This piece is really funny, IMO. >>Why Are Austrians Unusually Bearish?
Mark Skousen
"Can capitalism survive. No. I do not think it can.... Can
socialism work? Of course it can."
Joseph A. Schumpeter 1
When the financial markets went into a tailspin in late October 1997, my
doomsday colleagues appeared gleeful. "The bear [market] has begun,"
predicted Gary North. "It isn't going to end for about 10 years. If things
go well." Adrian Day told me that the market was 70 percent overvalued
and was delighted to see some air come out of the "bubble." Doug
Casey had been forecasting the "Greater Depression" for over a decade.
"It could be worse than even I imagine."
Over the years, I've been collecting books written by the perma-bears
and the number is so high that I may need another shelf. Samples of
bestsellers: Howard Ruff, How to Prosper During the Coming Bad Years
(1979); Doug Casey, Crisis Investing: Your Profits and Opportunities in
the Coming Great Depression (1979); Jerome Smith, The Coming
Currency Collapse (19 80); Dr. Ravi Batra, The Depression of 1990 (1987);
James Dale Davidson and Lord William Rees-Mogg, The Great
Reckoning: How the World Will Change in the Depression of the 1990s
(1991); Harry Figgie, Jr., Bankruptcy 1995: The Coming Collapse of
America and How to Stop It (1992); and Robert Prechter, Jr., At the Crest
of the Tidal Wave: A Forecast for the Great Bear Market (1995). Harry
Browne has written a series of negative titles:
You Can Profit from a Monetary Crisis (1974), Why the Best-Laid
Investment Plans Usually Go Wrong (1987), and The Economic Time
Bomb (1989).
Of course, few of the doomsdayers' dire omens have come true so far,
yet their resolve in forecasting new crises is only strengthened.
The Root of Pessimism
What is at the root of this deep-seated pessimism about the global
economy? Part of it may be Christian theology, an apocalyptic vision of
the future (Matthew 24). But since many of the doomsdayers are not
Christians, an alternative source may be the "Austrian" school of
economics, some of whose leading figures feared for the future and
whose theories suggest financial and monetary trouble down the road.
Joseph Schumpeter, the enfant terrible of the Austrian school, was
deeply depressed about the prospects for capitalism and
entrepreneurship. He thought big business would destroy individuality
and initiative, and socialist central planning would engulf the world.
Many Austrian economists experienced the ravages of war and inflation
in the first half of the twentieth century and were pessimistic about the
future. Felix Somary, an economist who became a Swiss banker, forecast
the 1929 crash, the Great Depression, and World War II, turned
decidedly bearish in the mid-1950s, predicting another great depression
right before his death. 2
Ludwig von Mises was incurably gloomy about the future. Peter
Drucker, the management guru who grew up in Vienna and had contact
with Mises at New York University, expressed dismay about Mises. "He
was the most depressing person I ever met," he told me. Mises's despair
is clearly noticeable in his searing intellectual memoir, Notes and
Recollections. 3 Mises was downhearted about many things-the world
wars, the rise of socialism and Keynesianism, and his failure to receive a
full-time teaching position at a major university.
Lack of Faith in Fiat Money
But pessimism about the future goes beyond world events and personal
tragedy. It is also inherent in the theory of Austrian economics -
especially with regard to the world monetary system and the theory of
business cycles.
Austrians are deeply suspicious of the current fiat money system, which
they regard as unstable and prone to crisis. Today's monetary system of
unbacked, inflated currencies is at sea without a rudder. Floating (or
sinking) exchange rates may postpone, but cannot escape, the day of
reckoning. Someday, a monetary, economic, or financial crisis will arise
that will cause a run on the dollar, a collapse of the fractional-reserve
banking system, and the re-establishment of gold and silver as real
money. 4 Not surprisingly, sound-money advocates recommend the
accumulation of precious metals as a hedge against such an impending
crisis.
The Austrian theory of the business cycle, as developed by Mises and
Friedrich A. Hayek, also suggests inherent instability in the financial and
economic worlds. An increase in the fiat money supply will not simply
raise prices, but will create an imbalance in the structure of the economy,
a boom-bust cycle. The economic and financial boom cannot last, but
will cause prices and interest rates to rise, which eventually will cause a
recession and a collapse in stocks, real estate, and other assets. As
Murray Rothbard puts it, "The boom requires a bust." 5
Recently this Austrian perspective was taken by a well-known bear on
Wall Street. James Grant, editor of Grant's Interest Rate Observer,
editorialized in the October 29, 1997, New York Times that "all bull
markets are eventually self-limiting" due to inevitable over-investment.
He noted that global bull markets eventually have to crash because of
"superabundant" capital investment in the United States and Asia.
The Missing Link
Sometimes I feel like a lone bull among Austrian economists and
financial analysts. Why am I optimistic about the global economy and
stock prices? While the Austrian bears make a valid point about the
inevitable dangers of monetary inflation and a fiat money system, they
overlook another key element: free markets lead to long-term economic
growth, rising standards of living, and hence bull markets. I raised this
issue in the August 1997 issue of The Freeman, comparing two graphs of
GDP growth over the past century. We can either focus on the
short-term fluctuations in GDP, or the long-term trend. Short term, the
economy looks volatile and dangerous. Long term, it looks dynamic and
progressive.
The stock market can be viewed in the same light. We can constantly
focus on the short term and play on the fears of a bear market, or we can
take a long-term view. During the twentieth century, bull markets have
lasted a lot longer than bear markets, and almost 70 percent of the time
stocks were in a bullish mode. Why? Because in spite of wars,
recessions, taxes, regulations, and inflation, the U.S. economy has
remained largely favorable toward free enterprise.
Yes, crashes and bear markets are inevitable in today's inflationary
world, but so are bull markets in today's free-market economy.
At the time of the original publication, Dr. Skousen was an economist at
Rollins College, Department of Economics, Rollins College, Winter Park,
Florida 32789, a Forbes columnist, and editor of Forecasts & Strategies.
And was working on his own textbook, Economic Logic.
1. Joseph A. Schumpeter, Capitalism, Socialism and Democracy (Harper
& Row, 1942, 1947), pp. 61, 67.
2. Felix Somary, The Raven ofZurich (St. Martin's Press, 1986),
pp.293-302.
3. Ludwig von Mises, Notes and Recollections (Libertarian Press, 1978).
4. The best summary of this "Austrian" position is Murray N. Rothbard,
ff'hat Has Government Done to Our Money? (Mises Institute, 1990).
5. Murray N. Rothbard, America's Great Depression, 4th ed. (Richardson
& Snyder, 1983), p. 20. An excellent related booklet is The Austrian
Theory of the Trade Cycle and Other Essa ' vs, ed. by Richard Ebeling
with an introduction by Roger Garrison (The Lud- wig von Mises
Institute, 1996 [1983)).
Reprinted with permission from The Freeman, a publication of The
Foundation for Economic Education, Inc., January 1998, Vol. 48, No. 1. <<
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