It seems that when an economy goes bad, the temptation for intellectuals to go and do likewise is too much for them to resist. Public thinkers across the spectrum, from Paul Krugman to Richard Posner, are now calling for a return to Keynesian economics, which attributes recessions to irrational, unexplainable decreases in aggregate demand and calls for massive government monetary and fiscal stimulus to get us out of the economic slough of despair. Operating from this ideology, the current power elite charge that vague general culprits like corporate greed, predatory lending, and investor fear suddenly autonomously sprang on the economic scene with no reason or explanation. It is as if the entire economy just “caught” a recessionary cold. Keynesian ideology also drives the massive expansionary actions of the Federal Reserve, President Obama, and Congress, who, according to Bloomberg News, have together committed to throw as much as $11.6 trillion at the economic wall in the hopes that at least some of it will stick.
All of this is unfortunate; bad ideas are bad ideas whether we are in economic recession or prosperity.
To make sense of our current economic woes, it would be far better to look not to John Maynard Keynes but instead to a different economist: Ludwig von Mises, who was born over a century ago. In his monumental biography, “Mises: the Last Knight of Liberalism,” Guido Hülsmann makes the case that because of his theoretical framework and brilliant application of that framework, Mises was the greatest economist of the 20th century. Reading Hülsmann, it is clear that Mises’ voluminous body of work provides many insights that speak to our current situation. For example, Mises’ theory of the business cycle provides the genuine explanation why we are in the worst recession since the Great Depression and why our current policy trends toward a form of economic fascism that actually hampers recovery.
Decades before Keynes wrote his “General Theory,” Mises’ early work integrated monetary theory with the rest of economics and, in so doing, provided a truly general theory of the business cycle. Mises demonstrated that credit expansion by the central bank (in our case, the Federal Reserve) artificially lowers interest rates and promotes unwise borrowing and unsustainable malinvestments that eventually must be liquidated. Firms will go bankrupt, workers will be laid-off, and unemployment will increase. Sound familiar?
Mises provided such clear analysis of the business cycle because he rooted his economic analysis in the reality of human action. He refused to characterize the economy as if it were a hydraulic machine and people were merely inanimate objects reacting to stimuli. One of the crowning achievements of his great work “Human Action” is to explain that all social phenomena are the result of purposeful behavior of individuals. Humans are the cause, not the effect. Unlike much of modern economics, Mises explained that while humans do not have perfect foresight, they do not act irrationally.
Building on his foundation of human action, Mises forcefully demonstrated why all forms of socialism and government interventionism are recipes for economic destruction, not recovery and prosperity. In the 1920s, Mises explained that in a socialist economy the economic czar cannot rationally calculate expected profit and loss for different investment projects because there are no true prices for factors of production. There are no market prices because there is no exchange of these goods; the state owns them all. Without the tool of economic calculation, central planners are left, as Mises said, “groping about in the dark.” Such insights are the primary reason to oppose root and branch centralization of the economy, such as government takeovers of the banking and automobile industries and universal government healthcare.
Mises further demonstrated that the only way back to prosperity is through capital accumulation made possible by real savings. Government stimulus/spending programs are futile because such spending must be funded by taxation, borrowing, or monetary inflation, all of which have negative economic consequences. What the state giveth with its right hand, it taketh away with its left.
In order to recover true prosperity, we must follow the Misesian prescription: cut government spending, cut taxes, reduce regulation, cease the push for further socialized healthcare, and stop the monetary inflation that the Fed has been pursuing in great earnest for the past year. In short, we need a return to real private property in this country. Only such an economy fosters saving and investment in the capital accumulation necessary for economic recovery. We fail to heed the economic insights of Ludwig von Mises at our peril.