News & Analysis
Austrian Business Cycle Analysis Explains the Misery of the World
Long-term unemployment: the next threat to the world economy ... As during the Great Depression, long-term unemployment will be an impediment to global economic recovery ... However bad you think the global economy is today in terms of the business cycle, that is only one lens through which to view the world. In terms of global life expectancy, total world wealth, the overall level of technology, growth prospects in emerging economies, and global income distribution, things look rather good, while on still other dimensions – say, global warming or domestic income inequality and its effects on countries' social solidarity – they look bad. – UK Guardian
Dominant Social Theme: Print money as fast as you can ... before it is too late!
Free-Market Analysis: Another weary article on the need for central bank money printing. This one is served up in the Guardian from J. Bradford DeLong, a former deputy assistant secretary of the US Treasury. He is also apparently a professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.
These are fancy titles, and yet nomenclature cannot substitute for rigorous thinking. DeLong seems to us to be wrong on many points. Certainly his analysis stands in opposition to the logic of the marketplace. It contradicts what we know of Austrian economic theory – which has proven itself massively correct over the past decade, as it has been better publicized.
Of course, Austrian theory has been correct all along ... It is business cycle theory in particular, a truly brilliant deduction by Ludwig von Mises, that panicked the elites of the 20th century and caused the entire discipline to virtually disappear in the latter half of the 20th century.
DeLong in this article cites the "business cycle," though he apparently has no real understanding of what it portends. Like John Maynard Keynes, DeLong does not explain it. He merely intends to deal with its ramifications after-the-fact.
It is pure Keynesianism ... even to the jargon. In this article he calls for "more aggressively expansionary monetary and fiscal policies." If the Fed would just press the magic money button, America's biggest problems "would quickly melt away." So he seems to believe.
What nonsense. Over and over Greenbackers, Georgists and social creditors express these sorts of sentiments. Like all the rest, DeLong doesn't even bother to suggest that the money be placed directly in the hands of people. He is perfectly willing to let the nation's phony banking system distribute the money provided to it by the Federal Reserve.
It simply defies common sense that one can print monopoly paper money in order to salvage a system already ravaged by paper money.
DeLong is wrong that monopoly central banks can lead the way out of the "greater depression" they have created. But he adds some urgency to his argument by claiming America and the West are entering a kind of mini-depression. The Great Depression, he writes, is no less relevant because "it is increasingly likely that long-term unemployment will become a similar impediment to recovery within the next two years."
DeLong explains the nature of America's Great Depression as follows:
At its nadir in the winter of 1933, the Great Depression was a form of collective insanity. Workers were idle because firms would not hire them; firms would not hire them because they saw no market for their output; and there was no market for output because workers had no incomes to spend.
By that point, a great deal of unemployment had become long-term unemployment, which had two consequences. First, the burden of economic dislocation was borne unequally. Because consumer prices fell faster than wages, the welfare of those who remained employed rose in the Great Depression. Overwhelmingly, those who became and remained unemployed suffered the most.
Second, reintegrating the unemployed even into a smoothly functioning market economy would prove to be very difficult. After all, how many employers would not prefer a fresh entrant into the labor force to someone who has been out of work for years? The simple fact that an economy had recently undergone a period of mass unemployment made it difficult to recover levels of growth and employment that are often attained as a matter of course.
Devalued exchange rates, moderate government budget deficits, and the passage of time all appeared to be equally ineffective remedies. Highly centralized and unionised labor markets, like Australia's, did as poorly as decentralized and laissez-faire labor markets, like that of the United States, in dealing with long-term unemployment. Fascist solutions were equally unsuccessful, as in Italy, unless accompanied by rapid rearmament, as in Germany.
In the end, in the US, it was the approach of the second world war and the associated demand for military goods that led private-sector employers to hire the long-term unemployed at wages they would accept. But, even today, economists can provide no clear explanation of why the private sector could not find ways to employ the long-term unemployed in the near-decade from the winter of 1933 to full war mobilization. The extent of persistent unemployment, despite different labor-market structures and national institutions, suggests that theories that pinpoint one key failure should be taken with a grain of salt.
DeLong seems puzzled by the lack of private market solutions to the Great Depression, but he does make a good point about the command-and-control economy that was put into place near World War II.
It seems fairly evident that even the most dictatorial regimes can create an initial burst of employment and prosperity by creating various state-controlled enterprises. It is only later on that these enterprises fail because they remain static. They partake of available technology but the rigidities of state control make it impossible for such facilities once established to grow and evolve.
They simply exist, after a generation (or less) as increasingly outmoded environments, sinking deeper into torpor and inefficiency. In the US, especially, this fate was avoided to begin with because the entire world was devastated by World War II ... with the result that the US claimed something like half the world's productive capacity by the time the war ended.
Of course, the US still retained many features of a command-and-control economy, which is one reason among many why the US economy began a slow collapse after the war that continues today.
DeLong ends his article with a warning. He believes that there is only about a two-year window to stimulate in the US and throughout the West in proper Keynesian fashion. After that, even money printing won't work.
His idea is that the Great Depression devolved into a terrible spiral of dysfunction. Companies would not hire because they had no confidence the economy would recover. Unemployment became institutionalized. All this could have been avoided if government had moved aggressively enough with its Keynesian recipes. (And so we must now!)
Of course, the power elite that wants to run the world spent decades purveying the falsehood that Keynes really did win the day during the Great Depression. The argument was that President Franklin Delano Roosevelt disbursed enough money to put Keynes's dysfunctional recipes into practice. But since the era of the Internet began, these falsehoods have been rectified by various books and articles.
Roosevelt, a servant of Money Power just like other big-state presidents like Theodore Roosevelt and Abraham Lincoln, was dysfunctional when it came to economic reality. Of course, Money Power had not installed him to alleviate the depression it had apparently caused.
Money Power seemingly hired on Roosevelt to expand the power of the state and this he did deviously and competently. But Roosevelt could not have alleviated the Great Depression via money printing because it is not possible to do so when there has been such a massive bust.
As Austrians have pointed out, first economic distortions need to be wrung out – and then a recovery can begin.
It is mystifying that in the midst of what we call the Internet Reformation that otherwise logical people can still call for money printing to "reflate" the economy. Exactly what economy are they reflating? The economy of the past century, anyway, has not been a normal economy in any sense of the word but a hyper-economy, one out of whack because of all the money printing to begin with.
We do not even know what a real economy would look like because we have not seen one for a century or more. When we look to places like Switzerland we see villages that have not changed much for hundreds of years. We see a more agrarian society as well. Meanwhile in the US, Detroit is razed!
To reflate the current nonsensical system is merely to add insult to injury. Yet, of course, this is what mainstream economics demands, along with a sizable dollop of Greenbackers, Georgists and social creditors.
The hope of the world then is price deflation via economic contraction that allows a more sane society to take hold again. Left alone, communities would take on more normal and smaller dimensions. Leviathan itself, swollen and regnant, would subside.
Absent a war, a big war, this is probably what is going to happen anyway. The bet the elites are taking is that they will be able to control events once the Greater Depression is fully in force.
Can the elites succeed with their plans to create world government in the face of widespread exposure on the Internet? Answer this question correctly and you will be in a better position to survive and even thrive than those who have never contemplated it or, even worse, have come to the wrong conclusion.
Conclusion: Of course, we do not know the right answer but we continue to work at figuring it out every day.