A libertarian guide to booms and busts
Just read Meltdown (Regnery Publishing, 2009) by Thomas E Woods Jr., a senior fellow at the von Mises Institute. I have read quite a number of accounts of the GFC; many taking a left-wing perspective; some taking a more balanced perspective but nevertheless inevitably pointing the finger at greed and lax regulation as being part of the problem; this is the only book I have read which takes an uncompromisingly libertarian perspective.
Woods is inspired by the economics of the Austrian economists, Ludwig von Mises and Hayek. He absolves capitalism and blames the GFC, and other past financial and economic crises, on currency debasement – whether that of the rulers of yore clipping gold coins or central banks now underwriting lower interest rates and promoting an expansion of credit way beyond real savings. He argues that this produces untoward increases in assets prices which eventually must fall and trigger a crisis. He advocates a return to a gold standard or better still, as Hayek proposed, the replacement of government-issued money with private money. Banks, say, would issue their own money. Good money (with adequate backing, issued by disciplined institutions) would drive out the bad, which no-one would want to hold (to turn Gresham’s law on its head).
Woods goes on to argue that conditions, which cause crises in the first place, are logically not the ones governments should try to bring about to cure crises. In other words, credit expansion, fuelling investment in unwanted assets, is best not cured by bailing out failed companies, more credit expansion and capricious government spending. Seems reasonable enough and the fact that most economic commentators don’t get it obviously annoys and frustrates Woods and he lets it show. For example, he calls Keynes a ‘crackpot’’ and a call for a revival of Keynesianism ‘absurd’. He gives special attention to the New York Times and Washington Post. On spending bringing prosperity no matter on what it is spent: “Anyone who buys an absurdity like this belongs in a lunatic asylum or on the editorial pages of the NYT”. On the financial bailout: the NYT ‘lived up to its usual level of sycophancy’ and carried on ‘being wrong on everything’. In comparing the GFC with the Great Depression (GD) he observed that in 1932, ‘as usual the quacks prevailed’ but is particularly scathing of those who learnt nothing from it. “From the point of view of the geniuses at the WP and NYT, this history [the New Deal’s prolongation of the GD] may as well not have occurred.” Nobel Prize winner, and unabashed Keynesian, Paul Krugman is also in Wood’s firing line. “If we want a repeat of those years [the GD years] or if we’d like to share the fate of Japan for the past eighteen years, we should listen to Paul Krugman and implement the same policies that gave the world these two disasters.”
A first thing to say about this book is that it enormously refreshing and stimulating. There is no hiding behind caveats. To echo Woods, why do policymakers believe that spending taxpayers’ money willy-nilly or encouraging more misdirected and unsustainable spending will solve economic problems? This is a mystery which can be unravelled and marvelled at only by reading the macroeconomic section of first year economic textbooks or by the almost insurmountably turgid task of reading Keynes’ The General Theory. Both tell a fictional tale of the economy being comprised of amorphous aggregates. In this aggregated world no heed is paid to resource allocation; to distinguishing between productive and unproductive investment or between spending and production – they are simply two sides of the same coin. Thus, if you increase spending on whatever it will translate into production and production of anything is good. No wonder Woods gets mad.
On his advocacy of removing the power of creating money and credit from government control I think Woods is on understandable but less sure grounds. First, it won’t happen and we do need solutions which can be implemented but, second, even with a gold standard or with private money, irrational exuberance will have its way at times. There would be economic cycles, though perhaps less pronounced than those underwritten by central bankers like Greenspan. This is a good thing; economic progress depends on getting rid of the old and replacing it with the new – ‘creative destruction’, as Schumpeter called it. Perhaps the best we can hope for and work towards are independent central banks, like the Reserve Bank model, and some constitutional limitation on the ability of governments to spend what they don’t have. Apart from that, what we need is common sense to avoid putting ourselves in the hands of a theory propagated by a ‘crackpot’ when the economy goes awry.
Meltdown is great reading for those who like their economics pure, libertarian and unexpurgated.