The latest two Daily Articles emailed to me from the Mises Institute make plain why, when they’re talking economics, you need to read what they’re saying.
Three theories offer competing explanations of the Great Depression, says David Gordon in yesterday’s article ‘Did FDR Make the Depression Great?’
There is the Keynesian account, which stresses a lack of aggregate demand; Milton Friedman's monetarism, which ascribes the severity of the early years of the Depression to a drastic cut in the money supply by the Fed; and, of course, the Austrian theory that Bob Murphy describes in his new book, and on which Gordon relies here.
Using Murphy’s analysis, Gordon explains in short order how both the first two theories can be summarily dismissed, and why the Austrian account needs to be taken seriously – not least because so many Austrians saw it all coming before the Great Depression * , just as they did before this latest Great Downturn.
As [Murphy] abundantly shows, historical evidence strikes decisive blows against both the Keynesian and monetarist theories. On the Keynesian account, increased spending, by reviving aggregate demand, will restore good times. If so, why did Hoover and Roosevelt's massive spending leave America mired in depression?
[And] Murphy turns the tables on Milton Friedman, who emphasized statistical evidence, by showing that monetarism fails to explain the data. . .
If Keynesian and monetarist theories cannot cope with the historical evidence, does the Austrian theory fare better? In the Austrian view, depressions come about because expansion of bank credit results in malinvestments. Because these need to be liquidated, the government should follow a "do nothing" policy that allows the market to return to normal conditions. When this policy was followed, recovery from depression took no more than a few years, in the 1873 depression, in contrast to the total failure to recover during the New Deal. The results were even better in the 1920–1921 depression, when both Wilson and Harding slashed government spending: "the 1920–1921 depression was so short-lived that most Americans today are unaware of its existence."
So that’s the first article. The second builds on it: Should People Just Ignore Economists? The answer might surprise you.
Citing a Businessweek cover story "What Good Are Economists Anyway?" Mark Brandy records their
important point that, since most economists failed to predict the current crisis, the worst economic collapse in nearly 80 years, we need to consider whether or not their work has any value.
Unfortunately, after bringing this failure to our attention, the article, written by economics editor Peter Coy, concludes that it's important to accept advice from the same economists who demonstrated their incompetence by not seeing this financial collapse in advance.
As Mark Brandy and Businessweek point out, surely it would be far better to ignore those now exposed as incompetent -- "If you are an economist and did not see this coming,” says a blogger they quote, “you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables" – and to take your advice instead from those who did see it coming.
And those economists are overwhelmingly from the Austrian school. You can read their analysis by visiting the Econoblogs down on my left-hand sidebar, and in your own inbox every day by subscribing here. Do it now.