduction of interest rate and not showing up in the traditional inflation measures (which do not take in to account real and financial assets and capital goods bubbles).

    After this, in the long run, a gold/silver standard (100% reserves for anything called “money” and free contractual partial reserves for IOUs labeled as “IOU”s but not labeled as “money”: free banking defenders must accept that a correct labeling is needed: a promise of payment of money is not money, so free banking must accept that “promise of payment” in specie must not be fungible with “money” ) would appear much more acceptable.

  • lola says:

    Wonderful!

    • Carlos Novais, Your proposals are pretty similar to those of Positive Money’s, which means I agree with them. But I don’t agree with gold or silver backed currencies.

      First, Winston Churchill said that putting Britain back on the gold standard was the worst mistake of his life.

      Second, there is nowhere near enough gold and silver in the world to FULLY back the world’s demand for currency. That means that the portion that is not backed is effectively fiat currency.

      Third, what happens when you have wild fluctuations in the price of gold, as has happened in the last two years? The idea that car manufacturers and supermarkets are going to alter their prices pari passu is just unrealistic.

      Fourth, you can get round the latter problem by “fixing” the price of gold. But that is a very artificial set up: the currency is not being backed by the “real” price of gold. It is being backed by government’s announcement that gold is worth £X an ounce. That’s not vastly different from a fiat currency where £10 notes have value because government says they have value (or to be more accurate, because government accepts them in payment of tax, plus government says £10 notes are legal tender).

      • mrg says:

        “Winston Churchill said that putting Britain back on the gold standard was the worst mistake of his life.”

        Isn’t that mostly because we went back at the wrong rate?

        “there is nowhere near enough gold and silver in the world to FULLY back the world’s demand for currency”

        Why do you say that?

        Surely any amount would do, it would just mean gold and silver getting much more expensive, in dollar terms, than they are now.

        Do you mean that the transition would be politically infeasible, because of the windfall to current owners of gold?

        I suppose the fundamental problem here is that the current distribution of gold across the countries of the world does not correspond to the current distribution of real wealth (e.g. the UK is much wealthier than our gold reserves would suggest).

        “what happens when you have wild fluctuations in the price of gold, as has happened in the last two years?”

        If gold was money in large parts of the world, I don’t think you’d see these fluctuations.

        However, that might be a reasonable argument against any individual country, especially a small one like the UK, adopting a gold standard unilaterally.

        I’m not a gold bug, and I don’t especially like the idea of money that can simply be dug out of the ground, but gold as money has worked in the past, and I think it could probably work again.

        • Current says:

          > Isn’t that mostly because we went back at the wrong rate?

          Exactly, Churchill regretted putting Britain back on the gold standard at such a high rate. He said that he wished he’d listened to voices from industry who were asking for a lower rate rather than those from finance.

  • “First, Winston Churchill said that putting Britain back on the gold standard was the worst mistake of his life.”

    Yes, at a highly artificial rate. As Mises said, after you inflate a currency you must accept it and ot try to deflate also artificially. In fact, Churchill action is very connected to the several actions that lead to the Great Depression.

    “Second, there is nowhere near enough gold and silver in the world to FULLY back the world’s demand for currency. That means that the portion that is not backed is effectively fiat currency.”

    This is a fallacy. There is never a shortage of money because prices just fall and the economy adapts to that.

    “Third, what happens when you have wild fluctuations in the price of gold, as has happened in the last two years? The idea that car manufacturers and supermarkets are going to alter their prices pari passu is just unrealistic.”

    THis would not be a problem. For a transition period, just let gold/silver to circulate freely as money ( no tender laws against gold/silver).

    “Fourth, you can get round the latter problem by “fixing” the price of gold. But that is a very artificial set up: the currency is not being backed by the “real” price of gold. It is being backed by government’s announcement that gold is worth £X an ounce. ”

    No, gold would price is weight. Notes would represent some weight in deposit (100% reserve3s).

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