Austria and its close neighbors have been the source of one nonsensical (and often dangerous) theory after another over the past century or so. Marxism and Freudianism are the best known of these. But, there are actually quite a few. Thus, the Austrian School of Economics might be better described as the Austrian Asylum, were there not already so much competition for the title.
All of these intellectual cults start off with an insight that is true enough in small doses, indeed almost trivally obvious, and then in the finest tradition of Continental intellectualism, carries the insight to absurd lengths in an attempt to explain everything under the sun, and, more dangerously, prescibes remedies for the world's problems that are either drastic and/or utterly foolish.
For example, Marx, noting that politics in general and wars in particular are fought by one group seeking to seize the property of another, claimed to have discovered the "hidden laws of history" and extended this metaphor to explain all human experience. Similarly, Freud noted that dreams were clues to hopes and fears normally hidden to the conscious mind, and proceeded to postulate an all-encompassing explanation of human experience therefrom.
The Austrian School's blinding insight is that when Central Banks artificially inject liquidity into the economy, economic choices get made that are less than optimal. Well, yeah. Except that would happen if, say, gold were the only medium of exchange, because there is always risk. Ah, but the AS replies, with a gold standard the market promptly punishes and rectifies suboptimal allocations. Whereas with a Central Bank making it possible to borrow at lower and lower rates, the suboptimal allocations can be propped up for years, draining resources, and therefore crowding out better uses of the money. Eventually interest rates hit zero, yet the system is bankrupt.
The AS solution is for government to abandon its role as Central Banker. This way we can return to the level of economic activity that preceded World War I -- a time when little credit was available for suboptimal allocations, or for that matter any consumer credit at all.
People who don't have the time or the patience to exhaust their curiosity about every kooky theory may find Milton Friedman's verdict persuasive. In an interview with Barron's Gene Epstein, Friedman unequivocally stated that the AS did great harm during the Great Depression by influencing the U.S. and British governments to do nothing while the situation went from terrible to disasterous. Fortunately, more pragmatic types finally stepped in to prevent massive collapse, until the government spending and borrowing of the World War II period got the economy going again. Friedman, as is well known, generally finds government intervention in the economy complete anathema. But, Friedman is not a nut about it.
It is interesting that an AS cultist whose article recently was posted to this thread cited David Ricardo. Ricardo may be the most seminal thinker about economics of all time. But, Ricardo argued that feeding the poor would only increase their numbers. Likewise, in our time, Jonas Salk, discoverer of the polio vaccine, late in life gloomily reflected that curing people of fatal disieases increased the number of sickly people in the population. Ricardo, in step with the thinking of his time, argued that fewer people would starve if they weren't kept alive with alms in the first place. Salk, of course, accepted that increased morbidity was the lesser evil compared to just letting the sick expire.
Unlike many doomsday cults, the AS is fortunate in never actually specifying when the end times will occur, thereby avoiding the embarrassment that inevitably ensues as the supposed "end time" recedes further and further into the past.
Yet, it should be noted that the Western World left the Great Depression almost 60 years ago, and shows no signs of returning. In the posted article just preceding this one, Brazil, Russia, and Japan are cied as examples of the incapacity of Central Bank infusions of liquidity to reflate an economy.
But, Brazil's fundamental economic problem is massive transfer payments to retirees who spent only 20 years in the labor force in the first place. This, along with a closed economy led to hyperinflation. No one said that lack of Central Bank monetary accommodation was Brazil's problem, or that the opposite was its solution.
Russia's problems, as are well known, are the absence of laws protecting private property, or much of anything else. Again, no one expected a bath of liquidity to revive Russia.
Japan, admittedly, perhaps comes closest to exemplifying the process the AS is describing. Decades of artificially depressed interest rates made possible the financing of massive asset accumulation, at the same time it hid the fact that these assets were largely profitless. In the late 80's, this cheap money led to hyper-asset-inflation. It was the government itself that pricked the bubble. Ever since, air has been slowly leaking out, and no amount of government tinkering has been able to re-inflate it. And, the AS is right again to say that a lot of banks need to be closed, a lot of borrowers need to go bankrupt, and a lot of assets need to be sold off to vulture capitalists. However, you hardly need to subscribe to the AS to realize this.
And, the single most important reason cited by outside observers for Japan's failure to take more decisive action sooner is precisely because the problem is hardly being felt by most of the Japanese people themselves.
What the AS glides over is that Japan remains the world's 2nd largest economy; and it got that way largely through government orchestrated money policies that AS deplores. As Yardeni commented during the last global credit collapse at the end of the 80's, an awful lot of things got built that would not have been built without the loose credit. And, liquidation is not the same as elimination. Most assets in bankruptcy survive the reorganization process in some form, rather than being dumped into the sea. Thus, however inefficiently, the loose credit provided added value to society.
And, the AS analysis completely falls down when it says that loose money necessariy creates demand that isn't backed up by production. Japan's whole problem is that loose money has created productive capacity which (once it was imitated by the rest of East Asia) has completely overwhelmed demand.
At all events, the last thing the Japanese governemt should do is to just watch from the sidelines, and allow the chaos of market panic to throw the country into great suffering and turmoil, which is the AS's idea of a cure. If you drain the patient of all his blood, you eliminate the blood disease.
The Japanese goverment will have to be an active player in the inevitable restructuring to come. Japan will eventually get its act together. It will once again be a vital economic power. And, it will not get there from here without some combination of both governemt fiscal and monetary policy, as well as lowering of barriers to the workings of the free market. |
