Tuesday, 7 October 2008


An economic recession is the sign that a correction is necessary.  Prices are too high -- resources are misallocated -- prices and wages need to be corrected so that markets can clear and resources be reallocated so that the economy can recover and get back on track.

But what if prices don't drop when they need to?  Any student of supply and demand can tell you the answer: markets don't clear. Instead of You're left standing there with your dick in your hand and a big bundle of unsold oversupply -- and that's the same for every producer. Businesses that need to reduce costs in order to recover, and can't, are forced instead to go to the wall, and the labour they would have employed is forced instead to go hungry.

So just when the urgency of a major correction -- especially the necessity of price flexibility -- should be on the mind of any sober commentator over the age of twelve, the dim bulbs at The Standard blog are instead talking up the notion of a rise in the government-mandated minimum wage.  A rise to $15/hour!

Have they not seen the news?   Do they not realise an economic tsunami is on its way?  Do they have any idea what happens when you keep prices artificially high at the  start of a depression?

In fact, have they any idea what happened when prices, including labour prices, were kept artificially high at the start of a depression?  The answer, as the total and complete failure of Herbert Hoover at the start of the 1930s depression would tell you, is widespread capital destruction and a giant leap in unemployment.

great-depression4 Hoover's plans, continued by Roosevelt in 1932, did precisely the opposite of what he intended: instead of protecting labour and failing businesses and providing the funds necessary for recovery as he hoped, the failure to let the market contract and flush out the dead wood and malinvestments (urgently necessary for recovery) simply prolonged the pain.  As Murray Rothbard points out in his history of America's Great Depression:

    Led by President Hoover, the government embarked on what Benjamin Anderson has accurately called the "Hoover New Deal." For if we define "New Deal" as an antidepression program marked by extensive governmental economic planning and intervention – including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending (e.g., subsidies to unemployment and public works) – Herbert Clark Hoover must be considered the founder of the New Deal in America.
    Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. As a consequence, he left office with the economy at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor force.

I'm sure none of us want that -- whatever our political persuasion -- so can't we please learn from the mistakes of history?

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